[STRONG LOGO]
THE STRONG
INSTITUTIONAL BOND FUND
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ANNUAL REPORT o FEBRUARY 28, 1999
[PICTURE OF STRONG FUNDS BUILDING]
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THE STRONG
INSTITUTIONAL
BOND FUND
----------------------------------------
ANNUAL REPORT o FEBRUARY 28, 1999
Table of Contents
Investment Review
The Strong Institutional Bond Fund ....................................2
Financial Information
Schedule of Investments in Securities .................................4
Statement of Assets and Liabilities ...................................7
Statement of Operations ...............................................8
Statements of Changes in Net Assets ...................................9
Notes to Financial Statements ........................................10
Financial Highlights .....................................................12
Report of Independent Accountants ........................................12
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THE STRONG INSTITUTIONAL BOND FUND
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FUND
HIGHLIGHTS
o The Strong Institutional Bond Fund returned 7.91% for the 12 months ended
February 28, 1999.
o The Fund's share price experienced only moderate fluctuation despite
extremely volatile interest rates around the world throughout the year and
significantly wider credit spreads in the second half of the year.
o We successfully dampened share price fluctuation by managing the Fund's
interest rate exposure, avoiding poor-performing corporate and government
securities, and avoiding exposure to Japan and the emerging markets.
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AVERAGE ANNUAL
TOTAL RETURN
As of 2-28-99
1-year 7.91%
Since Inception 13.25%
(on 12-31-96)
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PORTFOLIO
STATISTICS
As of 2-26-99
30-day annualized yield(1) 5.93%
Average quality rating(2) AA
PERSPECTIVES
FROM THE MANAGERS
/s/ Bradley C. Tank /s/ Jeffrey A. Koch /s/ Shirish T. Malekar
Bradley C. Tank Jeffrey A. Koch Shirish T. Malekar
Portfolio Co-manager Portfolio Co-manager Portfolio Co-manager
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The last twelve to eighteen months have seen a number of financial, economic and
political crises in many parts of the world. The financial markets vacillated
between worries about overheating economies in the developed world in early 1998
to fears of global recession after the Russian debt default in August. High
profile hedge fund liquidations added to the financial market instability,
causing extreme valuation discrepancies in many sectors of the market.
Central bankers around the world cut interest rates to provide liquidity to
global capital markets. The interest rate cuts also signaled that the central
bankers were worried about the potential threat to the global financial markets.
U.S. and Japanese interest rates went down only to return to higher levels,
whereas European interest rates went down and stayed down in response to the
slower economic growth throughout the region. The U.S. Federal Reserve took
leadership, cutting interest rates by 0.75% in the last quarter of 1998. The
eleven European countries joining the "European Union" cut interest rates in a
coordinated action to prepare the region for the union and to address the global
crisis. Meanwhile, the Japanese government and central bank are desperately
trying to revive their moribund economy through interest rate and fiscal
stimulation.
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THE FUND'S SHARE
PRICE EXPERIENCED
ONLY MODERATE
FLUCTUATION DESPITE
EXTREMELY VOLATILE
INTEREST RATES AROUND
THE WORLD...
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1 Yields vary and are annualized. 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. Note that the amount
distributed by a Fund during any given 30-day period may be more or less
than the stated yield.
2 For purposes of this average rating, the Fund's short-term debt obligations
have been assigned a long-term rating by the Advisor.
2
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In the emerging countries, the risk premium, or credit spread, versus U.S.
Treasury securities increased dramatically from 4.40% at the beginning of the
year to over 17.00% in the middle of the crisis in October. This risk premium
narrowed to about 13.00% after the global interest rate cuts.
Continued strong economic growth in the U.S. has improved confidence in the
corporate bond markets, and both investment grade and high-yield bonds have
performed relatively well over the last three months. We expect this performance
to continue as valuations are still at attractive levels.
The Federal Reserve will likely keep interest rates steady for the foreseeable
future as concerns about above-trend U.S. economic growth are offset by slow
economic growth abroad and the still fragile recovery in global financial
markets. As a result, we expect the domestic economy to perform relatively well
over the next year with moderate economic growth and continued low inflation.
Thank you for your continued investment in the Strong Institutional Bond Fund.
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 12-31-96 to 2-28-99
THE STRONG Lipper Intermediate
INSTITUTIONAL Blended Investment Grade
BOND FUND Bond Index* Debt Funds Index*
12-96 10,000 10,000 10,000
6-97 11,032 10,374 10,294
12-97 11,886 11,033 10,879
6-98 12,451 11,501 11,289
12-98 13,174 11,929 11,735
2-99 13,095 11,867 11,597
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.
