<PAGE>
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THE STRONG INSTITUTIONAL
BOND FUND
ANNUAL REPORT * DECEMBER 31, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING BONDS]
[STRONG FUNDS LOGO]
STRONG FUNDS
<PAGE>
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THE STRONG INSTITUTIONAL
BOND FUND
ANNUAL REPORT * DECEMBER 31, 1997
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Institutional Bond Fund.......................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities....................................4
Statement of Assets and Liabilities......................................6
Statement of Operations..................................................7
Statement of Changes in Net Assets.......................................8
Notes to Financial Statements............................................9
FINANCIAL HIGHLIGHTS.........................................................11
REPORT OF INDEPENDENT ACCOUNTANTS............................................12
<PAGE>
THE STRONG INSTITUTIONAL BOND FUND
IN THE CURRENT ECONOMIC ENVIRONMENT, WE BELIEVE DOMESTIC FIXED INCOME
INVESTMENTS WILL CONTINUE TO PROFIT FROM THE LACK OF INFLATIONARY PRESSURE.
The Strong Institutional Bond Fund seeks total return by investing for a high
level of current income with a moderate degree of share-price fluctuation. The
Fund invests in fixed income securities with an average portfolio
duration--under normal market conditions--of between three and six years. The
primary portion of the Fund's assets are invested in dollar-denominated,
investment-grade securities. In addition, the Fund may invest up to 20% of its
assets in non-investment grade corporate bonds and other high-yield securities.
The Fund may also hold up to 20% of its assets in foreign (non-US dollar
denominated) debt obligations.
===============================================
ASSET ALLOCATION
===============================================
As of 12-31-97
[PIE CHART]
U.S. Government and Agency Issues 45.7%
Corporate Bonds 32.1%
Foreign Government Issues 9.3%
Non-Agency Mortgage and Asset-
Backed Securities 7.9%
Preferred Stocks 2.5%
Municipal Bonds 2.5%
The asset allocation depicts market exposure
and is not given as a percentage of net assets.
===============================================
CALENDAR YEAR 1997
For the year, the total return of the Fund was 18.86%, outperforming its
benchmarks--the Blended Bond Index and the Lehman Brothers Aggregate Bond
Index--by over 850 basis points. During the second half of 1997, the Fund
posted a 7.74% gain, outpacing the Blended and Lehman Brothers indices. Both
benchmarks returned 6.36% during this period.*
======================================
PORTFOLIO STATISTICS
======================================
As of 12-31-97
30-DAY ANNUALIZED YIELD(1) 6.37%
AVERAGE MATURITY 9.0 YEARS
AVERAGE QUALITY RATING(2) AA
======================================
Due to the volatility in the financial markets, the Fund maintained a neutral
duration position relative to the benchmark throughout the latter three
quarters of the year. Conversely, the Fund benefited from issue selection,
sector allocation, and yield curve allocation.
During the first part of the year, most of the Fund's excess returns vs. its
benchmarks were attributed to our commitment to the high-yield sector and our
issue selection capabilities. Our top-down credit research process identified
sectors and industries with positive credit trends. Within these industries, we
were able to find companies where shareholder interests were aligned with
bondholder interests, while maintaining the link between credit and value.
Yield curve positioning and issue selection also added significant value during
the fourth quarter. The US fixed-income market was the beneficiary of the
flight to quality and liquidity that took place as the Asian financial crisis
developed. The demand for long-term US Treasuries and high-quality corporate
issues increased, causing a dramatic flattening of the yield curve. By the end
of the quarter, the yield on the 30-year bellwether Treasury had fallen 48
basis points to 5.92%, while the Federal Reserve held the target overnight rate
steady at 5.50%. The Fund, with a slight barbell stance, was well positioned to
take advantage of this.
In addition, the fixed-income market benefited from continuous good news about
inflation. Consumer and Producer Price Indexes both fell substantially in the
second half of the year. In particular, producer prices finished the year down
1.2%.
