PROSPECTUS FEBRUARY 29, 2000
AS SUPPLEMENTED ON NOVEMBER 30, 2000
[INSTITUTIONAL CLASS (written vertically)]
The Strong
Advisor Bond
Fund
[PICTURE OF MAN HOLDING TELEPHONE]
[STRONG LOGO] STRONG
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
1
<PAGE>
TABLE OF CONTENTS
Your Investment.................................................................
Key Information.................................................................
What is the fund's goal?.......................................................1
What are the fund's principal investment strategies?...........................1
What are the main risks of investing in the fund?..............................2
What are the fund's fees and expenses?.........................................7
Who are the fund's investment advisor and portfolio managers?..................8
Other Important Information You Should Know.....................................
A Word About Credit Quality....................................................9
Financial Highlights..........................................................11
Your Account....................................................................
Share Price...................................................................13
Buying Shares.................................................................13
Selling Shares................................................................15
Additional Policies...........................................................15
Distributions.................................................................17
Taxes.........................................................................18
Reserved Rights...............................................................19
For More Information..................................................Back Cover
IN THIS PROSPECTUS, "WE" REFERS TO STRONG CAPITAL MANAGEMENT, INC., THE
INVESTMENT ADVISOR, ADMINISTRATOR, AND TRANSFER AGENT FOR THE STRONG FUNDS.
2
<PAGE>
YOUR INVESTMENT
KEY INFORMATION
WHAT IS THE FUND'S GOAL?
The STRONG ADVISOR BOND FUND (formerly, the Strong Bond Fund) seeks total
return by investing for a high level of current income with a moderate degree
of share-price fluctuation.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The ADVISOR BOND FUND invests, under normal market conditions, 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.
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.
Although the fund invests primarily for income, it also employs 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 fund's managers may sell a holding if its value becomes unattractive (for
example, when its fundamental qualities deteriorate or when other opportunities
exist that have more attractive yields). Also, the managers may invest any
amount in cash or cash-type securities (high-quality, short-term debt
securities issued by corporations, financial institutions, or the U.S.
government) as a temporary defensive position to avoid losses during adverse
market conditions. This could reduce the benefit to the fund if the market
goes up. In this case, the fund may not achieve its investment goal. In
addition, the fund's active trading approach may increase the fund's costs
which may reduce the fund's performance. The fund's active trading approach
may also increase the amount of capital gains tax that you pay on the fund's
returns.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
BOND RISKS: The major risks of the fund are those of investing in the bond
market. A bond's market value is affected significantly by changes in interest
rates-generally, when interest rates rise, the bond's market value declines and
when interest rates decline, its market value rises (interest-rate risk).
Generally, the longer a bond's maturity, the greater the risk and the higher
its yield. Conversely, the shorter a bond's maturity, the lower the risk and
the lower its yield (maturity risk). A bond's value can also be affected by
changes in the bond's credit quality rating or its issuer's financial condition
(credit quality risk). Because bond values fluctuate, the fund's share price
fluctuates. So, when you sell your investment, you may receive more or less
money than you originally invested.
HIGH-YIELD BOND RISKS: The fund invests in lower-quality bonds, commonly known
as high-yield bonds or junk bonds. These bonds offer the potential for higher
returns but also involve greater risk than bonds of better quality, including
an increased possibility that the bond's issuer may not be able to make its
payments of interest and principal (credit quality risk). If that happens, the
fund's share price would decrease and its income distributions would be
reduced. An economic downturn or period
3
<PAGE>
of rising interest rates (interest rate risk) could adversely affect the market
for these bonds and reduce the fund's ability to sell its bonds (liquidity
risk). The lack of a liquid market for these bonds could decrease the fund's
share price.
MANAGEMENT RISK: The fund is subject to management risk because it is actively
managed. There is no guarantee that the investment techniques and risk
analyses used by the managers will produce the desired results.
MORTGAGE- AND ASSET-BACKED SECURITIES RISK: The 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 RISKS: The fund may invest up to 20% of its assets in
dollar-denominated foreign securities. Foreign investments involve additional
risks including less liquidity, currency-rate fluctuations, political and
economic instability, differences in financial reporting standards, and
less-strict regulation of securities markets.
FUTURES RISKS: The 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.
The fund is appropriate for investors who are comfortable with the risks
described here and whose financial goals are four to seven years in the future.
The fund is not appropriate for investors concerned primarily with principal
stability.
FUND STRUCTURE
The fund adopted a multiple class plan. It offers Class A, Class B, Class C,
Class L, Class Z, and Institutional Class shares. Only the Institutional Class
shares are offered in this prospectus. The principal differences among the
classes are each class' sales charges and annual expenses. Each class may also
pay different administrative and transfer agency fees and expenses.
FUND PERFORMANCE
The following return information illustrates how the performance of the fund's
Institutional Class shares can vary, which is one indication of the risks of
investing in the fund. Please keep in mind that the past performance of the
fund's Institutional Class shares does not represent how they will perform in
the future. The information assumes that you reinvested all dividends and
distributions.
CALENDAR YEAR TOTAL RETURNS
<TABLE>
<CAPTION>
<S> <C>
Year Advisor Bond
---- ------------
1997 18.9%
---- ------------
1998 10.8%
---- ------------
1999 1.3%
---- ------------
</TABLE>
BEST AND WORST QUARTERLY PERFORMANCE
(DURING THE PERIODS SHOWN ABOVE)
<TABLE>
<CAPTION>
<S> <C> <C>
FUND NAME BEST QUARTER RETURN WORST QUARTER RETURN
------------ ------------------- ---------------------
Advisor Bond 6.5% (1st Q 1997) -0.8% (2nd Q 1999)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
AS OF 12-31-99
FUND/INDEX 1-YEAR SINCE INCEPTION
ADVISOR BOND 1.31% 10.10% (12-31-96)
Lehman Brothers Aggregate Bond Index -0.82% 5.73%
Lipper Intermediate Investment Grade
Debt Funds Index -0.98% 5.13%
4
<PAGE>
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.
For current yield information on the fund, call 800-368-3863.
WHAT ARE THE FUND'S FEES AND EXPENSES?
This section describes the fees and expenses that you may pay if you buy and
hold shares of the fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
The Institutional Class shares of the 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 fund are deducted from the fund's assets, which
means you pay them indirectly. These costs are deducted before computing the
daily share price or making distributions. As a result, they don't appear on
your account statement, but instead reduce the total return you receive from
your fund investment.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENT OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
<S> <C>
Management Fee 0.23%
Other Expenses 0.14%
Total Annual Fund Operating Expenses 0.37%*
</TABLE>
* WE HAVE CONTRACTUALLY AGREED TO WAIVE OUR MANAGEMENT FEE AND ABSORB EXPENSES
UNTIL DECEMBER 31, 2000 TO KEEP TOTAL EXPENSES AT NO MORE THAN 0.40%.
EXAMPLE: This example is intended to help you compare the cost of investing in
the fund, before fee waivers and expense absorptions, with the cost of
investing in other mutual funds. The example assumes that you invest $10,000 in
the fund and reinvest all dividends and distributions for the time periods
indicated, and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the fund's operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions, your costs would be:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$38 $119 $208 $468
</TABLE>
WHO ARE THE FUND'S INVESTMENT ADVISOR AND PORTFOLIO MANAGERS?
Strong Capital Management, Inc. (Strong) is the investment advisor for the
funds. Strong provides investment management services for mutual funds and
other investment portfolios representing assets over $38 billion. Strong began
conducting business in 1974. Since then, its principal business has been
providing investment advice for individuals and institutional accounts, such as
pension and profit-sharing plans, as well as mutual funds, several of which are
available through variable insurance products. Strong's address is P.O. Box
2936, Milwaukee, WI 53201.
The following individuals are the fund's portfolio managers.
JEFFREY A. KOCH co-manages the ADVISOR 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. Prior to joining Strong, Mr. Koch was employed by Fossett Corporation, a
clearing firm, as a market maker clerk. Mr. Koch received his bachelors degree
in Economics from the University of Minnesota in 1987 and his Masters of
Business Administration in Finance from Washington University in 1989.
BRADLEY C. TANK co-manages the ADVISOR 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
5
<PAGE>
1996. For eight years prior to joining Strong, he worked for Salomon Brothers
Inc. He was a vice president and fixed income specialist for six years and for
the two years prior to that, a fixed income specialist. He received his
bachelors degree in English from the University of Wisconsin in 1980 and his
Masters of Business Administration in Finance from the University of Wisconsin
in 1982, where he also completed the Applied Securities Analysis Program. Mr.
Tank chairs Strong's Fixed Income Investment Committee.
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>
<S> <C> <C> <C>
CREDIT
QUALITY S&P'S DEFINITION S&P'S RATINGS GROUP RATING CATEGORY
---------- ------------------- ------------------- ---------------
Higher Highest quality AAA First highest
High quality AA Second highest
Upper medium grade A Third highest
---------- ------------------- ------------------- ---------------
Medium Medium grade BBB Fourth highest
---------- ------------------- ------------------- ---------------
Lower Low grade BB
Speculative B
Submarginal CCC, CC, C
---------- ------------------- -------------------
In default Probably in default D
---------- ------------------- -------------------
</TABLE>
We determine a bond's credit quality rating at the time of investment by
conducting credit research and analysis and by relying on credit ratings of
several nationally recognized statistical rating organizations. These
organizations are called NRSROs. When we determine if a bond is in a specific
category, we may use the highest rating assigned to it by any NRSRO. If a bond
is not rated, we rely on our credit research and analysis to rate the bond. If
a bond's credit quality rating is downgraded after our investment, we monitor
the situation to decide if we need to take any action such as selling the bond.
Investments in lower-quality bonds (junk bonds) will be more dependent on our
credit analysis than would be higher-quality bonds because, while lower-quality
bonds generally offer higher yields than higher-quality bonds with similar
maturities, lower-quality bonds involve greater risks. These include the
possibility of default or bankruptcy because the issuer's capacity to pay
interest and repay principal is considered predominantly speculative. Also,
lower-quality bonds are less liquid, meaning that they may be harder to sell
than bonds of higher quality because the demand for them may be lower and there
are fewer potential buyers. This lack of liquidity may lower the value of the
fund and your investment.
6
<PAGE>
FINANCIAL HIGHLIGHTS
This information describes investment performance of the Institutional Class
shares of the fund for the periods shown. Certain information reflects
financial results for a single Institutional Class share outstanding for the
entire period. "Total Return" shows how much an investment in the
Institutional Class shares of the fund would have increased (or decreased)
during each period, assuming you had reinvested all dividends and
distributions. These figures have been audited by PricewaterhouseCoopers LLP,
whose report, along with the fund's financial statements, is included in the
fund's annual report.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
STRONG ASVISOR BOND FUND - INSTITUTIONAL CLASS
Oct. 31, Feb. 28, Feb. 28, Dec. 31,
SELECTED PER-SHARE DATA(a) 1999(b) 1999 1998(c) 1997
Net Asset Value, Beginning of Period $11.12 $11.18 $11.06 $10.00
Income From Investment Operations:
Net Investment Income 0.48 0.67 0.11 0.66
Net Realized and Unrealized Gains
(Losses) on Investments (0.39) 0.19 0.12 1.18
Total from Investment Operations 0.09 0.86 0.23 1.84
Less Distributions:
From Net Investment Income (0.48) (0.68) (0.11) (0.66)
In Excess of Net Investment Income - - (0.00)(d) -
From Net Realized Gains (0.06) (0.24) - (0.12)
Total Distributions (0.54) (0.92) (0.11) (0.78)
Net Asset Value, End of Period $10.67 $11.12 $11.18 $11.06
RATIOS AND SUPPLEMENTAL DATA
Total Return +0.9% +7.9% +2.1% +18.9%
Net Assets, End of Period
(In Millions) $166 $135 $57 $52
Ratio of Expenses to Average Net
Assets without Waivers or Absorptions 0.4%* 0.4% 0.4%* 0.7%
Ratio of Expenses to Average Net Assets 0.4%* 0.4% 0.4%* 0.4%
Ratio of Net Investment Income
to Average Net Assets 6.6%* 6.0% 6.2%* 6.3%
Portfolio Turnover Rate(e) 250.7% 305.4% 68.1% 358.6%
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the
fund outstanding for the entire period.
(b) In 1999, the fund changed its fiscal year-end from February to
October.
(c) In 1997, the fund changed its fiscal year-end from December to
February.
(d) Amount calculated is less than $0.01.
(e) Calculated on the basis of the fund as a whole without
distinguishing between the classes of shares issued.
</TABLE>
YOUR ACCOUNT
SHARE PRICE
Your transaction price for buying, selling, or exchanging shares of the fund or
specific classes of the fund is the net asset value per share (NAV) for the
fund or class of shares. NAV is generally calculated as of the close of
trading on the New York Stock Exchange (usually 3:00 p.m. Central Time) every
day the NYSE is open. If the NYSE closes at any other time, or if an emergency
exists, NAV may be calculated at a different time. Your share price will be
the next NAV calculated after we accept your order.
NAV is based on the market value of the securities in a fund's portfolio. If
market prices are not available, NAV is based on a security's fair value as
determined in good faith by us under the supervision of the Board of Directors
of the Strong Funds.
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
We determine the share price or NAV of a fund or class
by dividing net assets attributable to the fund or class
(the value of the investments, cash, and other assets
attributable to the fund or class minus the liabilities
attributable to the fund or class) by the number of fund
or class shares outstanding.
--------------------------------------------------------
</TABLE>
FOREIGN SECURITIES
Some of the fund's portfolio securities may be listed on foreign exchanges that
trade on days when we do not calculate an NAV. As a result, the fund's NAV may
change on days when you will not be able to purchase or redeem shares. In
addition, a foreign exchange may not value its listed securities at the same
time that we calculate a fund's NAV. Events affecting the values of portfolio
securities that occur between the time a foreign exchange assigns a price to
the portfolio securities and the time when we calculate a fund's NAV generally
will not be reflected in the fund's NAV. These events will be reflected in the
fund's NAV when we, under the supervision of the Board of Directors of the
Strong Funds, determine that they would have a material effect on the fund's
NAV.
BUYING SHARES
Prior to your initial investment, complete and sign an application and send it
to Strong Institutional Client Services, P.O. Box 2936, Milwaukee, Wisconsin
53201-2936 or send it by facsimile to 414-359-3535. The initial investment
minimum for the fund is $250,000. After your initial investment, additional
transactions may be made in any amount. Shares must be purchased by wire
unless you use the Exchange Option described below. To purchase by wire,
place an order by calling 800-368-1683 before 3:00 p.m. Central Time. Firstar
Bank Milwaukee, N.A., the fund's agent, must receive payment by the close of
the federal wire system that day. If payment is not received by this
deadline, your order may be canceled or you may be liable for the resulting
interest expenses. You should wire federal funds as follows:
7
<PAGE>
Firstar Bank Milwaukee, N.A.