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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 three- to six-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 Inc.
YOUR FUND'S
APPROACH
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 PRIMARILY IN INVESTMENT-GRADE DEBT OBLIGATIONS AND ITS AVERAGE
PORTFOLIO DURATION WILL NORMALLY VARY BETWEEN THREE AND SIX YEARS. THE FUND MAY
INVEST UP TO 20% OF ITS NET ASSETS IN NON-INVESTMENT-GRADE DEBT OBLIGATIONS AND
OTHER HIGH-YIELD SECURITIES. THE FUND MAY ALSO INVEST UP TO 20% OF ITS NET
ASSETS IN SECURITIES DENOMINATED IN FOREIGN CURRENCIES.
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MARKET
HIGHLIGHTS
o The Federal Reserve lowered short-term interest rates three times in the
Fall of 1998. Longer-term U.S. interest rates nearly made a round trip from
5.5% on the 10-year note to a low of 4.2% in October, and then back up to
5.3% in February of 1999.
o Credit spreads were severely affected from the global credit crunch
emanating from the Asian crisis and the Russian debt default. In the U.S.,
both investment grade and high yield spreads reached levels not seen since
the 1990 recession.
o A global flight to quality into U.S. and German bonds was slowly unwound
over the last three months.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES February 28, 1999
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================================================================================
STRONG INSTITUTIONAL BOND FUND
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Shares or
Principal Value
Amount (Note 2)
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CORPORATE BONDS 32.4%
Allied Waste North America, Inc. Senior Notes,
7.875%, Due 1/01/09 $1,000,000 $1,012,500
APCOA/Standard Parking, Inc. Senior
Subordinated Notes, 9.25%, Due 3/15/08 750,000 712,500
ARA Services, Inc. Guaranteed Notes, 10.625%,
Due 8/01/00 270,000 285,032
Atlas Air, Inc. Senior Notes, 10.75%, Due 8/01/05 275,000 292,875
Bay View Capital Corporation Subordinated
Notes, 9.125%, Due 8/15/07 500,000 490,000
Capstar Radio Broadcasting Partners, Inc. Senior
Subordinated Notes, 9.25%, Due 7/01/07 500,000 531,250
Cendant Corporation Notes, 7.75%, Due 12/01/03 3,000,000 3,063,000
Cleveland Electric/Toledo Edison Notes, Series B,
7.67%, Due 7/01/04 1,500,000 1,575,536
DTE Capital Corporation Notes, 6.17%, Due 6/15/03
(Acquired 6/16/98; Cost $845,000)(b) 845,000 846,758
Fox/Liberty Networks LLC Senior Notes, 8.875%,
Due 8/15/07 500,000 523,125
Fresenius Medical Care Capital Trust II Guaranteed
Preferred Securities, 7.875%, Due 2/01/08 500,000 482,500
Global Crossing Holding, Ltd. Senior Notes, 9.625%,
Due 5/15/08 500,000 525,000
Graham Packaging Holdings Company/GPC Capital
Corporation II Senior Discount Notes, Zero %,
Due 1/15/09 (Rate Reset Effective 1/15/03) 1,000,000 705,000
Hermes Europe Railtel BV Senior Notes, 10.375%,
Due 1/15/09 (Acquired 1/08/99; Cost $786,563)(b) 750,000 800,625
Imax Corporation Senior Yankee Notes, 7.875%,
Due 12/01/05 600,000 591,000
Intermedia Communications, Inc. Senior Notes,
8.60%, Due 6/01/08 500,000 476,250
Israel Electric Corporation, Ltd., 7.75%, Due 3/01/09
(Acquired 2/25/99; Cost $998,970)(b) 1,000,000 1,004,200
Jordan Telecommunication Products, Inc. Senior