CURRENT STRATEGY
In the current economic environment, we believe domestic fixed income
investments will continue to profit from the lack of inflationary pressure. In
addition, the Asian financial crisis has all but eliminated the possibility of
the Fed tightening. An upward movement in US yields could result in another
round of capital flight, further jeopardizing international financial
stability. Because the Fed is not willing to take on the risk of this
prospect, we believe the downside in US bonds is very limited at this time. On
the other hand, the currently high short-term interest rates could discourage
any sustained rally in the market. Also, because of the Asian crisis the Fed
does not appear ready to lower the overnight discount rate, although it is
possible later in the year.
In the high-yield component of the portfolio, the duration is positioned
neutral to slightly longer than the benchmark. As always, issue selection and
sector/industry allocation will play a key role in generating performance. We
remain overweighted in the competitive local exchange carriers and radio
industries as they continue to benefit from the Telecommunications Act of 1996.
In the international component of the portfolio, we are generally optimistic
about international rates, but we remain wary of their present volatility.
2
<PAGE>
OUTLOOK
Looking forward, we continue to be cautiously optim-istic in the near term with
the duration of the overall portfolio position neutral to the benchmark. We
continue to actively look for opportunities in corporate issues. We believe
high-quality bonds should rally early in the year due to the excess demand in
the sector from institutional and individual investors. In addition, high-yield
corporate issues, despite historically low yield spreads relative to
treasuries, should remain steady.
Under the current economic conditions, bond prices should continue to be
supported by positive inflation reports, and the effects of the tight labor
markets should be offset by the deflationary impact of the Asian crisis. The
yield on Treasuries should remain within its current trading range, with the up
side limited by relatively high short-term interest rates.
Thank you for your investment in the Strong Institutional Bond Fund. We look
forward to earning your continued confidence.
Sincerely,
/s/ Bradley C. Tank
Bradley C. Tank
/s/ Jeffrey A. Koch
Jeffrey A. Koch
/s/ Shirish Malekar
Shirish T. Malekar
Portfolio Co-managers
[PHOTO OF BRADLEY C. TANK, JEFFREY A. KOCH, AND SHIRISH T. MALEKAR]
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 12-31-96 to 12-31-97
[GRAPH]
THE STRONG Lipper Intermediate
INSTITUTIONAL Investment Grade
BOND FUND Blended Bond Index* Debt Funds Index
12-96 10,000 10,000 10,000
1-97 10,391 10,054 10,033
2-97 10,746 10,107 10,053
3-97 10,655 10,000 9,943
4-97 10,781 10,135 10,077
5-97 10,885 10,242 10,165
6-97 11,032 10,374 10,283
7-97 11,347 10,636 10,553
8-97 11,357 10,572 10,454
9-97 11,526 10,739 10,599
10-97 11,679 10,861 10,724
11-97 11,736 10,922 10,752
12-97 11,886 11,033 10,847
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Blended Bond Index. Results include the reinvestment of all dividends and
capital gains distributions. Performance is historical and does not represent
future results. Investment returns and principal value vary, and you may have a
gain or loss when you sell shares.
===============================================================================
================================
TOTAL RETURN
================================
As of 12-31-97
SINCE INCEPTION 18.86%
(on 12-31-96)
================================
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* The Blended Bond Index is comprised of 70% Lehman Brothers Aggregate Bond
Index, 15% Lehman Brothers High-Yield Bond Index, and 15% Salomon Brothers
Non-U.S. World Government Bond Index (Currency Hedged). The Lehman Brothers
Aggregate Bond Index is an unmanaged index composed of securities from the
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities
Index, and Asset-Backed Securities Index. The Lehman Brothers High-Yield
Bond Index is an unmanaged index generally representative of corporate
bonds rated below investment-grade. The Salomon Brothers Non-U.S. World
Government Bond Index (Currency Hedged) is an unmanaged index generally
representative of liquid, non-U.S. fixed income government securities.
Rolling one-month forward exchange contracts are used as the hedging
instrument. The Lipper Intermediate Investment Grade Debt Funds Index is an
equally-weighted performance index of the largest qualifying funds in this
Lipper category. Source of the Blended Bond Index data is Standard & Poor's
Micropal. Source of the Lipper index data is Lipper Analytical Services, Inc.