777 East Wisconsin Avenue
Milwaukee, WI 53202
ABA routing number: 075000022
Account number: 112737-090
For further credit to: (insert your account number and registration)
MULTIPLE CLASS PLAN
The fund has adopted a multiple class plan. It offers Class A, Class B, Class
C, Class L, Class Z, and Institutional Class shares. Only the Institutional
Class shares of the fund are offered in this prospectus. The principal
differences among the classes are each class' sales charges and annual
expenses. Each class may also pay different administrative and transfer
agency fees and expenses.
BROKER-DEALER
Broker-dealers, including the fund's distributor, and other intermediaries may
also from time to time sponsor or participate in promotional programs pursuant
to which investors receive incentives for establishing with the broker-dealer
or intermediary an account and/or for purchasing shares of the Strong Funds
through the account(s). Investors should contact the broker-dealer or
intermediary and consult the Statement of Additional Information for more
information about promotional programs.
SELLING SHARES
Shares must be redeemed by wire unless you use the Exchange Option described
below. The fund pays the wire fees which are a fund expense. You may redeem
shares by either telephone or written instruction.
To redeem by wire, place an order by calling Strong Institutional Client
Services at 800-368-1683 before 3:00 p.m. Central Time. The original
application must be on file with the fund's transfer agent before a redemption
will be processed. You may also redeem shares by sending a written request to
Strong Institutional Client Services, P.O. Box 2936, Milwaukee, Wisconsin
53201-2936 or sending it by facsimile to 414-359-3535. Your written request
must be signed exactly as the names of the registered owners appear on the
fund's account records, and the request must be signed by the minimum number of
persons designated on the account application that are required to effect a
redemption. Please note that any written redemption request of $50,000 or more
must be accompanied by a signature guarantee. Payment of the redemption
proceeds will be wired to the bank account(s) designated on the account
application. Redemption proceeds will ordinarily be wired the next business
day, but in no event more than seven days after receipt of the redemption.
((Side Box))
<TABLE>
<CAPTION>
<S> <C>
SIGNATURE GUARANTEES help ensure that major
transactions or changes to your account are in fact
authorized by you. For example, we require a signature
guarantee on written redemption requests for more than
$50,000. You can obtain a signature guarantee for a
nominal fee from most banks, brokerage firms, and
other financial institutions. A notary public stamp or
seal cannot be substituted for a signature guarantee.
--------------------------------------------------------
</TABLE>
ADDITIONAL POLICIES
EXCHANGE OPTION
You may exchange your shares of the fund for shares of another Strong Fund. You
may make an exchange by calling Strong Institutional Client Services at
800-368-1683 or by sending a facsimile to 414-359-3535. Please obtain and read
the appropriate prospectus before investing in any of the Strong Funds.
Remember, an exchange of shares of one Strong Fund for those of another Strong
Fund, is considered a sale and a purchase of fund shares for tax purposes and
may result in a capital gain or loss. Some Strong Funds that you may want to
exchange into may charge a redemption fee of 0.50% to 1.00% on the sale of
shares held for less than six months. Purchases by exchange are subject to the
investment requirements and other criteria of the fund and class purchased.
8
<PAGE>
ADVANCE NOTICE OF LARGE TRANSACTIONS
We strongly urge you to begin all purchases and redemptions as early in the day
as possible and to notify us at least one day in advance of transactions in
excess of $5 million. This will allow Strong to manage the fund most
effectively. When you give us this advance notice, you must provide us with
your name and account number. To protect the fund's performance and
shareholders, we discourage frequent trading in response to short-term market
fluctuations.
PURCHASES IN KIND
You may, if we approve, purchase shares of the fund with securities that are
eligible for purchase by the fund (consistent with the fund's investment
restrictions, policies, and goal) and that have a value that is readily
ascertainable in accordance with the fund's valuation policies.
TELEPHONE TRANSACTIONS
We use reasonable procedures to confirm that telephone transaction requests are
genuine. We may be responsible if we do not follow these procedures. You are
responsible for losses resulting from fraudulent or unauthorized instructions
received over the telephone, provided we reasonably believe the instructions
were genuine. During times of unusual market activity, our phones may be busy
and you may experience a delay placing a telephone request.
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.
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 monthly and
distributes any net capital gains that it realizes annually. Dividends are
declared on each day NAV is calculated, except for bank holidays. Dividends
earned on weekends, holidays, and days when the fund's NAV is not calculated
are declared on the first day preceding these days that the fund's NAV is
calculated. Your investment generally earns dividends from the first business
day after we accept your purchase order.
REINVESTMENT OF DIVIDENDS AND CAPITAL 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 or have them credited to your bank account
by Electronic Funds Transfer. To change the current option for payment of
dividends and capital gain distributions, please call 800-368-1683.
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.
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.
9
<PAGE>
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).
Because everyone's tax situation is unique, you should consult your tax
professional for assistance.
RESERVED RIGHTS
We reserve the right to:
- Reject any purchase request for any reason including exchanges from other
Strong Funds. Generally, we do this if the purchase or exchange is
disruptive to the efficient management of a fund (due to the timing of the
investment or an investor's history of excessive trading).
- Change the minimum or maximum investment amounts.
- Delay sending out redemption proceeds for up to seven days (this generally
only applies to very large redemptions without notice, excessive trading, or
during unusual market conditions).
- Suspend redemptions or postpone payments when the NYSE is closed for any
reason other than its usual weekend or holiday closings, when trading is
restricted by the SEC, or under any emergency circumstances.
- Make a redemption in kind (a payment in portfolio securities rather than
cash) if the amount you are redeeming is in excess of the lesser of (1)
$250,000 or (2) 1% of the fund's assets. Generally, redemption in kind is
used when large redemption requests may cause harm to the fund and its
shareholders.
- Close any account that does not meet minimum investment requirements. We
will give you notice and 60 days to increase your balance to the required
minimum.
- We may waive the minimum initial investment at our discretion.
- Reject any purchase or redemption request that does not contain all required
documentation.
- Amend or terminate purchases in kind at any time.
10
<PAGE>
FOR MORE INFORMATION
More information is available upon request at no charge, including:
SHAREHOLDER REPORTS: Additional information is available in the annual and
semi-annual report to shareholders. These reports contain a letter from
management, discuss recent market conditions, economic trends and investment
strategies that significantly affected your investment's performance during the
last fiscal year, and list portfolio holdings.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI contains more details about
investment policies and techniques. A current SAI is on file with the SEC and
is incorporated into this prospectus by reference. This means that the SAI is
legally considered a part of this prospectus even though it is not physically
contained within this prospectus.
To request information or to ask questions:
BY TELEPHONE BY OVERNIGHT DELIVERY
800-368-1683 Strong Institutional Client Services
100 Heritage Reserve
BY MAIL Menomonee Falls, WI 53051
Strong Institutional Client Services
P.O. Box 2936 ON THE INTERNET
Milwaukee, WI 53201-2936 View online or download documents:
SEC*: www.sec.gov
This prospectus is not an offer to sell securities in places other than the
United States and its territories.
*INFORMATION ABOUT A FUND (INCLUDING THE SAI) CAN ALSO BE REVIEWED AND COPIED
AT THE SECURITIES AND EXCHANGE COMMISSION'S PUBLIC REFERENCE ROOM IN
WASHINGTON, D.C. YOU MAY CALL THE COMMISSION AT 202-942-8090 FOR INFORMATION
ABOUT THE OPERATION OF THE PUBLIC REFERENCE ROOM. REPORTS AND OTHER
INFORMATION ABOUT A FUND ARE ALSO AVAILABLE FROM THE EDGAR DATABASE ON THE
COMMISSION'S INTERNET SITE AT WWW.SEC.GOV. YOU MAY OBTAIN A COPY OF THIS
INFORMATION, AFTER PAYING A DUPLICATING FEE, BY SENDING A WRITTEN REQUEST TO
THE COMMISSION'S PUBLIC REFERENCE SECTION, WASHINGTON, D.C. 20549-0102, OR BY
SENDING AN ELECTRONIC REQUEST TO THE FOLLOWING E-MAIL ADDRESS:
[email protected].
Strong Advisor Bond Fund, a series of Strong Income Funds II, Inc., SEC file
number: 811-7335
11
<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 and Semi-Annual Reports which accompany this SAI, are incorporated into
this SAI by reference.
November 30, 2000
1
<PAGE>
TABLE OF CONTENTS PAGE
INVESTMENT RESTRICTIONS........................................................3
INVESTMENT POLICIES AND TECHNIQUES.............................................5
Strong Advisor Bond Fund.......................................................5
Strong Advisor Aggressive High-Yield Bond Fund.................................5
Strong Advisor Short Duration Bond Fund........................................5
Borrowing......................................................................5
Cash Management................................................................5
Convertible Securities.........................................................6
Debt Obligations...............................................................6
Depositary Receipts............................................................6
Derivative Instruments.........................................................7
Duration......................................................................15
Foreign Investment Companies..................................................16
Foreign Securities............................................................16
High-Yield (High-Risk) Securities.............................................16
Illiquid Securities...........................................................18
Lending of Portfolio Securities...............................................18
Loan Interests................................................................19
Maturity......................................................................20
Mortgage- and Asset-Backed Debt Securities....................................20
Municipal Obligations.........................................................21
Participation Interests.......................................................22
Repurchase Agreements.........................................................22
Reverse Repurchase Agreements and Mortgage Dollar Rolls.......................22
Short Sales...................................................................23
Sovereign Debt................................................................23
Standby Commitments...........................................................25
U.S. Government Securities....................................................25
Variable- or Floating-Rate Securities.........................................25
Warrants......................................................................26
When-Issued and Delayed-Delivery Securities...................................26
Zero-Coupon, Step-Coupon, and Pay-in-Kind Securities..........................26
DIRECTORS AND OFFICERS........................................................27
PRINCIPAL SHAREHOLDERS........................................................29
INVESTMENT ADVISOR............................................................30
ADMINISTRATOR.................................................................33
DISTRIBUTOR...................................................................35
DISTRIBUTION PLAN.............................................................36
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................38
CUSTODIAN.....................................................................41
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT..................................41
TAXES.........................................................................42
DETERMINATION OF NET ASSET VALUE..............................................45
ADDITIONAL SHAREHOLDER INFORMATION............................................45
ORGANIZATION..................................................................49
SHAREHOLDER MEETINGS..........................................................50
PERFORMANCE INFORMATION.......................................................50
GENERAL INFORMATION...........................................................57
INDEPENDENT ACCOUNTANT........................................................59
LEGAL COUNSEL.................................................................59
FINANCIAL STATEMENTS..........................................................59
APPENDIX A - DEFINITION OF BOND RATINGS.......................................60
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS................................67
APPENDIX C - SHARE CLASSES....................................................68
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.
2
<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.
3
<PAGE>
NON-FUNDAMENTAL OPERATING POLICIES
The following are the Fund's non-fundamental operating policies, which may be
changed by the Fund's Board of Directors without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. Sell securities short, unless the Fund owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, or
unless it covers such short sale as required by the current rules and
positions of the Securities and Exchange Commission ("SEC") or its staff,
and provided that transactions in options, futures contracts, options on
futures contracts, or other derivative instruments are not deemed to
constitute selling securities short.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts,
options
on futures contracts, or other derivative instruments shall not constitute
purchasing securities on margin.
3. Invest in illiquid securities if, as a result of such investment, more
than
15% 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.
4
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
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.
- The Fund may invest up to 25% of its net assets directly or indirectly in
foreign securities.
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 SHORT DURATION BOND FUND (FORMERLY, STRONG SHORT-TERM GLOBAL
BOND FUND)
- The Fund invests primarily in investment-grade debt obligations of U.S.
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 Fund may invest up to 25% of its assets in foreign securities.
The following information supplements the discussion of the Fund's investment
objective, policies, and techniques described in the Prospectus.
BORROWING
The Fund may borrow money from banks and make other investments or engage in
other transactions permissible under the 1940 Act, which may be considered a
borrowing (such as mortgage dollar rolls and reverse repurchase agreements).
However, the Fund may not purchase securities when bank borrowings exceed 5%
of the Fund's total assets. Presently, the Fund only intends to borrow from
banks for temporary or emergency purposes.
The Fund has established a line-of-credit ("LOC") with certain banks by which
it may borrow funds for temporary or emergency purposes. A borrowing is
presumed to be for temporary or emergency purposes if it is repaid by the Fund
within 60 days and is not extended or renewed. The Fund intends to use the
LOC to meet large or unexpected redemptions that would otherwise force the
Fund to liquidate securities under circumstances, which are unfavorable to the
Fund's remaining shareholders. The Fund pays a commitment fee to the banks
for the LOC.
CASH MANAGEMENT
The Fund may invest directly in cash and short-term fixed-income securities,
including, for this purpose, shares of one or more money market funds managed
by Strong Capital Management, Inc., the Fund's investment advisor ("Advisor")
(collectively, the "Strong Money Funds"). The Strong Money Funds seek current
income, a stable share price of $1.00, and daily liquidity. All money market
instruments can change in value when interest rates or an issuer's
creditworthiness change dramatically. The Strong Money Funds cannot guarantee
that they will always be able to maintain a stable net asset value of $1.00
per share.
5
<PAGE>
CONVERTIBLE SECURITIES
Convertible securities are bonds, debentures, notes, preferred stocks, or
other securities that may be converted into or exchanged for a specified
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. A convertible security
entitles the holder to receive interest normally paid or accrued on debt or
the dividend paid on preferred stock until the convertible security matures or
is redeemed, converted, or exchanged. Convertible securities have unique
investment characteristics in that they generally (1) have higher yields than
common stocks, but lower yields than comparable non-convertible securities,
(2) are less subject to fluctuation in value than the underlying stock since
they have fixed income characteristics, and (3) provide the potential for
capital appreciation if the market price of the underlying common stock
increases. Most convertible securities currently are issued by U.S.
companies, although a substantial Eurodollar convertible securities market has
developed, and the markets for convertible securities denominated in local
currencies are increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and
its "conversion value" (the security's worth, at market value, if converted
into the underlying common stock). The investment value of a convertible
security is influenced by changes in interest rates, with investment value
declining as interest rates increase and increasing as interest rates decline.
The credit standing of the issuer and other factors also may have an effect on
the convertible security's investment value. The conversion value of a
convertible security is determined by the market price of the underlying
common stock. If the conversion value is low relative to the investment
value, the price of the convertible security is governed principally by its
investment value. Generally, the conversion value decreases as the
convertible security approaches maturity. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value. A convertible security generally will sell at a premium
over its conversion value by the extent to which investors place value on the
right to acquire the underlying common stock while holding a fixed income
security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security is called for redemption, the Fund will
be required to permit the issuer to redeem the security, convert it into the
underlying common stock, or sell it to a third party.