Subordinated Discount Notes, Zero %, Due 8/01/07
(Rate Reset Effective 8/01/00) 385,000 309,925
LCI International, Inc. Senior Notes, 7.25%,
Due 6/15/07 820,000 836,962
Liberty Mutual Insurance Company Surplus Notes,
8.20%, Due 5/04/07 (Acquired 2/23/99;
Cost $1,036,961) (b) 940,000 1,014,351
MCI Worldcom, Inc. Notes, 6.125%, Due 4/15/12
(Remarketing Date 4/15/02) 1,235,000 1,233,930
Metronet Communications Corporation Senior Notes,
12.00%, Due 8/15/07 350,000 397,250
Mohegan Tribal Gaming Authority Senior Notes,
8.125%, Due 1/01/06 (Acquired 2/24/99;
Cost $1,000,000) (b) 1,000,000 1,008,750
National Wine & Spirits, Inc. Senior Notes, 10.125%,
Due 1/15/09 (Acquired 1/20/99; Cost $754,313) (b) 750,000 774,375
Nextlink Communications LLC Senior Notes, 12.50%,
Due 4/15/06 275,000 309,031
Niagara Mohawk Power Corporation Senior Notes,
Series G, 7.75%, Due 10/01/08 1,000,000 1,076,855
NTL, Inc. Senior Notes, 11.50%, Due 10/01/08
(Acquired 10/26/98; Cost $500,000) (b) 500,000 565,000
Pepsi Bottling Holdings, Inc. Notes, 5.625%,
Due 2/17/09 (Acquired 2/03/99; Cost $940,908) (b) 945,000 910,801
Philip Morris Companies, Inc. Notes, 6.15%,
Due 3/15/10 (Putable at $100 and Rate Reset
Effective 3/15/00) 1,330,000 1,336,570
Pogo Producing Company Senior Subordinated
Notes, 10.375%, Due 2/15/09 (Acquired 1/12/99;
Cost $488,500) (b) 500,000 497,500
Protection One Alarm Monitoring, Inc. Senior
Subordinated Notes, 8.125%, Due 1/15/09
(Acquired 12/16/98; Cost $1,000,000) (b) 1,000,000 1,017,500
Providian National Bank Senior Notes, 6.25%,
Due 5/07/01 1,020,000 1,010,861
Qwest Communications International, Inc.
Senior Notes, 7.25%, Due 11/01/08
(Acquired 12/07/98; Cost $1,017,500) (b) 1,000,000 1,020,000
Riggs Capital Trust Preferred Securities, Series A,
8.625%, Due 12/31/26 (Acquired 8/29/97;
Cost $181,211) (b) 180,000 183,494
Riggs Capital Trust II Preferred Securities, Series B,
8.875%, Due 3/15/27 95,000 98,873
Riggs Capital Trust II Preferred Securities, Series C,
8.875%, Due 3/15/27 (Acquired 5/06/98;
Cost $751,027) (b) 685,000 712,929
Saks, Inc. Notes, 7.25%, Due 12/01/04 855,000 859,506
Saks, Inc. Notes, 7.375%, Due 2/15/19 1,500,000 1,483,259
Scotts Company Senior Subordinated Notes, 8.625%,
Due 1/15/09 (Acquired 1/14/99; Cost $760,731) (b) 750,000 776,250
SFX Entertainment, Inc. Senior Subordinated Notes,
9.125%, Due 12/01/08 (Acquired 1/08/99;
Cost $756,563) (b) 750,000 774,375
Simon Property Group LP Notes, 6.75%, Due 2/09/04 560,000 552,131
Starwood Hotels & Resorts Worldwide, Inc., 6.75%,
Due 11/15/05 1,000,000 899,316
Station Casinos, Inc. Senior Subordinated Notes,
9.75%, Due 4/15/07 750,000 795,938
Stop & Shop Companies, Inc. Senior Subordinated
Notes, 9.75%, Due 2/01/02 375,000 409,562
SunAmerica, Inc. Debentures, 5.60%, Due 7/31/97 1,100,000 907,276
SunTrust Capital III Floating Rate Notes, 5.8706%,
Due 3/15/28 2,125,000 2,077,188
Telemundo Holdings, Inc. Senior Discount Notes,
Zero %, Due 8/15/08 (Rate Reset Effective 8/15/03)
(Acquired 12/07/98; Cost $515,250) (b) 900,000 526,500
Transwestern Publishing Company LP/TWP
Capital Corporation Senior Subordinated Notes,
9.625%, Due 11/15/07 850,000 896,750
Tricon Global Restaurants, Inc. Senior Notes, 7.45%,
Due 5/15/05 750,000 771,099
United Air Lines Pass-Thru Trust Certificates,
Series 1992-A2, 9.35%, Due 4/07/16 575,000 650,713