1 The Advisor temporarily absorbed expenses of 0.18%. Otherwise, current
yield would have been 6.19% and returns would have been lower. Yields are
historical and do not represent future yields, which will fluctuate.
2 For purposes of this average rating, the Fund's short-term debt obligations
have been assigned a long-term rating by the Advisor.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES DECEMBER 31, 1997
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
CORPORATE BONDS 32.3%
AES Corporation Senior Subordinated Notes,
8.50%, Due 11/01/07 (Acquired 11/04/97;
Cost $347,375) (b) $ 350,000 $ 351,750
ARA Services, Inc. Guaranteed Notes,
10.625%, Due 8/01/00 270,000 293,207
Atlas Air, Inc. Senior Notes, 10.75%,
Due 8/01/05 275,000 291,500
BankAmerica Capital III Floating Rate Notes,
Series 3, 6.3278%, Due 1/15/27 135,000 133,229
Bay View Capital Corporation Subordinated
Notes, 9.125%, Due 8/15/07 500,000 517,500
Bell Cablemedia PLC Senior Discount Yankee
Notes, Zero %, Due 7/15/04
(Rate Reset Effective 7/15/99) 850,000 803,250
Cablevision Systems Corporation Senior
Notes, 7.875 %, Due 12/15/07 500,000 512,500
California Federal Bank Linked Restructured
Asset Certificates with Enhanced
Returns, Series 1997-C-5-5, 8.625%, Due 4/01/99
(Acquired 5/05/97; Cost $775,000) (b) 775,000 772,094
Capstar Radio Broadcasting Partners, Inc.
Senior Subordinated Notes, 9.25%, Due 7/01/07 500,000 513,750
Contifinancial Corporation Senior Notes,
8.375%, Due 8/15/03 375,000 390,937
FWT, Inc. Senior Subordinated Notes, 9.875%,
Due 11/15/07 (Acquired 12/12/97;
Cost $513,750) (b) 500,000 515,000
Fresenius Medical Care Capital Trust Preferred
Securities, 9.00%, Due 12/01/06 500,000 525,000
Gruma SA de CV Bonds, 7.625%, Due 10/15/07
(Acquired 10/02/97; Cost $818,622) (b) 820,000 807,420
Jordan Telecommunication Products, Inc. Senior
Subordinated Discount Notes, Zero %,
Due 8/01/07 (Rate Reset Effective 8/01/00)
(Acquired 8/08/97; Cost $275,275) (b) 385,000 313,775
LCI International, Inc. Senior Notes, 7.25%,
Due 6/15/07 820,000 850,057
Metronet Communications Corporation Units,
12.00%, Due 8/15/07 350,000 406,000
NTC Capital I Floating Rate Notes, 6.2778%,
Due 1/15/27 545,000 523,723
NWCG Holdings Corporation Senior Secured
Discount Notes, Series B, Zero %, Due 6/15/99 645,000 586,950
National Westminster Bank Senior Subordinated
Notes, 6.5125%, Due 9/29/49 915,000 915,000
Newpark Resources, Inc. Senior Subordinated Notes,
8.625%, Due 12/15/07 (Acquired 12/12/97;
Cost $510,000) (b) 500,000 510,625
Nextlink Communications LLC Senior Notes,
12.50%, Due 4/15/06 275,000 314,875
Qwest Communications International, Inc. Senior
Discount Notes, Zero %, Due 10/15/07 (Rate Reset
Effective 10/15/02) (Acquired 11/04/97;
Cost $323,750) (b) 500,000 340,000
Riggs Capital Trust Preferred Securities, Series A,
8.625%, Due 12/31/26 180,000 190,494
Salomon, Inc. Senior Consumer Price Index-
Linked Bonds, 3.65%, Due 2/14/02 165,000 160,103
Sunamerica, Inc. Debentures, 5.60%,
Due 7/31/2097 1,000,000 758,926
Superior National Capital Trust I Company Guarantee
Notes, 10.75%, Due 12/01/17
(Acquired 12/02/97; Cost $510,000) (b) 500,000 513,750
TCI Communications, Inc. Senior Notes,
6.375%, Due 9/15/99 1,220,000 1,223,467
Terra Nova Insurance UK Holdings PLC Senior
Guaranteed Notes, 10.75%, Due 7/01/05 280,000 314,738
Time Warner Entertainment Senior Notes,
8.375%, Due 7/15/33 535,000 614,215
Transwestern Publishing Company LP/TWP Capital
Corporation Senior Subordinated Notes, 9.625%,
Due 11/15/07 (Acquired 11/06/97;
Cost $350,000) (b) 350,000 365,750
United Air Lines Pass-Thru Trust Certificates,
Series 1992-A2, 9.35%, Due 4/07/16 575,000 705,473
Vicap SA de CV Guaranteed Senior Yankee Notes,
10.25%, Due 5/15/02 (Acquired 5/07/97;
Cost $747,375) (b) 750,000 787,500
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TOTAL CORPORATE BONDS (COST $16,558,066) 16,822,558
- -----------------------------------------------------------------------------
CONVERTIBLE BONDS 0.4%
Tecnomatix Technologies, Ltd. Subordinated Notes,
5.25%, Due 8/15/04 (Acquired 8/12/97;
Cost $200,000) (b) 200,000 201,000
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TOTAL CONVERTIBLE BONDS (COST $200,000) 201,000
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MUNICIPAL BONDS 2.5%
New Jersey Economic Development Authority
Pension Funding Revenue, Series B, Zero %:
Due 2/15/19 3,415,000 869,975
