<PAGE>
As filed with the Securities and Exchange Commission on or about September 22,
2000
Securities Act Registration No. 33-61545
Investment Company Act Registration No. 811-7335
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. ________ [_]
Post-Effective Amendment No. 13 [X]
--------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [_]
Amendment No. 14 [X]
------
(Check appropriate box or boxes)
STRONG INCOME FUNDS II, INC.
(formerly known as Strong Institutional Funds, Inc.)
(Exact Name of Registrant as Specified in Charter)
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (414) 359-3400
Elizabeth N. Cohernour
Strong Capital Management, Inc.
100 Heritage Reserve
Menomonee Falls, Wisconsin 53051
(Name and Address of Agent for Service)
With Copies to:
W. John McGuire, Esq.
Morgan, Lewis & Bockius LLP
1800 M Street, N.W.
Washington, DC 20036
It is proposed that this filing will become effective (check
appropriate box).
[_] immediately upon filing pursuant to paragraph (b) of
Rule 485
[_] on (date) pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of
Rule 485
[X] on November 30, 2000 pursuant to paragraph (a)(1) of
Rule 485
[_] 75 days after filing pursuant to paragraph (a)(2) of
Rule 485
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
This Post-Effective Amendment to the Registration Statement of Strong
Income Funds II, Inc., relates to the name change of the Strong Bond
Fund to the Strong Advisor Bond Fund, and the conversion of the Strong
Advisor Bond Fund's Investor Class share into Class Z shares and
Advisor Class shares into Class A Shares. This Post-Effective
Amendment also relates to the addition of Class B, Class C, and Class
L shares to the Strong Advisor Bond Fund. This Post-Effective
Amendment does not amend, supersede, or otherwise affect the separate
Prospectus and Statement of Additional Information contained in Post-
Effective Amendment No. 12.
<PAGE>
[Strong logo and picture of man and two children fishing]
prospectus
the Strong Advisor INCOME funds
-------------------------------
Class A, B, C, and L
November 30, 2000
The Strong Advisor Aggressive High-Yield Fund
The Strong Advisor Bond Fund
The Strong Advisor Short Duration Bond Fund
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.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the Registration Statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
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TABLE OF CONTENTS
Your Investment
Key Information
What are the funds' goals?
What are the funds' principal investment strategies?
What are the main risks of investing in the funds?
What are the funds' fees and expenses?
Who are the funds' investment advisor and portfolio managers?
Other Important Information You Should Know
A Word About Credit Quality
Financial Highlights
Your Account
Distribution Fees
Share Price
What Share Classes We Offer
How to Reduce Your Sales Charge
Buying Shares
Selling Shares
Additional Policies
Distributions
Taxes
Services For Investors
Reserved Rights
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 Advisor
Funds.
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YOUR INVESTMENT
Key Information
What are the funds' goals?
--------------------------------------------------------------------------------
The Strong Advisor Aggressive High-Yield Bond Fund seeks total return by
investing for a high level of current income and capital growth.
The Strong Advisor Bond Fund seeks total return by investing for a high level of
current income with a moderate degree of share-price fluctuation.
The Strong Advisor Short Duration Bond Fund seeks total return by investing for
a high level of income with a low degree of share-price fluctuation.
What are the funds' principal investment strategies?
--------------------------------------------------------------------------------
The Strong Advisor Aggressive 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
may invest a portion of its assets (up to 20%) in common stocks and portion of
its assets (up to 20%) in debt obligations that are in default. To a limited
extent, the fund may also invest in loan interests, convertible securities and
foreign securities.
The Strong Advisor Bond Fund invests primarily in higher- and medium-quality
corporate, mortgage- and asset-backed, U.S. government (and its agencies and
instrumentalities), and foreign government bonds. The fund's duration will
normally vary between three and six years. The fund may invest up to 20% of its
assets in securities denominated in foreign currencies and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers. The fund
may also invest up to 20% of its assets in lower-quality, high-yield bonds
(commonly referred to as junk bonds). These high-yield bonds may be either U.S.
or foreign securities. In addition, the fund may use futures contracts for
hedging and risk management purposes. To a limited extent, the fund may also
invest in dollar-denominated foreign securities. In selecting bonds for the
portfolio, the managers engage in rigorous, security-by-security research as
well as thorough analysis of general economic conditions. Generally,
quantitative analysis (focused on such factors as duration, yield spreads, and
yield curves) drives issue selection in the Treasury and mortgage marketplace
and proactive credit research drives corporate issue selection.
((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 Strong Advisor Short Duration Bond Fund invests primarily in higher- and
medium-quality bonds from U.S. and foreign issuers. The fund may also invest up
to 35% of its assets in lower-quality, high-yield bonds (commonly referred to as
junk bonds). Under normal conditions, the fund maintains a duration of three
years or less. The fund's managers intend to attempt to limit the fund's
exposure to foreign currency risk by using hedging strategies. When a bond no
longer offers attractive return potential, the managers may sell it.
Although each of the funds invests primarily for income, they also employ
techniques designed to realize capital appreciation. For example, the managers
may select bonds with maturities and coupon rates that position them for
potential capital appreciation for a variety of reasons including a manager's
view on the direction of future interest-rate movements and the potential for a
credit upgrade.
The managers may sell a holding if its fundamental qualities deteriorate, or to
take advantage of more attractive yield opportunities. Also, the managers may
invest any amount in cash or cash-type securities (high-quality, short-term debt
securities issued by corporations, financial institutions, the U.S. government,
or foreign governments) as a temporary defensive
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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, the Advisor Aggressive High-Yield
Bond Fund's and Advisor Bond Fund's active trading approach may increase each
fund's costs, which may reduce each fund's performance. The Advisor Aggressive
High-Yield Bond Fund's and Advisor Bond 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.
High-yield bonds: The Advisor Bond Fund and, to a limited extent, the Advisor
Short Duration Bond Fund invest in medium- and lower-quality bonds, including
high-yield bonds (commonly referred to as junk bonds). The Advisor Aggressive
High-Yield Bond Fund principally invests in medium- and lower-quality bonds,
including high-yield bonds. Lower-quality bonds involve greater interest-rate
and credit-quality risks than higher- and medium-quality bonds. High-yield bonds
possess an increased possibility that the bond's issuer may not be able to make
its payments of interest and principal. 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 could adversely affect the high-
yield bond market and reduce the fund's ability to sell its high-yield bonds
(liquidity risk). A lack of a liquid market for these bonds could decrease the
fund's share price. The Advisor Aggressive High-Yield Bond Fund also invests in
debts obligations that are in default and these obligations possess an increased
possibility that the issuer may not be able to make its payments of principal
and interest.
Mortgage- and asset-backed securities: The Advisor Aggressive High-Yield Bond
Fund and Advisor Bond Fund invest in mortgage-backed and asset-backed
securities. These 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.
Foreign securities: The Advisor Bond Fund may invest up to 20% of its assets in
dollar-denominated foreign securities. The Advisor Aggressive High-Yield Bond
Fund may invest up to 25% of its assets in foreign securities. The Advisor Short
Duration 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: The Advisor Aggressive High-Yield Bond Fund and Advisor 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.
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.
Convertible Securities: The Advisor Aggressive High-Yield Bond Fund may invest
in convertible securities. A convertible security is a bond, debenture, note,
preferred stock, or other security 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. Until the convertible
security is redeemed, converted or exchanged, the holder of the convertible
security is entitled to receive interest normally paid on debt or dividends paid
on preferred stock. Convertible securities have unique investment
characteristics in that they generally have: (i) higher yields than common
stocks, but lower yields than comparable non-
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convertible securities; (ii) are less subject to fluctuation in value than the
underlying stock since they have fixed income characteristics; and (iii) provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
Loan Interests: The Advisor Aggressive High-Yield Bond Fund may acquire loan
interests (for example, indebtedness or loan participations). The purchase of
loan interests of a troubled company always involves a credit-quality risk and
the possibility that invested principal may be lost. Purchasers of
participations, such as the fund, must rely on the financial institution issuing
the participation to assert any rights against the borrower with respect to the
underlying indebtedness. In addition, the fund takes on the credit-quality risk
of the bank or other financial intermediary issuing the participation, as well
as that of the company issuing the underlying indebtedness.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the Advisor Aggressive High-Yield Bond Fund and Advisor
Bond Fund are appropriate for investors whose financial goals are four to seven
years in the future. The Advisor Short Duration Bond Fund is appropriate for
investors whose financial goals are two to four years in the future. The funds
are not appropriate for investors concerned primarily with principal stability.
Fund Structure
Each of the funds has adopted a multiple class plan and offers several classes
of shares. Only the Class A, Class B, Class C and Class L shares of each fund
are offered in this prospectus. The principal differences among Class A, B, C
and L shares are each Class's sales charges and annual expenses. Class A and L
shares are subject to a front-end sales charge. Class B, C and L shares are
subject to a contingent deferred sales charge (CDSC), and Class A shares are
subject to a CDSC in limited circumstances. Class A, B, C and L shares are
subject to distribution fees under a Rule 12b-1 plan. Because distribution fees
are paid out of the fund's assets on an on-going basis, over time these fees
will increase the cost of an investment in Class A, B, C or L shares and may
cost more than other types of sales charges. Each class also pays different
administrative and transfer agency fees and expenses.
Fund Performance
The following return information illustrates how the performance of the funds
can vary, which is one indication of the risks of investing in the funds.
Calendar year total returns shown are for Class Z shares, a class not offered by
this prospectus. The returns for Class A, B, C and L shares are substantially
similar to those of the Class Z shares since each is invested in the same
portfolio of securities and the only differences relate to the differences in
the fees and expenses of each class of shares. Unlike the bar chart, performance
results for the Short Duration Bond Fund's Class A, B, C and L shares and the
Bond Fund's Class B, C and L shares, which were first offered on November 30,
2000, are based on the historical performance of the Class Z shares from the
inception of each fund up to September 30, 2000, recalculated to reflect the
higher annual expense ratios applicable to the Class A, B, C and L shares.
Performance results for the Bond Fund's Class A shares are based on the
historical performance of the Bond Fund's former Advisor Class shares from the
Advisor Class shares' inception up to September 30, 2000. Class B shares
performance assumes conversion to Class A shares after eight years. Please keep
in mind that the past performance of each fund does not represent how it will
perform in the future. The information assumes that you reinvested all dividends
and distributions.
The bar chart and performance table for the Advisor Aggressive High-Yield Bond
Fund is not presented here because the fund is new and did not begin operations
until November 30, 2000.
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CALENDAR YEAR TOTAL RETURNS/1/
Class Z Annual Returns
-----------------------------------------------
Advisor
Advisor Short Duration
Year Bond Bond
-----------------------------------------------
1990
-----------------------------------------------
1991
-----------------------------------------------
1992
-----------------------------------------------
1993
-----------------------------------------------
1994
-----------------------------------------------
1995
-----------------------------------------------
1996
-----------------------------------------------
1997
-----------------------------------------------
1998
-----------------------------------------------
1999
-----------------------------------------------
BEST AND WORST QUARTERLY PERFORMANCE
(During the periods shown above)
Fund name Best quarter return Worst quarter return
--------------------------------------------------------------------------------
Advisor Bond
Advisor Short Duration Bond
/1/ The Class Z shares of the Advisor Bond Fund are the fund's former Investor
Class shares. The Class Z shares of the Advisor Short Duration Bond Fund are the
fund's former Retail Class shares. The Class Z year-to-date returns through
September 30, 2000 were: the Advisor Bond Fund, __% and the Advisor Short
Duration Bond Fund, __%.
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<PAGE>
AVERAGE ANNUAL TOTAL RETURNS/1/
As of 12-31-99
Fund/Index 1-year 5-year 10-year Since Inception
Advisor Bond
Class A
Class B
Class C
Class L
Lehman Brothers Aggregate
Bond Index
Lipper Intermediate Investment
Grade Debt Funds Index
Advisor Short Duration Bond
Class A
Class B
Class C
Class L
Salomon Smith Barney 1-3
Year World Government Bond
Index (Currency Hedged)
Lipper Short World Multi-Market
Income Funds Average
/1/ The Advisor Bond Fund's Class A total returns are the total returns for the
fund's former Advisor Class shares. The Advisor Bond Fund's Class B, C and L
total returns and the Advisor Short Duration Bond Fund's Class A, B, C and L
total returns reflect Class Z returns adjusted for the differences in fees among
the classes.
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 Intermediate Investment Grade Debt Funds Index is an equally-weighted
performance index of the largest qualifying funds in this Lipper category. The
Salomon Smith Barney 1-3 Year World Government Bond Index (Currency Hedged) is
an unmanaged index generally representative of short-term, global fixed income
government securities. Rolling one-month forward exchange contracts are used as
the hedging instrument. The Lipper Short World Multi-Market Income Funds Average
represents funds that invest in non-U.S. dollar and U.S. dollar debt instruments
and, by policy, keep a dollar-weighted average maturity of less than five years.
For current yield information on the funds, call 800-368-3863.
Page 7
<PAGE>
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)
Fees are stated as a percentage of offering price unless otherwise noted.
--------------------------------------------------------------------------------
Maximum Contingent
Maximum Sales Deferred Sales Charge (Load)
Charge (Load) (CDSC) (As a percentage of the
Fund / Share Class Imposed on Purchases purchase price)
--------------------------------------------------------------------------------
Advisor Aggressive
High-Yield Bond
Class A 4.50% None
Class B None 4.00%
Class C None 1.00%
Class L 1.00% 1.00%
--------------------------------------------------------------------------------
Advisor Bond
Class A 4.50% None
Class B None 4.00%
Class C None 1.00%
Class L 1.00% 1.00%
--------------------------------------------------------------------------------
Advisor Short Duration
Bond
Class A 2.25% None
Class B None 4.00%
Class C None 1.00%
Class L 1.00% 1.00%
--------------------------------------------------------------------------------
You may not pay the maximum sales charge because waivers and reduced sales
charges are available. Certain Class A purchases of $1 million or more or
without an initial sales charge may be subject to a 1% CDSC if redeemed within
12 months of purchase. Class C purchases will be subject to a 1% CDSC if
redeemed within 12 months of purchase. Class L purchases will be subject to a 1%
CDSC if redeemed within 18 months of purchase. See "What Share Classes We
Offer."
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Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
The costs of operating the funds are deducted from fund assets, which means you
pay them indirectly. These costs are deducted before computing the daily share
price or making distributions. As a result, they don't appear on your account
statement, but instead reduce the total return you receive from your fund
investment.
Annual Fund Operating Expenses (as a percent of average net assets)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
12b-1 Distribution Total Annual Fund
Fund / Share Class Management Fees and Service Fees Other Expenses/1/ Operating Expenses
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisor Aggressive High-Yield
Bond
Class A 0.25%
Class B 1.00%
Class C 1.00%
Class L 0.75%
--------------------------------------------------------------------------------------------------------------------------
Advisor Bond
Class A 0.25%
Class B 1.00%
Class C 1.00%
Class L 0.75%
--------------------------------------------------------------------------------------------------------------------------
Advisor Short Duration Bond
Class A 0.25%
Class B 1.00%
Class C 1.00%
Class L 0.75%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ "Other Expenses" for the Advisor Aggressive High-Yield Bond Fund are based
on estimated amounts for the current fiscal year.
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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 either redeem or do not
redeem all of your shares at the end of those periods. The example also assumes
that your investment has a 5% return each year and that the funds' operating
expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Fund / Share Class 1 year 3 years 5 years 10 years
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advisor Aggressive High-Yield Bond
Class A n/a n/a
Class B (if you redeem your shares) n/a n/a
Class B (if you do not redeem your shares) n/a n/a
---
Class C (if you redeem your shares) n/a n/a
Class C (if you do not redeem your shares) n/a n/a
---
Class L (if you redeem your shares) n/a n/a
Class L (if you do not redeem your shares) n/a n/a
---
----------------------------------------------------------------------------------------------------------------------
Advisor Bond
Class A
Class B (if you redeem your shares)
Class B (if you do not redeem your shares)
---
Class C (if you redeem your shares)
Class C (if you do not redeem your shares)
---
Class L (if you redeem your shares)
Class L (if you do not redeem your shares)
---
----------------------------------------------------------------------------------------------------------------------
Advisor Short Duration Bond
Class A
Class B (if you redeem your shares)
Class B (if you do not redeem your shares)
---
Class C (if you redeem your shares)
Class C (if you do not redeem your shares)
---
Class L (if you redeem your shares)
Class L (if you do not redeem your shares)
---
----------------------------------------------------------------------------------------------------------------------
</TABLE>
Who are the funds' investment advisor and portfolio managers?
--------------------------------------------------------------------------------
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and other
investment portfolios representing assets, as of October 31, 2000, of over $__
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.
Jeffrey A. Koch co-manages the Advisor Aggressive High-Yield Bond Fund, the
Advisor Bond Fund, and the Advisor Short Duration 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 co-managed the Advisor Aggressive High-Yield Bond Fund Bond Fund since
its inception, managed or co-managed the Advisor Bond Fund since its inception
in December 1996, and co-managed the Advisor Short Duration Bond Fund since
August 1999. Prior to joining Strong, Mr. Koch was employed by Fossett
Corporation, a clearing firm, as a market maker clerk. Mr. Koch received his
bachelor's degree in Economics from the University of Minnesota in 1987 and his
Masters of Business Administration in Finance from Washington University in
1989.
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Thomas M. Price co-manages the Advisor Aggressive High-Yield Bond Fund. He has
over nine years of investment experience and is a Chartered Financial Analyst.
He has co-managed the Advisor Aggressive High-Yield Bond Fund since its
inception in November 2000. 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 bachelor's 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.
Bradley C. Tank co-manages the Advisor Bond Fund and the Advisor Short Duration
Bond Fund. He has over 15 years of investment experience. Mr. Tank joined Strong
as a portfolio manager in June 1990. He has managed or co-managed the Advisor
Bond Fund since its inception in December 1996 and co-managed the Advisor Short
Duration 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 bachelor's 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.
Other Important Information You Should Know
A Word About Credit Quality
--------------------------------------------------------------------------------
Credit quality measures the issuer's expected ability to pay interest and
principal payments on time. Credit quality can be "higher-quality," "medium-
quality," "lower-quality," or "in default."
Higher-quality means bonds that are in any of the three highest rating
categories. For example, bonds rated AAA to A by Standard & Poor's Ratings Group
(S&P)*.
Medium-quality means bonds that are in the fourth-highest rating category. For
example, bonds rated BBB by S&P*.
Lower-quality means bonds that are below the fourth-highest rating category.
They are also known as non-investment, high-risk, high-yield, or "junk bonds."
For example, bonds rated BB to C by S&P*.
In default means the bond's issuer has not paid principal or interest on time.
*or those rated in this category by any nationally recognized statistical rating
organization. S&P is only one example of a nationally recognized statistical
rating organization.
This chart shows S&P's definition and ratings group for credit quality. Other
rating organizations use similar definitions.
<TABLE>
<CAPTION>
Credit
Quality S&P's Definition S&P's Ratings Group Rating Category
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Highest quality AAA First highest
Higher High quality AA Second highest
Upper medium grade A Third highest
------------------------------------------------------------------------------------------
Medium Medium grade BBB Fourth highest
------------------------------------------------------------------------------------------
Low grade BB
Lower Speculative B
Submarginal CCC, CC, C
-----------------------------------------------------------------------
In default Probably in default D
-----------------------------------------------------------------------
</TABLE>
Page 11
<PAGE>
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 and Retail
Class shares for Class A, B, C, and L of the Advisor Bond Fund and the Advisor
Short Duration Bond Fund, respectively, for the periods shown. Certain
information reflects financial results for a single Investor or Retail Class
fund share. "Total Return" shows how much an investment in Investor or Retail
Class shares of the fund would have increased (or decreased) during each period,
assuming you had reinvested all dividends and distributions. These figures,
except for the most recent six-month period, have been audited by
_________________________, whose report, along with the funds' financial
statements, is included in the funds' annual report.