United States Filter Corporation Variable Rate
Remarketable or Redeemable Securities, 9.625%,
Due 5/15/11 (Remarketing Date 5/15/01) 1,000,000 982,138
US Air, Inc. Senior Notes, 9.625%, Due 2/01/01 500,000 513,848
Vintage Petroleum, Inc. Senior Subordinated Notes,
9.75%, Due 6/30/09 (Acquired 1/20/99;
Cost $750,000) (b) 750,000 723,750
Waste Management, Inc. Senior Notes, 6.125%,
Due 7/15/01 805,000 803,861
WorldCom, Inc. Senior Notes, 6.40%, Due 8/15/05 55,000 55,851
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Total Corporate Bonds (Cost $43,272,976) 43,691,419
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CONVERTIBLE BONDS 1.9%
Bell Atlantic Financial Services, Inc. Senior
Convertible Notes, 5.75%, Due 4/01/03
(Acquired 2/12/98; Cost $2,028,750) (b) 2,000,000 2,135,000
Corporate Express, Inc. Convertible Subordinated
Notes, 4.50%, Due 7/01/00 500,000 442,500
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Total Convertible Bonds (Cost $2,481,869) 2,577,500
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4
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================================================================================
STRONG INSTITUTIONAL BOND FUND (continued)
================================================================================
Shares or
Principal Value
Amount (Note 2)
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NON-AGENCY MORTGAGE & ASSET BACKED
SECURITIES 13.7%
Bear Stearns Mortgage Securities, Inc. Mortgage
Pass-Thru Certificates, Series 1995-1, Class 2-P,
Principal Only, Due 7/25/10 $ 215,204 $ 182,976
Bear Stearns Commercial Mortgage Securities, Inc.
Variable Rate Mortgage Pass-Thru Certificates,
Series 1999-C1, Class A-2, 6.02%, Due 2/14/09 2,215,000 2,140,244
CMC Securities Corporation III Collateralized
Mortgage Obligation, Series 1998-2, Class B-3,
6.75%, Due 11/25/28 1,995,861 1,805,426
Deutsche Mortgage and Asset Receiving
Corporation Commercial Mortgage Pass-Thru
Certificates, Series 1998-C1, Class A2, 6.538%,
Due 2/15/08 1,475,000 1,472,426
DLJ Commercial Mortgage Corporation Commercial
Mortgage Pass-Thru Certificates, Series 1998-CF1,
Class A1B, 6.41%, Due 2/15/08 1,725,000 1,712,640
Headlands Mortgage Securities, Inc. Mortgage
Pass-Thru Certificates, Series 1975, Class AII1,
6.75%, Due 11/25/27 820,114 826,720
Nomura Asset Securities Corporation, Series 1994-4B,
Class 4PO, Principal Only, Due 9/25/24 95,723 74,783
PNC Mortgage Securities Corporation Mortgage
Pass-Thru Certificates, Series 1998-1, Class 4B4,
6.75%, Due 3/25/13 (Acquired 10/23/98;
Cost $287,336) (b) 360,933 283,105
PNC Mortgage Securities Corporation Mortgage
Pass-Thru Certificates, Series 1998-11, Class 2B4,
6.25%, Due 11/25/13 (Acquired 10/23/98;
Cost $279,306) (b) 370,248 279,537
RTC Floating Rate Bond, Series 1992-C8, Class A2,
6.288%, Due 12/25/23 1,462,575 1,465,770
RTC Variable Rate Mortgage Pass-Thru Securities,
Inc., Series 1991-M4, Class A-1, 6.155%,
Due 2/25/20 1,749,300 1,750,166
Rural Housing Trust 1987-1 Senior Mortgage
Pass-Thru Certificates, Series 1, Class D, 6.33%,
Due 4/01/26 1,359,772 1,334,256
Salomon Brothers Mortgage Securities VII, Inc.
Mortgage Pass-Thru Certificates, Series 1996-LB2,
Class A-5, 7.25%, Due 10/25/26 2,675,000 2,688,121
Structured Asset Mortgage Investments, Inc.