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,
6
<PAGE>
in registered form, are denominated in U.S. dollars and are designed for use
in the U.S. securities markets, while EDRs, in bearer form, may be denominated
in other currencies and are designed for use in the European securities
markets. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. EDRs are European receipts
evidencing a similar arrangement. For purposes of the Fund's investment
policies, ADRs and EDRs are deemed to have the same classification as the
underlying securities they represent, except that ADRs and EDRs shall be
treated as indirect foreign investments. For example, an ADR or EDR
representing ownership of common stock will be treated as common stock.
Depositary receipts do not eliminate all of the risks associated with directly
investing in the securities of foreign issuers.
ADR facilities may be established as either "unsponsored" or "sponsored."
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants.
A depositary may establish an unsponsored facility without participation by
(or even necessarily the permission of) the issuer of the deposited
securities, although typically the depositary requests a letter of
non-objection from such issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the costs of such facility.
The depositary usually charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into U.S. dollars, the
disposition of non-cash distributions, and the performance of other services.
The depositary of an unsponsored facility frequently 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.
7
<PAGE>
HEDGING. The Fund may use derivative instruments to protect against possible
adverse changes in the market value of securities held in, or are anticipated
to be held in, its portfolio. Derivatives may also be used to "lock-in"
realized but unrecognized gains in the value of its portfolio securities.
Hedging strategies, if successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. To the extent that a hedge matures prior
to or after the disposition of the investment subject to the hedge, any gain
or loss on the hedge will be realized earlier or later than any offsetting
gain or loss on the hedged investment.
MANAGING RISK. The Fund may also use derivative instruments to manage the
risks of its portfolio. Risk management strategies include, but are not
limited to, facilitating the sale of portfolio securities, managing the
effective maturity or duration of debt obligations in its portfolio,
establishing a position in the derivatives markets as a substitute for buying
or selling certain securities, or creating or altering exposure to certain
asset classes, such as equity, debt, or foreign securities. The use of
derivative instruments may provide a less expensive, more expedient or more
specifically focused way to invest than "traditional" securities (I.E., stocks
or bonds) would.
EXCHANGE AND OTC DERIVATIVES. Derivative instruments may be exchange-traded
or traded in OTC transactions between private parties. Exchange-traded
derivatives are standardized options and futures contracts traded in an
auction on the floor of a regulated exchange. Exchange contracts are
generally very liquid. The exchange clearinghouse is the counterparty of
every contract. Thus, each holder of an exchange contract bears the credit
risk of the clearinghouse (and has the benefit of its financial strength)
rather than that of a particular counterparty. OTC transactions are subject
to additional risks, such as the credit risk of the counterparty to the
instrument, and are less liquid than exchange-traded derivatives since they
often can only be closed out with the other party to the transaction.
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.
8
<PAGE>
(4) LIQUIDITY RISK. Derivatives are also subject to liquidity risk.
Liquidity risk is the risk that a derivative instrument cannot be sold, closed
out, or replaced quickly at or very close to its fundamental value.
Generally, exchange contracts are very liquid because the exchange
clearinghouse is the counterparty of every contract. OTC transactions are
less liquid than exchange-traded derivatives since they often can only be
closed out with the other party to the transaction. The Fund might be
required by applicable regulatory requirement to maintain assets as "cover,"
maintain segregated accounts, and/or make margin payments when it takes
positions in derivative instruments involving obligations to third parties
(I.E., instruments other than purchased options). If the Fund was unable to
close out its positions in such instruments, it might be required to continue
to maintain such assets or accounts or make such payments until the position
expired, matured, or was closed out. The requirements might impair the Fund's
ability to sell a portfolio security or make an investment at a time when it
would otherwise be favorable to do so, or require that the Fund sell a
portfolio security at a disadvantageous time. The Fund's ability to sell or
close out a position in an instrument prior to expiration or maturity depends
on the existence of a liquid secondary market or, in the absence of such a
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).
9
<PAGE>
OPTIONS. The Fund may use options for any lawful purpose consistent with its
investment objective such as hedging or managing risk. An option is a
contract in which the "holder" (the buyer) pays a certain amount ("premium")
to the "writer" (the seller) to obtain the right, but not the obligation, to
buy from the writer (in a "call") or sell to the writer (in a "put") a
specific asset at an agreed upon price ("strike price" or "exercise price") at
or before a certain time ("expiration date"). The holder pays the premium at
inception and has no further financial obligation. The holder of an option
will benefit from favorable movements in the price of the underlying asset but
is not exposed to corresponding losses due to adverse movements in the value
of the underlying asset. The writer of an option will receive fees or
premiums but is exposed to losses due to changes in the value of the
underlying asset. The Fund may buy or write (sell) put and call options on
assets, such as securities, currencies, financial commodities, and indices of
debt and equity securities ("underlying assets") and enter into closing
transactions with respect to such options to terminate an existing position.
Options used by the Fund may include European, American, and Bermuda style
options. If an option is exercisable only at maturity, it is a "European"
option; if it is also exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it is a "Bermuda" option.
The Fund may purchase (buy) and write (sell) put and call options underlying
assets and enter into closing transactions with respect to such options to
terminate an existing position. The purchase of a call option serves as a
long hedge, and the purchase of a put option serves as a short hedge. Writing
put or call options can enable the Fund to enhance income by reason of the
premiums paid by the purchaser of such options. Writing call options serves
as a limited short hedge because declines in the value of the hedged
investment would be offset to the extent of the premium received for writing
the option. However, if the security appreciates to a price higher than the
exercise price of the call option, it can be expected that the option will be
exercised and the Fund will be obligated to sell the security at less than its
market value or will be obligated to purchase the security at a price greater
than that at which the security must be sold under the option. All or a
portion of any assets used as cover for OTC options written by the Fund would
be considered illiquid to the extent described under "Investment Policies and
Techniques - Illiquid Securities." Writing put options serves as a limited
long hedge because decreases in the value of the hedged investment would be
offset to the extent of the premium received for writing the option. However,
if the security depreciates to a price lower than the exercise price of the
put option, it can be expected that the put option will be exercised and the
Fund will be obligated to purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
historical price volatility of the underlying investment, the current market
value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying
investment, and general market conditions.
The Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a
closing sale transaction. Closing transactions permit the Fund to realize the
profit or limit the loss on an option position prior to its exercise or
expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange-traded options are issued by a clearing organization affiliated with
the exchange on which the option is listed that, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC
options are contracts between the Fund and the other party to the transaction
("counterparty") (usually a securities dealer or a bank) with no clearing
organization guarantee. Thus, when the Fund purchases or writes an OTC
option, it relies on the counterparty to make or take delivery of the
underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by the Fund
as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears
to be a liquid secondary market. However, there can be no assurance that such
a market will exist at any particular time. Closing transactions can be made
for OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. Although the
Fund will enter into OTC options only with counter parties that are expected
to be capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option at a
favorable price prior to expiration. In the event of insolvency of the
counterparty, the Fund might be unable to close out an OTC option position at
any time prior to its expiration. If the Fund were unable to effect a closing
transaction for an option it had purchased, it would have to exercise the
option to realize any profit.
The Fund may engage in options transactions on indices in much the same manner
as the options on securities discussed above, except the index options may
serve as a hedge against overall fluctuations in the securities market
represented by the relevant market index.
10
<PAGE>
The writing and purchasing of options is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. Imperfect correlation between the
options and securities markets may detract from the effectiveness of the
attempted hedging.
SPREAD TRANSACTIONS. The Fund may use spread transactions for any lawful
purpose consistent with its investment objective such as hedging or managing
risk. The Fund may purchase covered spread options from securities dealers.
Such covered spread options are not presently exchange-listed or
exchange-traded. The purchase of a spread option gives the Fund the right to
put, or sell, a security that it owns at a fixed dollar spread or fixed yield
spread in relation to another security that the Fund does not own, but which
is used as a benchmark. The risk to the Fund in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing
transactions will be available. The purchase of spread options will be used
to protect the Fund against adverse changes in prevailing credit quality
spreads, I.E., the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
option.
FUTURES CONTRACTS. The Fund may use futures contracts for any lawful purpose
consistent with its investment objective such as hedging or managing risk.
The Fund may enter into futures contracts, including, but not limited to,
interest rate and index futures. The Fund may also purchase put and call
options, and write covered put and call options, on futures in which it is
allowed to invest. The purchase of futures or call options thereon can serve
as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, and writing covered put options
on futures contracts can serve as a limited long hedge, using a strategy
similar to that used for writing covered options in securities. The Fund may
also write put options on futures contracts while at the same time purchasing
call options on the same futures contracts in order to create synthetically a
long futures contract position. Such options would have the same strike
prices and expiration dates. The Fund will engage in this strategy only when
the Advisor believes it is more advantageous to the Fund than purchasing the
futures contract.
To the extent required by regulatory authorities, the Fund only enters into
futures contracts that are traded on national futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures contracts could be used
to reduce the Fund's exposure to market or interest rate fluctuations, the
Fund may be able to hedge its exposure more effectively and perhaps at a lower
cost through the use of futures contracts.
An interest rate futures contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific financial
instrument (E.G., debt security) for a specified price at a designated date,
time, and place. An index futures contract is an agreement pursuant to which
the parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index futures contract was
originally written. Transaction costs are incurred when a futures contract is
bought or sold and margin deposits must be maintained. A futures contract may
be satisfied by delivery or purchase, as the case may be, of the instrument or
by payment of the change in the cash value of the index. More commonly,
futures contracts are closed out prior to delivery by entering into an
offsetting transaction in a matching futures contract. Although the value of
an index might be a function of the value of certain specified securities, no
physical delivery of those securities is made. If the offsetting purchase
price is less than the original sale price, the Fund realizes a gain; if it is
more, the Fund realizes a loss. Conversely, if the offsetting sale price is
more than the original purchase price, the Fund realizes a gain; if it is
less, the Fund realizes a loss. The transaction costs must also be included
in these calculations. There can be no assurance, however, that the Fund will
be able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Fund is not able to enter into
an offsetting transaction, the Fund will continue to be required to maintain
the margin deposits on the futures contract.
No price is paid by the Fund upon entering into a futures contract. Instead,
at the inception of a futures contract, the Fund is required to deposit in a
segregated account with its custodian, in the name of the futures broker
through whom the transaction was effected, "initial margin" consisting of cash
and/or other appropriate liquid assets in an amount generally equal to 10% or
less of the contract value. Margin must also be deposited when writing a call
or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin on futures
contracts does not represent a borrowing, but rather is in the nature of a
performance bond or good-faith deposit that is returned to the Fund at the
termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility,
the Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally
in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures broker
daily as the value of the futures position varies, a process known as "marking
to market." Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
11
<PAGE>
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 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.
12
<PAGE>
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.
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
13
<PAGE>
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 that 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.
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
14
<PAGE>
parties are calculated with respect to a "notional amount" (I.E., the return on
or increase in value of a particular dollar amount invested at a particular
interest rate) in a particular foreign currency, or in a "basket" of securities
representing a particular index. Swap agreements may include interest rate
caps, under which, in return for a premium, one party agrees to make payments
to
the other to the extent that interest rates exceed a specified rate, or "cap;"
interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a
specified level, or "floor;" and interest rate collars, under which a party
sells a cap and purchases a floor, or vice versa, in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of the swap agreement is the agreed upon basis for
calculating the obligations that the parties to a swap agreement have agreed
to exchange. Under most swap agreements entered into by the Fund, the
obligations of the parties would be exchanged on a "net basis." Consequently,
the Fund's obligation (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based
on the relative values of the positions held by each party to the agreement
("net amount"). The Fund's obligation under a swap agreement will be accrued
daily (offset against amounts owed to the Fund) and any accrued but unpaid net
amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash and/or other appropriate liquid assets.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend, in part, on the Advisor's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Swap agreements may be considered to be
illiquid. Moreover, the Fund bears the risk of loss of the amount expected to
be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement counterparty. Certain restrictions imposed on the Fund by
the Internal Revenue Code of 1986 ("IRC") may limit the Fund's ability to use
swap agreements. The swaps market is largely unregulated.
The Fund will enter swap agreements only with counterparties that the Advisor
reasonably believes are capable of performing under the swap agreements. If
there is a default by the other party to such a transaction, the Fund will
have to rely on its contractual remedies (which may be limited by bankruptcy,
insolvency or similar laws) pursuant to the agreements related to the
transaction.
ADDITIONAL DERIVATIVE INSTRUMENTS AND STRATEGIES. In addition to the
derivative instruments and strategies described above and in the Prospectus,
the Advisor expects to discover additional derivative instruments and other
hedging or risk management techniques. The Advisor may utilize these new
derivative instruments and techniques to the extent that they are consistent
with the Fund's investment objective and permitted by the Fund's investment
limitations, operating policies, and applicable regulatory authorities.
DURATION
Duration was developed as a more precise alternative to the concept of
"maturity." Traditionally, a debt obligations' maturity has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
maturity measures only the time until a debt obligation provides its final
payment, taking no account of the pattern of the security's payments prior to
maturity. In contrast, duration incorporates a bond's yield, coupon interest
payments, final maturity and call features into one measure. Duration
management is one of the fundamental tools used by the Advisor.
Duration is a measure of the expected life of a debt obligation on a present
value basis. Duration takes the length of the time intervals between the
present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, the time the principal payments
are expected to be received, and weights them by the present values of the
cash to be received at each future point in time. For any debt obligation with
interest payments occurring prior to the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest of a fixed income security, the longer
the duration of the security; conversely, the higher the stated or coupon rate
of interest of a fixed income security, the shorter the duration of the
security.
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.
15
<PAGE>
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current
prepayment rates are more critical in determining the securities' interest
rate exposure. Finally, the duration of a debt obligation may vary over time
in response to changes in interest rates and other market factors.
FOREIGN INVESTMENT COMPANIES
The Fund may invest, to a limited extent, in foreign investment companies.
Some of the countries in which the Fund invests may not permit direct
investment by outside investors. Investments in such countries may only be
permitted through foreign government-approved or -authorized investment
vehicles, which may include other investment companies. In addition, it may
be less expensive and more expedient for the Fund to invest in a foreign
investment company in a country, which permits direct foreign investment.
Investing through such vehicles may involve frequent or layered fees or
expenses and may also be subject to limitation under the 1940 Act. Under the
1940 Act, the Fund may invest up to 10% of its assets in shares of other
investment companies and up to 5% of its assets in any one investment company
as long as the investment does not represent more than 3% of the voting stock
of the acquired investment company. The Fund does not intend to invest in
such investment companies unless, in the judgment of the Advisor, the
potential benefits of such investments justify the payment of any associated
fees and expenses.
FOREIGN SECURITIES
Investing in foreign securities involves a series of risks not present in
investing in U.S. securities. Many of the foreign securities held by the Fund
will not be registered with the SEC, nor will the foreign issuers be subject
to SEC reporting requirements. Accordingly, there may be less publicly
available information concerning foreign issuers of securities held by the
Fund than is available concerning U.S. companies. Disclosure and regulatory
standards in many respects are less stringent in emerging market countries
than in the U.S. and other major markets. There also may be a lower level of
monitoring and regulation of emerging markets and the activities of investors
in such markets, and enforcement of existing regulations may be extremely
limited. Foreign companies, and in particular, companies in smaller and
emerging capital markets are not generally subject to uniform accounting,
auditing and financial reporting standards, or to other regulatory
requirements comparable to those applicable to U.S. companies. The Fund's net
investment income and capital gains from its foreign investment activities may
be subject to non-U.S. withholding taxes.