((Financial Highlights))
Page 12
<PAGE>
YOUR ACCOUNT
Distribution Fees
--------------------------------------------------------------------------------
The funds have adopted a Rule 12b-1 distribution and service plan for their
Class A, B, C and L shares. Under the distribution and service plan, each fund
pays its distributor or others to sell shares of a given class. These expenses
may also include service fees paid to securities dealers or others that provide
on-going account services to distributors and shareholders. These services may
include establishing and maintaining shareholder accounts, answering shareholder
inquiries, and providing other personal services to shareholders. These fees
also compensate Strong for other expenses including: (i) printing and
distributing prospectuses to persons other than shareholders; and (ii)
preparing, printing and distributing advertising and sales literature and
reports to shareholders used for sales purposes. The distribution and service
fees charged to each class are based only on the fees attributable to that
particular class. See "What Share Classes We Offer" for a description of the
distribution and service fees paid by each class. Because Rule 12b-1 fees are
on-going, over time these fees will increase the cost of your investment and may
cost more than other types of sales charges.
Share Price
--------------------------------------------------------------------------------
Your transaction price for buying, selling, or exchanging specific classes of
shares is the net asset value per share (NAV) for that class of shares. Any
applicable sales charges will be added to the purchase price. The "offering
price" is the initial sales charge plus the NAV. 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 Advisor Funds.
((Side Box))
-----------------------------------------
We determine the share price or NAV of
a class of shares by dividing net
assets attributable to the class of
shares (the value of the investments,
cash, and other assets attributable to
the class of shares minus the fund's
liabilities attributable to the class
of shares) by the number of shares in
the class outstanding.
-----------------------------------------
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
Advisor Funds, determine that they would have a material effect on the fund's
NAV.
Page 13
<PAGE>
What Share Classes We Offer
--------------------------------------------------------------------------------
We offer several classes of fund shares in this prospectus, each with a
different combination of sales charges, fees, eligibility requirements and other
features. Your financial advisor can help you determine which class is best for
you. Class Z shares are generally not available except to a limited class of
investors. A brief summary of each class is presented below and a more detailed
description follows the table.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class L
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Initial Sales Charge 4.50% or less/1/ None None 1.00%
2.25% or less/2/
----------------------------------------------------------------------------------------------------------------------------------
4% on shares sold
1% on purchases of within the first year, 1% on purchases 1% on purchases
Deferred Sales Charge $1 million or more sold declining to 1% within sold within 12 months sold within 18 months
within 12 months six years and
eliminated after that
----------------------------------------------------------------------------------------------------------------------------------
Maximum 12b-1 Fees 0.25% 1.00% 1.00% 0.75%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/1/ For the Advisor Aggressive High-Yield Bond Fund and the Advisor Bond Fund.
/2/ For the Advisor Short Duration Bond Fund.
Class A Shares
You can buy Class A shares at the offering price, which is the net asset value
per share plus an up-front sales charge. You may qualify for a reduced sales
charge, or the sales charge may be waived, as described in "How to Reduce Your
Sales Charge." Class A shares are also subject to an annual service fee of .25%
of the fund's average daily net assets which compensates your financial advisor
for providing on-going service to you. Strong retains the up-front sales charge
and the service fee on accounts with no authorized dealer of record. The up-
front Class A sales charge for the Advisor Aggressive High-Yield Bond Fund and
the Advisor Bond Fund described in the prospectus is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Authorized Dealer
Sales Charge as % of Sales Charge as % of Net Commission as % of
Amount of Purchase Public Offering Price Amount Invested Public Offering Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
-----------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.75% 3.90% 3.25%
-----------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.75% 2.83% 2.25%
-----------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
-----------------------------------------------------------------------------------------------------------------------
$1,000,000 and over 0.00% 0.00% 0.75%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The up-front Class A sales charge for the Advisor Short Duration Bond Fund
described in the prospectus is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Authorized Dealer
Sales Charge as % of Sales Charge as % of Net Commission as % of
Amount of Purchase Public Offering Price Amount Invested Public Offering Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
-----------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75% 1.78% 1.50%
-----------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 1.25% 1.27% 1.00%
-----------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.00% 1.01% 0.75%
-----------------------------------------------------------------------------------------------------------------------
$1,000,000 and over 0.00% 0.00% 0.75%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
If you invest $1 million or more, you can buy Class A shares without an initial
sales charge. However, if you sell (redeem) your shares within 12 months of
purchase, you may have to pay a contingent deferred sales charge (CDSC) of 1% of
your
Page 14
<PAGE>
purchase price. You do not have to pay this CDSC if your financial advisor has
made arrangements with Strong and agrees to waive the commission.
Class B Shares
You can buy Class B shares at the offering price, which is the net asset value
per share without any up-front sales charge so that the full amount of your
purchase is invested in the fund. However, you will pay annual distribution and
service fees of 1.00% of the funds' average daily net assets. The annual 0.25%
service fee compensates your financial advisor for providing on-going service to
you. Strong retains the service and distribution fees on accounts with no
authorized dealer of record. The annual 0.75% distribution fee compensates
Strong for paying your financial advisor a 3.00% up-front sales commission,
which includes an advance of the first year's service fee. If you sell your
shares within six years of purchase, you will have to pay a CDSC, based on your
purchase price, according to the following schedule.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Years Since Purchase 0 - 1 1 - 2 2 - 3 3 - 4 4 - 5 5 - 6 Over 6
--------------------------------------------------------------------------------
CDSC 4% 4% 3% 3% 2% 1% None
--------------------------------------------------------------------------------
</TABLE>
You do not pay a CDSC on any Class B shares you purchase by reinvesting
dividends. Class B shares automatically convert to Class A shares eight years
after you buy them so that the distribution fees you pay over the life of your
investment are limited. You will continue to pay an annual service fee on any
converted Class B shares.
Class C Shares
You can buy Class C shares at the offering price, which is the net asset value
per share without an up-front sales charge. Class C shares are also subject to
annual distribution and service fees of 1.00%. The annual 0.25% service fee
compensates your financial advisor for providing on-going service to you.
Strong retains the service and distribution fees on accounts with no authorized
dealer of record. The annual 0.75% distribution fee reimburses Strong for
paying your financial advisor a 1.00% up-front sales commission. Strong
advances the first-year's service and distribution fees.
If you sell (redeem) your Class C shares within 12 months of purchase, you will
have to pay a CDSC of 1.00% of your purchase price.
Class L Shares
You can buy Class L shares at the offering price, which is the net asset value
per share plus an up-front sales charge. Class L shares are also subject to
annual distribution and service fees of 0.75%. The annual 0.25% service fee
compensates your financial advisor for providing on-going service to you.
Strong retains the service and distribution fees on accounts with no authorized
dealer of record. The annual 0.50% distribution fee reimburses Strong for
paying your financial advisor an on-going sales commission. Strong advances the
first-year's service and distribution fees. The up-front Class L sales charge
for all funds described in the prospectus is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Authorized Dealer
Sales Charge as % of Sales Charge as % of Net Commission as % of
Amount of Purchase Public Offering Price Amount Invested Public Offering Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $1,000,000 1.00% 1.01% 2.00%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
If you sell (redeem) your Class L shares within 18 months of purchase, you will
have to pay a CDSC of 1% of your purchase price.
((Side Box))
------------------------------------------------------------
We place any investment of $ 1 million or more in Class A
shares since there is no initial sales charge and Class
A's annual expenses are lower.
------------------------------------------------------------
Page 15
<PAGE>
How to Reduce Your Sales Charge
--------------------------------------------------------------------------------
If you qualify for any of the sales charge reductions or waivers below, please
let us know at the time of your investment to help ensure that you receive the
lower sales charge.
Quantity Discounts
We offer several ways for you to combine your purchases in the Strong Advisor
Funds to take advantage of the lower sales charges for large purchases of Class
A shares.
. Rights of Accumulation - lets you combine all of your shares in the Strong
Advisor Funds for purposes of calculating the sales charge. You may also
combine the shares of your spouse, and your children or grandchildren, if
they are under the age of 21. Certain company and retirement plan accounts
may be included.
. Letter of Intent - expresses your intent to buy a stated dollar amount of
shares over a 13-month period and lets you receive the same sales charge as
if all shares had been purchased at one time. We will reserve a portion of
your shares to cover any additional sales charge that may apply if you do
not buy the amount stated in your letter of intent.
Reinstatement Privilege
If you sell your shares of a Strong Advisor Fund, you may reinvest some or all
of the proceeds within 365 days without an initial sales charge. The proceeds
must be reinvested within the same share class, except proceeds from the sale of
Class B shares will be reinvested in Class A shares. If you paid a CDSC when
you sold your Class A, C, or L shares, we will credit your account with the
amount of the CDSC paid, but a new CDSC will apply. For Class B shares
reinvested in Class A, a new CDSC will not apply, although your account will not
be credited with the amount of any CDSC paid when you sold your Class B shares.
This privilege does not apply to shares you buy and sell under our exchange
program.
Sales Charge Waivers
Class A shares may be purchased without an initial sales charge or CDSC by
various individuals, institutions and retirement plans or by investors who
reinvest certain distributions and proceeds within 365 days. Certain investors
also may buy Class L shares without an initial sales charge. The CDSC for each
class may be waived for certain redemptions and distributions. If you would
like information about sales charge waivers, call your investment representative
or call us at 800-368-3863. A list of available sales charge waivers may also
be found in the Statement of Additional Information.
Group Investment Program
Groups of 11 or more investors are allowed to invest as a group. For sales
charge purposes, the group's investments are added together. There are certain
other requirements and the group must have a purpose other than buying fund
shares at a discount.
Buying Shares
--------------------------------------------------------------------------------
You can buy shares either through a broker-dealer or other investment
professional, or directly from us. We encourage you to consult with an
investment professional that can open an account for you and help you with your
investment decisions. Once you have an account, you can buy, sell and exchange
shares by contacting your investment professional. They will look after any
necessary paperwork that is needed to complete a transaction and send your order
to us. Also, please ask your investment professional about its limits, fees and
policies for buying, selling and exchanging shares, which may be different from
those described here, and about its related programs or services.
Page 16
<PAGE>
Investment Minimums: When buying shares, you must meet the following investment
minimum requirements.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Initial Investment Minimum Additional Investment Minimum
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Regular accounts $2,500 $50
---------------------------------------------------------------------------------------------------------------------
Education IRA accounts $ 500 $50
---------------------------------------------------------------------------------------------------------------------
Other IRAs and UGMA/UTMA accounts $ 250 $50
---------------------------------------------------------------------------------------------------------------------
SIMPLE IRA, SEP-IRA, 403(b)(7), Keogh, the lesser of $250 or $25 per month $50
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.
Buying Instructions
You can buy shares in several ways. If you are opening a new account, please
complete and sign a new account application. Make sure you indicate the share
class you have chosen.
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).
((Side Box))
-------------------
Questions?
Call 800-368-3863
24 hours a day
7 days a week
-------------------
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.
Express Purchase(SM)
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 Advisor 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 Advisor 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
Page 17
<PAGE>
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 Advisor 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.
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.
Page 18
<PAGE>
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
generally will not be honored until 10 days after we receive the purchase
check or electronic transaction.
. While the funds do not charge a redemption fee, you may be assessed a CDSC,
if applicable. When you redeem Class A, Class B, Class C or Class L shares
subject to a CDSC, the fund will first redeem any shares that are not
subject to a CDSC, and then redeem the shares you have owned for the
longest period of time, unless you ask the fund to redeem your shares in a
different order. No CDSC is imposed on shares you buy through the
reinvestment of dividends and capital gains. The holding period is
calculated on a monthly basis and begins on the first day of the month in
which you buy shares. When you redeem shares subject to a CDSC, the CDSC is
calculated on your purchase price, deducted from your redemption proceeds,
and paid to Strong. The CDSC may be waived under certain special
circumstances as described in the Statement of Additional Information.
. Some transactions and requests require a signature guarantee.
. 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.
------------------------------------------------------
Page 19
<PAGE>
((Side Box))
--------------------------------------------------------
Signature Guarantees help ensure that major
transactions or changes to your account are in fact
authorized by you. For example, we require a signature
guarantee on written redemption requests for more than
$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.
--------------------------------------------------------
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 on-line 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.
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 Advisor 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.
Page 20
<PAGE>
Distributions
--------------------------------------------------------------------------------
Distribution Policy
The 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 order.
Reinvestment of Dividends and Capital Gain Distributions
Your dividends and capital gain distributions 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 Advisor 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.
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.
((Side Box))
---------------------------------------------------
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.
---------------------------------------------------
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))
--------------------------------------------------
Unless your investment is in a tax-deferred
retirement account such as an IRA, you may
want to avoid:
. Investing a large amount in a fund close to
the end of the calendar year. If the fund
makes a capital gain distribution, you may
receive some of your investment back as a
taxable
--------------------------------------------------
Page 21
<PAGE>
--------------------------------------------------
distribution.
. 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.
--------------------------------------------------
((Side Box))
---------------------------------------------------
Cost Basis is the amount that you paid for the
shares. When you sell shares, you subtract the
cost basis from the sale proceeds to determine
whether you realized an investment gain or loss.
For example, if you bought a share of a fund at
$10 and you sold it two years later at $11, your
cost basis on the share is $10 and your gain is
$1.
---------------------------------------------------
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 on-line 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.
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 an appropriate class of another
Strong Advisor 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 Advisor Funds.
Remember, an exchange of shares of one Strong Advisor Fund for those of another
Strong Advisor Fund is considered a sale and a purchase of shares for tax
purposes and may result in a capital gain or loss. Purchases by exchange are
subject to the investment requirements and other criteria of the fund purchased.
With this option, you can exchange shares between most Strong Advisor Funds
within the same class, generally without paying any additional sales charges.
However, if you exchange shares held for less than six months, you may be
charged the difference between the initial sales charge of the two funds.
Generally exchanges may only be made between identically
Page 22
<PAGE>
registered accounts, unless you send written instructions with a signature
guarantee. Any CDSC will continue to be calculated from the date of your initial
investment and will not be charged at the time of the exchange. The purchase
price for determining a CDSC on exchanged shares will be the price you paid for
the original shares. If you exchange your Class B shares for the same class of
shares of another Strong Advisor Fund, the time your shares are held in that
fund will count towards the eight year period for automatic conversion to Class
A shares. Frequent exchanges can interfere with fund management or operations
and drive up costs for all shareholders. To protect shareholders, there are
limits on the number and amount of exchanges you may make (please see "Market
Timers" below).
Market Timers
The funds do not allow investments by market timers. You will be considered a
market timer if you have (i) requested an exchange out of the fund within two
weeks of an earlier exchange request, or (ii) exchanged shares out of a fund
more than twice in a calendar quarter, or (iii) exchanged shares equal to at
least $5 million, or more than 1% of a fund's net assets, or (iv) otherwise seem
to follow a timing pattern. Shares under common ownership or control are
combined for purposes of these limits.
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 Advisor 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 Advisor 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
Advisor 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.
Page 23
<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 Advisor 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 begin an automatic investment program
or 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.
Page 24
<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 on-line 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].
The Strong Advisor Aggressive High-Yield Bond Fund, a series of Strong Short-
Term Global Bond Fund, Inc., SEC file number: 811-8320
The Strong Advisor Bond Fund, a series of Strong Income Funds II, Inc., SEC file
number: 811-7335
The Strong Advisor Short Duration Bond Fund, a series of Strong Short-Term
Global Bond Fund, Inc., SEC file number: 811-8320
Page 25
<PAGE>
[Strong logo and picture of man and two children fishing]
prospectus
the Strong Advisor INCOME funds
-------------------------------
Class Z
November 30, 2000
The Strong Advisor Bond Fund
The Strong Advisor Short Duration Bond Fund
The Securities and Exchange Commission (SEC) has not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Page 1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Your Investment
Key Information
What are the funds' goals?
What are the funds' principal investment strategies?
What are the main risks of investing in the funds?
What are the funds' fees and expenses?
Who are the funds' investment advisor and portfolio managers?
Other Important Information You Should Know
A Word About Credit Quality
Financial Highlights
Your Account
Share Price
Qualified Investors
Buying Shares
Selling Shares
Additional Policies
Distributions
Taxes
Services For Investors
Reserved Rights
For More Information Back Cover
</TABLE>
In this prospectus, "we" refers to Strong Capital Management, Inc., the
investment advisor, administrator, and transfer agent for the Strong Advisor
Funds.
Page 2
<PAGE>
YOUR INVESTMENT
Key Information
What are the funds' goals?
-------------------------------------------------------------------------------
The Strong Advisor Bond Fund seeks total return by investing for a high level of
current income with a moderate degree of share-price fluctuation.
The Strong Advisor Short Duration Bond Fund seeks total return by investing for
a high level of income with a low degree of share-price fluctuation.
What are the funds' principal investment strategies?
--------------------------------------------------------------------------------
The Strong Advisor Bond Fund invests primarily in higher- and medium-quality
corporate, mortgage- and asset-backed, U.S. government (and its agencies and
instrumentalities), and foreign government bonds. The fund's duration will
normally vary between three and six years. The fund may invest up to 20% of its
assets in securities denominated in foreign currencies and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers. The fund
may also invest up to 20% of its assets in lower-quality, high-yield bonds
(commonly referred to as junk bonds). These high-yield bonds may be either U.S.
or foreign securities. In addition, the fund may use futures contracts for
hedging and risk management purposes. To a limited extent, the fund may also
invest in dollar-denominated foreign securities. In selecting bonds for the
portfolio, the managers engage in rigorous, security-by-security research as
well as thorough analysis of general economic conditions. Generally,
quantitative analysis (focused on such factors as duration, yield spreads, and
yield curves) drives issue selection in the Treasury and mortgage marketplace
and proactive credit research drives corporate issue selection.
((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 Strong Advisor Short Duration Bond Fund invests primarily in higher- and
medium-quality bonds from U.S. and foreign issuers. The fund may also invest up
to 35% of its assets in lower-quality, high-yield bonds (commonly referred to as
junk bonds). Under normal conditions, the fund maintains a duration of three
years or less. The fund's managers intend to attempt to limit the fund's
exposure to foreign currency risk by using hedging strategies. When a bond no
longer offers attractive return potential, the managers may sell it.
Although each of the funds invests primarily for income, they also employ
techniques designed to realize capital appreciation. For example, the managers
may select bonds with maturities and coupon rates that position them for
potential capital appreciation for a variety of reasons including a manager's
view on the direction of future interest-rate movements and the potential for a
credit upgrade.
The managers may sell a holding if its fundamental qualities deteriorate, or to
take advantage of more attractive yield opportunities. Also, the managers may
invest any amount in cash or cash-type securities (high-quality, short-term debt
securities issued by corporations, financial institutions, the U.S. government,
or foreign governments) 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, the Advisor Bond Fund's active trading approach may increase the
fund's costs, which may reduce the fund's performance. The Advisor Bond Fund's
active trading approach may also increase the amount of capital gains tax that
you pay on the fund's returns.
Page 3
<PAGE>
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.