Due 2/15/20 1,800,000 429,806
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TOTAL MUNICIPAL BONDS (COST $1,062,541) 1,299,781
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NON-AGENCY MORTGAGE & ASSET-BACKED SECURITIES 8.1%
Bear Stearns Mortgage Securities, Inc. Mortgage
Pass-Thru Certificates, Series 1995-1, Class 2-P,
Principal Only, Due 7/25/10 306,145 241,481
Chase Commercial Mortgage Securities Corporation
Mortgage Pass-Thru Certificates, Series 1997-2,
Class A-2, 6.60%, Due 11/19/07 950,000 961,580
First Union-Lehman Brothers Commercial Mortgage
Trust Pass-Thru Certificates, Series 1997-C2,
Class D, 7.12%, Due 11/18/12 650,000 46,854
Nomura Asset Securities Corporation, Series
1994-4B, Class 4PO, Principal Only, Due 9/25/24 144,851 103,205
SCE Funding LLC, Series 97-1, Class A, 6.38%,
Due 9/25/08 1,125,000 1,139,051
Trust Investment Enhanced Return Securities -
Chase Credit Card Master Trust, Series 1997-7,
Class A, 6.688%, Due 11/17/03 1,140,000 1,143,990
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TOTAL NON-AGENCY MORTGAGE & ASSET-BACKED SECURITIES
(COST $4,192,170) 4,236,161
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UNITED STATES GOVERNMENT & AGENCY ISSUES 46.6%
FHLMC Participation Certificates, 9.00%,
Due 5/15/25 859,284 913,797
FHLMC Variable Rate Participation Certificates,
8.057%, Due 8/01/25 2,014,749 2,085,265
FNMA Guaranteed Real Estate Mortgage
Investment Conduit Pass-Thru Certificates:
6.82%, Due 10/01/07 1,317,814 1,360,235
8.00%, Due 9/01/23 981,857 1,028,496
FNMA Guaranteed Real Estate Mortgage
Investment Conduit Variable Rate Mortgage
Certificates, 7.619%, Due 6/01/18 263,236 274,444
United States Treasury Bonds:
6.125%, Due 11/15/27 1,550,000 1,593,110
9.25%, Due 2/15/16 445,000 603,671
4
<PAGE>
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Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
United States Treasury Notes:
5.625%, Due 11/30/99 $4,000,000 $ 3,997,504
5.75%, Due 11/30/02 2,300,000 2,302,877
5.875%, Due 11/30/01 1,000,000 1,005,001
6.25%, Due 2/15/03 5,775,000 5,908,553
6.625%, Due 3/31/02 2,105,000 2,174,071
7.75%, Due 12/31/99 965,000 1,002,998
- -----------------------------------------------------------------------------
TOTAL UNITED STATES GOVERNMENT & AGENCY ISSUES (COST $24,059,186) 24,250,022
- -----------------------------------------------------------------------------
FOREIGN GOVERNMENT ISSUES 9.5%
Australian Government Bonds, 8.75%,
Due 8/15/08 1,250,000 AUD 980,068
Republic of Argentina Notes, 9.50%,
Due 11/30/02 1,000,000 USD 993,100
Republic of Germany Debentures, Series 94,
7.50%, Due 11/11/04 3,100,000 DEM 1,957,931
United Kingdom Government Bonds, 7.25%,
Due 12/07/07 565,000 GBP 995,403
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TOTAL FOREIGN GOVERNMENT ISSUES (COST $4,946,910) 4,926,502
- -----------------------------------------------------------------------------
PREFERRED STOCKS 2.5%
Chancellor Radio Broadcasting Company
12.25% Senior Series A 2,000 274,500
Superior Healthcare Management Series A
(Acquired 12/30/97; Cost $1,006,460) (b) 1,000 1,006,460
- -----------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $1,274,460) 1,280,960
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 5.0%
COMMERCIAL PAPER 0.8%
INTEREST BEARING, DUE UPON DEMAND
Johnson Controls, Inc., 5.33% $ 121,000 121,000
Pitney Bowes Credit Corporation, 5.33% 61,000 61,000
Warner Lambert Company, 5.49% 58,800 58,800
Wisconsin Electric Power Company, 5.49% 140,400 140,400
-----------
381,200
REPURCHASE AGREEMENT 4.2%
ABN-AMRO Chicago Corporation (Dated 12/31/97),
6.82%, Due 1/02/98 (Repurchase proceeds
$2,200,834);Collateralized by: $3,395,000
United States Treasury Strips, Due 2/15/05
(Market Value $ 2,247,762) (c) 2,200,000 2,200,000
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TOTAL SHORT-TERM INVESTMENTS (COST $2,581,200) 2,581,200
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- -----------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $54,874,533) 106.9% 55,598,184
Other Assets and Liabilities, Net (6.9%) (3,590,532)
- -----------------------------------------------------------------------------
NET ASSETS 100.0% $52,007,652
=============================================================================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- -----------------------------------------------------------------------------