Mortgage Pass-Thru Certificates, Series 1998-12,
Class B-3, 6.75%, Due 2/25/29 1,112,123 1,003,953
The Equitable Life Assurance Society of the
United States Floating Rate Notes, Series 174,
Class A2, 5.296%, Due 5/15/03 (Acquired 1/29/99;
Cost $1,491,914) (b) 1,500,000 1,489,695
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Total Non-Agency Mortgage & Asset Backed Securities
Cost $18,679,540) 18,509,818
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MUNICIPAL BONDS 0.8%
New Jersey EDA State Pension Funding Revenue,
7.425%, Due 2/15/29 915,000 1,011,124
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Total Municipal Bonds (Cost $1,006,098) 1,011,124
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UNITED STATES GOVERNMENT & AGENCY
ISSUES 37.4%
FHLMC Participation Certificates, 6.25%,
Due 6/15/12 thru 9/15/22 1,850,000 1,816,916
FHLMC Variable Rate Participation Certificates,
8.109%, Due 8/01/25 1,080,741 1,112,279
FNMA Guaranteed Real Estate Mortgage
Investment Conduit Pass-Thru Certificates:
6.25%, Due 1/25/08 2,435,000 2,438,324
8.00%, Due 4/01/17 thru 9/01/23 3,508,944 3,655,527
8.50%, Due 8/01/12 172,233 182,375
9.00%, Due 12/01/16 thru 8/01/17 2,919,023 3,126,568
FNMA Guaranteed Real Estate Mortgage
Investment Conduit Adjustable Rate Mortgage
Certificates, Pool #92117, 7.206%, Due 6/01/18 174,686 180,034
United States Treasury Bonds:
5.25%, Due 2/15/29 945,000 902,475
5.50%, Due 8/15/28 5,035,000 4,880,803
6.125%, Due 11/15/27 2,950,000 3,097,500
United States Treasury Notes:
4.00%, Due 10/31/00 7,500,000 7,364,063
4.75%, Due 11/15/08 1,990,000 1,911,023
5.375%, Due 6/30/03 800,000 802,500
5.50%, Due 4/15/00 50,000 50,250
5.50%, Due 3/31/03 595,000 599,463
5.75%, Due 8/15/03 5,110,000 5,197,831
6.00%, Due 7/31/02 5,750,000 5,882,969
6.50%, Due 5/15/05 390,000 413,035
7.00%, Due 7/15/06 3,550,000 3,887,250
7.50%, Due 2/15/05 380,000 420,731
7.875%, Due 11/15/04 2,195,000 2,461,831
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Total United States Government & Agency Issues
Cost $51,252,990) 50,383,747
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FOREIGN GOVERNMENT ISSUES 6.1%
Australian Government Bonds, 8.75%,
Due 8/15/08 2,565,000 AUD 1,955,991
Government of United Kingdom Treasury
Notes, 7.25%, Due 12/07/07 2,500,000 GBP 4,734,702
Government of New Zealand Notes, 10.00%,
Due 3/15/02 2,500,000 NZD 1,471,632
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Total Foreign Government Issues (Cost $7,992,614) 8,162,325
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PREFERRED STOCKS 3.4%
Centaur Funding Corporation Series B
(Acquired 12/09/98; Cost $1,385,000) (b) 1,385 1,528,694
Indosuez Holdings SCA Sponsored ADR 10.375%
Representing 1/10 Series A (Acquired 2/05/98;
Cost $1,981,000) (b) 70,000 1,907,500
Superior Healthcare Management Series A 7.75%
(Acquired 12/30/97; Cost $1,006,460) (b) 1,000 1,066,580
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Total Preferred Stocks (Cost $4,372,460) 4,502,774
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COMMON STOCKS 0.0%
Optel, Inc. Non-Voting (Acquired 4/14/98;
Cost $20,000) (b) (e) 500 15,000
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Total Common Stocks (Cost $20,000) 15,000
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WARRANTS 0.0%
MetroNet Communications Corporation, Expire 8/15/07 350 14,000
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Total Warrants (Cost $4) 14,000
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5
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) February 28, 1999
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================================================================================
STRONG INSTITUTIONAL BOND FUND (continued)
================================================================================
Shares or
Principal Value
Amount (Note 2)
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SHORT-TERM INVESTMENTS (a) 4.0%
Commercial Paper 0.2%
Interest Bearing, Due Upon Demand
General Mills, Inc., 4.54% $ 25,400 $ 25,400
Pitney Bowes Credit Corporation, 4.51% 292,800 292,800
-----------
318,200
Corporate Bonds 0.9%
TCI Communications, Inc. Senior Notes, 6.375%,
Due 9/15/99 1,220,000 1,228,489
Repurchase Agreements 2.8%
ABN-AMRO Tri-Party (Dated 2/26/99), 4.75%, Due 3/01/99
(Repurchase proceeds $3,801,504); Collateralized by:
Tennessee Valley Authority Strips and Notes, SLMA Notes,
FNMA Notes and Principal Strips, FHLMC Home
Loan Mortgage Bank Bonds, and Federal Farm
Credit Bank Notes (d) 3,800,000 3,800,000
United States Government Issues 0.1%
United States Treasury Bills, Due 4/29/99 thru
5/13/99 (c) 125,000 124,007
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Total Short-Term Investments (Cost $5,461,689) 5,470,696
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Total Investments in Securities (Cost $134,540,240) 99.7% 134,338,403
Other Assets and Liabilities, Net 0.3% 377,313
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NET ASSETS 100.0% $134,715,716
================================================================================
FUTURES
- --------------------------------------------------------------------------------
Underlying Unrealized
Expiration Face Amount Appreciation
Date at Value (Depreciation)
- --------------------------------------------------------------------------------
Purchased:
39 U.S. Treasury Bonds 6/99 $4,717,781 ($61,937)
Sold:
44 Five Year U.S. Treasury Notes 6/99 (4,882,625) 41,615
54 Ten Year U.S. Treasury Notes 6/99 (6,196,500) 54,280
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FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- --------------------------------------------------------------------------------
Unrealized
Currency Settlement Value Appreciation
Bought/Sold Date in USD (Depreciation)
- --------------------------------------------------------------------------------
Sold:
3,290,000 AUD 3/29/99 $2,035,205 ($ 12,908)
3,015,000 GBP 3/29/99 4,831,538 209,934
2,750,000 NZD 3/29/99 1,436,884 (79,484)
CURRENCY ABBREVIATIONS
- --------------------------------------------------------------------------------
AUD Australian Dollar
GBP British Pound
NZD New Zealand Dollar
USD United States Dollar
LEGEND
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(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Restricted security.
(c) All or a portion of security pledged to cover margin requirements for
futures contracts.
(d) See Note 2(I) of Notes to Financial Statements.
(e) Non-income producing security.
Percentages are stated as a percent of net assets.
See Notes to Financial Statements.
6
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------
February 28, 1999
<CAPTION>
Strong Institutional
Bond Fund
--------------------
ASSETS:
<S> <C>
Investments in Securities, at Value (Cost of $134,540,240) $134,338,403
Receivable for Securities and Forward Foreign Currency Contracts Sold 2,025,108
Receivable from Fund Shares Sold 119,090
Interest Receivable 1,438,626
Other Assets 64,269
------------
Total Assets 137,985,496
LIABILITIES:
Payable for Securities Purchased 2,419,398
Payable for Fund Shares Redeemed 1,485
Dividends Payable 801,446
Accrued Operating Expenses and Other Liabilities 47,451
------------
Total Liabilities 3,269,780
------------
NET ASSETS $134,715,716
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $134,226,087
Undistributed Net Investment Income 31,622
Undistributed Net Realized Gain 511,301
Net Unrealized Depreciation (53,294)
------------
Net Assets $134,715,716
============
Capital Shares Outstanding (Unlimited Number Authorized) 12,119,230
NET ASSET VALUE PER SHARE $11.12
======
See Notes to Financial Statements.
7
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended February 28, 1999
Strong Institutional
Bond Fund
--------------------
INCOME:
Interest Income $5,178,658
Dividend Income 271,825
----------
TOTAL INCOME 5,450,483
EXPENSES:
Investment Advisory Fees 213,238
Custodian Fees 25,151
Shareholder Servicing Costs 25,462
Federal and State Registration Fees 23,905
Other 26,913
----------
Total Expenses 314,669
----------
NET INVESTMENT INCOME 5,135,814
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 1,792,256
Futures Contracts and Forward Foreign Currency Contracts (252,303)
Foreign Currencies 16,170
----------
Net Realized Gain 1,556,123
Change in Unrealized Appreciation/Depreciation on:
Investments (984,583)
Futures Contracts and Forward Foreign Currency Contracts 164,291
Foreign Currencies (4,372)
----------
Net Change in Unrealized Appreciation/Depreciation (824,664)
----------
NET GAIN ON INVESTMENTS 731,459
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,867,273
==========
See Notes to Financial Statements.