High-yield bonds: The Advisor Bond Fund and, to a limited extent, the Advisor
Short Duration Bond Fund invest in medium- and lower-quality bonds, including
high-yield bonds (commonly referred to as junk bonds). Lower-quality bonds
involve greater interest-rate and credit-quality risks than higher- and medium-
quality bonds. High-yield bonds possess an increased possibility that the bond's
issuer may not be able to make its payments of interest and principal. 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 could
adversely affect the high-yield bond market and reduce the fund's ability to
sell its high-yield bonds (liquidity risk). A lack of a liquid market for these
bonds could decrease the fund's share price.
Mortgage- and asset-backed securities: The Advisor Bond Fund invests in
mortgage-backed and asset-backed securities. These 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.
Foreign securities: The Advisor Bond Fund may invest up to 20% of its assets in
dollar-denominated foreign securities. The Advisor Short Duration 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: The Advisor Bond Fund often uses 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.
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.
The funds are appropriate for investors who are comfortable with the risks
described here. Also, the Advisor Bond Fund is appropriate for investors whose
financial goals are four to seven years in the future. The Advisor Short
Duration Bond Fund is appropriate for investors whose financial goals are two to
four years in the future. The funds are not appropriate for investors concerned
primarily with principal stability.
Fund Structure
Each of the funds has adopted a multiple class plan and offers several classes
of shares. The principal differences among the classes are each class's sales
charges and annual expenses. Each class also pays different administrative and
transfer agency fees and expenses. Only the Class Z shares of each fund are
offered in this prospectus. The Class Z shares are the Advisor Bond Fund's and
Advisor Short Duration Bond Fund's former Investor Class shares and non-
designated class of shares, respectively. Class Z shares, which are not subject
to a sales charge or distribution fee, are available only to certain types of
investors (see "Qualified Investors").
Page 4
<PAGE>
Fund Performance
The following return information illustrates how the performance of the Class Z
shares of the funds can vary, which is one indication of the risks of investing
in the funds. Please keep in mind that the past performance of each fund does
not represent how it will perform in the future. The information assumes that
you reinvested all dividends and distributions.
CALENDAR YEAR TOTAL RETURNS/1/
Class Z Annual Returns
-----------------------------------------------
Advisor
Advisor Short Duration
Year Bond Bond
-----------------------------------------------
1990
-----------------------------------------------
1991
-----------------------------------------------
1992
-----------------------------------------------
1993
-----------------------------------------------
1994
-----------------------------------------------
1995
-----------------------------------------------
1996
-----------------------------------------------
1997
-----------------------------------------------
1998
-----------------------------------------------
1999
-----------------------------------------------
BEST AND WORST QUARTERLY PERFORMANCE
(During the periods shown above)
Fund name Best quarter return Worst quarter return
--------------------------------------------------------------------------------
Advisor Bond
Advisor Short Duration Bond
/1/ The Class-Z shares of the Advisor Bond Fund are the fund's former Investor
Class shares. The Class Z shares of the Advisor Short Duration Bond Fund are the
fund's former Retail Class of shares. The Class Z year-to-date returns through
September 30, 2000 were: the Advisor Bond Fund, __% and the Advisor Short
Duration Bond Fund, __%.
AVERAGE ANNUAL TOTAL RETURNS
As of 12-31-99
Fund/Index 1-year 5-year 10-year Since Inception
Advisor Bond
Lehman Brothers Aggregate
Bond Index
Lipper Intermediate Investment
Grade Debt Funds Index
Advisor Short Duration Bond
Salomon Smith Barney 1-3
Year World Government Bond
Index (Currency Hedged)
Lipper Short World Multi-Market
Income Funds Average
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 Intermediate Investment Grade Debt Funds Index is an equally-weighted
performance index of the largest qualifying funds in this Lipper category. The
Salomon Smith Barney 1-3 Year World Government Bond Index (Currency Hedged) is
an unmanaged index generally representative of short-term, global fixed income
government securities. Rolling one-month forward exchange contracts are used as
the hedging instrument. The Lipper Short World Multi-Market Income Funds Average
represents funds that invest in non-U.S. dollar and U.S. dollar debt instruments
and, by policy, keep a dollar-weighted average maturity of less than five years.
Page 5
<PAGE>
As of September 30, 2000, the 30-day yields for the funds' Class Z shares were
as follows: the Advisor Bond Fund, __% and the Advisor Short Duration Bond Fund,
__%. For current yield information on the funds, call 800-368-3863.
What are the funds' fees and expenses?
-------------------------------------------------------------------------------
This section describes the fees and expenses that you may pay if you buy and
hold shares of the funds.
Shareholder Fees
(fees paid directly from your investment)
The Class Z shares of each fund are 100% no-load, so you pay no sales charges
(loads) to buy or sell shares.
Annual Fund Operating Expenses
(expenses that are deducted from fund assets)
The costs of operating the funds are deducted from fund assets, which means you
pay them indirectly. These costs are deducted before computing the daily share
price or making distributions. As a result, they don't appear on your account
statement, but instead reduce the total return you receive from your fund
investment.
Annual Fund Operating Expenses (as a percent of average net assets)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
12b-1
Distribution and Total Annual Fund
Fund Management Fees Service Fees Other Expenses Operating Expenses
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advisor Bond 0.00%
------------------------------------------------------------------------------------------------------------
Advisor Short Duration Bond 0.00%
------------------------------------------------------------------------------------------------------------
</TABLE>
Example: This example is intended to help you compare the cost of investing in
the funds with the cost of investing in other mutual funds. The example assumes
that you invest $10,000 in the funds and reinvest all dividends and
distributions for the time periods indicated, and then either redeem or do not
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:
--------------------------------------------------------------------------------
Fund 1 year 3 years 5 years 10 years
--------------------------------------------------------------------------------
Advisor Bond
--------------------------------------------------------------------------------
Advisor Short Duration Bond
--------------------------------------------------------------------------------
Who are the funds' investment advisor and portfolio managers?
-------------------------------------------------------------
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and other
investment portfolios representing assets, as of October 31, 2000, of over $__
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.
Jeffrey A. Koch co-manages the Advisor Bond Fund and the Advisor Short Duration
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 Advisor Bond Fund
since its inception in December 1996 and co-managed the Advisor Short Duration
Bond Fund since August 1999. Prior to joining Strong, Mr. Koch was employed by
Fossett Corporation, a clearing firm, as a market maker clerk. Mr. Koch received
his bachelor's degree in Economics from
Page 6
<PAGE>
the University of Minnesota in 1987 and his Masters of Business Administration
in Finance from Washington University in 1989.
Bradley C. Tank co-manages the Advisor Bond Fund and the Advisor Short Duration
Bond Fund. He has over 15 years of investment experience. Mr. Tank joined Strong
as a portfolio manager in June 1990. He has managed or co-managed the Advisor
Bond Fund since its inception in December 1996 and co-managed the Advisor Short
Duration 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 bachelor's 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.
Other Important Information You Should Know
A Word About Credit Quality
--------------------------------------------------------------------------------
Credit quality measures the issuer's expected ability to pay interest and
principal payments on time. Credit quality can be "higher-quality," "medium-
quality," "lower-quality," or "in default."
Higher-quality means bonds that are in any of the three highest rating
categories. For example, bonds rated AAA to A by Standard & Poor's Ratings Group
(S&P)*.
Medium-quality means bonds that are in the fourth-highest rating category. For
example, bonds rated BBB by S&P*.
Lower-quality means bonds that are below the fourth-highest rating category.
They are also known as non-investment, high-risk, high-yield, or "junk bonds."
For example, bonds rated BB to C by S&P*.
In default means the bond's issuer has not paid principal or interest on time.
___________
*or those rated in this category by any nationally recognized statistical rating
organization. S&P is only one example of a nationally recognized statistical
rating organization.
This chart shows S&P's definition and ratings group for credit quality. Other
rating organizations use similar definitions.
Credit
Quality S&P's Definition S&P's Ratings Group Rating Category
-------------------------------------------------------------------------------
Highest quality AAA First highest
Higher High quality AA Second highest
Upper medium grade A Third highest
-------------------------------------------------------------------------------
Medium Medium grade BBB Fourth highest
-------------------------------------------------------------------------------
Low grade BB
Lower Speculative B
Submarginal CCC, CC, C
-------------------------------------------------------------------------------
In default Probably in default D
===============================================================================
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
Page 7
<PAGE>
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 Advisor Bond Fund and the Retail Class shares of the Advisor Short
Duration Bond Fund for the periods shown. Certain information reflects financial
results for a single Investor Class or Retail Class fund share. "Total Return"
shows how much an investment in the Investor Class shares of the Advisor Bond
Fund or Retail Class shares of the Advisor Short Duration Bond Fund would have
increased (or decreased) during each period, assuming you had reinvested all
dividends and distributions. These figures, except for the most recent six-month
period, have been audited by _________________________, whose report, along with
the funds' financial statements, is included in the funds' annual report.
((Financial Highlights))
Page 8
<PAGE>
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 Advisor Funds.
((Side Box))
----------------------------------------
We determine the share price or NAV of a
class of shares by dividing net assets
attributable to the class of shares (the
value of the investments, cash, and
other assets attributable to the class
of shares minus the fund's liabilities
attributable to the class of shares) by
the number of shares in the class
outstanding.
----------------------------------------
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 Advisor Funds, determine that they would have a material effect on the
fund's NAV.
Qualified Investors
--------------------------------------------------------------------------------
You may purchase Class Z shares only under limited circumstances, at the net
asset value on the day of purchase. Investors that owned shares of a fund on
November 30, 2000, that were renamed Class Z shares, may continue to own those
Class Z shares. The following types of investors may qualify to purchase Class
Z shares of the funds:
. Investors holding Class Z shares of a fund on November 30, 2000 that
were purchased directly from Strong, and not through an intermediary,
may purchase additional Class Z shares of that fund;
. 401(k) plans holding Class Z shares of a fund on November 30, 2000 may
purchase additional Class Z shares of that fund;
. Employees of Strong and Strong Investments, Inc. and their immediate
family members (grandparent, parent, sibling, child, grandchild and
spouse) who live in the same household;
. Certain retirement plans or trust accounts whose third party
administrators or dealers have entered into an administrative services
agreement with Strong to perform certain administrative services; and
. Certain institutional investors purchasing more than $10 million of
Class Z shares.
Page 9
<PAGE>
Buying Shares
--------------------------------------------------------------------------------
Investment Minimums: When buying shares, you must meet the following investment
minimum requirements. Institutions buying Class Z shares for the first time
must invest at least $10 million.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial Investment Minimum Additional Investment Minimum
-----------------------------------------------------------------------------------------------------------------
Regular accounts $2,500 $50
-----------------------------------------------------------------------------------------------------------------
Education IRA accounts $ 500 $50
-----------------------------------------------------------------------------------------------------------------
Other IRAs and UGMA/UTMA accounts $ 250 $50
-----------------------------------------------------------------------------------------------------------------
SIMPLE IRA, SEP-IRA, 403(b)(7), Keogh, the lesser of $250 or $25 per month $50
Pension Plan, and Profit Sharing Plan
accounts
-----------------------------------------------------------------------------------------------------------------
</TABLE>
Buying Instructions
You can buy shares in several ways. If you are opening a new account, please
complete and sign a new account application.
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).
((Side Box))
-----------------
Questions?
Call 800-368-3863
24 hours a day
7 days a week
-----------------
Express Purchase(SM)
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 Advisor 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 Advisor 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.
Page 10
<PAGE>
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 Advisor 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.
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.
Page 11
<PAGE>
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
generally will not be honored until 10 days after we receive the purchase
check or electronic transaction.
. Some transactions and requests require a signature guarantee.
. 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))
----------------------------------------
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.
----------------------------------------
Page 12
<PAGE>
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 on-line 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.
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 applicable at the time of the initial investment. 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
Advisor 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
The 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 order.
Reinvestment of Dividends and Capital Gain Distributions
Your dividends and capital gain distributions 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 Advisor 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.
Page 13
<PAGE>
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.
((Side Box))
----------------------------------------
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.
----------------------------------------
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))
---------------------------------------
Unless your investment is in a tax-
deferred retirement account such as an
IRA, you may want to avoid:
. Investing a large amount in a fund
close to the end of the calendar
year. If the fund makes a capital
gain distribution, you may receive
some of your investment back as a
taxable distribution.
. 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.
---------------------------------------
((Side Box))
----------------------------------------
Cost Basis is the amount that you paid
for the shares. When you sell shares,
you subtract the cost basis from the
sale proceeds to determine whether you
realized an investment gain or loss. For
example, if you bought a share of a fund
at $10 and you sold it two years later
at $11, your cost basis on the share is
$10 and your gain is $1.
----------------------------------------
Page 14
<PAGE>
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 on-line 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.
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 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 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 Advisor 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
Advisor 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:
Page 15
<PAGE>
. 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.
Reserved Rights
--------------------------------------------------------------------------------
We reserve the right to:
. Refuse, change, discontinue, or temporarily suspend account services,
including purchase, or telephone and Strong netDirect(R) redemption
privileges, for any reason.
. Reject any purchase request for any reason including exchanges from other
Strong Advisor 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.
. Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to begin an automatic investment program
or 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.
Page 16
<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 on-line 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].
The Strong Advisor Bond Fund, a series of Strong Income Funds II, Inc., SEC file
number: 811-7335
The Strong Advisor Short Duration Bond Fund, a series of Strong Short-Term
Global Bond Fund, Inc., SEC file number: 811-8320
Page 17
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
STRONG ADVISOR BOND FUND, a series fund of Strong Income Funds II, Inc.
STRONG ADVISOR AGGRESSIVE HIGH-YIELD BOND FUND, a series fund of Strong Short-
Term Global Bond Fund, Inc.
STRONG ADVISOR SHORT DURATION BOND FUND, a series fund of Strong Short-Term
Global Bond Fund, 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 November 30, 2000 and, with
respect to Institutional Class shares, the Prospectus for the Bond Fund dated
February 29, 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.
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell securities and is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
November 30, 2000
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
INVESTMENT RESTRICTIONS................................... 4
INVESTMENT POLICIES AND TECHNIQUES........................ 5
Strong Advisor Bond Fund................................. 5
Strong Advisor Aggressive High-Yield Bond Fund........... 5
Strong Advisor Short Duration Bond Fund.................. 6
Borrowing................................................ 6
Cash Management.......................................... 6
Convertible Securities................................... 6
Debt Obligations......................................... 7
Depositary Receipts...................................... 7
Derivative Instruments................................... 8
Duration................................................. 17
Foreign Investment Companies............................. 17
Foreign Securities....................................... 18
High-Yield (High-Risk) Securities........................ 18
Illiquid Securities...................................... 19
Lending of Portfolio Securities.......................... 20
Loan Interests........................................... 21
Maturity................................................. 22
Mortgage- and Asset-Backed Debt Securities............... 22
Municipal Obligations.................................... 23
Participation Interests.................................. 24
Repurchase Agreements.................................... 24
Reverse Repurchase Agreements and Mortgage Dollar Rolls.. 25
Short Sales.............................................. 25
Sovereign Debt........................................... 25
Standby Commitments...................................... 27
U.S. Government Securities............................... 27
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.................................... 29
PRINCIPAL SHAREHOLDERS.................................... 32
INVESTMENT ADVISOR........................................ 32
ADMINISTRATOR............................................. 35
DISTRIBUTOR............................................... 36
DISTRIBUTION PLAN......................................... 37
PORTFOLIO TRANSACTIONS AND BROKERAGE...................... 39
CUSTODIAN................................................. 43
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.............. 43
TAXES..................................................... 44
DETERMINATION OF NET ASSET VALUE.......................... 47
ADDITIONAL SHAREHOLDER INFORMATION........................ 47
ORGANIZATION.............................................. 51
SHAREHOLDER MEETINGS...................................... 52
PERFORMANCE INFORMATION................................... 52
GENERAL INFORMATION....................................... 61
INDEPENDENT ACCOUNTANTS................................... 63
LEGAL COUNSEL............................................. 63
FINANCIAL STATEMENTS...................................... 64
APPENDIX A - DEFINITION OF BOND RATINGS................... 65
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS............ 72
APPENDIX C - SHARE CLASSES................................ 73
</TABLE>
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.
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:
4
<PAGE>
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% 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.
INVESTMENT POLICIES AND TECHNIQUES
Strong Advisor Bond Fund
. Under normal market conditions, at least 80% 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 20% 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 20% of its net assets in securities denominated in
foreign currencies, and may invest beyond this limit in U.S. dollar-
denominated securities of foreign issuers.
Strong Advisor Aggressive 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 20% 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.
5
<PAGE>
. The Fund may invest up to 25% of its net assets directly or indirectly in
foreign securities.
Strong Advisor Short Duration Bond Fund (formerly Strong Short-Term Global Bond
Fund)
. The Fund invests primarily in investment-grade debt obligations of U.S. and
foreign issuers. Although there are no maturity restrictions on the
individual securities in the portfolio, the Fund will normally maintain an
average portfolio maturity of three years or less.
. The Fund may invest up to 35% of its net assets in non-investment-grade debt
obligations.
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 market price of the underlying common stock approaches or
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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
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into U.S. dollars, the disposition of non-cash distributions, and the
performance of other services. The depositary of an unsponsored facility
frequently is under no obligation to pass through voting rights to ADR holders
in respect of the deposited securities. In addition, an unsponsored facility is
generally not obligated to distribute communications received from the issuer of
the deposited securities or to disclose material information about such issuer
in the U.S. and there may not be a correlation between such information and the
market value of the depositary receipts.
Sponsored ADR facilities are created in generally the same manner as unsponsored
facilities, except that the issuer of the deposited securities enters into a
deposit agreement with the depositary. The deposit agreement sets out the rights
and responsibilities of the issuer, the depositary, and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depositary), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities.
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
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selling certain securities, or creating or altering exposure to certain asset
classes, such as equity, debt, or foreign securities. The use of derivative
instruments may provide a less expensive, more expedient or more specifically
focused way to invest than "traditional" securities (i.e., stocks or bonds)
would.
Exchange and OTC Derivatives. Derivative instruments may be exchange-traded or
traded in OTC transactions between private parties. Exchange-traded derivatives
are standardized options and futures contracts traded in an auction on the floor
of a regulated exchange. Exchange contracts are generally very liquid. The
exchange clearinghouse is the counterparty of every contract. Thus, each holder
of an exchange contract bears the credit risk of the clearinghouse (and has the
benefit of its financial strength) rather than that of a particular
counterparty. OTC transactions are subject to additional risks, such as the
credit risk of the counterparty to the instrument, and are less liquid than
exchange-traded derivatives since they often can only be closed out with the
other party to the transaction.
Risks and Special Considerations. The use of derivative instruments involves
risks and special considerations as described below. Risks pertaining to
particular derivative instruments are described in the sections that follow.
(1) Market Risk. The primary risk of derivatives is the same as the risk of
the underlying assets, namely that the value of the underlying asset may go up
or down. Adverse movements in the value of an underlying asset can expose the
Fund to losses. Derivative instruments may include elements of leverage and,
accordingly, the fluctuation of the value of the derivative instrument in
relation to the underlying asset may be magnified. The successful use of
derivative instruments depends upon a variety of factors, particularly the
ability of 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
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instruments, it might be required to continue to maintain such assets or
accounts or make such payments until the position expired, matured, or was
closed out. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to sell or close out a position in an instrument prior
to expiration or maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness of the
counterparty to enter into a transaction closing out the position. Therefore,
there is no assurance that any derivatives position can be sold or closed out at
a time and price that is favorable to the Fund.