Settlement Value Unrealized
Date in USD Appreciation
- -----------------------------------------------------------------------------
Sold:
1,550,000 AUD 7/03/98 ($1,012,381) $2,869
3,500,000 DEM 7/03/98 (1,966,911) 5,087
600,000 GBP 7/03/98 (979,395) 5,715
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INDUSTRY DIVERSIFICATION
- -----------------------------------------------------------------------------
Percentage of Net Assets
- -----------------------------------------------------------------------------
U.S. Government & Agency............................................... 50.9%
Foreign Government..................................................... 9.5
Telecommunication Service.............................................. 6.0
Non-Agency Asset-Backed................................................ 4.4
Media-Radio/TV......................................................... 4.0
Insurance - Diversified................................................ 3.1
General Obligation..................................................... 2.5
Savings & Loan......................................................... 2.5
Media Publishing....................................................... 2.3
Bank-Money Center...................................................... 2.0
Airline................................................................ 1.9
Bank-Super Regional.................................................... 1.9
Non-Agency Commercial.................................................. 1.8
Diversified Operations................................................. 1.7
Consumer Miscellaneous................................................. 1.6
Telephone.............................................................. 1.6
Bank-Regional.......................................................... 1.4
Non-Agency Multi-Family................................................ 1.2
Healthcare - Medical Supply............................................ 1.0
Oil Well Equipment & Service........................................... 1.0
Electric Power......................................................... 0.9
Mortgage & Related Service............................................. 0.8
Non-Agency Single-Family............................................... 0.7
Transportation Service................................................. 0.7
Leisure Services....................................................... 0.6
Computer Service....................................................... 0.4
Brokerage & Investment Management...................................... 0.3
Healthcare - Drug/Diversified.......................................... 0.1
Office Automation...................................................... 0.1
Other Assets and Liabilities, Net...................................... (6.9)
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Total 100.0%
- -----------------------------------------------------------------------------
COUNTRY DIVERSIFICATION
- -----------------------------------------------------------------------------
Percentage of Net Assets
- -----------------------------------------------------------------------------
United States.......................................................... 92.0%
Argentina.............................................................. 1.9
Australia.............................................................. 1.8
Germany................................................................ 3.8
Mexico................................................................. 3.1
United Kingdom......................................................... 4.3
Other Assets and Liabilities, Net...................................... (6.9)
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Total 100.0%
- -----------------------------------------------------------------------------
5
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) DECEMBER 31, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CURRENCY ABBREVIATIONS
- ------------------------------------------------------------------------------
AUD Australian Dollar
DEM German Mark
GBP British Pound
USD United States Dollar
- -------------------------------------------------------------------------------
LEGEND
- ------------------------------------------------------------------------------
(a) Short-term investments include any security which has a maturity of
less than one year.