The costs attributable to foreign investing that the Fund must bear frequently
are higher than those attributable to domestic investing; this is particularly
true with respect to emerging capital markets. For example, the cost of
maintaining custody of foreign securities exceeds custodian costs for domestic
securities, and transaction and settlement costs of foreign investing also
frequently are higher than those attributable to domestic investing. Costs
associated with the exchange of currencies also make foreign investing more
expensive than domestic investing. Investment income on certain foreign
securities in which the Fund may invest may be subject to foreign withholding
or other government taxes that could reduce the return of these securities.
Tax treaties between the U.S. and foreign countries, however, may reduce or
eliminate the amount of foreign tax to which the Fund would be subject.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have failed to keep
pace with the volume of securities transactions, making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are uninvested and are earning no investment
return. The inability of the Fund to make intended security purchases due to
settlement problems could cause the Fund to miss investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to the 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
16
<PAGE>
interest and repay principal. The special risk considerations in connection
with investments in these securities are discussed below. Refer to the
Appendix for a description of the securities ratings.
EFFECT OF INTEREST RATES AND ECONOMIC CHANGES. The lower-quality and
comparable unrated security market is relatively new and its growth has
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such
conditions could severely disrupt the market for and adversely affect the
value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of lower-quality and comparable unrated securities tend to reflect
individual corporate developments to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower-quality and comparable unrated securities also tend to
be more sensitive to economic conditions than are higher-rated securities. As
a result, they generally involve more credit risks than securities in the
higher-rated categories. During an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower-quality and
comparable unrated securities may experience financial stress and may not have
sufficient revenues to meet their payment obligations. The issuer's ability
to service its debt obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet specific projected
business forecasts or the unavailability of additional financing. The risk of
loss due to default by an issuer of these securities is significantly greater
than issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a lower-quality or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery. Periods of economic
uncertainty and changes would also generally result in increased volatility in
the market prices of these securities and thus in the Fund's net asset value.
As previously stated, the value of a lower-quality or comparable unrated
security will decrease in a rising interest rate market and accordingly, so
will the Fund's net asset value. If the Fund experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of lower-quality and comparable unrated securities
(discussed below), the Fund may be forced to liquidate these securities at a
substantial discount. Any such liquidation would force the Fund to sell the
more liquid portion of its portfolio.
PAYMENT EXPECTATIONS. Lower-quality and comparable unrated securities
typically contain redemption, call or prepayment provisions, which permit the
issuer of such securities containing such provisions to, at its discretion,
redeem the securities. During periods of falling interest rates, issuers of
these securities are likely to redeem or prepay the securities and refinance
them with debt securities with a lower interest rate. To the extent an issuer
is able to refinance the securities, or otherwise redeem them, the Fund may
have to replace the securities with a lower yielding security, which would
result in a lower return for the Fund.
CREDIT RATINGS. Credit ratings issued by credit rating agencies are designed
to evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of lower-quality
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in lower-quality and comparable unrated obligations will be more
dependent on the Advisor's credit analysis than would be the case with
investments in investment-grade debt obligations. The Advisor employs its own
credit research and analysis, which includes a study of existing debt, capital
structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history and the current
trend of earnings. The Advisor continually monitors the investments in the
Fund's portfolio and 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.
17
<PAGE>
LEGISLATION. Legislation may be adopted, from time to time, designed to limit
the use of certain lower-quality and comparable unrated securities by certain
issuers. It is anticipated that if additional legislation is enacted or
proposed, it could have a material affect on the value of these securities and
the existence of a secondary trading market for the securities.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities (I.E., securities that are not
readily marketable). However, the Fund will not acquire illiquid securities
if, as a result, the illiquid securities would comprise more than 15% (10% for
money market funds) of the value of the Fund's net assets (or such other
amounts as may be permitted under the 1940 Act). However, as a matter of
internal policy, the Advisor intends to limit the Fund's investments in
illiquid securities to 10% of its net assets.
The Board of Directors of the Fund, or its delegate, has the ultimate
authority to determine, to the extent permissible under the federal securities
laws, which securities are illiquid for purposes of this limitation. Certain
securities exempt from registration or issued in transactions exempt from
registration under the Securities Act of 1933, as amended ("Securities Act"),
such as securities that may be resold to institutional investors under Rule
144A under the Securities Act and Section 4(2) commercial paper, may be
considered liquid under guidelines adopted by the Fund's Board of Directors.
The Board of Directors of the Fund has delegated to the Advisor the day-to-day
determination of the liquidity of a security, although it has retained
oversight and ultimate responsibility for such determinations. The Board of
Directors has directed the Advisor to look to such factors as (1) the
frequency of trades or quotes for a security, (2) the number of dealers
willing to purchase or sell the security and number of potential buyers, (3)
the willingness of dealers to undertake to make a market in the security, (4)
the nature of the security and nature of the marketplace trades, such as the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer, (5) the likelihood that the security's
marketability will be maintained throughout the anticipated holding period,
and (6) any other relevant factors. The Advisor may determine 4(2) commercial
paper to be liquid if (1) the 4(2) commercial paper is not traded flat or in
default as to principal and interest, (2) the 4(2) commercial paper is rated
in one of the two highest rating categories by at least two NRSROs, or if only
one NRSRO rates the security, by that NRSRO, or is determined by the Advisor
to be of equivalent quality, and (3) the Advisor considers the trading market
for the specific security taking into account all relevant factors. With
respect to any foreign holdings, a foreign security may be considered liquid
by the Advisor (despite its restricted nature under the Securities Act) if the
security can be freely traded in a foreign securities market and all the facts
and circumstances support a finding of liquidity.
Restricted securities may be sold only in privately negotiated transactions or
in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and
the time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions
were to develop, the Fund might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced in accordance
with pricing procedures adopted by the Board of Directors of the Fund. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities the Fund should be in a position where more than 15%
of the value of its net assets are invested in illiquid securities, including
restricted securities which are not readily marketable (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
18
<PAGE>
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund
will receive reasonable interest on the loan or a flat fee from the borrower
and amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities
to exercise beneficial rights, such as voting and subscription rights and
rights to dividends, interest or other distributions, when retaining such
rights is considered to be in the Fund's interest.
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. 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
19
<PAGE>
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.
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
20
<PAGE>
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 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
21
<PAGE>
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 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
22
<PAGE>
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.
SOVEREIGN DEBT
Sovereign debt differs from debt obligations issued by private entities in
that, generally, remedies for defaults must be pursued in the courts of the
defaulting party. Legal recourse is therefore limited. Political conditions,
especially a sovereign entity's willingness to meet the terms of its debt
obligations, are of considerable significance. Also, there can be no
assurance that the holders of commercial bank loans to the same sovereign
entity may not contest payments to the holders of sovereign debt in the event
of default under commercial bank loan agreements.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by a variety of factors, including
among others, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of the debt service burden to the economy as a whole, the
sovereign debtor's policy toward principal international lenders and the
political constraints to which a sovereign debtor may be subject. A country
whose exports are concentrated in a few commodities could be vulnerable to a
decline in the international price of such commodities. Increased
protectionism on the part of a country's trading partners, or political
changes in those countries, could also adversely affect its exports. Such
events could diminish a country's trade account surplus, if any, or the credit
standing of a particular local government or agency. Another factor bearing
on the ability of a country to repay sovereign debt is the level of the
country's international reserves. Fluctuations in the level of these reserves
can affect the amount of foreign exchange readily available for external debt
payments and, thus, could have a bearing on the capacity of the country to
make payments on its sovereign debt.
To the extent that a country has a current account deficit (generally when its
exports of merchandise and services are less than its country's imports of
merchandise and services plus net transfers (E.G., gifts of currency and
goods) to foreigners), it may need to depend on loans from foreign
governments, multilateral organizations or private commercial banks, aid
payments from foreign governments and inflows of foreign investment. The
access of a country to these forms of external funding may not be certain,
and a withdrawal of external funding could adversely affect the capacity of a
government to make payments on its obligations. In addition, the cost of
servicing debt obligations can be adversely affected, by a change in
international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
With respect to sovereign debt of emerging market issuers, investors should be
aware that certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times, certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt.
Certain emerging market countries have experienced difficulty in servicing
their sovereign debt on a timely basis which led to defaults on certain
obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit
agreements or converting outstanding principal and unpaid interest to Brady
Bonds (discussed below), and obtaining new credit to finance interest
payments. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such
23
<PAGE>
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.
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
24
<PAGE>
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
- 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
25
<PAGE>
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 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
26
<PAGE>
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 58 mutual funds ("Strong
Funds"). The Strong Funds, in the aggregate, pay each Director who is not a
director, officer, or employee of the Advisor, or any affiliated company (a
"disinterested director") an annual fee of $86,000 plus $6,000 per Board
meeting, except for the Chairman of the Independent Directors Committee. The
Chairman of the Independent Directors Committee receives an annual fee of
$94,600 plus $6,600 per Board meeting. The Independent Directors have formed
an Audit Committee. For their services on the Audit Committee, each
Independent Director receives an additional $2,500 per meeting attended. The
Chairman of the Audit Committee receives $2,750 per meeting attended. In
addition, each disinterested director is reimbursed by the Strong Funds for
travel and other expenses incurred in connection with attendance at such
meetings. Other officers and directors of the Strong Funds receive no
compensation or expense reimbursement from the Strong Funds.
*RICHARD S. STRONG (DOB 5/12/42), Director and Chairman of the Board of the
Strong Funds.
Prior to August 1985, Mr. Strong was Chief Executive Officer of the Advisor,
which he founded in 1974. Since August 1985, Mr. Strong has been a Security
Analyst and Portfolio Manager of the Advisor. In October 1991, Mr. Strong also
became the Chairman of the Advisor. Mr. Strong is a Director of the Advisor.
Mr. Strong has been in the investment management business since 1967.
MARVIN E. NEVINS (DOB 7/9/18), Director of the Strong Funds.
Private Investor. From 1945 to 1980, Mr. Nevins was Chairman of Wisconsin
Centrifugal Inc., a foundry. From 1980 until 1981, Mr. Nevins was the Chairman
of the Wisconsin Association of Manufacturers & Commerce. He has been a
Director of A-Life Medical, Inc., San Diego, CA since 1996 and Surface Systems,
Inc. (a weather information company), St. Louis, MO since 1992. He was also a
regent of the Milwaukee School of Engineering and a member of the Board of
Trustees of the Medical College of Wisconsin and Carroll College.
WILLIE D. DAVIS (DOB 7/24/34), Director of the Strong Funds.
Mr. Davis has been Director of Alliance Bank since 1980, Sara Lee Corporation
(a food/consumer products company) since 1983, KMart Corporation (a discount
consumer products company) since 1985, Dow Chemical Company since 1988, MGM
Mirage (formerly MGM Grand, Inc.) (an entertainment/hotel company) since 1990,
Wisconsin Energy Corporation (formerly WICOR, Inc.) (a utility company) since
1990, Johnson Controls, Inc. (an industrial company) since 1992, Checker's
Drive In Restaurants, Inc. (formerly Rally's Hamburgers, Inc.) since 1994,
Metro-Goldwyn-Mayer, Inc. (an entertainment company) since 1998, and Bassett
Furniture Industries, Inc. since 1997. Mr. Davis has been a trustee of the
University of Chicago since 1980 and Marquette University since 1988. Since
1977, Mr. Davis has been President and Chief Executive Officer of All Pro
Broadcasting, Inc. Mr. Davis was a Director of the Fireman's Fund (an
insurance company) from 1975 until 1990.
STANLEY KRITZIK (DOB 1/9/30), Director and Chairman of the Audit Committee of
the Strong Funds.
Mr. Kritzik has been a Partner of Metropolitan Associates since 1962, a
Director of Aurora Health Care since 1987 and of Wisconsin Health Information
Network since November 1997, and a member of the Board of Governors of the
Snowmass Village Resort Association since October 1999. He was a Director of
Health Network Ventures, Inc. from 1992 until April 2000.
WILLIAM F. VOGT (DOB 7/19/47), Director and Chairman of the Independent
Directors Committee of the Strong Funds.
Mr. Vogt has been the President of Vogt Management Consulting, Inc. since 1990.
From 1982 until 1990, he served as Executive Director of University Physicians
of the University of Colorado. Mr. Vogt is the Past President of the Medical
Group Management Association and a Fellow of the American College of Medical
Practice Executives.
27
<PAGE>
NEAL MALICKY (DOB 9/14/34), Director of the Strong Funds.
Mr. Malicky has been President Emeritus of Baldwin-Wallace College since July
2000. From July 1999 to June 2000, he served as Chancellor of Baldwin-Wallace
College. From 1981 to June 1999, he served as President of Baldwin-Wallace
College. He is a Trustee of Southwest Community Health Systems, Cleveland
Scholarship Program, and The National Conference for Community Justice and
President of the Reserve Homeowners Association. He is also the Past President
of the National Association of Schools and Colleges of the United Methodist
Church, the Past Chairperson of the Association of Independent Colleges and
Universities of Ohio, and the Past Secretary of the National Association of
Independent Colleges and Universities.
ELIZABETH N. COHERNOUR (DOB 4/26/50), Vice President and Secretary of the
Strong Funds.
Ms. Cohernour has been General Counsel and Senior Vice President of the Advisor
since January 2000. From February 1999 until January 2000, Ms. Cohernour acted
as Counsel to MFP Investors. From May 1988 to February 1999, Ms. Cohernour
acted as General Counsel and Vice President to Franklin Mutual Advisers, Inc.
CATHLEEN A. EBACHER (DOB 11/9/62), Vice President and Assistant Secretary of
the Strong Funds.
Ms. Ebacher has been Senior Counsel of the Advisor since December 1997. From
November 1996 until December 1997, Ms. Ebacher acted as Associate Counsel to
the Advisor. From May 1992 until November 1996, Ms. Ebacher acted as Corporate
Counsel to Carson Pirie Scott & Co., a department store retailer. From June
1989 until May 1992, Ms. Ebacher was an attorney for Reinhart, Boerner, Van
Deuren, Norris & Rieselbach, s.c., a Milwaukee law firm.
RHONDA K. HAIGHT (DOB 11/13/64), Assistant Treasurer of the Strong Funds.
Ms. Haight has been Manager of the Mutual Fund Accounting Department of the
Advisor since January 1994. From May 1990 to January 1994, Ms. Haight was a
supervisor in the Mutual Fund Accounting Department of the Advisor. From June
1987 to May 1990, Ms. Haight was a Mutual Fund Accountant of the Advisor.