(5) Legal Risk. Legal risk is the risk of loss caused by the legal
unenforcibility of a party's obligations under the derivative. While a party
seeking price certainty agrees to surrender the potential upside in exchange for
downside protection, the party taking the risk is looking for a positive payoff.
Despite this voluntary assumption of risk, a counterparty that has lost money in
a derivative transaction may try to avoid payment by exploiting various legal
uncertainties about certain derivative products.
(6) Systemic or "Interconnection" Risk. Interconnection risk is the risk that
a disruption in the financial markets will cause difficulties for all market
participants. In other words, a disruption in one market will spill over into
other markets, perhaps creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves, thus creating a large
interconnected web of financial obligations. This interconnectedness raises the
possibility that a default by one large dealer could create losses at other
dealers and destabilize the entire market for OTC derivative instruments.
General Limitations. The use of derivative instruments is subject to applicable
regulations of the SEC, the several options and futures exchanges upon which
they may be traded, the Commodity Futures Trading Commission ("CFTC"), and
various state regulatory authorities. In addition, the Fund's ability to use
derivative instruments may be limited by certain tax considerations.
The Fund has filed a notice of eligibility for exclusion from the definition of
the term "commodity pool operator" with the CFTC and the National Futures
Association, which regulate trading in the futures markets. In accordance with
Rule 4.5 of the regulations under the Commodity Exchange Act ("CEA"), the notice
of eligibility for the Fund includes representations that the Fund will use
futures contracts and related options solely for bona fide hedging purposes
within the meaning of CFTC regulations, provided that the Fund may hold other
positions in futures contracts and related options that do not qualify as a bona
fide hedging position if the aggregate initial margin deposits and premiums
required to establish these positions, less the amount by which any such futures
contracts and related options positions are "in the money," do not exceed 5% of
the Fund's net assets. Adherence to these guidelines does not limit the Fund's
risk to 5% of the Fund's assets.
The SEC has identified certain trading practices involving derivative
instruments that involve the potential for leveraging the Fund's assets in a
manner that raises issues under the 1940 Act. In order to limit the potential
for the leveraging of the Fund's assets, as defined under the 1940 Act, the SEC
has stated that the Fund may use coverage or 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).
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Options. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a contract
in which the "holder" (the buyer) pays a certain amount ("premium") to the
"writer" (the seller) to obtain the right, but not the obligation, to buy from
the writer (in a "call") or sell to the writer (in a "put") a specific asset at
an agreed upon price ("strike price" or "exercise price") at or before a certain
time ("expiration date"). The holder pays the premium at inception and has no
further financial obligation. The holder of an option will benefit from
favorable movements in the price of the underlying asset but is not exposed to
corresponding losses due to adverse movements in the value of the underlying
asset. The writer of an option will receive fees or premiums but is exposed to
losses due to changes in the value of the underlying asset. The Fund may buy or
write (sell) put and call options on assets, such as securities, currencies,
financial commodities, and indices of debt and equity securities ("underlying
assets") and enter into closing transactions with respect to such options to
terminate an existing position. Options used by the Fund may include European,
American, and Bermuda style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also exercisable prior to
maturity, it is an "American" option. If it is exercisable only at certain
times, it is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put and call options underlying
assets and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of a call option serves as a long
hedge, and the purchase of a put option serves as a short hedge. Writing put or
call options can enable the Fund to enhance income by reason of the premiums
paid by the purchaser of such options. Writing call options serves as a limited
short hedge because declines in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However, if
the security appreciates to a price higher than the exercise price of the call
option, it can be expected that the option will be exercised and the Fund will
be obligated to sell the security at less than its market value or will be
obligated to purchase the security at a price greater than that at which the
security must be sold under the option. All or a portion of any assets used as
cover for OTC options written by the Fund would be considered illiquid to the
extent described under "Investment Policies and Techniques -- Illiquid
Securities." Writing put options serves as a limited long hedge because
decreases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the put option will be exercised and the Fund will be obligated
to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the historical
price volatility of the underlying investment, the current market value of the
underlying investment, the time remaining until expiration, the relationship of
the exercise price to the market price of the underlying investment, and general
market conditions.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize the profit or
limit the loss on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options. Exchange-
traded options are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion of
every exchange-traded option transaction. In contrast, OTC options are contracts
between the Fund and the other party to the transaction ("counterparty")
(usually a securities dealer or a bank) with no clearing organization guarantee.
Thus, when the Fund purchases or writes an OTC option, it relies on the
counterparty to make or take delivery of the underlying investment upon exercise
of the option. Failure by the counterparty to do so would result in the loss of
any premium paid by the Fund as well as the loss of any expected benefit of the
transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with counter parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the Fund
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were unable to effect a closing transaction for an option it had purchased, it
would have to exercise the option to realize any profit.
The Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may serve
as a hedge against overall fluctuations in the securities market represented by
the relevant market index.
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
Spread Transactions. The Fund may use spread transactions for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The Fund may purchase covered spread options from securities dealers. Such
covered spread options are not presently exchange-listed or exchange-traded. The
purchase of a spread option gives the Fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relation to
another security that the Fund does not own, but which is used as a benchmark.
The risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition, there
is no assurance that closing transactions will be available. The purchase of
spread options will be used to protect the Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread option.
Futures Contracts. The Fund may use futures contracts for any lawful purpose
consistent with its investment objective such as hedging or managing risk. The
Fund may enter into futures contracts, including, but not limited to, interest
rate and index futures. The Fund may also purchase put and call options, and
write covered put and call options, on futures in which it is allowed to invest.
The purchase of futures or call options thereon can serve as a long hedge, and
the sale of futures or the purchase of put options thereon can serve as a short
hedge. Writing covered call options on futures contracts can serve as a limited
short hedge, and writing covered put options on futures contracts can serve as a
limited long hedge, using a strategy similar to that used for writing covered
options in securities. The Fund may also write put options on futures contracts
while at the same time purchasing call options on the same futures contracts in
order to create synthetically a long futures contract position. Such options
would have the same strike prices and expiration dates. The Fund will engage in
this strategy only when the Advisor believes it is more advantageous to the Fund
than purchasing the futures contract.
To the extent required by regulatory authorities, the Fund only enters into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used to
reduce the Fund's exposure to market or interest rate fluctuations, the Fund may
be able to hedge its exposure more effectively and perhaps at a lower cost
through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which the
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was originally
written. Transaction costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures contract may be satisfied
by delivery or purchase, as the case may be, of the instrument or by payment of
the change in the cash value of the index. More commonly, futures contracts are
closed out prior to delivery by entering into an offsetting transaction in a
matching futures contract. Although the value of an index might be a function of
the value of certain specified securities, no physical delivery of those
securities is made. If the offsetting purchase price is less than the original
sale price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
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No price is paid by the Fund upon entering into a futures contract. Instead, at
the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker through
whom the transaction was effected, "initial margin" consisting of cash and/or
other appropriate liquid assets in an amount generally equal to 10% or less of
the contract value. Margin must also be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules.
Unlike margin in securities transactions, initial margin on futures contracts
does not represent a borrowing, but rather is in the nature of a performance
bond or good-faith deposit that is returned to the Fund at the termination of
the transaction if all contractual obligations have been satisfied. Under
certain circumstances, such as periods of high volatility, the Fund may be
required by an exchange to increase the level of its initial margin payment, and
initial margin requirements might be increased generally in the future by
regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather represents a
daily settlement of the Fund's obligations to or from a futures broker. When the
Fund purchases an option on a future, the premium paid plus transaction costs is
all that is at risk. In contrast, when the Fund purchases or sells a futures
contract or writes a call or put option thereon, it is subject to daily
variation margin calls that could be substantial in the event of adverse price
movements. If the Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures positions and options on
futures can enter into offsetting closing transactions by selling or purchasing,
respectively, an instrument identical to the instrument held or written.
Positions in futures and options on futures may be closed only on an exchange or
board of trade that provides a secondary market. The Fund intends to enter into
futures transactions only on exchanges or boards of trade where there appears to
be a liquid secondary market. However, there can be no assurance that such a
market will exist for a particular contract at a particular time.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is reached, no trades may
be made that day at a price beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily limit for several
consecutive days with little or no trading, thereby preventing liquidation of
unfavorable positions.
If the Fund were unable to liquidate a futures or option on a futures contract
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the future or option or to 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
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dollar value of the security will increase. Conversely, a decline in the
exchange rate of the currency would adversely affect the value of the portfolio
investment expressed in U.S. dollars.
For example, the Fund might use currency-related derivative instruments to "lock
in" a U.S. dollar price for a portfolio investment, thereby enabling the Fund to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received. The Fund also might use currency-related
derivative instruments when the Advisor believes that one currency may
experience a substantial movement against another currency, including the U.S.
dollar, and it may use currency-related derivative instruments to sell or buy
the amount of the former foreign currency, approximating the value of some or
all of the Fund's portfolio securities denominated in such foreign currency.
Alternatively, where appropriate, the Fund may use currency-related derivative
instruments to hedge all or part of its foreign currency exposure through the
use of a basket of currencies or a proxy currency where such currency or
currencies act as an effective proxy for other currencies. The use of this
basket hedging technique may be more efficient and economical than using
separate currency-related derivative instruments for each currency exposure held
by the Fund. Furthermore, currency-related derivative instruments may be used
for short hedges - for example, the Fund may sell a forward currency contract to
lock in the U.S. dollar equivalent of the proceeds from the anticipated sale of
a security denominated in a foreign currency.
In addition, the Fund may use a currency-related derivative instrument to shift
exposure to foreign currency fluctuations from one foreign country to another
foreign country where the Advisor believes that the foreign currency exposure
purchased will appreciate relative to the U.S. dollar and thus better protect
the Fund against the expected decline in the foreign currency exposure sold.
For example, if the Fund owns securities denominated in a foreign currency and
the Advisor believes that currency will decline, it might enter into a forward
contract to sell an appropriate amount of the first foreign currency, with
payment to be made in a second foreign currency that the Advisor believes would
better protect the Fund against the decline in the first security than would a
U.S. dollar exposure. Hedging transactions that use two foreign currencies are
sometimes referred to as "cross hedges." The effective use of currency-related
derivative instruments by the Fund in a cross hedge is dependent upon a
correlation between price movements of the two currency instruments and the
underlying security involved, and the use of two currencies magnifies the risk
that movements in the price of one instrument may not correlate or may correlate
unfavorably with the foreign currency being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of the currency instruments
used or investments being hedged, such as speculative or other pressures on the
markets in which these instruments are traded.
The Fund also might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Fund may hedge against price movements in that currency by
entering into transactions using currency-related derivative instruments on
another foreign currency or a basket of currencies, the values of which the
Advisor believes will have a high degree of positive correlation to the value of
the currency being hedged. The risk that movements in the price of the hedging
instrument will not correlate perfectly with movements in the price of the
currency being hedged is magnified when this strategy is used.
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.
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Settlement of transactions in currency-related derivative instruments might be
required to take place within the country issuing the underlying currency.
Thus, the Fund might be required to accept or make delivery of the underlying
foreign currency in accordance with any U.S. or foreign regulations regarding
the maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
When the Fund engages in a transaction in a currency-related derivative
instrument, it relies on the counterparty to make or take delivery of the
underlying currency at the maturity of the contract or otherwise complete the
contract. In other words, the Fund will be subject to the risk that a loss may
be sustained by the Fund as a result of the failure of the counterparty to
comply with the terms of the transaction. The counterparty risk for exchange-
traded instruments is generally less than for privately negotiated or OTC
currency instruments, since generally a clearing agency, which is the issuer or
counterparty to each instrument, provides a guarantee of performance. For
privately negotiated instruments, there is no similar clearing agency guarantee.
In all transactions, the Fund will bear the risk that the counterparty will
default, and this could result in a loss of the expected benefit of the
transaction and possibly other losses to the Fund. The Fund will enter into
transactions in currency-related derivative instruments only with counterparties
that the Advisor reasonably believes are capable of performing under the
contract.
Purchasers and sellers of currency-related derivative instruments may enter into
offsetting closing transactions by selling or purchasing, respectively, an
instrument identical to the instrument purchased or sold. Secondary markets
generally do not exist for forward currency contracts, with the result that
closing transactions generally can be made for forward currency contracts only
by negotiating directly with the counterparty. Thus, there can be no assurance
that the Fund will in fact be able to close out a forward currency contract (or
any other currency-related derivative instrument) at a time and price favorable
to the Fund. In addition, in the event of insolvency of the counterparty, the
Fund might be unable to close out a forward currency contract at any time prior
to maturity. In the case of an exchange-traded instrument, the Fund will be
able to close the position out only on an exchange, which provides a market for
the instruments. The ability to establish and close out positions on an
exchange is subject to the maintenance of a liquid market, and there can be no
assurance that a liquid market will exist for any instrument at any specific
time. In the case of a privately negotiated instrument, the Fund will be able
to realize the value of the instrument only by entering into a closing
transaction with the issuer or finding a third party buyer for the instrument.
While the Fund will enter into privately negotiated transactions only with
entities who are expected to be capable of entering into a closing transaction,
there can be no assurance that the Fund will in fact be able to enter into such
closing transactions.
The precise matching of currency-related derivative instrument amounts and the
value of the portfolio securities involved generally will not be possible
because the value of such securities, measured in the foreign currency, will
change after the currency-related derivative instrument position has been
established. Thus, the Fund might need to purchase or sell foreign currencies
in the spot (cash) market. The projection of short-term currency market
movements is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
Permissible foreign currency options will include options traded primarily in
the OTC market. Although options on foreign currencies are traded primarily in
the OTC market, the Fund will normally purchase or sell OTC options on foreign
currency only when the Advisor reasonably believes a liquid secondary market
will exist for a particular option at any specific time.
There will be a cost to the Fund of engaging in transactions in currency-related
derivative instruments that will vary with factors such as the contract or
currency involved, the length of the contract period and the market conditions
then prevailing. The Fund using these instruments may have to pay a fee or
commission or, in cases where the instruments are entered into on a principal
basis, foreign exchange dealers or other counterparties will realize a profit
based on the difference ("spread") between the prices at which they are buying
and selling various currencies. Thus, for example, a dealer may offer to sell a
foreign currency to the Fund at one rate, while offering a lesser rate of
exchange should the Fund desire to resell that currency to the dealer.
When required by the SEC guidelines, the Fund will set aside permissible liquid
assets in segregated accounts or otherwise cover the Fund's potential
obligations under currency-related derivatives instruments. To the extent the
Fund's assets are so set aside, they cannot be sold while the corresponding
currency position is open, unless they are replaced with similar assets. As a
result, if a large portion of the Fund's assets are so set aside, this could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
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The Advisor's decision to engage in a transaction in a particular currency-
related derivative instrument will reflect the Advisor's judgment that the
transaction will provide value to the Fund and its shareholders and is
consistent with the Fund's objectives and policies. In making such a judgment,
the Advisor will analyze the benefits and risks of the transaction and weigh
them in the context of the Fund's entire portfolio and objectives. The
effectiveness of any transaction in a currency-related derivative instrument is
dependent on a variety of factors, including the Advisor's skill in analyzing
and predicting currency values and upon a correlation between price movements of
the currency instrument and the underlying security. There might be imperfect
correlation, or even no correlation, between price movements of an instrument
and price movements of investments being hedged. Such a lack of correlation
might occur due to factors unrelated to the value of the investments being
hedged, such as speculative or other pressures on the markets in which these
instruments are traded. In addition, the Fund's use of currency-related
derivative instruments is always subject to the risk that the currency in
question could be devalued by the foreign government. In such a case, any long
currency positions would decline in value and could adversely affect any hedging
position maintained by the Fund.
The Fund's dealing in currency-related derivative instruments will generally be
limited to the transactions described above. However, the Fund reserves the
right to use currency-related derivatives instruments for different purposes and
under different circumstances. Of course, the Fund is not required to use
currency-related derivatives instruments and will not do so unless deemed
appropriate by the Advisor. It also should be realized that use of these
instruments does not eliminate, or protect against, price movements in the
Fund's securities that are attributable to other (i.e., non-currency related)
causes. Moreover, while the use of currency-related derivatives instruments may
reduce the risk of loss due to a decline in the value of a hedged currency, at
the same time the use of these instruments tends to limit any potential gain
which may result from an increase in the value of that currency.
Swap Agreements. The Fund may enter into interest rate, securities index,
commodity, or security and currency exchange rate swap agreements for any lawful
purpose consistent with the Fund's investment objective, such as for the purpose
of attempting to obtain or preserve a particular desired return or spread at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return or spread. The Fund also may enter into swaps
in order to protect against an increase in the price of, or the currency
exchange rate applicable to, securities that the Fund anticipates purchasing at
a later date. Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to several years.
In a standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or 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.
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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.
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.
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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 Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
High-Yield (High-Risk) Securities
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
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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 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
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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 (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
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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.
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 which 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 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.
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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.
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.
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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 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
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state, regional, and local governments. Municipal notes include tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax and revenue
anticipation notes, construction loan notes, short-term discount notes, tax-
exempt commercial paper, demand notes, and similar instruments.
Lease Obligations. Municipal lease obligations may take the form of a lease, an
installment purchase, or a conditional sales contract. They are issued by state
and local governments and authorities to acquire land, equipment, and
facilities, such as state and municipal vehicles, telecommunications and
computer equipment, and other capital assets. The Fund may purchase these
obligations directly, or it may purchase participation interests in such
obligations. (See "Participation Interests" below.) Municipal leases are
generally subject to greater risks than general obligation or revenue bonds.
State constitutions and statutes set forth requirements that states or
municipalities must meet in order to issue municipal obligations. Municipal
leases may contain a covenant by the state or municipality to budget for,
appropriate, and make payments due under the obligation. Certain municipal
leases may, however, contain "non-appropriation" clauses which provide that the
issuer is not obligated to make payments on the obligation in future years
unless funds have been appropriated for this purpose each year. Accordingly,
such obligations are subject to "non-appropriation" risk. While municipal leases
are secured by the underlying capital asset, it may be difficult to dispose of
any such asset in the event of non-appropriation or other default.
Mortgage-Backed Bonds. The Fund's investments in municipal obligations may
include mortgage-backed municipal obligations, which are a type of municipal
security issued by a state, authority, or municipality to provide financing for
residential housing mortgages to target groups, generally low-income individuals
who are first-time home buyers. The Fund's interest, evidenced by such
obligations, is an undivided interest in a pool of mortgages. Payments made on
the underlying mortgages and passed through to the Fund will represent both
regularly scheduled principal and interest payments. The Fund may also receive
additional principal payments representing prepayments of the underlying
mortgages. While a certain level of prepayments can be expected, regardless of
the interest rate environment, it is anticipated that prepayment of the
underlying mortgages will accelerate in periods of declining interest rates. In
the event that the Fund receives principal prepayments in a declining interest-
rate environment, its reinvestment of such funds may be in bonds with a lower
yield.
Participation Interests
A participation interest gives the Fund an undivided interest in a municipal
obligation in the proportion that the Fund's participation interest bears to the
principal amount of the obligation. These instruments may have fixed, floating,
or variable rates of interest. The Fund will only purchase participation
interests if accompanied by an opinion of counsel that the interest earned on
the underlying municipal obligations will be tax-exempt. If the Fund purchases
unrated participation interests, the Board of Directors or its delegate must
have determined that the credit risk is equivalent to the rated obligations in
which the Fund may invest. Participation interests may be backed by a letter of
credit or guaranty of the selling institution. When determining whether such a
participation interest meets the Fund's credit quality requirements, the Fund
may look to the credit quality of any financial guarantor providing a letter of
credit or guaranty.