(b) Non-income producing security.
(c) The Fund may engage in repurchase agreements where the underlying
collateral consists of U.S. Government securities which are maintained in
a segregated account with a custodian. The market value of the collateral
must exceed the principal amount by at least two percent on a daily basis.
Percentages are stated as a percent of net assets.
See notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1997
ASSETS:
Investments in Securities, at Value
(Cost of $54,874,533) $55,598,184
Receivable for Securities and
Forward Foreign Currency Contracts Sold 29,839
Interest Receivable 646,427
Other Assets 39,435
-----------
Total Assets 56,313,885
LIABILITIES:
Payable for Securities Purchased 3,992,103
Dividends Payable 267,807
Accrued Operating Expenses and Other Liabilities 46,323
-----------
Total Liabilities 4,306,233
-----------
NET ASSETS $52,007,652
===========
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $51,031,736
Undistributed Net Realized Gain 224,106
Net Unrealized Appreciation 751,810
-----------
Net Assets $52,007,652
===========
Capital Shares Outstanding (Unlimited Number Authorized) 4,702,330
NET ASSET VALUE PER SHARE $11.06
======
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Year Ended December 31, 1997
INCOME:
Interest $1,386,098
Dividends 18,638
----------
Total Income 1,404,736
EXPENSES:
Investment Advisory Fees 51,698
Custodian Fees 7,177
Shareholder Servicing Costs 25,000
Reports to Shareholders 18,545
Federal and State Registration Fees 36,664
Other 16,305
----------
Total Expenses before Waivers and Absorptions 155,389
Voluntary Expense Waivers and Absorptions by Advisor (72,164)
----------
Expenses, Net 83,225
----------
NET INVESTMENT INCOME 1,321,511
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 771,346
Futures Contracts and Forward Foreign Currency Contracts (248)
----------
Net Realized Gain 771,098
Change in Unrealized Appreciation/Depreciation on:
Investments 723,651
Futures Contracts and Forward Foreign Currency Contracts 13,671
Foreign Currencies 14,488
----------
Net Change in Unrealized Appreciation/Depreciation 751,810
----------
NET GAIN 1,522,908
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,844,419
==========
See notes to financial statements.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
YEAR ENDED
DEC. 31, 1997
-------------
OPERATIONS:
Net Investment Income $ 1,321,511
Net Realized Gain 771,098
Change in Unrealized Appreciation/Depreciation 751,810
-----------
Increase in Net Assets Resulting from Operations 2,844,419
DISTRIBUTIONS:
From Net Investment Income (1,321,511)
From Net Realized Gains (546,992)
-----------
Total Distributions (1,868,503)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 66,565,110
Proceeds from Reinvestment of Dividends 1,576,599
Payment for Shares Redeemed (17,109,973)
-----------
Net Increase in Net Assets from Capital Share Transactions 51,031,736
-----------
TOTAL INCREASE IN NET ASSETS 52,007,652
NET ASSETS:
Beginning of Year --
-----------
End of Year $52,007,652
===========
TRANSACTIONS IN SHARES OF THE FUND:
Sold 6,116,637
Issued in Reinvestment of Dividends 143,923
Redeemed (1,558,230)
---------
Net Increase in Shares of the Fund 4,702,330
=========
See notes to financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1997
1. ORGANIZATION
The Strong Institutional Bond Fund commenced investment operations on
January 2, 1997, and is a diversified series of Strong Institutional Funds,
Inc., an open-end management investment company registered under the
Investment Company Act of 1940.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Security Valuation -- Securities of the Fund are valued through
valuations obtained by a commercial pricing service or the mean of the
bid and asked prices, when no last sales price is available. Securities
for which market quotations are not readily available are valued at fair
value as determined in good faith under consistently applied procedures
established by and under the general supervision of the Board of
Directors. Securities which are purchased within 60 days of their
stated maturity are valued at amortized cost, which approximates current
value.