8
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Strong Institutional Bond Fund
----------------------------------------------
Year Ended Year Ended Year Ended
Feb. 28, 1999 Feb. 28, 1998 Dec. 31, 1997
------------- ------------- -------------
(Note 1)
OPERATIONS:
<S> <C> <C> <C>
Net Investment Income $ 5,135,814 $ 547,035 $ 1,321,511
Net Realized Gain 1,556,123 528,611 771,098
Net Change in Unrealized Appreciation/Depreciation (824,664) 19,560 751,810
------------ ----------- -----------
Net Increase in Net Assets Resulting from Operations 5,867,273 1,095,206 2,844,419
DISTRIBUTIONS:
From Net Investment Income (5,166,846) (535,167) (1,321,511)
In Excess of Net Investment Income -- (11,433) --
From Net Realized Gains (1,721,649) -- (546,992)
------------ ----------- -----------
Total Distributions (6,888,495) (546,600) (1,868,503)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 86,338,180 3,994,776 66,565,110
Proceeds from Reinvestment of Distributions 6,064,592 536,657 1,576,599
Payment for Shares Redeemed (13,230,237) (523,288) (17,109,973)
------------ ----------- -----------
Net Increase in Net Assets from Capital Share Transactions 79,172,535 4,008,145 51,031,736
------------ ----------- -----------
TOTAL INCREASE IN NET ASSETS 78,151,313 4,556,751 52,007,652
NET ASSETS:
Beginning of Year 56,564,403 52,007,652 --
------------ ----------- -----------
End of Year $134,715,716 $56,564,403 $52,007,652
============ =========== ===========
TRANSACTIONS IN SHARES OF THE FUND:
Sold 7,695,552 357,661 6,116,637
Issued in Reinvestment of Distributions 542,552 48,261 143,923
Redeemed (1,180,209) (46,916) (1,558,230)
--------- ------- ---------
Net Increase in Shares of the Fund 7,057,895 359,006 4,702,330
========= ======= =========
See Notes to Financial Statements.
9
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
February 28, 1999
1. Organization
The Strong Institutional Bond Fund (the "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. During 1997, the Board
of Directors of the Fund approved changing the Fund's fiscal year-end from
December 31 to February 28.
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
fair value, whereby a portfolio security is valued at its cost
initially, and thereafter valued to reflect a constant amortization to
maturity of any discount or premium.
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 held at February 28, 1999 was $21,563,263 and
$21,862,269, respectively, representing 16.2% of the net assets of the
Fund. Of these securities, which are restricted as to resale, 90.5% is
either Section 4(2) commercial paper or is 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 --
The Fund intends 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 income and 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.
The Fund generally pays dividends from net investment income monthly
and distributes any net capital gains that it realizes annually.
Dividends are declared on each day net asset value is calculated,
except for bank holidays.
(C) Realized Gains and Losses on Investment Transactions -- Investment
security transactions are recorded on the trade date. 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) Certain Investment Risks -- The Fund may 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 against
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.
To the extent the Fund has foreign denominated assets or forward
currency contracts, these investments may involve greater risks than
domestic transactions, including currency, political and economic,
regulatory and market risks.
(E) 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. Additional securities held by
the Fund may be designated as collateral on open futures contracts.
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.
(F) Options -- The Fund may write put or call options (none were written
during the period). 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.
10
<PAGE>
- --------------------------------------------------------------------------------
(G) 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.
(H) 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.
(I) Repurchase Agreements -- The Fund may enter into repurchase agreements
with institutions that the Fund's investment advisor, Strong Capital
Management, Inc. ("the Advisor"), has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each
repurchase agreement is recorded at cost. The Fund requires that the
collateral, represented by securities (primarily U.S. Government
securities), in a repurchase transaction be maintained in a segregated
account with a custodian bank in a manner sufficient to enable the
Fund to obtain those securities in the event of a default under the
repurchase agreement. On a daily basis, the Advisor monitors each
repurchase agreement to ensure the value of the collateral, including
accrued interest, is at least equal to the amounts owed to the Fund
under each repurchase agreement.
(J) 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 in these financial statements. Actual results could differ
from those estimates.
(K) Other -- 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
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 0.25% of the average daily net assets of the Fund.
Based on the terms of the Advisory Agreement, advisory fees and other
expenses will be waived or reimbursed by the Advisor if the Fund's
operating expenses exceed 2% of the average daily net assets of the Fund.
In addition, the Fund's Advisor may voluntarily waive or absorb certain
expenses at its discretion. Shareholder recordkeeping and related service
fees are based on an annualized rate of 0.02% of the Fund's average daily
net asset value with a minimum annual fee of $25,000. The Advisor is
compensated for certain other services related to costs incurred for
reports to shareholders.
The Fund may invest cash 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 February 28, 1999, shareholder
servicing and other expenses paid to Advisor and unaffiliated directors'
fees for the period then ended, excluding the effect of waivers and
reimbursements, were $34,610, $21,818, and $1,500, respectively.