Repurchase Agreements
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a security at one price, and
at the time of sale, the seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within seven days). The repurchase
agreement, thereby, determines the yield during the purchaser's holding period,
while the seller's obligation to repurchase is secured by the value of the
underlying security. The Advisor will monitor, on an ongoing basis, the value
of the underlying securities to ensure that the value always equals or exceeds
the repurchase price plus accrued interest. Repurchase agreements could involve
certain risks in the event of a default or insolvency of the other party to the
agreement, including possible delays or restrictions upon the Fund's ability to
dispose of the underlying securities. Although no definitive creditworthiness
criteria are used, the Advisor reviews the creditworthiness of the banks and
non-bank dealers with which the Fund enters into repurchase agreements to
evaluate those risks. The Fund may, under certain circumstances, deem
repurchase agreements collateralized by U.S. government securities to be
investments in U.S. government securities.
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
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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.
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.
The following section applies to the Bond and Short Duration Bond Funds only:
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
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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 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.
26
<PAGE>
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 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
27
<PAGE>
. 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.
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
28
<PAGE>
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 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 59 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
29
<PAGE>
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 attended. In addition, each disinterested director
is reimbursed by the Strong Funds for travel and other expenses incurred in
connection with attendance at such meetings. Other officers and directors of the
Strong Funds receive no compensation or expense reimbursement from the Strong
Funds.
*Richard S. Strong (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor.
Mr. Strong has been in the investment management business since 1967.
Marvin E. Nevins (DOB 7/9/18), Director of the Strong Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From 1980 until 1981, Mr. Nevins was the Chairman
of the Wisconsin Association of Manufacturers & Commerce. He has been a
Director of A-Life Medical, Inc., San Diego, CA since 1996 and Surface Systems,
Inc. (a weather information company), St. Louis, MO since 1992. He was also a
regent of the Milwaukee School of Engineering and a member of the Board of
Trustees of the Medical College of Wisconsin and Carroll College.
Willie D. Davis (DOB 7/24/34), Director of the Strong Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee Corporation (a
food/consumer products company) since 1983, KMart Corporation (a discount
consumer products company) since 1985, Dow Chemical Company since 1988, MGM
Grand, Inc. (an entertainment/hotel company) since 1990, WICOR, Inc. (a utility
company) since 1990, Johnson Controls, Inc. (an industrial company) since 1992,
Checker's Hamburger, Inc. since 1994, and MGM, Inc. (an entertainment company)
since 1998. 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 Health Network Ventures, Inc. since 1992.
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 Chancellor at Baldwin-Wallace College since July 1999.
From 1981 to July 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 (NCCJ). 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.
30
<PAGE>
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.
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.
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<PAGE>
Unless otherwise noted below, as of October 31, 2000, the officers and directors
of the Fund in the aggregate beneficially owned less than 1% of the Fund's then
outstanding shares. Class B, C and L shares of the Bond Fund were not offered
for sale until November 30, 2000 and Class A, B, C and L shares of the
Aggressive High-Yield Bond Fund and Short Duration Bond Fund were not offered
for sale until November 30, 2000.
Fund Shares Percent
--------------------------------------------------------------------------------
Bond Fund Class A - %
PRINCIPAL SHAREHOLDERS
Unless otherwise noted below, as of October 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.
Name and Address Fund/Shares Percent
* This represents the initial capital of the class of shares of the Fund.
INVESTMENT ADVISOR
The Fund has entered into an Advisory Agreement with Strong Capital Management,
Inc. ("Advisor"). Mr. Strong controls the Advisor due to his stock ownership of
the Advisor. Mr. Strong is the Chairman and a Director of the Advisor, Ms.
Cohernour is Senior Vice President and General Counsel of the Advisor, Ms.
Ebacher is Senior Counsel of the Advisor, Ms. Hollister is Associate 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 October 31, 2000, the Advisor had over
$___ 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 not "interested persons" of the
Advisor; expenses of indemnification; extraordinary expenses; and costs of
shareholder and director meetings.
32
<PAGE>
On July 23, 1999, the Board of Directors of the Bond 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 monthly advisory fee paid by the Bond
Fund has been reduced by 0.02% 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 Institutional Class shares of the Fund exceed 0.02% of the
average daily net asset value of the Fund.
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.
Fund Annual Rate Annual Rate
Prior to 8/31/99
--------------------------------------------------------------------------------
Bond Fund 0.23% 0.25%
Aggressive High-Yield 0.75% N/A
Bond Fund
Short Duration Bond Fund 0.625% N/A
The Fund paid the following management fees for the time periods indicated:
Note: the Aggressive High-Yield Bond Fund is not listed below because it first
offered its shares on November 30, 2000.
Management Fee
Fiscal Year Ended Management Fee ($) Waiver($) After Waiver ($)
--------------------------------------------------------------------------------
Bond Fund
12/31/97(1) 51,698 0 51,698
2/28/98* 21,934 0 21,934
2/28/99 212,238 0 212,238
10/31/99** 254,301 0 254,301
Short Duration Bond Fund
10/31/97 563,944 257,899 306,045
10/31/98 578,926 84,626 494,300
10/31/99 334,220 0 334,220
(1) Commenced operations on December 31, 1996
* For the two-month fiscal year ended February 28, 1998.
** For the eight-month fiscal year ended October 31, 1999.
The organizational expenses for the Fund which were advanced by the Advisor and
which will be reimbursed by the Fund over a period of not more than 60 months
from the Fund's date of inception are listed below.
Fund Organizational Expenses
--------------------------------------------------------------------------------
Bond Fund $2,910
33
<PAGE>
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 Rule 12b-1 fees, taxes, interest, brokerage
commissions, and similar fees and to the extent permitted extraordinary
expenses, exceed two percent (2%) of the average net asset value of the Fund for
such year, as determined by valuations made as of the close of each business day
of the year. Reimbursement of expenses in excess of the applicable limitation
will be made on a monthly basis and will be paid to the Fund by reduction of the
Advisor's fee, subject to later adjustment, month by month, for the remainder of
the Fund's fiscal year. The Advisor may from time to time voluntarily absorb
expenses for the Fund in addition to the reimbursement of expenses in excess of
applicable limitations.
On July 12, 1994, the SEC filed an administrative action ("Order") against the
Advisor, Mr. Strong, and another employee of the Advisor in connection with
conduct that occurred between 1987 and early 1990. In re Strong/Corneliuson
Capital Management, Inc., et al. Admin. Proc. File No. 3-8411. The proceeding
was settled by consent without admitting or denying the allegations in the
Order. The Order found that the Advisor and Mr. Strong aided and abetted
violations of Section 17(a) of the 1940 Act by effecting trades between mutual
funds, and between mutual funds and Harbour Investments Ltd. ("Harbour"),
without complying with the exemptive provisions of SEC Rule 17a-7 or otherwise
obtaining an exemption. It further found that the Advisor violated, and Mr.
Strong aided and abetted violations of, the disclosure provisions of the 1940
Act and the Investment Advisers Act of 1940 by misrepresenting the Advisor's
policy on personal trading and by failing to disclose trading by Harbour, an
entity in which principals of the Advisor owned between 18 and 25 percent of the
voting stock. As part of the settlement, the respondents agreed to a censure and
a cease and desist order and the Advisor agreed to various undertakings,
including adoption of certain procedures and a limitation for six months on
accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the
terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
The Fund 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
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<PAGE>
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 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.
ADMINISTRATOR
The Fund has entered into a separate administration 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
Short Duration Bond Fund currently offers five classes of shares: Class A, Class
B, Class C, Class L and Class Z. The Bond Fund currently offers six classes of
shares: Class A, Class B, Class C, Class L, Class Z, and Institutional Class.
The Aggressive High-Yield Bond Fund currently offers four classes of shares:
Class A, Class B, Class C and Class L.
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.
Under the Administration Agreement, the Advisor provides certain administrative
functions for the shares of the Fund, including: (i) authorizing expenditures
and approving bills for payment on behalf of the Fund; (ii) supervising
preparation
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<PAGE>
of the periodic updating of the Fund's registration statements, including
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 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 classes of 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, including the Custodian, DST and printers; (vi) supervising compliance
by the Fund 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 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 shares; and (xii)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law. For its services
under the Administration Agreement the Advisor receives a monthly fee from the
Fund at the annual rate of _____% of the Fund's average daily net assets
attributable to each class of shares.
The Fund paid the following administrative fees for the time period indicated:
Note - the following table does not contain information on the Class B, C and L
shares of the Bond Fund and all shares of the Aggressive High-Yield Bond Fund,
because those shares, and that Fund, respectively, were not offered until
November 30, 2000. The Short Duration Bond Fund was not subject to separate
administrative fees before November 30, 2000.
<TABLE>
<CAPTION>
Administrative Fee
Fiscal Year Ended Administrative Fee ($) Waiver($) After Waiver ($)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bond Fund - Class Z**
10/31/99* 11 0 11
Bond Fund - Class A***
10/31/99* 0 0 0
Bond Fund - Institutional Class
10/31/99* 5,411 0 5,411
</TABLE>
* For the two-month period ended October 31, 1999.
** Reflects the former Investor Class. Before November 30, 2000, the Investor
Class shares were subject to an administrative fee of 0.25%.
*** Reflects the former Advisor Class.
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
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<PAGE>
controlled by the Advisor and Richard S. Strong. The Distribution Agreement is
subject to the same termination and renewal provisions as are described above
with respect to the Advisory Agreement.
The Institutional Class shares of the Bond Fund are offered on a "no-load"
basis, which means that no sales commissions are charged on the purchases of
these shares.
The Class Z shares of the Bond Fund and Short Duration Bond Fund are offered on
a "no-load" basis, which means that no sales commissions are charged on the
purchases of those shares. The former Investor Class shares of the Bond Fund and
the former Retail Class shares of the Short Duration Bond Fund were redesignated
Class Z shares on November 30, 2000. Class Z shares are only available to
certain types of investors. See Appendix C for more information on the
eligibility criteria for purchasing Class Z shares.
The Class A shares of each Fund are offered at net asset value plus an initial
sales charge. The "offering price" is the initial sales charge plus the net
asset value. The Distributor may pay up to 100% of the applicable initial sales
charges due upon the purchase of the Class A shares to the brokers, if any,
involved in the transaction. As compensation for its services under the
Distribution Agreement, the Distributor may retain all or a portion of the
initial sales charge from purchases of Class A shares of the Fund. Class A
shares also are subject to a contingent deferred sales charge (CDSC) in certain
circumstances. See Appendix C for more information on Class A shares, including
sales charge break points and waivers.
The Class B shares of each Fund are offered at net asset value. Class B shares
redeemed within six years of purchase are subject to a CDSC, beginning at 4% for
redemptions within the first two years, declining to 3% for redemptions within
years three and four, 2% in year 5, 1% in Year 6, and disappearing after the
sixth year. The annual 1.0% distribution fee compensates the Distributor for
paying the brokers involved in the transaction, if any, a 4% up-front sales
commission, which includes an advance of the first year's service fee. See
Appendix C for more information on Class B shares.
The Class C shares of each Fund are offered at net asset value. The annual 1%
distribution fee compensates the Distributor for paying the brokers involved in
the transaction, if any, a 1.0% up-front sales commission, which includes an
advance of the first year's service fee. Class C shares are also subject to a
CDSC in certain circumstances. See Appendix C for more information on Class C
shares.
The Class L shares of each Fund are offered at net asset value plus an initial
sales charge. The "offering price" is the initial sales charge plus the net
asset value. The Distributor may pay up to 100% of the applicable initial sales
charges due upon the purchase of the Class L shares to the brokers, if any,
involved in the transaction. As compensation for its services under the
Distribution Agreement, the Distributor may retain all or a portion of the
initial sales charge from purchases of Class L shares of the Fund. The annual
0.75% distribution fee compensates the Distributor for paying the brokers
involved in the transaction, if any, a 2% up-front sales commission. Class L
shares also are subject to a CDSC in certain circumstances. See Appendix C for
more information on Class L shares.
From time to time, the Distributor may hold in-house sales incentive programs
for its associated persons under which these persons may receive non-cash
compensation awards in connection with the sale and distribution of the Fund's
shares. These awards may include items such as, but not limited to, gifts,
merchandise, gift certificates, and payment of travel expenses, meals, and
lodging. As required by the National Association of Securities Dealers, Inc.
("NASD"), any in-house sales incentive program will be multi-product oriented,
i.e., any incentive will be based on an associated person's gross production of
all securities and will not be based on the sales of shares of any specifically
designated mutual fund.
DISTRIBUTION PLAN
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act for Class
A, Class B, Class C and Class L shares. Although the plan differs in some ways
for each class, the plan is designed to benefit the Fund and its shareholders.
The plan is expected to, among other things, increase advertising of the Fund,
encourage sales of the Fund and service to its shareholders, and increase or
maintain assets of the Fund so that certain fixed expenses may be spread over a
broader asset base, resulting in lower per share expense ratios. In addition, a
positive cash flow into the Fund is useful in managing the Fund because the
manager has more flexibility in taking advantage of new investment opportunities
and handling shareholder redemptions.
37
<PAGE>
Under the plan, the Fund pays the Distributor or others for the expenses of
activities that are primarily intended to sell Class A, Class B, Class C and
Class L shares, 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 Class A, Class B, Class C and Class L
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 Class A, Class B, Class C and Class L shares; and compensation
of broker-dealers. The Distributor may determine the services the broker-dealer
will provide to shareholders in connection with the sale of Class A, Class B,
Class C and Class L shares. The Distributor may reallocate all or any portion of
the compensation it receives to broker-dealers who sell Class A, Class B, Class
C and Class L shares.
These expenses also may include service fees paid to securities dealers or
others who have a servicing agreement with the Fund, the Distributor or its
affiliates who provide service or account maintenance to shareholders (service
fees); the expenses of printing prospectuses and reports used for sales
purposes, and of preparing and distributing sales literature and advertisements;
and a prorated portion of the Distributor's overhead expenses related to these
activities. Together, these expenses, including the service fees, are "eligible
expenses." The distribution and service (12b-1) fees charged to each class are
based only on the fees attributable to that particular class.
Class A Shares. The Fund pays up to 0.25% per year of Class A's average daily
net assets to the Distributor or others. Of this amount, the Distributor
generally will retain 0.10% for distribution expenses.
Class B and Class C Shares. The Fund may pay the Distributor up to 1.00% per
year of the class's average daily net assets, out of which 0.25% may be used for
service fees. The plan also may be used to pay the Distributor for advancing
commissions to securities dealers for the initial sale of Class B and C shares.
The Distributor uses 12b-1 plan fees payable to it to pay third party financing
entities that have provided financing to the Distributor in connection with
advancing commissions to securities dealers.
Class L Shares. The Fund pays the Distributor up to 0.75% per year of the
class's average daily net assets. The plan also may be used to pay the
Distributor for advancing commissions to securities dealers for the initial sale
of Class L shares. The Distributor uses 12b-1 plan fees payable to it to pay
third party financing entities that have provided financing to the Distributor
in connection with advancing commissions to securities dealers.
The Rule 12b-1 plan is a compensation plan. It allows the Fund to pay a fee to
the Distributor that may be more than the eligible expenses the Distributor has
incurred at the time of the payment. The Distributor must, however, report to
the board on how it has spent or has immediate plans to spend the amount
received on eligible expenses. The Fund will not pay more than the maximum
amount allowed under the plan, but shall not exceed the amount permitted to be
paid under the rules of the National Association of Securities Dealers.
In addition to the payments that the Distributor or others are entitled to under
the plan, the plan also provides that to the extent the Fund, the Advisor or the
Distributor or other parties on behalf of the Fund, the Advisor or the
Distributor make payments that are deemed to be for the financing of any
activity primarily intended to result in the sale of fund shares within the
meaning of Rule 12b-1 under the Investment Company Act of 1940, as amended, then
these payments shall be deemed to have been made pursuant to the plan.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plan because of applicable federal law prohibiting certain
banks from engaging in the distribution of mutual fund shares. These banks,
however, are allowed to receive fees under the plan for administrative servicing
or for agency transactions.
The Distributor must provide written reports to the board at least quarterly on
the amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
The plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1. 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
38
<PAGE>
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 with respect to a class of shares 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 Class A, Class B,
Class C or Class L shareholders of the Fund, as appropriate, 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 (as defined in the 1940 Act) of the Class 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 Class A, Class B, Class C and Class L 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.
Note: the following table does not contain information on the Class B, C and L
shares of the Bond Fund and all classes of the Aggressive High-Yield Bond Fund,
because those shares, and that Fund, respectively, were not offered until
November 30, 2000. The Short Duration Bond Fund did not impose Rule 12b-1 fees
before November 30, 2000.
The Fund paid the following distribution and service fees under its Rule 12b-1
Plan:
Paid by Retained by Paid by
Fiscal Year Ended Fund Distributors* Dealers
--------------------------------------------------------------------------------
Bond Fund - Class A 1 0 0
(formerly Advisor Class)
10/31/99*
* 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 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
39
<PAGE>
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.
Generally, research services provided by brokers may include information on the
economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues. Such
research services are received primarily in the form of written reports,
telephone contacts, and personal meetings with security analysts. In addition,
such research services may be provided in the form of access to various
computer-generated data, computer hardware and software, and meetings arranged
with corporate and industry spokespersons, economists, academicians, and
government representatives. In some cases, research services are generated by
third parties but are provided to the Advisor by or through brokers. Such
brokers may pay for all or a portion of computer hardware and software costs
relating to the pricing of securities.
Where the Advisor itself receives both administrative benefits and research and
brokerage services from the services provided by brokers, it makes a good faith
allocation between the administrative benefits and the research and brokerage
services, and will pay for any administrative benefits with cash. In making good
faith allocations between administrative benefits and research and brokerage
services, a conflict of interest may exist by reason of the Advisor's allocation
of the costs of such benefits and services between those that primarily benefit
the Advisor and those that primarily benefit the Fund and other advisory
clients.
From time to time, the Advisor may purchase new issues of securities for the
Fund in a fixed income price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling the securities to
the Fund and other advisory clients, provide the Advisor with research. The NASD
has adopted rules expressly permitting these types of arrangements under certain
circumstances. Generally, the seller will provide research "credits" in these
situations at a rate that is higher than that which is available for typical
secondary market transactions. These arrangements may not fall within the safe
harbor of Section 28(e).
At least annually, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will the Advisor
make binding commitments as to the level of brokerage commissions it will
allocate to a broker,
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<PAGE>
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.
With respect to the 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 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.
The Advisor places portfolio transactions for other advisory accounts, including
other mutual funds managed by the Advisor. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Advisor in servicing all of its accounts; not all of such services may be used
by the Advisor in connection with the Fund. In the opinion of the Advisor, it is
not possible to measure separately the benefits from research services to each
of the accounts managed by the Advisor. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each account for brokerage and
research services will vary. However, in the opinion of the Advisor, such costs
to the Fund will not be disproportionate to the benefits received by the Fund on
a continuing basis.
The Advisor seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations between the Fund and other advisory accounts, the main factors
considered by the Advisor are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and the opinions of the persons responsible for recommending the
investment.
Where consistent with a client's investment objectives, investment restrictions,
and risk tolerance, the Advisor may purchase securities sold in underwritten
public offerings for client accounts, commonly referred to as "deal" securities.