SUSAN A. HOLLISTER (DOB 7/8/68), Vice President and Assistant Secretary of the
Strong Funds.
Ms. Hollister has been Associate Counsel of the Advisor since July 1999. From
August 1996 until May 1999, Ms. Hollister completed a Juris Doctor at the
University of Wisconsin Law School. From December 1993 until August 1996, Ms.
Hollister was Deposit Operations Supervisor for First Federal Savings Bank, La
Crosse - Madison.
DENNIS A. WALLESTAD (DOB 11/3/62), Vice President of the Strong Funds.
Mr. Wallestad has been Director of Finance and Operations of the Advisor since
February 1999. From April 1997 to February 1999, Mr. Wallestad was the Chief
Financial Officer of The Ziegler Companies, Inc. From November 1996 to April
1997, Mr. Wallestad was the Chief Administrative Officer of Calamos Asset
Management, Inc. From July 1994 to November 1996, Mr. Wallestad was Chief
Financial Officer for Firstar Trust and Investments Group. From September 1991
to June 1994 and from September 1985 to August 1989, Mr. Wallestad was an Audit
Manager for Arthur Andersen & Co., LLP in Milwaukee. Mr. Wallestad completed a
Masters of Accountancy from the University of Oklahoma from September 1989 to
August 1991.
JOHN W. WIDMER (DOB 1/19/65), Treasurer of the Strong Funds.
Mr. Widmer has been Treasurer of the Advisor since April 1999. From May 1997
to January 2000, Mr. Widmer was the Manager of Financial Management and Sales
Reporting Systems. From May 1992 to May 1997, Mr. Widmer was an Accounting and
Business Advisory Manager in the Milwaukee office of Arthur Andersen LLP. From
June 1987 to May 1992, Mr. Widmer was an accountant at Arthur Andersen LLP.
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.
28
<PAGE>
Except for Messrs. Nevins, Davis, Kritzik, Vogt, and Malicky, the address of
all of the above persons is P.O. Box 2936, Milwaukee, Wisconsin 53201. Mr.
Nevins' address is 6075 Pelican Bay Boulevard #1006, Naples, Florida 34108. Mr.
Davis' address is 161 North La Brea, Inglewood, California 90301. Mr.
Kritzik's address is 1123 North Astor Street, P.O. Box 92547, Milwaukee,
Wisconsin 53202-0547. Mr. Vogt's address is 55 North Holden Road, P.O. Box
7657, Avon, CO 81620. Mr. Malicky's address is 518 Bishop Place, Berea, OH
44017.
Unless otherwise noted below, as of 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 Advisor Bond
Fund were not offered for sale until November 30, 2000 and Class A, B, C, and L
shares of the Advisor Aggressive High-Yield Bond Fund and Advisor Short
Duration Bond Fund were not offered for sale until November 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
FUND SHARES PERCENT
----------------- --------------- -------
Advisor Bond Fund Class A - 1,510 12.31%
</TABLE>
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. Class B, C, and L shares of the Advisor Bond Fund
were not offered for sale until November 30, 2000 and Class A, B, C, and L
shares of the Advisor Aggressive High-Yield Bond Fund and Advisor Short
Duration Bond Fund were not offered for sale until November 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AND ADDRESS FUND/CLASS/SHARES PERCENT
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Charles Schwab & Co Inc Bond - Class Z - 810,897 33.30%
101 Montgomery St
San Francisco, CA 94104-4122
EMRE & Co Bond - Class Z - 657,097 26.98%
PO Box 1408
Milwaukee, WI 53201-1408
IMS & Co Bond - Class Z - 374,019 15.36%
PO Box 3865
Englewood, CO 80155-3865
First Trust Corporation Tr Bond - Class A - 10,757 87.69%
PO Box 173301
Denver, CO 80217-3301
Strong Capital Management Bond - Class A - 1,510.064 12.31%
100 Heritage Reserve
Menomonee Falls, WI 53051
Charles Schwab & Co Inc Bond - Institutional - 8,943,417 36.21%
101 Montgomery St
San Francisco, CA 94104-4122
Mellon Bank NA Bond - Institutional - 3,047,848 12.34%
PO Box 3198
Pittsburgh, PA 15230-3198
IBEW Local 117 Bond - Institutional - 3,006,585 12.17%
6525 Centurion Dr
Lansing, MI 48917-9275
First Security Bank Cust Bond - Institutional - 2,033,506 8.23%
PO Box 25297
Salt Lake City, UT 84125-0297
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
National Financial Services Corp Bond - Institutional - 1,383,238 5.60%
One World Financial Center
200 Liberty St
New York, NY 10281-1003
Charles Schwab & Co Inc Short Duration Bond - Class Z - 3,040,348 60.05%
101 Montgomery St
San Francisco, CA 94104-4122
</TABLE>
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 September 30, 2000, the Advisor had
over $47 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.
On July 23, 1999, and November 10, 2000, the Board of Directors of the Advisor
Bond Fund and the Advisor Short Duration Bond Fund, respectively, 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.
30
<PAGE>
As a result of these arrangements, the annual advisory fee paid by the Advisor
Bond Fund and the Advisor Short Duration Bond Fund has been reduced by 0.02%
and 0.25%, respectively, of the average daily net asset value of the Fund,
effective August 31, 1999, and November 30, 2000, respectively. In no event
will the fees under the Administrative Agreement for the Institutional Class
shares of the Advisor Bond Fund exceed 0.02% nor will the fees under the
Administrative Agreement for the Class Z shares of the Advisor Short Duration
Bond Fund exceed 0.25% of the average daily net asset value of the Fund.
The Class A, B, C, and L shares of the Advisor Short Duration Bond Fund and the
Class B, C, and L shares of the Advisor Bond Fund were not affected by the new
advisory and administrative agreements because those classes of shares were
first offered for sale on November 30, 2000.
As compensation for its advisory services, the Fund pays to the Advisor a
monthly management fee at the annual rate specified below of the average daily
net asset value of the Fund. From time to time, the Advisor may voluntarily
waive all or a portion of its management fee for the Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
PRIOR
FUND ANNUAL RATE ANNUAL RATE
------------------------------ ----------- --------------------------
Advisor Bond Fund 0.23% 0.25% (Prior to 8/31/99)
Advisor Aggressive High-Yield
Bond Fund 0.50% N/A
Advisor Short Duration Bond 0.375% 0.625% (Prior to 11/30/00)
Fund
</TABLE>
The Fund paid the following management fees for the time periods indicated:
NOTE: THE ADVISOR AGGRESSIVE HIGH-YIELD BOND FUND IS NOT LISTED BELOW BECAUSE
IT FIRST OFFERED ITS SHARES ON NOVEMBER 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
MANAGEMENT FEE
FISCAL YEAR ENDED MANAGEMENT FEE ($) WAIVER($) AFTER WAIVER ($)
----------------- ------------------ --------- ----------------
</TABLE>
Advisor Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
12/31/97(1) 51,698 0 51,698
2/28/98(2) 21,934 0 21,934
2/28/99 212,238 0 212,238
10/31/99(3) 254,301 0 254,301
</TABLE>
Advisor Short Duration Bond Fund
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
(1) Commenced operations on December 31, 1996
(2) For the two-month fiscal year ended February 28, 1998.
(3) 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.
<TABLE>
<CAPTION>
<S> <C>
FUND ORGANIZATIONAL EXPENSES
----------------- -----------------------
Advisor Bond Fund $2,910
</TABLE>
The Advisory Agreement, except for the Advisory Agreement for the Advisor
Aggressive High-Yield Bond Fund, 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
31
<PAGE>
applicable limitation will be made on a monthly basis and will be paid to the
Fund by reduction of the Advisor's fee, subject to later adjustment, month by
month, for the remainder of the Fund's fiscal year.
The Advisor may from time to time voluntarily absorb expenses for the Fund in
addition to the reimbursement of expenses in excess of applicable limitations.
On July 12, 1994, the SEC filed an administrative action ("Order") against the
Advisor, Mr. Strong, and another employee of the Advisor in connection with
conduct that occurred between 1987 and early 1990. In re Strong/Corneliuson
Capital Management, Inc., et al. Admin. Proc. File No. 3-8411. The proceeding
was settled by consent without admitting or denying the allegations in the
Order. The Order found that the Advisor and Mr. Strong aided and abetted
violations of Section 17(a) of the 1940 Act by effecting trades between mutual
funds, and between mutual funds and Harbour Investments Ltd. ("Harbour"),
without complying with the exemptive provisions of SEC Rule 17a-7 or otherwise
obtaining an exemption. It further found that the Advisor violated, and Mr.
Strong aided and abetted violations of, the disclosure provisions of the 1940
Act and the Investment Advisers Act of 1940 by misrepresenting the Advisor's
policy on personal trading and by failing to disclose trading by Harbour, an
entity in which principals of the Advisor owned between 18 and 25 percent of
the voting stock. As part of the settlement, the respondents agreed to a
censure and a cease and desist order and the Advisor agreed to various
undertakings, including adoption of certain procedures and a limitation for six
months on accepting certain types of new advisory clients.
On June 6, 1996, the Department of Labor ("DOL") filed an action against the
Advisor for equitable relief alleging violations of the Employee Retirement
Income Security Act of 1974 ("ERISA") in connection with cross trades that
occurred between 1987 and late 1989 involving certain pension accounts managed
by the Advisor. Contemporaneous with this filing, the Advisor, without
admitting or denying the DOL's allegations, agreed to the entry of a consent
judgment resolving all matters relating to the allegations. Reich v. Strong
Capital Management, Inc., (U.S.D.C. E.D. WI) ("Consent Judgment"). Under the
terms of the Consent Judgment, the Advisor agreed to reimburse the affected
accounts a total of $5.9 million. The settlement did not have any material
impact on the Advisor's financial position or operations.
The Fund , the Advisor, and the Distributor have adopted a Code of Ethics
("Code") which governs the personal trading activities of all "Access Persons"
of the Advisor and the Distributor. Access Persons include every director and
officer of the Advisor, the Distributor, and the investment companies managed
by the Advisor, including the Fund, as well as certain employees of the Advisor
and the Distributor who have access to information relating to the purchase or
sale of securities by the Advisor on behalf of accounts managed by it. The
Code is based upon the principal that such Access Persons have a fiduciary duty
to place the interests of the Fund and the Advisor's and Distributor's other
clients ahead of their own.
The Code requires Access Persons (other than Access Persons who are
independent directors of the investment companies managed by the Advisor,
including the Fund) to, among other things, preclear their securities
transactions (with limited exceptions, such as transactions in shares of
mutual funds, direct obligations of the U.S. government, and certain options
on broad-based securities market indexes) and to execute such transactions
through the Advisor's trading department. The Code, which applies to all
Access Persons (other than Access Persons who are independent directors of the
investment companies managed by the Advisor, including the Fund), includes a
ban on acquiring any securities in an initial public offering, other than a
new offering of a registered open-end investment company, and a prohibition
from profiting on short-term trading in securities. In addition, no Access
Person may purchase or sell any security 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 may not
trade in securities that have been purchased or sold by any client for which
the Advisor serves as an investment advisor or subadvisor, renders investment
advice, makes investment decisions, or places orders through its Trading
Department.
The Advisor provides investment advisory services for multiple clients through
different types of investment accounts (E.G., mutual funds, hedge funds,
separately managed accounts, etc.) who may have similar or different
investment objectives and investment policies (E.G., some accounts may have an
active trading strategy while others follow a "buy and hold" strategy). In
managing these accounts, the Advisor seeks to maximize each account's return,
consistent with the account's investment objectives and investment strategies.
While the Advisor's policies are designed to ensure that over time
similarly-situated clients receive similar treatment, to the maximum extent
possible, because of the range of the Advisor's clients, the Advisor may give
advice and take action with respect to one account that may differ from the
advice given, or the timing or nature of action taken, with respect to another
account (the Advisor, 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
32
<PAGE>
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 two programs of custom portfolio management called
Strong Advisor and Strong Private Client. These programs are designed to
determine an investment approach that fits an investor's financial needs and
then provide the investor with a custom built portfolio of Strong Funds and
certain other unaffiliated mutual funds, in the case of Strong Advisor, and
Strong Funds, and individual stocks and bonds, in the case of Strong Private
Client, based on that allocation. The Advisor, on behalf of participants in
the Strong Advisor and Strong Private Client programs, may determine to invest
a portion of the program's assets in any one Strong Fund, which investment,
particularly in the case of a smaller Strong Fund, could represent a material
portion of the Fund's assets. In such cases, a decision to redeem the Strong
Advisor or Strong Private Client program's investment in a Fund on short notice
could raise a potential conflict of interest for the Advisor, between the
interests of participants in the Strong Advisor or Strong Private Client
program and of the Fund's other shareholders. In general, the Advisor does not
expect to direct the Strong Advisor or Strong Private Client program to make
redemption requests on short notice. However, should the Advisor determine
this to be necessary, the Advisor will use its best efforts and act in good
faith to balance the potentially competing interests of participants in the
Strong Advisor and Strong Private Client program and the Fund's other
shareholders in a manner the Advisor deems most appropriate for both parties in
light of the circumstances.
From time to time, the Advisor may make available to third parties current and
historical information about the portfolio holdings of the Advisor's mutual
funds or other clients. Release may be made to entities such as fund ratings
entities, industry trade groups, and financial publications. Generally, the
Advisor will release this type of information only where it is otherwise
publicly available. This information may also be released where the Advisor
reasonably believes that the release will not be to the detriment of the best
interests of its clients.
For more complete information about the Advisor, including its services,
investment strategies, policies, and procedures, please call 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 Advisor Short Duration Bond Fund currently offers five classes of
shares: Class A, Class B, Class C, Class L, and Class Z. The Advisor Bond
Fund currently offers six classes of shares: Class A, Class B, Class C, Class
L, Class Z, and Institutional Class. The Advisor 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 Class A, Class B, Class C, Class L, and Class
Z shares of the Fund, including: (i) authorizing expenditures and approving
bills for payment on behalf of the Fund; (ii) supervising preparation 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
33
<PAGE>
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; (xii) providing such other related services as
the Fund or a shareholder may reasonably request, to the extent permitted by
applicable law; and, in addition, for Class Z shares only, (xiii) answering
shareholder inquiries regarding account status and history, the manner in which
purchases and redemptions of the shares may be effected, and certain other
matters pertaining to the Funds; and (xiv) assisting shareholders in
designating and changing dividend options, account designations, and addresses.
For its services under the Administration Agreement the Advisor receives a
monthly fee from the Fund at the annual rate of 0.25% of the Fund's average
daily net assets attributable to Class Z shares, and 0.28% of the Fund's
average daily net assets attributable to Class A, B, C, and L shares.