4. Line of Credit
The Strong Funds have established a line of credit agreement ("LOC") with
certain financial institutions to be used for temporary or emergency
purposes, primarily for financing redemption payments. Combined borrowings
among all participating Strong Funds are subject to a $350 million cap on
the total line of credit. For an individual Fund, borrowings under the LOC
are limited to either the lesser of 15% of the market value of total assets
or any explicit borrowing limits in the Fund's prospectus. Borrowings under
the LOC bear interest based on prevailing market rates as defined in the
LOC. A commitment fee of .07% per annum is incurred on the unused portion
of the line of credit and is allocated to all participating Strong Funds.
At February 28, 1999, there were no borrowings by the Fund outstanding
under the LOC.
5. Investment Transactions
The aggregate purchases and sales of U.S. Government and Agency securities
for the year ended February 28, 1999 were $137,841,282 and $105,410,371,
respectively. The aggregate purchases and sales of other long-term
securities for the year ended February 28, 1999 were $185,988,269 and
$145,911,835, respectively.
6. Income Tax Information
At February 28, 1999, the cost of investments in securities for federal
income tax purposes was $134,722,105. Net unrealized depreciation of
securities was $383,702, consisting of gross unrealized appreciation and
depreciation of $1,290,566 and $1,674,268, respectively.
During the year ended February 28, 1999, the Fund paid capital gains
distributions (taxable as long-term capital gains at 20%) to shareholders
in the amount of $148,285 (unaudited).
For corporate shareholders in the Fund, the percentage of dividend income
distributed for the period ended February 28, 1999 which is designated as
qualifying for the dividends-received deduction is 1.3% (unaudited).
11
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
STRONG INSTITUTIONAL BOND FUND
- --------------------------------------------------------------------------------
Year Ended
---------------------------
Feb. 28, Feb. 28, Dec. 31,
Selected Per-Share Data(a) 1999 1998(b) 1997
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $11.18 $11.06 $10.00
Income From Investment Operations
Net Investment Income 0.67 0.11 0.66
Net Realized and Unrealized Gains on Investments 0.19 0.12 1.18
------------------------------------------------------------------------------
Total from Investment Operations 0.86 0.23 1.84
Less Distributions
From Net Investment Income (0.68) (0.11) (0.66)
In Excess of Net Investment Income -- 0.00(c) --
From Net Realized Gains (0.24) -- (0.12)
------------------------------------------------------------------------------
Total Distributions (0.92) (0.11) (0.78)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $11.12 $11.18 $11.06
================================================================================
Ratios and Supplemental Data
- --------------------------------------------------------------------------------
Total Return +7.9% +2.1% +18.9%
Net Assets, End of Period (In Thousands) $134,716 $56,564 $52,008
Ratio of Expenses to Average Net Assets 0.4% 0.4%* 0.4%
Ratio of Expenses to Average Net Assets
Without Voluntary Waivers and Absorptions 0.4% 0.4%* 0.7%
Ratio of Net Investment Income to Average Net Assets 6.0% 6.2%* 6.3%
Portfolio Turnover Rate 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) For the period from December 31, 1997 to February 28, 1998 (Note 1).
(c) Amount calculated is less than $0.01.
See Notes to Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors of the Strong Institutional Funds, Inc.
and the Shareholders of the Strong Institutional Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Strong Institutional Bond Fund (the
"Fund") (one of the portfolios constituting the Strong Institutional Funds,
Inc.) at February 28, 1999, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for the year
ended February 28, 1999, the period from January 1, 1998 to February 28, 1998,
and for the year ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities owned at February 28, 1999 by correspondence with the
custodians, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
April 7, 1999
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
Dana J. Russart, Treasurer
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
DISTRIBUTOR
Strong Investments, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
CUSTODIAN
Firstar Bank Milwaukee, N.A.
P.O. Box 701, Milwaukee, Wisconsin 53201
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
100 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 1-800-368-1030. 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.
[PICTURE OF TELEPHONE]
To order a free prospectus kit,
CALL 1-800-368-1030
To learn more about our funds,
discuss an existing account,
or conduct a transaction,
CALL 1-800-368-3863
-------------------
If you are a
Financial Professional,
CALL 1-800-368-1683
[PICTURE OF STRONG WEB SITE ON COMPUTER]
Strong On-line
www.strongfunds.com
[STRONG LOGO]
STRONG FUNDS
P.O. Box 2936 o Milwaukee, Wisconsin 53201
Strong Investments, Inc. 11144C99