To the extent the Fund participates in deals in the initial public offering
market ("IPOs") and during the period that the Fund has a small asset base, a
significant portion of the Fund's returns may be attributable to its IPO
investments. As the Fund's assets grow, any impact of IPO investments on the
Fund's total return may decline and the Fund may not continue to experience
substantially similar performance.
The Advisor has adopted deal allocation procedures ("Procedures"), summarized
below, that reflect the Advisor's overriding policy that deal securities must be
allocated among participating client accounts in a fair and equitable manner and
that deal securities may not be allocated in a manner that unfairly
discriminates in favor of certain clients or types of clients.
The Procedures provide that, in determining which client accounts a portfolio
manager team will seek to have purchase deal securities, the team will consider
all relevant factors including, but not limited to, the nature, size, and
expected allocation to the Advisor of deal securities; the size of the
account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions
41
<PAGE>
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:
Note: the Aggressive High-Yield Bond Fund is not listed because its shares were
first offered on November 30, 2000:
Fiscal Year Ended Brokerage Commissions ($)
--------------------------------------------------------------------------------
Bond Fund
12/31/97(1) 115
2/28/98* 808
2/28/99 7,898
10/31/99** 3,038
Short Duration Bond Fund
10/31/97 12,267
10/31/98 19,244
10/31/99 1,051
(1) Commenced operations on December 31, 1996.
* For the two-month fiscal year ended February 28, 1999.
** For the eight-month fiscal year ended October 31, 1999.
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.
For the fiscal period ended October 31, 1999 the Bond Fund's portfolio turnover
rate was 250.7%. The portfolio turnover rate was 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.
42
<PAGE>
CUSTODIAN
As custodian of the Fund's assets,_____________________________________, 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>
------------------------------------------------------------------------------------------------------------------
Fund Type/Share Class Fee*
------------------------------------------------------------------------------------------------------------------
<S> <C>
Class A shares of Equity Funds _____% of the average daily net asset value of all Class A shares.
and Income Funds
------------------------------------------------------------------------------------------------------------------
Class B shares of Equity Funds _____% of the average daily net asset value of all Class B shares.
and Income Funds
------------------------------------------------------------------------------------------------------------------
Class C shares of Equity Funds _____% of the average daily net asset value of all Class C shares.
and Income Funds
------------------------------------------------------------------------------------------------------------------
Class L shares of Equity Funds _____% of the average daily net asset value of all Class L shares.
and Income Funds
------------------------------------------------------------------------------------------------------------------
Class Z shares of Equity Funds _____% of the average daily net asset value of all Class Z shares.
and Income Funds
------------------------------------------------------------------------------------------------------------------
Institutional Class shares of 0.015% of the average daily net asset value of all Institutional Class shares.
Income Funds
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Plus out-of-pocket expenses, such as postage and printing expenses in
connection with shareholder communications.
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 amounts to third parties that provide
transfer agent type services and other administrative services relating to the
Fund to persons who beneficially own interests in the Fund, such as participants
in 401(k) plans. These services may include, among other things, sub-accounting
services, transfer agent type activities, answering inquiries relating to the
Fund, transmitting proxy statements, annual reports, updated prospectuses, other
communications regarding the Fund, and related services as the Fund or
beneficial owners may reasonably request. In such cases, the Fund will not pay
fees based on the number of beneficial owners at a rate that is greater than the
rate the Fund is currently paying the Advisor for providing these services to
Fund shareholders.
The Fund paid the following amounts for the time periods indicated for transfer
agency and dividend disbursing and printing and mailing services:
<TABLE>
<CAPTION>
Per Account Out-of-Pocket Printing/Mailing Total Cost after
Fund Charges ($) Expenses ($) Services ($) Waiver ($) Waiver ($)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Bond Fund - Class Z
(formerly Investor Class)
10/31/99*** 12 151 0 0 163
Bond Fund - Class A
(formerly Advisor Class)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
10/31/99*** 1 0 0 0 1
Bond Fund - Institutional Class
12/31/97/(1)/ 25,000 3,639 0 6,262 22,377
2/28/98* 3,288 0 0 0 3,288
2/28/99 21,818 3,533 0 0 25,351
10/31/99** 19,381 1,008 22 0 20,411
Short Duration Bond Fund - Class Z
(formerly Retail Class)
10/31/97 156,221 11,580 1,557 13,024 156,334
10/31/98 183,275 12,787 2,345 0 198,407
10/31/99 125,955 7,853 393 0 134,201
</TABLE>
* For the two-month fiscal year ended February 28, 1998.
** For the eight-month fiscal year ended October 31, 1999.
*** For the two-month fiscal year ended October 31, 1999.
(1) Commenced operations on December 31, 1996.
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 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. 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.
44
<PAGE>
If Fund shares are sold at a loss after being held for 12 months or less, the
loss will be treated as short-term, instead of long-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.
All or a portion of a sales charge paid in purchasing shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of these shares within 90 days after their purchase to the extent
shares of the Fund or another fund are subsequently acquired without payment of
a sales charge pursuant to the reinvestment or exchange privilege. Any
disregarded portion of this sales charge will increase the shareholder's tax
basis in the shares subsequently acquired. In addition, no loss will be allowed
on the redemption or exchange of shares of the Fund if the shareholder purchases
other shares of the Fund (whether through reinvestment of distributions or
otherwise) or acquires or enters into a contract or option to acquire securities
that are substantially identical to shares of the Fund within a period of 61
days beginning 30 days before and ending 30 days after the redemption or
exchange. If disallowed, the loss will be reflected in an adjustment to the
basis of the shares acquired.
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 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).
45
<PAGE>
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.
Purchases In Kind
Shares of the Fund may be purchased "in kind," subject to the Advisor's
determination that the securities are acceptable investments for the Fund. In an
in-kind purchase, investors transfer securities to the Fund in exchange for Fund
shares. Securities accepted by the Fund in an in kind purchase will be valued at
market value. An in kind purchase may result in adverse tax consequences under
certain circumstances to: (1) investors transferring securities for shares ("In
Kind Investors"), (2) investors who acquire shares of the Fund after a transfer
("new shareholders") or (3) investors who own shares at the time of transfer
("current shareholders"). As a result of an in kind purchase, the Fund may
acquire securities that have appreciated in value or depreciated in value from
the date they were acquired. If appreciated securities were to be sold after an
in kind purchase, the amount of the gain would be taxable to new shareholders,
current shareholders and In
46
<PAGE>
Kind Investors. The effect of this for current shareholders or new shareholders
would be to tax them on a distribution that represents an increase in the value
of their investment. The effect on In Kind Investors would be to reduce their
potential liability for tax on capital gains by spreading it over a larger asset
base. The opposite may occur if the Fund acquires securities having an
unrealized capital loss. In that case, In Kind Investors will be unable to
utilize the loss to offset gains, but, because an in kind purchase will not
result in any gains, the inability of In Kind Investors to utilize unrealized
losses will have no immediate tax effect. For new shareholders or current
shareholders, to the extent that unrealized losses are realized by the Fund, new
shareholders or current shareholders may benefit by any reduction in net tax
liability attributable to the losses. The Advisor cannot predict whether
securities acquired in any in kind purchase will have unrealized gains or losses
on the date of the in kind purchase. Consistent with its duties, the Advisor
will, however, take tax consequences to investors into account when making
decisions to sell portfolio assets, including the impact of realized capital
gains on shareholders of the Fund.
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 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). If Strong Funds
receives such a request prior to the close of the New York Stock Exchange
("NYSE") on a day on which the NYSE is open, the share price will be the NAV
determined that day. The NAV for each Fund or each class of shares is normally
determined as of 3:00 p.m. Central Time ("CT") each day the NYSE is open. The
NYSE is open for trading Monday through Friday except, New Year's Day, Martin
Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. Additionally, if any of the
aforementioned holidays falls on a Saturday, the NYSE will not be open for
trading on the preceding Friday, and when any such holiday falls on a Sunday,
the NYSE will not be open for trading on the succeeding Monday, unless unusual
business conditions exist, such as the ending of a monthly or yearly accounting
period. The Fund reserves the right to change the time at which purchases,
redemptions, and exchanges are priced if the NYSE closes at a time other than
3:00 p.m. CT or if an emergency exists. The NAV of each Fund or of each class of
shares of a Fund is calculated by taking the fair value of the Fund's total
assets attributable to that Fund or class, subtracting all its liabilities
attributable to that Fund or class, and dividing by the total number of shares
outstanding of that Fund or class. Expenses are accrued daily and applied when
determining the NAV. The Fund's portfolio securities are valued based on market
quotations or at fair value as determined by the method selected by the Fund's
Board of Directors.
Debt securities are valued by a pricing service that utilizes electronic data
processing techniques to determine values for normal institutional-sized trading
units of debt securities without regard to sale or bid prices when such
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.
47
<PAGE>
Dollar Cost Averaging
Strong Funds' Automatic Investment Plan, Payroll Direct Deposit Plan, and
Automatic Exchange Plan are methods of implementing dollar cost averaging.
Dollar cost averaging is an investment strategy that involves investing a fixed
amount of money at regular time intervals. By always investing the same set
amount, an investor will be purchasing more shares when the price is low and
fewer shares when the price is high. Ultimately, by using this principle in
conjunction with fluctuations in share price, an investor's average cost per
share may be less than the average transaction price. A program of regular
investment cannot ensure a profit or protect against a loss during declining
markets. Since such a program involves continuous investment regardless of
fluctuating share values, investors should consider their ability to continue
the program through periods of both low and high share-price levels.
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 provided, however, that the Fund will not pay more for these services
through intermediary relationships than it would if the intermediaries'
customers were direct shareholders in the Fund. Certain financial intermediaries
may charge an advisory, transaction, or other fee for their services. 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, telephone exchange, telephone purchase and telephone
redemption), 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
48
<PAGE>
sweepstakes, give-aways, contests, incentive promotions, or other similar
programs ("Give-Aways"). This is done in order to, among other reasons, increase
the number of users of and visits to the Fund's Internet web site. As part of
the Give-Aways, persons may receive cash or other awards including without
limitation, gifts, merchandise, gift certificates, travel, meals, and lodging.
Under the Advisor's and Distributor's standard rules for Give-Aways, their
employees, subsidiaries, advertising and promotion agencies, and members of
their immediate families are not eligible to enter the Give-Aways.
Redemption in Kind
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the assets of
the Fund. If the Advisor determines that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in securities
or other financial assets, valued for this purpose as they are valued in
computing the NAV for the Fund's shares (a "redemption in kind"). Shareholders
receiving securities or other financial assets in a redemption in kind may
realize a gain or loss for tax purposes, and will incur any costs of sale, as
well as the associated inconveniences. If you expect to make a redemption in
excess of the lesser of $250,000 or 1% of the Fund's assets during any 90-day
period and would like to avoid any possibility of being paid with securities in
kind, you may do so by providing Strong Funds with an unconditional instruction
to redeem at least 15 calendar days prior to the date on which the redemption
transaction is to occur, specifying the dollar amount or number of shares to be
redeemed and the date of the transaction (please call 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.
49
<PAGE>
Salary Reduction Simplified Employee Pension Plan (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to defer
part of their salaries and contribute to an IRA account. These deferrals help
lower the employees' taxable income. Please note that you may no longer open new
SAR SEP-IRA plans (since December 31, 1996). However, employers with SAR SEP-IRA
plans that were established prior to January 1, 1997 may still open accounts for
new employees.
Simplified Incentive Match Plan for Employees (SIMPLE-IRA): A SIMPLE-IRA plan is
a retirement savings plan that allows employees to contribute a percentage of
their compensation, up to $6,000, on a pre-tax basis, to a SIMPLE-IRA account.
The employer is required to make annual contributions to eligible employees'
accounts. All contributions grow tax-deferred.
Defined Contribution Plan: A defined contribution plan allows self-employed
individuals, partners, or a corporation to provide retirement benefits for
themselves and their employees. Plan types include: profit-sharing plans, money
purchase pension plans, and paired plans (a combination of a profit-sharing plan
and a money purchase plan).
401(k) Plan: A 401(k) plan is a type of profit-sharing plan that allows
employees to have part of their salary contributed on a pre-tax basis to a
retirement plan which will earn tax-deferred income. A 401(k) plan is funded by
employee contributions, employer contributions, or a combination of both.
403(b)(7) Plan: A 403(b)(7) plan is a tax-sheltered custodial account designed
to qualify under section 403(b)(7) of the IRC and is available for use by
employees of certain educational, non-profit, hospital, and charitable
organizations.
Right of Set-Off
To the extent not prohibited by law, the Fund, any other Strong Fund, and the
Advisor, each has the right to set-off against a shareholder's account balance
with a Strong Fund, and redeem from such account, any debt the shareholder may
owe any of these entities. This right applies even if the account is not
identically registered.
Shares in Certificate Form
Certificates will be issued for shares held in a Fund account only upon written
request. 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 telephone 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 $50,000;
. when requesting to redeem or redeposit shares that have been issued in
certificate form;
. if requesting a certificate after opening an account;
. when requesting that redemption proceeds be sent to a different name or
address than is registered on an account;
. if adding/changing a name or adding/removing an owner on an account; and
. if adding/changing the beneficiary on a transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings associations,
credit unions, brokerage firms, and others. Please note that a notary public
stamp or seal is not acceptable.
50
<PAGE>
Telephone and Internet Exchange/Redemption Privileges
The Fund employs reasonable procedures to confirm that instructions communicated
by telephone or the Internet are genuine. The Fund may not be liable for losses
due to unauthorized or fraudulent instructions. Such procedures include but are
not limited to requiring a form of personal identification prior to acting on
instructions received by telephone or the Internet, providing written
confirmations of such transactions to the address of record, tape recording
telephone instructions and backing up Internet transactions.
ORGANIZATION
The Fund is a "Series" of common stock of a Corporation, as described in the
chart below:
<TABLE>
<CAPTION>
Incorporation Date Series Date Class Authorized Par
Corporation Date Created Created Shares Value ($)
--------------------------------------------------------------------------------------------------------
Strong Income Funds II, Inc./(1)/ Indefinite
<S> <C> <C> <C> <C> <C>
- Strong Advisor Bond Fund 01/05/94 Indefinite .01
Class A/(2)/ 8/23/99 Indefinite .01
Class B /2000 Indefinite .01
Class C /2000 Indefinite .01
Class L /2000 Indefinite .01
Class Z/(3)/ 8/23/99 Indefinite .01
Institutional Class/(4)/ 10/28/96 Indefinite .01
Strong Short-Term Global Bond Fund, Inc. 01/05/94 Indefinite
Strong Advisor Aggressive High-Yield /2000 Indefinite .01
Bond Fund
Class A Indefinite .01
Class B Indefinite .01
Class C Indefinite .01
Class L Indefinite .01
Strong Advisor Short Duration Bond Fund 01/05/94 Indefinite .01
Class A Indefinite .01
Class B Indefinite .01
Class C Indefinite .01
Class L Indefinite .01
Class Z/(5)/ Indefinite .01
</TABLE>
(1) Prior to August 23, 1999, the Corporation's name was Strong Institutional
Funds, Inc.
(2) Current Class A is comprised of former Advisor Class shares. The former
Advisor Class was created on August 23, 1999.
(3) Current Class Z is comprised of former Investor Class shares. The former
Investor Class was created on August 23, 1999.
(4) Before August 23, 1999, the former Institutional Class shares were Retail
Class shares of the Fund.
(5) Current Class Z is comprised of former Retail Class shares. The former
Retail Class was created on January 5, 1994.
The Strong Advisor Aggressive High-Yield Bond Fund and the Strong Advisor Short
Duration Bond Fund are diversified series of Strong Short-Term Global Bond Fund,
Inc., an open-end management investment company. The Strong Advisor Bond Fund is
a diversified series of Strong Income Funds II, Inc., 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
51
<PAGE>
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 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 Class A, Class B, Class C and Class L shares of the
Short Duration Bond Fund, which were first offered to the public on November 30,
2000, are based on the historical performance of the Fund's Class Z shares,
which has been recalculated to reflect the additional sales charges and expenses
imposed on the Class A, Class B, Class C and Class L shares. Performance
figures for the Bond Fund's Class A shares are based on the historical
performance of the Fund's former Advisor Class shares. Performance figures for
Bond Fund's Class B, Class C and Class L shares, which were first offered to the
public on November 30, 2000, are based on the historical performance of the
Fund's Class Z shares, which has been recalculated to reflect the additional
sales charges and expenses imposed on the Class B, Class C and Class L shares.
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).
52
<PAGE>
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.
Distribution Rate
The distribution rate for the Fund is computed, according to a non-standardized
formula, by dividing the total amount of actual distributions per share paid by
the Fund over a twelve month period by the Fund's net asset value on the last
day of the period. The distribution rate differs from the Fund's yield because
the distribution rate includes distributions to shareholders from sources other
than dividends and interest, such as short-term capital gains. Therefore, the
Fund's distribution rate may be substantially different than its yield. Both
the Fund's yield and distribution rate will fluctuate.
Average Annual Total Return
The Fund's average annual total return quotation is computed in accordance with
a standardized method prescribed by rules of the SEC. The average annual total
return for the Fund for a specific period is calculated by first taking a
hypothetical $10,000 investment ("initial investment") in the Fund's shares on
the first day of the period and computing the "redeemable value" of that
investment at the end of the period. The redeemable value is then divided by
the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period.
Total Return
Calculation of the Fund's total return is not subject to a standardized formula.
Total return performance for a specific period is calculated by first taking an
investment (assumed below to be $10,000) ("initial investment") in the Fund's
shares on the first day of the period and computing the "ending value" of that
investment at the end of the period. The total return percentage is then
determined by subtracting the initial investment from the ending value and
dividing the remainder by the initial investment and expressing the result as a
percentage. The calculation assumes that all income and capital gains dividends
paid by the Fund have been reinvested at net asset value of the Fund on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period.
Total return for the oldest class of the Fund reflects actual performance for
all periods. For other classes, total returns before inception reflect the
oldest class's performance, adjusted for the difference in sales charges and
expenses among the classes.
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.
Note: the 30-day yields for the Aggressive High-Yield Bond Fund are not shown
here because that Fund did not offer its shares until November 30, 2000.
Specific Fund Performance
30-Day Yield
------------
(30-day period ended ___________, 2000)
----------------------------------------------------------------------------
Waived Absorbed Yield Without Waivers
Fund Yield Management Fees Expenses and Absorptions
----------------------------------------------------------------------------
Bond Fund % 0 0 0%
----------------------------------------------------------------------------
Class A
----------------------------------------------------------------------------
Class B
----------------------------------------------------------------------------
Class C
----------------------------------------------------------------------------
53
<PAGE>
----------------------------------------------------------------------------
Class L
----------------------------------------------------------------------------
Class Z
----------------------------------------------------------------------------
Institutional
Class
----------------------------------------------------------------------------
Short Duration % 0 0 0%
Bond Fund
----------------------------------------------------------------------------
Class A
----------------------------------------------------------------------------
Class B
----------------------------------------------------------------------------
Class C
----------------------------------------------------------------------------
Class L
----------------------------------------------------------------------------
Class Z
----------------------------------------------------------------------------
Total Return
------------
Bond Fund
Class A*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000 9,770 -2.30% -2.30%
--------------------------------------------------------------------------------
Life of Fund** $10,000 12,416 24.16% 7.94%
--------------------------------------------------------------------------------
* Class commenced operations on August 31, 1999.