Under the Administration Agreement, the Advisor provides certain
administrative functions for the Institutional Class shares of the Fund,
including: (i) authorizing expenditures and approving bills for payment on
behalf of the Fund and the Institutional Class shares; (ii) supervising
preparation of the periodic updating of the Fund's registration statements,
with respect to the Institutional Class shares, including Institutional Class
prospectuses and statements of additional information, for the purpose of
filings with the SEC and state securities administrators and monitoring and
maintaining the effectiveness of such filings, as appropriate; (iii)
supervising preparation of shareholder reports, notices of dividends, capital
gains distributions and tax credits for the Fund's Institutional Class
shareholders, and attending to routine correspondence and other communications
with individual shareholders; (iv) supervising the daily pricing of the Fund's
investment portfolios and the publication of the respective net asset values
of the Institutional Class shares of the Fund, earnings reports and other
financial data to the extent required by the Fund's Advisory Agreement prior
to the adoption of this Administration Agreement; (v) monitoring relationships
with organizations providing services to the Fund, including the Custodian,
DST and printers; (vi) supervising compliance by the Fund, with respect to the
Institutional Class shareholders, with recordkeeping requirements under the
1940 Act and regulations thereunder, maintaining books and records for the
Fund (other than those maintained by the Custodian and the Fund's transfer
agent) and preparing and filing of tax reports other than the Fund's income
tax returns; (vii) transmitting shareholders' purchase and redemption orders
to the Fund's transfer agent; (viii) arranging for the wiring or other
transfer of funds to and from shareholder accounts in connection with
shareholder orders to purchase or redeem Institutional Class shares; (ix)
verifying purchase and redemption orders, transfers among and changes in
shareholder-designated accounts; (x) informing the distributor of the gross
amount of purchase and redemption orders for Institutional Class shares; (xi)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law. For its
services under the Administration Agreement the Advisor receives a monthly fee
from the Fund at the annual rate of 0.02% of the Fund's average daily net
assets attributable to Institutional Class shares.
34
<PAGE>
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 ADVISOR BOND FUND AND ALL SHARES OF THE ADVISOR AGGRESSIVE
HIGH-YIELD BOND FUND, BECAUSE THOSE SHARES, AND THAT FUND, RESPECTIVELY, WERE
NOT OFFERED UNTIL NOVEMBER 30, 2000. THE ADVISOR SHORT DURATION BOND FUND WAS
NOT SUBJECT TO SEPARATE ADMINISTRATIVE FEES BEFORE NOVEMBER 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ADMINISTRATIVE FEE
FISCAL YEAR ENDED ADMINISTRATIVE FEE ($) WAIVER($) AFTER WAIVER ($)
----------------- ---------------------- --------- ------------------
</TABLE>
Advisor Bond Fund - Class Z(1)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10/31/99(2) 11 0 11
</TABLE>
Advisor Bond Fund - Class A(3)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10/31/99(2) 0 0 0
</TABLE>
Advisor Bond Fund -
Institutional Class
<TABLE>
<CAPTION>
<S> <C> <C> <C>
10/31/99(2) 5,411 0 5,411
</TABLE>
(1) Reflects the former Investor Class.
(2) For the two-month period ended October 31, 1999.
(3) 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 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 Class Z and Institutional Class shares of the Advisor Bond Fund and the
Class Z shares of the Advisor 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 Advisor
Bond Fund and the former Retail Class shares of the Advisor 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 5%
for redemptions within the first year, declining to 4% for redemptions within
years two and three, 3% in year 4, 2% in year 5, 1% in year 6, and disappearing
after the sixth year. The annual 1% 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% up-front sales commission, which includes an
advance of the first
35
<PAGE>
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.
The Distributor has adopted a Code of Ethics. See the Investment Advisor
section for details.
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.
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.
CLASS B AND CLASS C SHARES. The Fund may pay the Distributor up to 1.00% per
year of the class' 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.
36
<PAGE>
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 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 ADVISOR BOND FUND AND ALL CLASSES OF THE ADVISOR AGGRESSIVE
HIGH-YIELD BOND FUND, BECAUSE THOSE SHARES, AND THAT FUND, RESPECTIVELY, WERE
NOT OFFERED UNTIL NOVEMBER 30, 2000. THE ADVISOR 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PAID BY RETAINED BY PAID BY
FISCAL YEAR ENDED FUND DISTRIBUTORS* DEALERS
----------------- ------- ------------- -------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Advisor Bond Fund - Class A 1 0 0
(formerly Advisor Class)
10/31/99*
</TABLE>
* For the two-month period ended October 31, 1999.
37
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for the
Fund and for the placement of the Fund's investment business and the
negotiation of the commissions to be paid on such transactions. It is the
policy of the Advisor, to seek the best execution at the best security price
available with respect to each transaction, in light of the overall quality of
brokerage and research services provided to the Advisor, or the Fund. In OTC
transactions, orders are placed directly with a principal market maker unless
it is believed that a better price and execution can be obtained using a
broker. The best price to the Fund means the best net price without regard to
the mix between purchase or sale price and commissions, if any. In selecting
broker-dealers and in negotiating commissions, the Advisor considers a variety
of factors, including best price and execution, the full range of brokerage
services provided by the broker, as well as its capital strength and stability,
and the quality of the research and research services provided by the broker.
Brokerage will not be allocated based on the sale of any shares of the Strong
Funds.
The Advisor has adopted procedures that provide generally for the Advisor to
seek to bunch orders for the purchase or sale of the same security for the
Fund, other mutual funds managed by the Advisor, and other advisory clients
(collectively, "client accounts"). The Advisor will bunch orders when it deems
it to be appropriate and in the best interest of the client accounts. When a
bunched order is filled in its entirety, each participating client account will
participate at the average share price for the bunched order on the same
business day, and transaction costs shall be shared pro rata based on each
client's participation in the bunched order. When a bunched order is only
partially filled, the securities purchased will be allocated on a pro rata
basis to each client account participating in the bunched order based upon the
initial amount requested for the account, subject to certain exceptions, and
each participating account will participate at the average share price for the
bunched order on the same business day.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)") permits
an investment advisor, under certain circumstances, to cause an account to pay
a broker or dealer a commission for effecting a transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
the transaction in recognition of the value of the brokerage and research
services provided by the broker or dealer. Brokerage and research services
include (1) furnishing advice as to the value of securities, the advisability
of investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; (2) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement, and custody).
In carrying out the provisions of the Advisory Agreement, the Advisor may cause
the Fund to pay a broker, 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.
38
<PAGE>
From time to time, the Advisor may purchase new issues of securities for the
Fund in a fixed income price offering. In these situations, the seller may be a
member of the selling group that will, in addition to selling the securities to
the Fund and other advisory clients, provide the Advisor with research. The
NASD has adopted rules expressly permitting these types of arrangements under
certain circumstances. Generally, the seller will provide research "credits" in
these situations at a rate that is higher than that which is available for
typical secondary market transactions. These arrangements may not fall within
the safe harbor of Section 28(e).
At least annually, the Advisor considers the amount and nature of research and
research services provided by brokers, as well as the extent to which such
services are relied upon, and attempts to allocate a portion of the brokerage
business of the Fund and other advisory clients on the basis of that
consideration. In addition, brokers may suggest a level of business they would
like to receive in order to continue to provide such services. The actual
brokerage business received by a broker may be more or less than the suggested
allocations, depending upon the Advisor's evaluation of all applicable
considerations.
The Advisor has informal arrangements with various brokers whereby, in
consideration for providing research services and subject to Section 28(e), the
Advisor allocates brokerage to those firms, provided that the value of any
research and brokerage services was reasonable in relationship to the amount of
commission paid and was subject to best execution. In no case will the
Advisor make binding commitments as to the level of brokerage commissions it
will allocate to a broker, nor will it commit to pay cash if any informal
targets are not met. The Advisor anticipates it will continue to enter into
such brokerage arrangements.
The Advisor may direct the purchase of securities on behalf of the Fund and
other advisory clients in secondary market transactions, in public offerings
directly from an underwriter, or in privately negotiated transactions with an
issuer. When the Advisor believes the circumstances so warrant, securities
purchased in public offerings may be resold shortly after acquisition in the
immediate aftermarket for the security in order to take advantage of price
appreciation from the public offering price or for other reasons. Short-term
trading of securities acquired in public offerings, or otherwise, may result in
higher portfolio turnover and associated brokerage expenses.
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 a limited extent, each Fund may participate in the
initial public offering ("IPO") market. When a Fund is small, IPOs may greatly
increase the Fund's total returns. But, as the Fund grows larger, the Fund is
unlikely to achieve the same
39
<PAGE>
level of returns from IPOs. Investing in IPOs is risky, and the prices of
stocks
purchased in IPOs tend to fluctuate more widely than stocks of more established
companies.
The Advisor has adopted deal allocation procedures ("Procedures"), summarized
below, that reflect the Advisor's overriding policy that deal securities must
be allocated among participating client accounts in a fair and equitable manner
and that deal securities may not be allocated in a manner that unfairly
discriminates in favor of certain clients or types of clients.
The Procedures provide that, in determining which client accounts a portfolio
manager team will seek to have purchase deal securities, the team will consider
all relevant factors including, but not limited to, the nature, size, and
expected allocation to the Advisor of deal securities; the size of the
account(s); the accounts' investment objectives and restrictions; the risk
tolerance of the client; the client's tolerance for possibly higher portfolio
turnover; the amount of commissions generated by the account during the past
year; and the number and nature of other deals the client has participated in
during the past year.
Where more than one of the Advisor's portfolio manager team seeks to have
client accounts participate in a deal and the amount of deal securities
allocated to the Advisor by the underwriting syndicate is less than the
aggregate amount ordered by the Advisor (a "reduced allocation"), the deal
securities will be allocated among the portfolio manager teams based on all
relevant factors. The primary factor shall be assets under management,
although other factors that may be considered in the allocation decision
include, but are not limited to, the nature, size, and expected allocation of
the deal; the amount of brokerage commissions or other amounts generated by the
respective participating portfolio manager teams; and which portfolio manager
team is primarily responsible for the Advisor receiving securities in the deal.
Based on relevant factors, the Advisor has established general allocation
percentages for its portfolio manager teams, and these percentages are reviewed
on a regular basis to determine whether asset growth or other factors make it
appropriate to use different general allocation percentages for reduced
allocations.
When a portfolio manager team receives a reduced allocation of deal securities,
the portfolio manager team will allocate the reduced allocation among client
accounts in accordance with the allocation percentages set forth in the team's
initial allocation instructions for the deal securities, except where this
would result in a DE MINIMIS allocation to any client account. On a regular
basis, the Advisor reviews the allocation of deal securities to ensure that
they have been allocated in a fair and equitable manner that does not unfairly
discriminate in favor of certain clients or types of clients.
Transactions in futures contracts are executed through futures commission
merchants ("FCMs"). The Fund's procedures in selecting FCMs to execute the
Fund's transactions in futures contracts are similar to those in effect with
respect to brokerage transactions in securities.
The Fund paid the following brokerage commissions for the time periods
indicated:
NOTE: THE ADVISOR AGGRESSIVE HIGH-YIELD BOND FUND IS NOT LISTED BECAUSE ITS
SHARES WERE FIRST OFFERED ON NOVEMBER 30, 2000:
<TABLE>
<CAPTION>
<S> <C>
FISCAL YEAR ENDED BROKERAGE COMMISSIONS ($)
------------------ -------------------------
</TABLE>
Advisor Bond Fund
<TABLE>
<CAPTION>
<S> <C>
12/31/97(1) 115
2/28/98(2) 808
2/28/99 7,898
10/31/99(3) 3,038
</TABLE>
Advisor Short Duration Bond Fund
<TABLE>
<CAPTION>
<S> <C>
10/31/97 12,267
10/31/98 19,244
10/31/99 1,051
</TABLE>
(1) Commenced operations on December 31, 1996.
(2) For the two-month fiscal year ended February 28, 1999.
(3) 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.
40
<PAGE>
For the fiscal period ended October 31, 1999 the Advisor 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.
CUSTODIAN
As custodian of the Advisor Bond and Advisor Short Duration Bond Funds' assets,
Firstar Bank Milwaukee, N.A., P.O. Box 761, Milwaukee, Wisconsin, 53201, has
custody of all securities and cash of the Fund, delivers and receives payment
for securities sold, receives and pays for securities purchased, collects
income from investments, and performs other duties, all as directed by officers
of the Fund. The custodian is in no way responsible for any of the investment
policies or decisions of the Fund.
As custodian of the Advisor Aggressive High-Yield Bond Fund's assets, State
Street Bank and Trust Company, 801 Pennsylvania Avenue, Kansas City, Missouri,
64105, 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.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
The Advisor, P.O. Box 2936, Milwaukee, Wisconsin, 53201, acts as transfer agent
and dividend-disbursing agent for the Fund. The Advisor is compensated as
follows:
<TABLE>
<CAPTION>
<S> <C>
FUND TYPE/SHARE CLASS FEE*
------------------------------------ ------------------------------------------
Class A shares of Equity Funds and 0.20% of the average daily net asset value
Income Funds of all Class A shares.
------------------------------------ ------------------------------------------
Class B shares of Equity Funds and 0.20% of the average daily net asset value
Income Funds of all Class B shares.
------------------------------------ ------------------------------------------
Class C shares of Equity Funds and 0.20% of the average daily net asset value
Income Funds of all Class C shares.
------------------------------------ ------------------------------------------
Class L shares of Equity Funds and 0.20% of the average daily net asset value
Income Funds of all Class L shares.
------------------------------------ ------------------------------------------
Class Z shares of Equity Funds $21.75 annual open account fee, $4.20 annual closed account fee.
------------------------------------ ------------------------------------------
Class Z shares of Income Funds $31.50 annual open account fee, $4.20 annual closed account fee.
------------------------------------ ------------------------------------------
Institutional Class shares of Income 0.015% of the average daily net asset
Funds value of all Institutional Class shares.
------------------------------------ ------------------------------------------
</TABLE>
* Plus out-of-pocket expenses, such as postage and printing expenses in
connection with shareholder communications.
The fees and services provided as transfer agent and dividend disbursing agent
are in addition to those received and provided by the Advisor under the
Advisory Agreements.
From time to time, the Fund, directly or indirectly through arrangements with
the Advisor, and/or the Advisor may pay amounts to third parties that provide
transfer agent type services and other administrative services relating to the
Fund to persons who beneficially own interests in the Fund, such as
participants in 401(k) plans. These services may include, among other things,
sub-accounting services, transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements, annual reports, updated
prospectuses, other communications regarding the Fund, and related services as
the Fund or beneficial owners may reasonably request. In such cases, the Fund
will not pay fees based on the number of beneficial owners at a rate that is
greater than the rate the Fund is currently paying the Advisor for providing
these services to Fund shareholders.