The Fund owns certain investment securities which are restricted as to
resale. These securities are valued by the Fund after giving due
consideration to pertinent factors, including recent private sales,
market conditions and the issuer's financial performance. The Fund
generally bears the costs, if any, associated with the disposition of
restricted securities. Aggregate cost and fair value of these
restricted securities at December 31, 1997 were $6,377,607 and
$6,485,124, respectively, representing 12.5% of the net assets of the
Fund. Of these securities, which are restricted as to resale, 84.5% are
eligible for resale pursuant to Rule 144A under the Securities Act of
1933 and also have been determined to be liquid by the Advisor based
upon guidelines established by the Fund's Board of Directors.
(B) Federal Income and Excise Taxes and Distributions to Shareholders -- It
is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders
in a manner which results in no tax cost to the Fund. Accordingly, no
federal income or excise tax provision is required.
The character of distributions made during the year from net investment
income or net realized gains may differ from the characterization for
federal income tax purposes due to differences in the recognition of
income and expense items for financial statement and tax purposes.
Where appropriate, reclassifications between net asset accounts are made
for such differences that are permanent in nature.
(C) Realized Gains and Losses on Investment Transactions -- Gains or losses
realized on investment transactions are determined by comparing the
identified cost of the security lot sold with the net sales proceeds.
(D) Futures -- Upon entering into a futures contract, the Fund pledges to
the broker cash or other investments equal to the minimum "initial
margin" requirements of the exchange. The Fund also receives from or
pays to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin" and are recorded as unrealized gains or losses. When
the futures contract is closed, a realized gain or loss is recorded
equal to the difference between the value of the contract at the time it
was opened and the value at the time it was closed.
(E) Options -- The Fund may write put or call options (none were written
during 1997). Premiums received by the Fund upon writing put or call
options are recorded as an asset with a corresponding liability which is
subsequently adjusted to the current market value of the option. When
an option expires, is exercised, or is closed, the Fund realizes a gain
or loss, and the liability is eliminated. The Fund continues to bear
the risk of adverse movements in the price of the underlying asset
during the period of the option, although any potential loss during the
period would be reduced by the amount of the option premium received.
(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities initially expressed in foreign currencies are converted
to U.S. dollars based upon current exchange rates. Purchases and sales
of foreign investment securities and income are converted to U.S.
dollars based upon currency exchange rates prevailing on the respective
dates of such transactions. The effect of changes in foreign exchange
rates on realized and unrealized security gains or losses is reflected
as a component of such gains or losses.
(G) Forward Foreign Currency Exchange Contracts -- Forward foreign currency
exchange contracts are valued at the forward rate and are marked-to-
market daily. The change in market value is recorded as an unrealized
gain or loss. When the contract is closed, the Fund records an exchange
gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
December 31, 1997
(H) Additional Investment Risks -- The Fund may invest in and utilize
derivative instruments including options, futures and other instruments
with similar characteristics to the extent that they are consistent with
the Fund's investment objectives and limitations. The Fund intends to
use such derivative instruments primarily to hedge or protect from
adverse movements in securities prices or interest rates. The use of
these instruments may involve risks such as the possibility of illiquid
markets or imperfect correlation between the value of the instruments
and the underlying securities, or that the counterparty will fail to
perform its obligations.
Foreign denominated assets and forward currency contracts may involve
greater risks than domestic transactions, including currency, political
and economic, regulatory and market risks.
(I) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
(J) Other -- Investment security transactions are recorded on the trade
date. Dividend income and distributions to shareholders are recorded on
the ex-dividend date. Interest income is recorded on the accrual basis
and includes amortization of premiums and discounts.
3. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and directors of the Fund are affiliated, provides investment advisory
services and shareholder recordkeeping and related services to the Fund.
The investment advisory fee, which is established by terms of the Advisory
Agreement, is based on an annualized rate of .25% of the average daily net
assets of the Fund. Advisory fees are subject to reimbursement by the
Advisor if the Fund's operating expenses exceed certain levels. Shareholder
recordkeeping and related service fees are based on an annualized rate of
.02% of the Fund's average daily net asset value with a minimum annual fee
of $25,000. In addition, the Advisor is compensated for certain other
services related to costs incurred for reports to shareholders.
The Fund may invest cash reserves in money market funds sponsored and
managed by the Advisor, subject to certain limitations. The terms of such
transactions are identical to those of non-related entities except that, to
avoid duplicate investment advisory fees, advisory fees of the Fund are
reduced by an amount equal to advisory fees paid to the Advisor under its
investment advisory agreement with the money market funds.
The amount payable to the Advisor at December 31, 1997 and unaffiliated
directors' fees, excluding the effect of waivers and reimbursements, for the
year then ended were $45,885 and $1,500, respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of U.S. Government and Agency securities
for the year ended December 31, 1997 were $64,846,573 and $40,216,526,
respectively. The aggregate purchases and sales of other long-term
securities for the year ended December 31, 1997 were $58,090,509 and
$31,277,140, respectively.
5. INCOME TAX INFORMATION
At December 31, 1997, the cost of investments in securities for federal
income tax purposes was $54,878,560. Net unrealized appreciation of
securities was $719,624, consisting of gross unrealized appreciation and
depreciation of $782,400 and $62,776, respectively.
10
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED PER-SHARE DATA (A)
--------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- ------------------------------------
Net Asset Net Realized Total Net Asset
Value, Net and Unrealized from From Net From Net Value,
Beginning Investment Gains on Investment Investment Realized Total End of
Year Ended of Period Income Investments Operations Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, 1997 $10.00 $0.66 $1.18 $1.84 ($0.66) ($0.12) ($0.78) $11.06
</TABLE>
<TABLE>
<CAPTION>
RATIOS AND SUPPLEMENTAL DATA
---------------------------------------------------------------------------
Net Ratio of Expenses Ratio of Net
Assets, Ratio of to Average Net Investment
End of Expenses Assets Without Income Portfolio
Total Period (In to Average Voluntary Waivers to Average Turnover
Year Ended Return Millions) Net Assets and Absorptions Net Assets Rate
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1997 +18.9% $52 0.4% 0.7% 6.3% 358.6%
(a) Information presented relates to a share of capital stock of the Fund outstanding for the entire period.
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Institutional Bond Fund
We have audited the accompanying statement of assets and liabilities of Strong
Institutional Bond Fund (one of the portfolios constituting the Strong
Institutional Funds, Inc.), including the schedule of investments in
securities, as of December 31, 1997, and the related statement of operations,
the statement of changes in net assets, and the financial highlights for the
year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1997 by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Strong Institutional Bond Fund as of December 31, 1997, the results of its
operations, the changes in its net assets, and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 4, 1998
12
<PAGE>
DIRECTORS
Richard S. Strong
Willie D. Davis
Stanley Kritzik
Marvin E. Nevins
William F. Vogt
OFFICERS
Richard S. Strong, Chairman of the Board
Mary F. Hoppa, Vice President
Thomas P. Lemke, Vice President
John S. Weitzer, Vice President
Stephen J. Shenkenberg, Vice President and Secretary
John A. Flanagan, Treasurer
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
AUDITOR
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
<PAGE>
For a prospectus containing more complete information, including management
fees and expenses, please call 1-800-733-CASH (2274).
Please read it carefully before investing or sending money. This report does
not constitute an offer for the sale of securities.
Strong Funds are offered for sale by prospectus only.
[STRONG FUNDS LOGO]
STRONG CAPITAL MANAGEMENT, INC.
P.O. Box 782 * Milwaukee, Wisconsin 53201 7030B98