** Commenced operations on December 31, 1996.
Class B*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
Class C*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
Class L*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
54
<PAGE>
** Commenced operations on December 31, 1996.
Class Z*
(formerly Investor Class)
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000 10,258 2.58% 2.58%
--------------------------------------------------------------------------------
Life of Fund** $10,000 13,138 31.38%
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
Institutional Class*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000 10,268 2.68% 2.68%
--------------------------------------------------------------------------------
Life of Fund** $10,000 13,206 32.06% 10.31%
--------------------------------------------------------------------------------
* Class commenced operations on October 28, 1996.
** Commenced operations on December 31, 1996.
Short Duration Bond Fund
Class A*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Five Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
Class B*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Five Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
Class C*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Five Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
55
<PAGE>
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
Class L*
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000
--------------------------------------------------------------------------------
Five Year $10,000
--------------------------------------------------------------------------------
Life of Fund** $10,000
--------------------------------------------------------------------------------
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
Class Z *
--------------------------------------------------------------------------------
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
--------------------------------------------------------------------------------
One Year $10,000 10,667 6.67% 6.67%
--------------------------------------------------------------------------------
Five Year $10,000 14,203 42.03% 7.27%
--------------------------------------------------------------------------------
Life of Fund** $10,000 14,892 48.92% 7.39%
--------------------------------------------------------------------------------
* Commenced operations on March 31, 1994.
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.
56
<PAGE>
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.
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.
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.
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.
<TABLE>
<CAPTION>
Fund Name Investment Objective
--------- --------------------
<S> <C>
----------------------------------------------------------------------------------------------------------------
Cash Management
----------------------------------------------------------------------------------------------------------------
Strong Advantage Fund Current income with a very low degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Heritage Money Fund Current income, a stable share price, and daily liquidity.
----------------------------------------------------------------------------------------------------------------
Strong Investors Money Fund Current income, a stable share price, and daily liquidity.
----------------------------------------------------------------------------------------------------------------
Strong Money Market Fund Current income, a stable share price, and daily liquidity.
----------------------------------------------------------------------------------------------------------------
Strong Municipal Advantage Fund Federally tax-exempt current income with a very low degree of
share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Municipal Money Market Fund Federally tax-exempt current income, a stable share-price, and daily
liquidity.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Conservative Equity
----------------------------------------------------------------------------------------------------------------
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 Advisor U.S. Value 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.
----------------------------------------------------------------------------------------------------------------
</TABLE>
57
<PAGE>
<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------------------------
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 Advisor Common Stock Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Discovery Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Dow 30 Value Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Enterprise Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Advisor Focus 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 Advisor Mid Cap Growth Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Advisor Small Cap Value Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Strategic Growth Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Advisor Technology Fund Capital growth
----------------------------------------------------------------------------------------------------------------
Strong Technology 100 Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong U.S. Emerging Growth Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Value Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Income
----------------------------------------------------------------------------------------------------------------
Strong Advisor Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Corporate Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Government Securities Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong High-Yield Bond Fund Total return by investing for a high level of current income and
capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Advisor Aggressive High-Yield Total return by investing for a high level of current income and
Bond Fund capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Short-Term Bond Fund Total return by investing for a high level of current income with a low
degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Short-Term High Yield Bond Fund Total return by investing for a high level of current income with a
moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
International
----------------------------------------------------------------------------------------------------------------
Strong Asia Pacific Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Foreign MajorMarketsSM Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Global High-Yield Bond Fund Total return by investing for a high level of current income and
capital growth.
----------------------------------------------------------------------------------------------------------------
Strong International Bond Fund High total return by investing for both income and capital appreciation.
----------------------------------------------------------------------------------------------------------------
Strong International Stock Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Overseas Fund Capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Advisor Short Duration Bond Total return by investing for a high level of income with a low degree
Fund of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Life Stage Series
----------------------------------------------------------------------------------------------------------------
Strong Aggressive Portfolio Capital growth.
----------------------------------------------------------------------------------------------------------------
</TABLE>
58
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<TABLE>
<S> <C>
----------------------------------------------------------------------------------------------------------------
Strong Conservative Portfolio Total return by investing primarily for income and secondarily for
capital growth.
----------------------------------------------------------------------------------------------------------------
Strong Moderate Portfolio Total return by investing primarily for capital growth and secondarily
for income.
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Municipal Income
----------------------------------------------------------------------------------------------------------------
Strong High-Yield Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income.
----------------------------------------------------------------------------------------------------------------
Strong Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Short-Term High Yield Total return by investing for a high level of federally tax-exempt
Municipal Fund current income with a moderate degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
Strong Short-Term Municipal Bond Fund Total return by investing for a high level of federally tax-exempt
current income with a low degree of share-price fluctuation.
----------------------------------------------------------------------------------------------------------------
</TABLE>
The Advisor also serves as Advisor to several management investment companies,
some of which fund variable annuity separate accounts of certain insurance
companies.
The Fund may from time to time be compared to other Strong Funds based on a
risk/reward spectrum. In general, the amount of risk associated with any
investment product is commensurate with that product's potential level of
reward. The Strong Funds risk/reward continuum or any Fund's position on the
continuum may be described or diagrammed in marketing materials. The Strong
Funds risk/reward continuum positions the risk and reward potential of each
Strong Fund relative to the other Strong Funds, but is not intended to position
any Strong Fund relative to other mutual funds or investment products. Marketing
materials may also discuss the relationship between risk and reward as it
relates to an individual investor's portfolio.
Tying Time Frames to Your Goals. There are many issues to consider as you make
your investment decisions, including analyzing your risk tolerance, investing
experience, and asset allocations. You should start to organize your
investments by learning to link your many financial goals to specific time
frames. Then you can begin to identify the appropriate types of investments to
help meet your goals. As a general rule of thumb, the longer your time horizon,
the more price fluctuation you will be able to tolerate in pursuit of higher
returns. For that reason, many people with longer-term goals select stocks or
long-term bonds, and many people with nearer-term goals match those up with for
instance, short-term bonds. The Advisor developed the following suggested
holding periods to help our investors set realistic expectations for both the
risk and reward potential of our funds. (See table below.) Of course, time is
just one element to consider when making your investment decision.
Strong Funds Suggested Minimum Holding Periods
<TABLE>
<CAPTION>
Under 1 Year 1 to 2 Years 4 to 7 Years 5 or More Years
------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Heritage Money Fund Advantage Fund Conservative Portfolio Aggressive Portfolio
Investors Money Fund Municipal Advantage Fund Advisor Bond Fund American Utilities Fund
Money Market Fund Corporate Bond Fund Asia Pacific Fund
Municipal Money Market 2 to 4 Years Global High-Yield Bond Fund Balanced Fund
Fund ------------
Government Securities Fund Blue Chip 100 Fund
Short-Term Bond Fund High-Yield Bond Fund Advisor Common Stock Fund
Advisor Short Duration Bond Advisor Aggressive High-Yield Discovery Fund
Fund Bond Fund Dow 30 Value Fund
Short-Term High Yield Bond High-Yield Municipal Bond Fund Enterprise Fund
Fund International Bond Fund Advisor U.S. Value Fund
Short-Term High Yield Municipal Bond Fund Foreign MajorMarkets(SM) Fund
Municipal Fund Advisor Focus Fund
Short-Term Municipal Bond Growth Fund
Fund Growth 20 Fund
Growth and Income Fund
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C> <C>
Index 500 Fund
International Stock Fund
Internet Fund
Large Cap Growth Fund
Limited Resources Fund
Mid Cap Disciplined Fund
Advisor Mid Cap Growth Fund
Moderate Portfolio
Opportunity Fund
Overseas Fund
Schafer Balanced Fund
Schafer Value Fund
Advisor Small Cap Value
Fund
Strategic Growth Fund
Advisor Technology Fund
Technology 100 Fund
U.S. Emerging Growth Fund
</TABLE>
Product Life Cycles. Discussions of product life cycles and their potential
impact on the Fund's investments may be used in advertisements and sales
materials. The basic idea is that most products go through a life cycle that
generally consists of an early adoption phase, a rapid growth phase, and a
maturity phase. The early adoption phase generally includes the time period
during which the product is first being developed and marketed. The rapid
growth phase usually occurs when the general public becomes aware of the new
product and sales are rising. The maturity phase generally includes the time
period when the public has been aware of the product for a period of time and
sales have leveled off or declined.
By identifying and investing in companies that produce or service products that
are in the early adoption phase of their life cycle, it may be possible for the
Fund to benefit if the product moves into a prolonged period of rapid growth
that enhances the company's stock price. However, you should keep in mind that
investing in a product in its early adoption phase does not provide any
guarantee of profit. A product may experience a prolonged rapid growth and
maturity phase without any corresponding increase in the company's stock price.
In addition, different products have life cycles that may be longer or shorter
than those depicted and these variations may influence whether the product has a
positive effect on the company's stock price. For example, a product may not
positively impact a company's stock price if it experiences an extremely short
rapid growth or maturity phase because the product becomes obsolete soon after
it is introduced to the general public. Other products may never move past the
early adoption phase and have no impact on the company's stock price.
Additional Fund Information
Portfolio Characteristics. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics may be
used to specify fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare the Fund's net asset value
or performance relative to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average performance
during a particular time period.
60
<PAGE>
Standard deviation is calculated using the following formula:
Standard deviation = the square root of E(xi - xm)/2/
-----------
n-1
Where: (E) = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
Statistics may also be used to discuss the Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the Fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost.
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
Duration. Duration is a calculation that seeks to measure the price sensitivity
of a bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes by taking into account the time value of
cash flows generated over the bond's life. Future interest and principal
payments are discounted to reflect their present value and then are multiplied
by the number of years they will be received to produce a value that is
expressed in years. Since duration can also be computed for the Fund, you can
estimate the effect of interest rates on the Fund's share price. Simply
multiply the Fund's duration by an expected change in interest rates. For
example, the price of the Fund with a duration of two years would be expected to
fall approximately two percent if market interest rates rose by one percentage
point.
GENERAL INFORMATION
Business Philosophy
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the focus
of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills and
processes for each asset class and style. Therefore, the Advisor believes that
active management should produce greater returns than a passively managed index.
The Advisor has brought together a group of top-flight investment professionals
with diverse product expertise, and each concentrates on their investment
specialty. The Advisor believes that people are the firm's most important asset.
For this reason, continuity of professionals is critical to the firm's long-term
success.
Investment Environment
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
61
<PAGE>
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.
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).
62
<PAGE>
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
____________________________________________, 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
____________________________________________, acts as legal counsel for the
Fund.
63
<PAGE>
FINANCIAL STATEMENTS
The Annual Report for the Fund that is attached to this SAI contains the
following audited financial information:
1. Schedule of Investments in Securities.
2. Statement of Operations.
3. Statement of Assets and Liabilities.
4. Statement of Changes in Net Assets.
5. Notes to Financial Statements.
6. Financial Highlights.
7. Report of Independent Accountants.
64
<PAGE>
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.
65
<PAGE>
`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.
?
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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<PAGE>
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.
Fitch, Inc. ("Fitch") Long-Term National Credit Ratings
AAA (xxx)
`AAA' national ratings denote the highest rating assigned by Fitch in its
national rating scale for that country. This rating is assigned to the "best"
credit risk relative to all other issuers or issues in the same country and will
normally be assigned to all financial commitments issued or guaranteed by the
sovereign state.
AA (xxx)
`AA' national ratings denote a very strong credit risk relative to other issuers
or issues in the same country. The credit risk inherent in these financial
commitments differs only slightly from the country's highest rated issuers or
issues.
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<PAGE>
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, favorable 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, favorable 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)'.
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.
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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.
`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.
69
<PAGE>
`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.
PRIME - 3 Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime
rating categories.
Fitch, Inc. ("Fitch") Short-Term National Credit Ratings
F1 (xxx)
Indicates the strongest capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. Under Fitch's national
rating scale, this rating is assigned to the "best" credit risk relative to all
others in the same country and is normally assigned to all financial commitments
issued or guaranteed by the sovereign state. Where the credit risk is
particularly strong, a "+" is added to the assigned rating.
F2 (xxx)
Indicates a satisfactory capacity for timely payment of financial commitments
relative to other issuers or issues in the same country. However, the margin of
safety is not as great as in the case of the higher ratings.
70
<PAGE>
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.
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.
71
<PAGE>
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS
Note: the Aggressive High-Yield Bond Fund is not shown because it first offered
its shares on November 30, 2000.
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 Advisor Short Duration Bond Fund
---------------------------------------
Rated Advisor's Assessment
Rating Securities* of Unrated Securities
--------------------------------------------------------------------------------
AAA 54.7% 0.0%
AA 13.6 0.0
A 4.9 0.0
BBB 14.7 0.0
BB 4.8 0.0
B 7.3 0.0
CCC 0.0 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 100% + 0.0% = 100%
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see the information below for the rating
categories of several NRSROs).
For the fiscal year ended February 28, 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 Advisor Bond Fund
------------------------
Rated Advisor's Assessment
Rating Securities* of Unrated Securities
--------------------------------------------------------------------------------
AAA 55.4 0.6%
AA 3.1 0.0
A 10.6 0.2
BBB 11.5 0.2
BB 6.7 0.1
B 10.9 0.0
CCC 0.8 0.0
CC 0.0 0.0
C 0.0 0.0
D 0.0 0.0
Total 98.9% + 1.1% = 100%
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see the information below for the rating
categories of several NRSROs).
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<PAGE>
APPENDIX C - SHARE CLASSES
FRONT-END SALES LOAD
The maximum front-end sales load is 4.50% for Class A shares of the Bond Fund
and Aggressive High-Yield Bond Fund. The maximum front-end sales load is 2.25%
for Class A shares of the Short Duration Bond Fund. There is no front-end load
for Class B, Class C or Institutional Class shares.
Before November 30, 2000, the Bond Fund offered three classes of shares:
Advisor, Investor, and Institutional. On November 30, 2000, the existing
Investor Class shares were converted to Class Z shares and the existing Advisor
Class shares were converted to Class A shares.
The offering price for Class A shares is the next NAV calculated after a
purchase order is accepted, plus any applicable initial sales charges. No sales
charge is imposed on reinvested dividends and distributions. Class A shares are
also subject to Rule 12b-1 fees at an annual rate of 0.25% of average daily net
assets. The amount of the initial sales charge you pay when you buy Class A
shares of the Bond Fund and the Aggressive High-Yield Bond Fund differs
depending on the amount you invest:
<TABLE>
<CAPTION>
Dealer
Reallowance as a
Amount of As a Percentage As a Percentage Percentage of Offering
Your Investment Of Offering Price of Investment Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
-----------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.75% 3.90% 3.25%
-----------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 2.75% 2.83% 2.25%
-----------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.25% 2.30% 2.00%
-----------------------------------------------------------------------------------------------------------------------
$1,000,000 or more None None 0.75%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of the initial sales charge you pay when you buy Class A shares of
the Short Duration Bond Fund also differs depending on the amount you invest:
<TABLE>
<CAPTION>
Dealer
Reallowance as a
Amount of As a Percentage As a Percentage Percentage of Offering
Your Investment Of Offering Price of Investment Price
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 2.25% 2.30% 2.00%
-----------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 1.75% 1.78% 1.50%
-----------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 1.25% 1.27% 1.00%
-----------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 1.00% 1.01% 0.75%
-----------------------------------------------------------------------------------------------------------------------
$1,000,000 or more None None 0.75%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
For Class L shares of each Fund, the front-end sales load is 1.00% of the amount
that you invest and the dealer reallowance as a percentage of offering price is
2.00%. The offering price for Class L shares is the next NAV calculated after a
purchase order is accepted, plus any applicable initial sales charges. No sales
charge is imposed on reinvested dividends and distributions. Class L shares are
also subject to Rule 12b-1 fees at an annual rate of 0.75% of average daily net
assets.
Dealer Reallowances. As shown above, Distributor pays (or "reallows") a portion
of the initial sales charge. The dealer reallowance is expressed as a percentage
of the Class A and Class L shares' offering price.
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<PAGE>
WAIVERS OR REDUCTIONS OF FRONT-END SALES LOADS
The initial sales charge may be reduced or waived in the following
circumstances.
1. Reinstatement Privilege. Shareholders of the Fund who have redeemed their
Class A shares have a one-time right to reinvest the redemption proceeds at net
asset value (without a sales charge). Such a reinvestment must be made within
90 days of the redemption and is limited to the amount of the redemption
proceeds. Although redemptions and repurchases of shares are taxable events, a
reinvestment within a certain period of time in the same fund may be considered
a "wash sale" and may result in the inability to recognize currently all or a
portion of a loss realized on the original redemption for federal income tax
purposes. Please see your tax adviser for further information. If you paid a
CDSC when you redeemed your Class A shares from the Fund, a new CDSC will apply
to your purchase of Fund shares and the CDSC holding period will begin again.
We will, however, credit your fund account with additional shares based on the
CDSC you previously paid and the amount of the redemption proceeds that you
reinvest.
2. Letter of Intent (LOI). If a shareholder (other than a group purchaser
described below) anticipates purchasing $50,000 or more of Class A shares of a
Fund within a 13-month period, the shareholder may obtain Class A shares of the
Fund at the same reduced sales charge as though the total quantity were invested
in one lump sum by completing the Letter of Intent and delivering the Letter of
Intent to the Advisor within 90 days of the commencement of purchases. Subject
to acceptance by the Advisor and the conditions mentioned below, each purchase
will be made at a public offering price applicable to a single transaction of
the dollar amount specified in the Letter of Intent. The shareholder or his
dealer must inform the Advisor that the Letter of Intent is in effect each time
shares are purchased. The shareholder makes no commitment to purchase
additional shares, but if his purchases within 13 months plus the value of
shares credited toward completion of the Letter of Intent do not total the sum
specified, the shareholder will pay the increased amount of the sales charge as
described below. Instructions for issuance of shares in the name of a person
other than the person signing the Letter of Intent application must be
accompanied by a written statement from the dealer stating that the shares were
paid for by the person signing such Letter. Neither income dividends nor capital
gain distributions taken in additional shares will apply toward the completion
of the Letter of Intent. Out of the shareholder's initial purchase (or
subsequent purchases if necessary), shares equal to difference between the lower
sales charge and the higher sales charge the investor would have paid had the
investor not purchased shares through this program will be held in escrow until
the intended amount is invested. These escrowed shares may be redeemed by the
Fund if the investor is required to pay additional sales charges. When the
minimum investment so specified is completed the escrowed shares will be
released. If the intended investment is not completed, the Advisor or
Distributor will redeem an appropriate number of the escrowed shares in order to
realize such difference. Shares remaining after any such redemption will be
released by the Advisor or Distributor. By completing and signing the Account
Application or Letter of Intent, the shareholder irrevocably appoints the
Advisor and/or the Distributor as the shareholder's attorney to surrender for
redemption any or all escrowed shares with full power of substitution in the
premises.
3. Right of Accumulation. A shareholder qualifies for cumulative quantity
discounts on the purchase of Class A shares when the shareholder's new
investment, together with the current offering price value of Class A shares of
that Fund reaches a discount level. A shareholder (or his investment adviser)
must provide the Advisor or Distributor with information to verify that the
quantity sales charge discount is applicable at the time the investment is made.