41
<PAGE>
The Fund paid the following amounts for the time periods indicated for transfer
agency and dividend disbursing and printing and mailing services:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PER OUT-OF- PRINTING/
ACCOUNT POCKET MAILING TOTAL COST
FUND CHARGES($) EXPENSES($) SERVICES($) WAIVER($) AFTER WAIVER($)
---- ----------- ----------- ------------ ---------- ---------------
</TABLE>
Advisor Bond Fund - Class Z
(formerly Investor Class)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
10/31/99(1) 12 151 0 0 163
</TABLE>
Advisor Bond Fund - Class A
(formerly Advisor Class)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
10/31/99(1) 1 0 0 0 1
</TABLE>
Advisor Bond Fund - Institutional Class
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
12/31/97(2) 25,000 3,639 0 6,262 22,377
2/28/98(3) 3,288 0 0 0 3,288
/28/99 21,818 3,533 0 0 25,351
10/31/99(4) 19,381 1,008 22 0 20,411
</TABLE>
Advisor Short Duration Bond Fund - Class Z
(formerly Retail Class)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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>
(1) For the two-month fiscal year ended October 31, 1999.
(2) Commenced operations on December 31, 1996.
(3) For the two-month fiscal year ended February 28, 1998.
(4) For the eight-month fiscal year ended October 31, 1999.
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
42
<PAGE>
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.
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.
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.
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
43
<PAGE>
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).
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.
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.
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 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.
44
<PAGE>
USE OF TAX-LOT ACCOUNTING
When sell decisions are made by the Fund's portfolio manager, the Advisor
generally sells the tax lots of the Fund's securities that results in the
lowest amount of taxes to be paid by the shareholders on the Fund's capital
gain distributions. The Advisor uses tax-lot accounting to identify and sell
the tax lots of a security that have the highest cost basis and/or longest
holding period to minimize adverse tax consequences to the Fund's shareholders.
However, if the Fund has a capital loss carry forward position, the Advisor
would reverse its strategy and sell the tax lots of a security that have the
lowest cost basis and/or shortest holding period to maximize the use of the
Fund's capital loss carry forward position.
ZERO-COUPON, STEP-COUPON, AND PAY-IN-KIND SECURITIES
The Fund may acquire zero-coupon, step-coupon, or other securities issued with
original issue discount. As a holder of those securities, the Fund must
include in its income the original issue discount that accrues on the
securities during the taxable year, even if the Fund receives no corresponding
payment on the securities during the year. Similarly, the Fund must include in
its income securities it receives as "interest" on pay-in-kind securities.
Because the Fund annually must distribute substantially all of its investment
company taxable income, including any original issue discount and other
non-cash income, to satisfy the Distribution Requirement and avoid imposition
of the Excise Tax, it may be required in a particular year to distribute as a
dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions may be made from the proceeds on sales of
portfolio securities, if necessary. The Fund may realize capital gains or
losses from those sales, which would increase or decrease its investment
company taxable income or net capital gain, or both.
DETERMINATION OF NET ASSET VALUE
Generally, when an investor makes any purchases, sales, or exchanges, the price
of the investor's shares will be the net asset value ("NAV") next determined
after Strong Funds receives a request in proper form (which includes receipt of
all necessary and appropriate documentation and subject to available funds)
plus any applicable sales charges. 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.
45
<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, or through a
broker-dealer (assuming all the appropriate documents and requirements have
been met for these account options). Institutional Class shareholders may
redeem some or all of their shares by telephone or by faxing a written request.
After a redemption request is processed, the proceeds from the sale will
normally be sent on the next business day but, in any event, no more than seven
days later.
MOVING ACCOUNT OPTIONS AND INFORMATION
When establishing a new account (other than an Institutional Class account) by
exchanging funds from an existing Strong Funds account, some account options
(such as checkwriting, the exchange option, Express Purchase and the redemption
option), if existing on the account from which money is exchanged, will
automatically be made available on the new account unless the shareholder
indicates otherwise, or the option is not available on the new account.
Subject to applicable Strong Funds policies, other account options, including
automatic investment, automatic exchange and systematic withdrawal, may be
moved to the new account at the request of the shareholder. These options are
not available for Institutional Class accounts. If allowed by Strong Funds
policies (i) once the account options are established on the new account, the
shareholder may modify or amend the options, and (ii) account options may be
moved or added from one existing account to another new or existing account.
Account information, such as the shareholder's address of record and social
security number, will be copied from the existing account to the new account.
PROMOTIONAL ITEMS
From time to time, the Advisor and/or Distributor may give de minimis gifts or
other immaterial consideration to investors who open new accounts or add to
existing accounts with the Strong Funds. In addition, from time to time, the
Advisor and/or Distributor, alone or with other entities or persons, may
sponsor,
participate in conducting, or be involved with sweepstakes, give-aways,
contests,
incentive promotions, or other similar programs ("Give-Aways"). This is done in
order to, among other reasons, increase the number of users of and visits to the
Fund's Internet web site. As part of the Give-Aways, persons may receive cash
or other awards including without limitation, gifts, merchandise, gift
certificates, travel, meals, and lodging. Under the Advisor's
46
<PAGE>
and Distributor's standard rules for Give-Aways, their employees, subsidiaries,
advertising and promotion agencies, and members of their immediate families are
not eligible to enter the Give-Aways.
REDEMPTION IN KIND
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Fund to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
assets of the Fund. If the Advisor determines that existing conditions make
cash payments undesirable, redemption payments may be made in whole or in part
in securities or other financial assets, valued for this purpose as they are
valued in computing the NAV for the Fund's shares (a "redemption in kind").
Shareholders receiving securities or other financial assets in a redemption in
kind may realize a gain or loss for tax purposes, and will incur any costs of
sale, as well as the associated inconveniences. If you expect to make a
redemption in excess of the lesser of $250,000 or 1% of the Fund's assets
during any 90-day period and would like to avoid any possibility of being paid
with securities in kind, you may do so by providing Strong Funds with an
unconditional instruction to redeem at least 15 calendar days prior to the date
on which the redemption transaction is to occur, specifying the dollar amount
or number of shares to be redeemed and the date of the transaction (please call
800-368-3863). This will provide the Fund with sufficient time to raise the
cash in an orderly manner to pay the redemption and thereby minimize the effect
of the redemption on the interests of the Fund's remaining shareholders.
Redemption checks in excess of the lesser of $250,000 or 1% of the Fund's
assets during any 90-day period may not be honored by the Fund if the Advisor
determines that existing conditions make cash payments undesirable.
RETIREMENT PLANS
TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT (IRA): Everyone under age 70 1/2
with earned income may contribute to a tax-deferred Traditional IRA. The
Strong Funds offer a prototype plan for you to establish your own Traditional
IRA. You are allowed to contribute up to the lesser of $2,000 or 100% of your
earned income each year to your Traditional IRA (or up to $4,000 between your
Traditional IRA and your non-working spouses' Traditional IRA). Under certain
circumstances, your contribution will be deductible.
ROTH IRA: Taxpayers, of any age, who have earned income, and whose adjusted
gross income ("AGI") does not exceed $110,000 (single) or $160,000 (joint) can
contribute to a Roth IRA. Allowed contributions begin to phase-out at $95,000
(single) or $150,000 (joint). You are allowed to contribute up to the lesser
of $2,000 or 100% of earned income each year into a Roth IRA. If you also
maintain a Traditional IRA, the maximum contribution to your Roth IRA is
reduced by any contributions that you make to your Traditional IRA.
Distributions from a Roth IRA, if they meet certain requirements, may be
federally tax free. If your AGI is $100,000 or less, you can convert your
Traditional IRAs into a Roth IRA. Conversions of earnings and deductible
contributions are taxable in the year of the distribution. The early
distribution penalty does not apply to amounts converted to a Roth IRA even if
you are under age 59 1/2.
EDUCATION IRA: Taxpayers may contribute up to $500 per year into an Education
IRA for the benefit of a child under age 18. Total contributions to any one
child cannot exceed $500 per year. The contributor must have adjusted income
under $110,000 (single) or $160,000 (joint) to contribute to an Education IRA.
Allowed contributions begin to phase-out at $95,000 (single) or $150,000
(joint). Withdrawals from the Education IRA to pay qualified higher
education expenses are federally tax free. Any withdrawal in excess of higher
education expenses for the year are potentially subject to tax and an
additional 10% penalty.
DIRECT ROLLOVER IRA: To avoid the mandatory 20% federal withholding tax on
distributions, you must transfer the qualified retirement or IRC section
403(b) plan distribution directly into an IRA. The distribution must be
eligible for rollover. The amount of your Direct Rollover IRA contribution
will not be included in your taxable income for the year.
SIMPLIFIED EMPLOYEE PENSION PLAN (SEP-IRA): A SEP-IRA plan allows an employer
to make deductible contributions to separate IRA accounts established for each
eligible employee.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION PLAN (SAR SEP-IRA): A SAR SEP-IRA
plan is a type of SEP-IRA plan in which an employer may allow employees to
defer part of their salaries and contribute to an IRA account. These deferrals
help lower the employees' taxable income. Please note that you may no longer
open new SAR SEP-IRA plans (since December 31, 1996). However, employers with
SAR SEP-IRA plans that were established prior to January 1, 1997 may still open
accounts for new employees.
47
<PAGE>
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 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 $100,000;
- when requesting to redeem or redeposit shares that have been issued in
certificate form;
- if requesting a certificate after opening an account;
- when requesting that redemption proceeds be sent to a different name or
address than is registered on an account;
- if adding/changing a name or adding/removing an owner on an account; and
- if adding/changing the beneficiary on a transfer-on-death account.
A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC. These institutions include banks, savings
associations, credit unions, brokerage firms, and others. Please note that a
notary public stamp or seal is not acceptable.
TELEPHONE AND INTERNET EXCHANGE/REDEMPTION/PURCHASE PRIVILEGES
The Fund employs reasonable procedures to confirm that instructions
communicated by telephone or the Internet are genuine. The Fund may not be
liable for losses due to unauthorized or fraudulent instructions. Such
procedures include but are not limited to requiring a form of personal
identification prior to acting on instructions received by telephone or the
Internet, providing written confirmations of such transactions to the address
of record, tape recording telephone instructions and backing up Internet
transactions.
48
<PAGE>
ORGANIZATION
The Fund is a "Series" of common stock of a Corporation, as described in the
chart below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Incorporation Date Series Date Class Authorized Par
Corporation Date Created Created Shares Value ($)
------------------------------------------- ------------- ----------- ---------- ---------- ---------
Strong Income Funds II, Inc.(1) Indefinite
- Strong Advisor Bond Fund (2) 01/05/1994 Indefinite .01
Class A(3) 8/23/1999 Indefinite .01
Class B 11/30/2000 Indefinite .01
Class C 11/30/2000 Indefinite .01
Class L 11/30/2000 Indefinite .01
Class Z(4) 8/23/99 Indefinite .01
Institutional Class(5) 10/28/96 Indefinite .01
Strong Short-Term Global Bond Fund, Inc. 01/05/1994 Indefinite
Strong Advisor Aggressive High-Yield Bond 11/30/2000 Indefinite .01
Fund
Class A 11/30/2000 Indefinite .01
Class B 11/30/2000 Indefinite .01
Class C 11/30/2000 Indefinite .01
Class L 11/30/2000 Indefinite .01
Strong Advisor Short Duration Bond Fund (6) 01/05/1994 Indefinite .01
Class A 11/30/2000 Indefinite .01
Class B 11/30/2000 Indefinite .01
Class C 11/30/2000 Indefinite .01
Class L 11/30/2000 Indefinite .01
Class Z(7) 01/05/1994 Indefinite .01
</TABLE>
(1) Prior to August 23, 1999, the Corporation's name was Strong
Institutional Funds, Inc.
(2) Prior to November 30, 2000, the Fund's name was Strong Bond Fund.
(3) Current Class A is comprised of former Advisor Class shares. The former
Advisor Class was created on August 23, 1999 and was redesignated as Class A
shares on November 30, 2000.
(4) Current Class Z is comprised of former Investor Class shares. The
former Investor Class was created on August 23, 1999 and was redesignated as
Class Z shares on November 30, 2000.
(5) Before August 23, 1999, the former Institutional Class shares were
Retail Class shares of the Fund.
(6) Prior to November 30, 2000, the Fund's name was Strong Short-Term Global
Bond Fund.
(7) 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 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.
49
<PAGE>
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
Advisor 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
former Retail Class shares, currently Class Z shares, from the inception of
the Fund up to November 29, 2000, 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 Advisor Bond Fund's Class
A shares, which were first offered on November 30, 2000, are based on the
historical performance of the Fund's former Institutional Class shares from
inception to August 31, 1999 and the Advisor Class shares from August 31, 1999
to November 29, 2000, recalculated to reflect the higher expenses associated
with the Class A shares. Performance figures for Advisor Bond Fund's Class B,
Class C, and Class L shares, which were first offered on November 30, 2000,
are based on the historical performance of the Fund's Institutional Class
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).
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
50
<PAGE>
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 ADVISOR AGGRESSIVE HIGH-YIELD BOND FUND ARE
NOT SHOWN HERE BECAUSE THAT FUND DID NOT OFFER ITS SHARES UNTIL NOVEMBER 30,
2000. THE 30-DAY YIELDS FOR CLASS A, B, C, AND L SHARES OF THE ADVISOR SHORT
DURATION BOND FUND, AND CLASS B, C, AND L SHARES OF THE ADVISOR BOND FUND ARE
NOT SHOWN HERE BECAUSE THOSE CLASSES WERE NOT OFFERED UNTIL NOVEMBER 30, 2000.
SPECIFIC FUND PERFORMANCE
30-DAY YIELD
(30-day period ended October 31, 2000)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Waived Absorbed Yield Without Waivers
Fund Yield Management Fees Expenses and Absorptions
--------------------- ----- --------------- --------- ----------------------
Advisor Bond Fund
- Class A 6.77% - 0.03% 6.74%
--------------------- ----- --------------- --------- ----------------------
Advisor Bond Fund
- Class Z 7.14% - - 7.14%
--------------------- ----- --------------- --------- ----------------------
Advisor Bond Fund
- Institutional Class 7.54% - - 7.54%
--------------------- ----- --------------- --------- ----------------------
Advisor Short
Duration Bond 6.33% - - 6.33%
Fund - Class Z
--------------------- ----- --------------- --------- ----------------------
</TABLE>
51
<PAGE>
TOTAL RETURN
ADVISOR BOND FUND
CLASS A*
(formerly Advisor Class)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $9,745 -2.55% -2.55%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $12,385 23.85% 7.84%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on August 31, 1999 as Advisor Class shares and
was redesignated on November 30, 2000 as Class A shares.
** Commenced operations on December 31, 1996.
CLASS B*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $9,646 -3.54% -3.54%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $12,279 22.79% 7.52%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
CLASS C*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,121 1.21% 1.21%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $12,679 26.79% 8.74%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
CLASS L*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $9,954 -0.46% -0.46%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $12,642 26.42% 8.63%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on December 31, 1996.
CLASS Z*
(formerly Investor Class)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,258 2.58% 2.58%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $13,138 31.38% 10.11%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on August 31, 1999 as Investor Class shares and
was redesignated on November 30, 2000 as Class Z shares.
** Commenced operations on December 31, 1996.
52
<PAGE>
INSTITUTIONAL CLASS*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,268 2.68% 2.68%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $13,206 32.06% 10.31%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on October 28, 1996.