4. Group Purchases. A bona fide group and all its members may be treated as a
single purchaser and, under the Right of Accumulation (but not the Letter of
Intent) obtain quantity sales charge discounts on the purchase of Class A shares
if the group (1) gives its endorsement or authorization to the investment
program so it may be used by the investment dealer to facilitate solicitation of
the membership, thus effecting economies of sales effort; (2) has been in
existence for at least six months and has a legitimate purpose other than to
purchase mutual fund shares at a discount; (3) is not a group of individuals
whose sole organizational nexus is as credit cardholders of a company,
policyholders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups; and (4) agrees to
provide certification of membership of those members investing money in the
Class A shares upon the request of the Advisor or Distributor.
The initial sales charge for Class A shares may be waived in the following
circumstances.
1. Waivers for investments from certain payments. Class A shares may be
purchased without an initial sales charge or contingent deferred sales charge
(CDSC) by investors who reinvest within 365 days, in these circumstances:
74
<PAGE>
a. Dividend and capital gain distributions from the Fund. The distributions
generally must be reinvested in the same share class. Certain exceptions apply
to Class Z shareholders of the Fund who may reinvest their distributions in the
Fund's Class A shares. This waiver category also applies to Class B, C and L
shares.
b. Annuity payments received under either an annuity option or from death
benefit proceeds, if the annuity contract offers the Fund as an investment
option. You should contact your tax advisor for information on any tax
consequences that may apply.
c. Distributions from an existing retirement plan invested in the Fund.
2. Bank trust departments and law firms. Shares acquired by certain bank
trust departments or law firms acting as trustee or manager for trust accounts
which have entered into an administrative services agreement with Distributor or
the Advisor or one of their affiliates and the shares are being acquired for the
benefit of their trust account clients.
3. Any state or local government or any instrumentality, department,
authority or agency thereof that has determined a Fund is a legally permissible
investment and that can only buy Fund shares without paying sales charges.
Please consult your legal and investment advisors to determine if an investment
in a Fund is permissible and suitable for you and the effect, if any, of
payments by the fund on arbitrage rebate calculations.
4. Wrap account and fund "supermarket" investments. Shares acquired by
investments through certain dealers (including registered investment advisors
and financial planners) which have established certain operational arrangements
with the Advisor which include a requirement that such shares be sold for the
sole benefit of clients participating in a "wrap" account, mutual fund
"supermarket" account, or a similar program under which such clients pay a fee
to such dealer.
5. Certain retirement plans. Shares acquired by certain retirement plans or
trust accounts whose third party administrators or dealers have entered into an
administrative services agreement with the Distributor or the Advisor or one of
their affiliates to perform certain administrative services, subject to certain
operational and minimum size requirements specified from time to time by the
Distributor or the Advisor or one of their affiliates. A CDSC may apply if the
retirement plan is transferred out of the Fund or terminated within 365 days of
the retirement plan account's initial purchase in the Fund.
6. Qualified registered investment advisors who buy through a broker-dealer
or service agent who has entered into an agreement with Distributor.
7. Registered securities dealers and their affiliates, for their investment
accounts only.
8. Current employees of securities dealers and their affiliates and their
family members, as allowed by the internal policies of their employer.
9. Officers, trustees, directors and full-time employees of the Fund or the
Advisor, and their family members living in the same household.
10. Investment companies exchanging shares or selling assets pursuant to a
merger, acquisition or exchange offer.
11. Accounts managed by the Advisor or an affiliate.
12. Certain unit investment trusts and their holders reinvesting distributions
from the trusts.
13. Group annuity separate accounts offered to retirement plans.
14. Investments by insurance company separate accounts. Shares acquired by
insurance company separate accounts.
75
<PAGE>
In addition, Class L shares may be purchased without an initial sales charge by
any investor who buys Class L shares through an omnibus account with
__________________________________.
DEALER COMPENSATION
Securities dealers may at times receive the entire sales charge. A securities
dealer who receives 90% or more of the sales charge may be deemed an underwriter
under the Securities Act of 1933, as amended. Financial institutions or their
affiliated brokers may receive an agency transaction fee in the percentages
indicated in the dealer compensation table in the funds' prospectus.
The Distributor may pay the following commissions, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more: 1% on sales of $1 million to $2 million, plus
0.80% on sales over $2 million to $3 million, plus 0.50% on sales over $3
million to $50 million, plus 0.25% on sales over $50 million to $100 million,
plus 0.15% on sales over $100 million.
These breakpoints are reset every 12 months for purposes of additional
purchases.
The Distributor or one of its affiliates may pay up to 1%, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of Class A shares by certain retirement plans without an initial sales charge.
These payments may be made in the form of contingent advance payments, which may
be recovered from the securities dealer or set off against other payments due to
the dealer if shares are sold within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed by
an agreement between the Distributor, or one of its affiliates, and the
securities dealer.
In addition to the payments above, the Distributor and/or its affiliates may
provide financial support to securities dealers that sell shares of the Fund.
This support is based primarily on the amount of sales of Fund shares and/or
total assets with the Fund. The amount of support may be affected by: total
sales; net sales; levels of redemptions; the proportion of a securities dealer's
sales and marketing efforts relating to the Fund; a securities dealer's support
of, and participation in, the Distributor's marketing programs; a securities
dealer's compensation programs for its registered representatives; and the
extent of a securities dealer's marketing programs relating to the Fund.
Financial support to securities dealers may be made by payments from the
Distributor's resources, from the Distributor's retention of underwriting
concessions, and from payments to Distributors under Rule 12b-1 plans. In
addition, certain securities dealers may receive brokerage commissions generated
by Fund portfolio transactions in accordance with the rules of the National
Association of Securities Dealers, Inc.
The Distributor routinely sponsors due diligence meetings for registered
representatives during which they receive updates on the Fund and are afforded
the opportunity to speak with portfolio managers. Invitation to these meetings
is not conditioned on selling a specific number of shares. Those who have shown
an interest in the Fund, however, are more likely to be considered. To the
extent permitted by their firm's policies and procedures, registered
representatives' expenses in attending these meetings may be covered by the
Distributor.
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you invest $1 million or more in Class A shares, either as a lump sum or
through our cumulative quantity discount or letter of intent programs, a CDSC
may apply on any shares you sell within 12 months of purchase. The CDSC is 1%
of the net asset value at the time of purchase.
Certain retirement plan accounts that qualify to buy Class A shares without an
initial sales charge also may be subject to a CDSC if the retirement plan is
transferred out of the Fund or terminated within 365 days of the account's
initial purchase in the Fund.
For Class B shares, there is a CDSC if you sell your shares within six years, as
described in the table below. The charge is based on the net asset value at the
time of purchase.
76
<PAGE>
IF YOU SELL YOUR CLASS B THIS % IS DEDUCTED FROM
SHARES WITHIN THIS MANY YOUR PROCEEDS AS A CDSC
YEARS AFTER BUYING
THEM
---------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
If you invest in Class C shares, a CDSC may apply on any shares you sell within
12 months of purchase. The CDSC is 1% of the net asset value at the time of
purchase.
If you invest in Class L shares, a CDSC may apply on any shares you sell within
18 months of purchase. The CDSC is 1% of the net asset value at the time of
purchase.
Any purchase of $1 million or more will be placed in Class A shares.
CDSC WAIVERS
The CDSC for any share class generally will be waived for:
1. Account fees.
2. Sales of Class A shares purchased without an initial sales charge by certain
retirement plan accounts if the securities dealer of record received a payment
from the Distributor of 0.25% or less, or the Distributor did not make any
payment in connection with the purchase, or the securities dealer of record has
entered into a supplemental agreement with the Distributor.
3. Redemptions of Class A shares by investors who purchased $1 million or more
without an initial sales charge if the securities dealer of record waived its
commission in connection with the purchase.
4. Redemptions by the Fund when an account falls below the minimum required
account size.
5. Redemptions following the death of the shareholder or beneficial owner.
6. Redemptions through a systematic withdrawal plan, up to 1% monthly, 3%
quarterly, 6% semiannually or 12% annually of your account's net asset value
depending on the frequency of your plan
7. Redemptions by an employee benefit plan or trust account whose third party
administrator or dealer has entered into an agreement with the Distributor or
the Advisor or one of their affiliates to perform certain administrative
services, subject to operational and minimum size requirements specified from
time to time by the Distributor or the Advisor or one of their affiliates (not
applicable to Class B)
8. Distributions from individual retirement accounts (IRAs) due to death or
disability or upon periodic distributions based on life expectancy (for Class B,
this applies to all retirement plan accounts, not only IRAs).
9. Returns of excess contributions (and earnings, if applicable) from
retirement plan accounts.
10. Participant initiated distributions from employee benefit plans or
participant initiated exchanges among investment choices in employee benefit
plans (not applicable to Class B).
77
<PAGE>
ADDITIONAL DEALER COMMISSIONS/CONCESSIONS
Dealers may receive different compensation with respect to sales of Class A,
Class B, Class C or Class L shares. In addition, from time to time, the
Distributor may pay dealers 100% of the applicable sales charge on sales of
Class A or Class L shares of certain specified Funds sold by such dealer during
a specified sales period. In addition, from time to time, the Distributor, at
its expense, may provide additional commissions, compensation or promotional
incentives ("concessions") to dealers which sell or arrange for the sale of
shares of the Fund. Such concessions provided by the Distributor may include
financial assistance to dealers in connection with pre-approved conferences or
seminars, sales or training programs for invited registered representatives and
other employees, payment for travel expenses, including lodging, incurred by
registered representatives and other employees for such seminars or training
programs, seminars for the public, advertising and sales campaigns regarding one
or more Funds, and/or other dealer-sponsored events. From time to time, the
Distributor may make expense reimbursements for special training of a dealer's
registered representatives and other employees in group meetings or to help pay
the expenses of sales contests. Other concessions may be offered to the extent
not prohibited by state laws or any self-regulatory agency, such as the NASD.
CLASS Z SHARES - ELIGIBILITY CRITERIA
Class Z shares are available for the Bond Fund and Short Duration Bond Fund
only. Investors that owned shares of a Fund on November 30, 2000, that were
renamed Class Z shares, may continue to own those Class Z shares. In addition,
Class Z shares are available for purchase by the following categories of
investors:
. Investors holding Class Z shares of a Fund on November 30, 2000 that were
purchased directly from Strong, and not through an intermediary, may
purchase additional Class Z shares of that Fund;
. 401(k) plans holding Class Z shares of a Fund on November 30, 2000 may
purchase additional Class Z shares of that Fund;
. Employees of Strong and Strong Investments, Inc. and their immediate family
members (grandparent, parent, sibling, child, grandchild and spouse) who
live in the same household;
. Certain retirement plans or trust accounts whose third party administrators
or dealers have entered into an administrative services agreement with
Strong to perform certain administrative services; and
. Certain institutional investors purchasing more than $10 million of Class Z
shares.
For more information on the purchase of Class Z shares, call Strong at
800-368-3863.
78
<PAGE>
STRONG INCOME FUNDS II, INC.
PART C
OTHER INFORMATION
Item 23. Exhibits
--------
(a) Articles of Incorporation dated July 31, 1996/(3)/
(a.1) Amendment to Articles of Incorporation dated October 22,
1996/(3)/
(a.2) Amendment to Articles of Incorporation dated August 23,
1999/(6)/
(b) Bylaws dated October 20, 1995/(1)/
(b.1) Amendment to Bylaws dated May 1, 1998/(4)/
(c) Specimen Stock Certificate/(6)/
(d) Amended and Restated Investment Advisory Agreement/(6)/
(e) Distribution Agreement - Investor and Institutional Class/(6)/
(e.1) Distribution Agreement - Advisor Class/(6)/
(e.2) Dealer Agreement/(7)/
(e.3) Services Agreement/(7)/
(f) Inapplicable
(g) Custody Agreement with Firstar/(2)/
(g.1) Global Custody Agreement with Brown Brothers Harriman & Co./(3)/
(h) Amended and Restated Transfer and Dividend Disbursing Agent
Agreement/(6)/
(h.1) Administration Agreement - Investor Class/(6)/
(h.2) Administration Agreement - Advisor Class/(6)/
(h.3) Administration Agreement - Institutional Class/(6)/
(i) Inapplicable
(j) Inapplicable
(k) Inapplicable
(l) Inapplicable
(m) Amended and Restated Rule 12b-1 Plan/(7)/
(n) Amended and Restated Rule 18f-3 Plan/(7)/
(o) Inapplicable
(p) Code of Ethics for Access Persons dated January 1, 1999/(5)/
(p.1) Code of Ethics for Non-Access Persons dated January 1, 1999/(5)/
(q) Power of Attorney
(r) Inapplicable
_______________________
/(1)/ Incorporated herein by reference to the Registration Statement on Form N-
1A of Registrant filed on or about August 3, 1995.
/(2)/ Incorporated herein by reference to Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed on or about June 27, 1996.
/(3)/ Incorporated herein by reference to Post-Effective Amendment No. 4 to the
Registration Statement on Form N-1A filed on or about December 30, 1996.
/(4)/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A filed on or about April 30, 1999.
/(5)/ Incorporated herein by reference to Post-Effective Amendment No. 8 to the
Registration Statement on Form N-1A filed on or about June 25, 1999.
/(6)/ Incorporated herein by reference to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed on or about August 27, 1999.
/(7)/ Incorporated herein by reference to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A filed on or about February 24, 2000.
C-1
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
Registrant neither controls any person nor is under common control
with any other person.
Item 25. Indemnification
---------------
Officers and directors of the Fund, its advisor and underwriter are
insured under a joint directors and officers errors and omissions insurance
policy underwritten by a group of insurance companies in the aggregate amount of
$115,000,000, subject to certain deductions. Pursuant to the authority of the
Wisconsin Business Corporation Law ("WBCL"), Article VII of Registrant's Bylaws
provides as follows:
ARTICLE VII. INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 7.01. Mandatory Indemnification. The Corporation
-------------------------
shall indemnify, to the full extent permitted by the WBCL, as in
effect from time to time, the persons described in Sections 180.0850
through 180.0859 (or any successor provisions) of the WBCL or other
provisions of the law of the State of Wisconsin relating to
indemnification of directors and officers, as in effect from time to
time. The indemnification afforded such persons by this section shall
not be exclusive of other rights to which they may be entitled as a
matter of law.
SECTION 7.02. Permissive Supplementary Benefits. The
---------------------------------
Corporation may, but shall not be required to, supplement the right of
indemnification under Section 7.01 by (a) the purchase of insurance on
behalf of any one or more of such persons, whether or not the
Corporation would be obligated to indemnify such person under Section
7.01; (b) individual or group indemnification agreements with any one
or more of such persons; and (c) advances for related expenses of such
a person.
SECTION 7.03. Amendment. This Article VII may be amended
---------
or repealed only by a vote of the shareholders and not by a vote of
the Board of Directors.
SECTION 7.04. Investment Company Act. In no event shall
----------------------
the Corporation indemnify any person hereunder in contravention of any
provision of the Investment Company Act.
Item 26. Business and Other Connections of Investment Advisor
----------------------------------------------------
The information contained under "Who are the funds' investment advisor
and portfolio managers" in each Prospectus and under "Directors and Officers,"
"Investment Advisor," and "Distributor" in the Statement of Additional
Information is hereby incorporated by reference pursuant to Rule 411 under the
Securities Act of 1933.
Item 27. Principal Underwriters
----------------------
(a) Strong Investments, Inc., principal underwriter for Registrant,
also serves as principal underwriter for Strong Advantage Fund, Inc.; Strong
Asia Pacific Fund, Inc.; Strong Balanced Fund, Inc.; Strong Common Stock Fund,
Inc.; Strong Conservative Equity Funds, Inc.; Strong Corporate Bond Fund, Inc.;
Strong Discovery Fund, Inc.; Strong Equity Funds, Inc.; Strong Government
Securities Fund, Inc.; Strong Heritage Reserve Series, Inc.; Strong High-Yield
Municipal Bond Fund, Inc.; Strong Income Funds, Inc.; Strong International
Equity Funds, Inc.; Strong International Income Funds, Inc.; Strong Large Cap
Growth Fund, Inc.; Strong Life Stage Series, Inc.; Strong Money Market Fund,
Inc.; Strong Municipal Bond Fund, Inc.; Strong Municipal Funds, Inc.; Strong
Opportunity Fund, Inc.; Strong Opportunity Fund II, Inc.; Strong Schafer Funds,
Inc.; Strong Schafer Value Fund, Inc.; Strong Short-Term Bond Fund, Inc.; Strong
Short-Term Global Bond Fund, Inc.; Strong Short-Term Municipal Bond Fund, Inc.;
and Strong Variable Insurance Funds, Inc.
C-2
<PAGE>
(b)
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Fund
-----------------------------------------------------------------------------
Peter D. Schwab President and Director none
100 Heritage Reserve
Menomonee Falls, WI 53051
Richard W. Smirl Vice President and none
100 Heritage Reserve Chief Compliance Officer
Menomonee Falls, WI 53051
Lyle J. Fitterer Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Dana J. Russart Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Michael W. Stefano Vice President none
100 Heritage Reserve
Menomonee Falls, WI 53051
Dennis A. Wallestad Vice President Vice President
100 Heritage Reserve
Menomonee Falls, WI 53051
Elizabeth N. Cohernour Secretary Vice President and
100 Heritage Reserve Secretary
Menomonee Falls, WI 53051
Thomas M. Zoeller Treasurer and Chief Vice President
100 Heritage Reserve Financial Officer
Menomonee Falls, WI 53051
Kevin J. Scott Assistant Treasurer none
100 Heritage Reserve
Menomonee Falls, WI 53051
Constance R. Wick Assistant Secretary none
100 Heritage Reserve
Menomonee Falls, WI 53051
(c) None
C-3
<PAGE>
Item 28. Location of Accounts and Records
--------------------------------
All accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the physical possession of Registrant's Vice President,
Elizabeth N. Cohernour, at Registrant's corporate offices, 100 Heritage Reserve,
Menomonee Falls, Wisconsin 53051.
Item 29. Management Services
-------------------
All management-related service contracts entered into by Registrant
are discussed in Parts A and B of this Registration Statement.
Item 30. Undertakings
------------
None
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment to the Registration Statement on Form N-1A to be signed on
its behalf by the undersigned, thereto duly authorized, in the Village of
Menomonee Falls, and State of Wisconsin on the 22nd day of September, 2000.
STRONG INCOME FUNDS II, INC.
(Registrant)
By: /s/ Elizabeth N. Cohernour
--------------------------------------------
Elizabeth N. Cohernour, Vice President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement on Form N-1A has been signed
below by the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Chairman of the Board (Principal
/s/ Richard S. Strong Executive Officer) and a Director September 22, 2000
---------------------------------
Richard S. Strong
Treasurer (Principal Financial
and Accounting Officer) September 22, 2000
/s/ John W. Widmer
---------------------------------
John W. Widmer
/s/ Marvin E. Nevins* Director September 22, 2000
---------------------------------
Marvin E. Nevins*
/s/ Willie D. Davis* Director September 22, 2000
---------------------------------
Willie D. Davis*
/s/ William F. Vogt* Director September 22, 2000
---------------------------------
William F. Vogt*
/s/ Stanley Kritzik* Director September 22, 2000
---------------------------------
Stanley Kritzik*
/s/ Neal Malicky* Director September 22, 2000
---------------------------------
Neal Malicky*
</TABLE>
* Susan A. Hollister signs this document pursuant to powers of attorney
filed with this Post-Effective Amendment to the Registration Statement on
Form N-1A.
By: /s/ Susan A. Hollister
---------------------------
Susan A. Hollister
<PAGE>
EXHIBIT INDEX
EDGAR
Exhibit No. Exhibit Exhibit No.
----------- ------- -----------
(q) Power of Attorney EX-99.q