** Commenced operations on December 31, 1996.
ADVISOR SHORT DURATION BOND FUND
CLASS A*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,431 4.31% 4.31%
-------------- --------------- ---------------- ------------ --------------
Five Year $10,000 $13,882 38.82% 6.78%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $14,557 45.57% 6.95%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
CLASS B*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,073 0.73% 0.73%
-------------- --------------- ---------------- ------------ --------------
Five Year $10,000 $13,416 34.16% 6.05%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $14,106 41.06% 6.35%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
CLASS C*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,573 5.73% 5.73%
-------------- --------------- ---------------- ------------ --------------
FiveYear $10,000 $13,616 36.16% 6.37%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $14,206 42.06% 6.49%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
CLASS L*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
-------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,383 3.83% 3.83%
-------------- --------------- ---------------- ------------ --------------
Five Year $10,000 $13,569 35.69% 6.29%
-------------- --------------- ---------------- ------------ --------------
Life of Fund** $10,000 $14,168 41.68% 6.44%
-------------- --------------- ---------------- ------------ --------------
</TABLE>
* Class commenced operations on November 30, 2000.
** Commenced operations on March 31, 1994.
53
<PAGE>
CLASS Z *
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Initial $10,000 Ending $ value Cumulative Average Annual
Time Period Investment October 31, 1999 Total Return Total Return
------------- --------------- ---------------- ------------ --------------
One Year $10,000 $10,667 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%
------------- --------------- ---------------- ------------ --------------
</TABLE>
* 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, 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.
OTHER SOURCES. The Fund's advertisements and supplemental sales literature may
contain full or partial reprints of editorials or articles evaluating the
Fund's management and performance from such sources as Money, Forbes,
Kiplinger's, Smart Money, Financial World, Business Week, U.S. News and World
Report, The Wall Street Journal, Mutual Fund Magazine, Barron's, and various
investment newsletters. The Fund may also include testimonials from
shareholders, clients, and others that describe their experiences with the
Fund, the Advisor, or the Distributor, including descriptions of the Fund's
performance, features, and attributes and the services, tools, and assistance
provided by the Fund, the Advisor, or the Distributor.
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
54
<PAGE>
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.
INVESTMENT OBJECTIVE. The Funds offer a comprehensive range of conservative
to aggressive investment options. The Funds and their investment objectives
are listed below.
FUND NAME INVESTMENT OBJECTIVE
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------- ---------------------------------------
GROWTH AND INCOME
--------------------------------------- ---------------------------------------
Strong Advisor U.S. Value Fund Total return by investing for both income and capital growth.
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
EQUITY
--------------------------------------- ---------------------------------------
Strong Advisor Common Stock Fund Capital growth.
--------------------------------------- ---------------------------------------
Strong Advisor Focus Fund Capital growth.
--------------------------------------- ---------------------------------------
Strong Advisor Mid Cap Growth Fund Capital growth.
--------------------------------------- ---------------------------------------
Strong Advisor Small Cap Value Fund Capital growth.
--------------------------------------- ---------------------------------------
Strong Advisor Technology Fund Capital growth
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
INCOME
--------------------------------------- ---------------------------------------
Strong Advisor Aggressive High-Yield Total return by investing for a high
Bond Fund level of current income and capital growth.
--------------------------------------- ---------------------------------------
Strong Advisor Bond Fund Total return by investing for a high
level of current income with a moderate
degree of share-price fluctuation.
--------------------------------------- ---------------------------------------
Strong Advisor Short Duration Bond Fund Total return by investing for a high
level of income with a low degree of
share-price fluctuation.
--------------------------------------- ---------------------------------------
--------------------------------------- ---------------------------------------
</TABLE>
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.
55
<PAGE>
SUGGESTED MINIMUM HOLDING PERIODS
<TABLE>
<CAPTION>
<S> <C> <C>
2 TO 4 YEARS 4 TO 7 YEARS 5 OR MORE YEARS
----------------------- -------------------- ---------------------
Advisor Short Duration Advisor Bond Fund Advisor Common Stock Fund
Bond Fund Advisor U.S. Value Fund
Advisor Aggressive Advisor Focus Fund
High-Yield Bond Fund Advisor Mid Cap Growth Fund
Advisor Small Cap Value Fund
Advisor Technology Fund
</TABLE>
PRODUCT LIFE CYCLES. Discussions of product life cycles and their potential
impact on the Fund's investments may be used in advertisements and sales
materials. The basic idea is that most products go through a life cycle that
generally consists of an early adoption phase, a rapid growth phase, and a
maturity phase. The early adoption phase generally includes the time period
during which the product is first being developed and marketed. The rapid
growth phase usually occurs when the general public becomes aware of the new
product and sales are rising. The maturity phase generally includes the time
period when the public has been aware of the product for a period of time and
sales have leveled off or declined.
By identifying and investing in companies that produce or service products
that are in the early adoption phase of their life cycle, it may be possible
for the Fund to benefit if the product moves into a prolonged period of rapid
growth that enhances the company's stock price. However, you should keep in
mind that investing in a product in its early adoption phase does not provide
any guarantee of profit. A product may experience a prolonged rapid growth
and maturity phase without any corresponding increase in the company's stock
price. In addition, different products have life cycles that may be longer or
shorter than those depicted and these variations may influence whether the
product has a positive effect on the company's stock price. For example, a
product may not positively impact a company's stock price if it experiences an
extremely short rapid growth or maturity phase because the product becomes
obsolete soon after it is introduced to the general public. Other products may
never move past the early adoption phase and have no impact on the company's
stock price.
ADDITIONAL FUND INFORMATION
PORTFOLIO CHARACTERISTICS. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
MEASURES OF VOLATILITY AND RELATIVE PERFORMANCE. Occasionally statistics may
be used to specify fund volatility or risk. The general premise is that
greater volatility connotes greater risk undertaken in achieving performance.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance relative to a market index. One measure of
volatility is beta. Beta is the volatility of a fund relative to the total
market as represented by the Standard & Poor's 500 Stock Index. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of
less than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is a statistical
tool that measures the degree to which a fund's performance has varied from
its average performance during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of [(xi - xm)2
------------
n-1
Where: [ = "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.
56
<PAGE>
Other measures of volatility and relative performance may be used as
appropriate. However, all such measures will fluctuate and do not represent
future results.
DURATION. Duration is a calculation that seeks to measure the price
sensitivity of a bond or a bond fund to changes in interest rates. It
measures bond price sensitivity to interest rate changes by taking into
account the time value of cash flows generated over the bond's life. Future
interest and principal payments are discounted to reflect their present value
and then are multiplied by the number of years they will be received to
produce a value that is expressed in years. Since duration can also be
computed for the Fund, you can estimate the effect of interest rates on the
Fund's share price. Simply multiply the Fund's duration by an expected change
in interest rates. For example, the price of the Fund with a duration of two
years would be expected to fall approximately two percent if market interest
rates rose by one percentage point.
GENERAL INFORMATION
BUSINESS PHILOSOPHY
The Advisor is an independent, Midwestern-based investment advisor, owned by
professionals active in its management. Recognizing that investors are the
focus of its business, the Advisor strives for excellence both in investment
management and in the service provided to investors. This commitment affects
many aspects of the business, including professional staffing, product
development, investment management, and service delivery.
The increasing complexity of the capital markets requires specialized skills
and processes for each asset class and style. Therefore, the Advisor believes
that active management should produce greater returns than a passively managed
index. The Advisor has brought together a group of top-flight investment
professionals with diverse product expertise, and each concentrates on their
investment specialty. The Advisor believes that people are the firm's most
important asset. For this reason, continuity of professionals is critical to
the firm's long-term success.
INVESTMENT ENVIRONMENT
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest
rates, political developments, the competitive environment, consumer behavior,
industry trends, technological advances, macroeconomic trends, and the supply
and demand of various financial instruments. In addition, marketing materials
may cite the portfolio management's views or interpretations of such factors.
EIGHT BASIC PRINCIPLES FOR SUCCESSFUL MUTUAL FUND INVESTING
These common sense rules are followed by many successful investors. They make
sense for beginners, too. If you have a question on these principles, or would
like to discuss them with us, please contact us at 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.
57
<PAGE>
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.
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, technology, 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.
RETIREMENT OPTIONS. The Advisor works closely with plan sponsors to design a
comprehensive retirement program. 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 videotapes, and
retirement education programs. The Advisor will work with plan sponsors to
identify participants' education needs.
SERVICE. The Advisor's goal is to provide a world class level of service
through the use of experienced retirement plan professionals and advanced
technology. 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 invests in the latest technology in order to provide plan sponsors
and participants with superior service.
The Advisor has designed both "high-tech" and "high-touch" systems, providing
an automated telephone system and Internet access as well as professional
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 INTERMEDIARY GROUP
The Strong Financial Intermediary Group is dedicated to helping financial
advisors better serve their clients. Financial advisors receive regular
updates on the mutual funds managed by the Advisor, access to portfolio
managers through special conference calls, consolidated mailings of duplicate
confirmation statements, access to the Advisor's network of regional
representatives, and other specialized services. For more information on the
Strong Financial Intermediary Group, call 800-368-1683.
58
<PAGE>
INDEPENDENT ACCOUNTANTS
Pricewaterhouse Coopers LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202 is the independent accountants for the Fund, providing audit services and
assistance and consultation with respect to the preparation of filings with
the SEC.
LEGAL COUNSEL
Godfrey & Kahn, S.C., 780 North Water Street, Milwaukee, Wisconsin 53202, acts
as legal counsel for the Fund.
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.
The Semi-Annual Report for the Fund that is attached to this SAI contains the
following unaudited 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.
59
<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.
60
<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.
r
This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.
This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular obligation as a matter of policy.
61
<PAGE>
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.
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.
62
<PAGE>
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.
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
63
<PAGE>
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.
'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.
64
<PAGE>
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.
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.
65
<PAGE>
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.
66
<PAGE>
APPENDIX B - ASSET COMPOSITION BY BOND RATINGS
NOTE: THE ADVISOR 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
<TABLE>
<CAPTION>
<S> <C> <C>
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%
</TABLE>
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
<TABLE>
<CAPTION>
<S> <C> <C>
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%
</TABLE>
* The indicated percentages are based on the highest rating received from any
one NRSRO. Each of the NRSROs utilizes rating categories that are substantially
similar to those used in this chart (see the information in Appendix A for the
rating categories of several NRSROs).
67
<PAGE>
APPENDIX C - SHARE CLASSES
FRONT-END SALES LOAD
The maximum front-end sales load is 4.50% for Class A shares of the ADVISOR
BOND FUND and ADVISOR AGGRESSIVE HIGH-YIELD BOND FUND. The maximum front-end
sales load is 2.25% for Class A shares of the ADVISOR 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 ADVISOR BOND FUND and the ADVISOR AGGRESSIVE
HIGH-YIELD BOND FUND differs depending on the amount you invest:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As a As a Dealer
Percentage Percentage Reallowance as a
Amount of of of Percentage of
Your Investment Offering Price Investment Offering Price
--------------------------------- ----------------- ---------- ---------------
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 ADVISOR SHORT DURATION BOND FUND also differs depending on the amount you
invest:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As a As a Dealer
Percentage Percnetage Reallowance as a
Amount of of of Percentage of
Your Investment Offering Price Investment Offering Price
--------------------------------- ----------------- --------- --------------
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.
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
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 365
days of the redemption and is limited to the amount of the redemption proceeds.
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. 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
68
<PAGE>
"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, Class B or Class L 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 the shareholder's 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:
a. Dividend and capital gain distributions from the Fund. The distributions
generally must be reinvested in the same share class. 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.
69
<PAGE>
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. Employer-sponsored retirement plans, and their
participants, for which the Advisor, the Fund's Distributor, or one of their
affiliates has entered into an agreement to provide document or administrative
services, and other retirement plans whose administrators or dealers have
entered into an agreement with the Advisor, the Fund's Distributor, or one of
their affiliates, to perform services. 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, DIRECTORS AND EMPLOYEES OF THE FUND, THE ADVISOR, THE FUND'S
DISTRIBUTOR, and these entities' affiliates, and each of 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, including accounts in
fee-based advisory programs such as the Strong Advisor and Strong Private
Client programs.
12. CERTAIN UNIT INVESTMENT TRUSTS and their holders reinvesting
distributions from the trusts.
13. GROUP ANNUITY SEPARATE ACCOUNTS offered to retirement plans.
14. INSURANCE COMPANY SEPARATE ACCOUNTS. Shares acquired by insurance
company separate accounts.
15. INTERNAL REVENUE CODE S 529 PLAN ACCOUNTS for which the Advisor
provides investment management services.
16. TRANSFERS OF $5 MILLION OR MORE, within a period of 90 days, from a
single registered investment professional.
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 up to 1% as a commission, out of its own resources, to
securities dealers who initiate and are responsible for purchases of Class A
shares of $1 million or more.
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.
70
<PAGE>
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.
Class B shares are only available for purchases up to $500,000. 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.
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 5
2 Years 4
3 Years 4
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.
71
<PAGE>
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. Systematic withdrawals of 12%
annually require that the minimum distribution for such plan is no less than
$250 per month.
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 document or
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 (as defined in the IRC) (for Class B, this applies to all retirement
plan accounts, not only IRAs) or for mandatory distributions once the
shareholder reaches age 70 1/2. Mandatory Redemptions at age 70 1/2 must
represent a minimum required pro rata distribution. For Class B shares that
are part of an individual's total IRA or 403(b) investment, the CDSC waiver is
available only for that portion of a mandatory distribution which bears the
same relation to the entire mandatory distribution as the Class B shares
investment bears to the total investment.
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).
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 Advisor Bond Fund and Advisor Short
Duration Bond Fund only. Investors and registered investment advisors 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, except as
described below, and registered investment advisors holding Class Z shares of
a fund on November 30, 2000;
- Officers, directors, and employees of the fund, the Advisor, the fund's
Distributor, and these entities' affiliates, and each of their immediate
family members (grandparent, parent, sibling, child, grandchild and spouse)
who live in the same household;
- Employer-sponsored retirement plans, and their participants, for which the
Advisor, the fund's Distributor, or one of their affiliates, has entered into
an agreement to provide document or administrative services, and other
retirement plans whose administrators or dealers have entered into an
agreement with the Advisor, the fund's Distributor, or one of their
affiliates, to perform services;
72
<PAGE>
- 401(k) plans holding Class Z shares of a fund on November 30, 2000;
- Certain institutional investors purchasing more than $10 million of Class Z
shares;
- Any Strong fund of funds structure such as Strong Life Stage Series, Inc.;
- Any Internal Revenue Code S 529 plan for which the Advisor provides
investment management services; and
- Any accounts in a fee-based advisory program managed by the Advisor
including, but not limited to the Strong Advisor and the Strong Private
Client programs.
For more information on the purchase of Class Z shares, call 800-368-3863.
73
<PAGE>
