<PAGE> 1
THE STRONG
DISCOVERY FUND II
ANNUAL REPORT - DECEMBER 31, 1995
[PHOTO OF FAMILY]
DESIGNED TO SEEK CAPITAL GROWTH BY EMPHASIZING INVESTMENTS IN COMPANIES WITH
ATTRACTIVE GROWTH OPPORTUNITIES
[STRONG FUNDS LOGO]
Strong Funds
<PAGE> 2
THE STRONG
DISCOVERY FUND II
ANNUAL REPORT - DECEMBER 31, 1995
Table of Contents
<TABLE>
<S> <C>
INVESTMENT REVIEWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FINANCIAL INFORMATION
Schedule of Investments in Securities . . . . . . . . . . . . . . . . . . . . . 4
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Statement of Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . 8
Statement of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
<PAGE> 3
The Strong DISCOVERY Fund II
[Photo of Component Boards]
Top Ten Sectors
based on net assets as of 12-31-95
<TABLE>
<S> <C> <C>
1. Technology 29.8%
2. Financial 13.9%
3. Consumer Cyclical 10.9%
4. Healthcare 10.6%
5. Capital Equipment 6.8%
6. Retail 4.1%
7. Transportation 1.4%
8. Consumer Staple 1.1%
9. Energy 0.7%
10. Basic Material 0.5%
</TABLE>
Please see the Schedule of Investments in Securities for a complete listing of
the Fund's portfolio.
As I begin my thirtieth year in this business, I appreciate more than ever what
it takes to survive--and to thrive--as a money manager. My experience has taught
me to be like a fox...to work with the pack without blindly following the
herd...to bide my time, always ready to pounce and take advantage of the
extraordinary opportunity when it presents itself.
I believe there are extraordinary opportunities out there right now for
incisive, agile money managers. A number of great, young growth companies--in
America and abroad--are poised to break away from their competition.
It is our goal to break away with them, using their strength and momentum to
create rewards for our shareholders.
Since its inception on May 8, 1992 through December 31, 1995 the Strong
Discovery Fund II has provided investors with a cumulative total return of
70.01%, outpacing the S&P 500 Stock Index's return of 63.88% for the same time
period.
Market Summary
STOCKS. In 1995, two of the most influential factors that drive stock
prices--earnings and interest rates--came together to create a nearly perfect
environment for U.S. common stocks. The rally was a fairly steady one, with the
S&P hitting 88 new highs during the twelve months. Most small stocks, though
they lagged their larger brethren a bit, produced solid gains as well.
LONG BONDS. Moderate inflation and slow economic growth also helped to fuel a
robust rally in long-term bonds. The benchmark 30-year Treasury bond's yield
dropped to 5.95% by December 31 from 7.88% a year ago.
SHORT BONDS. Interest rates fell at the short end of the market, too. Although,
thanks primarily to the Federal Reserve's moderated monetary policy, they
dropped less than long rates did. After raising rates in February, the central
bank lowered its federal funds rate twice, in July and in December. The easing,
however, totaled just 50 basis points (0.50%) for the year, leaving the yield
curve--the spread between short-and long-term rates--fairly flat.
Overall, 1995 was an excellent year for most investments, and we're proud to be
able to include the Strong Discovery Fund II among that group. By balancing
the Fund's holdings among a mix of resurgent, blue-chip companies and smaller,
rapidly growing companies, we were able to create a total return of 35.26% for
the year.
Strategy Review
STEADFAST COMMITMENT TO STOCKS. Throughout the year, we maintained a bullish
exposure to U.S. common stocks. Three key factors led us to hold our course:
1. two years of robust corporate earnings growth,
2. the poor performance of the market in 1994, and
3. our view that interest rates would decline.
Our willingness to stick with a market that many believed was topping out
helped the Fund participate fully in the market's year-long rally.
SELECTED THEMES. As ever, our approach to managing the portfolio included
healthy measures of both bottom-up stock selection and theme-oriented research.
For example, with the help of our energetic staff of analysts, we were able to
take advantage of the year's strong surge in technology stocks.
In fact, a number of our holdings in this sector were among the portfolio's top
performers. Examples include McAfee Associates, a California firm that
specializes in computer-virus software, and CBT Group PLC, which develops,
publishes, and markets software for networked and stand-alone personal
computers.
By year end, however, we had begun taking profits, reducing our technology
exposure significantly. As of December 31, technology issues accounted for
29.8% of the portfolio, down from a high of 50.3% at the end of September.
In addition to identifying sectors we believe show greater-than-average
opportunity, we also seek to identify areas of the market that
<PAGE> 4
may be headed for trouble. The aging baby-boom generation, if it follows
historical patterns, should soon begin to consume less and save more. This is
not good news for most U.S. retailers. As a result, we have significantly
underweighted this sector in the portfolio.
OPPORTUNISTIC USE OF BONDS. Late in the year, with the economy slowing and
interest rates headed down further, we moved a portion of the portfolio into
long-term bonds. As a result, we were able to lock in some attractive long-term
yields.
Our Outlook
Overall, our outlook for U.S. stocks remains favorable. All the key variables
are pointed in the right direction: growth is moderate, inflation is low, and
we expect interest rates to ease further.
We all must keep in mind, however, that the market's huge run up in 1995 is a
lot for the system to digest. Unless the Fed is willing to take more aggressive
action to fuel the economy, the prospects for corporate earnings are, if not
dim, certainly diminished, especially when compared to last year.
Still, we wholeheartedly believe that there are terrific investment
opportunities out there for those investors who know where to look.
Thank you for choosing the Strong Discovery Fund II to help meet your
investment needs.
Sincerely,
/s/ Richard S. Strong
Richard S. Strong
Portfolio Manager
[Photo of Richard S. Strong]
Asset Allocation
as of 12-31-95
Short-Term Investments 4.8%
Government Bonds 14.0%
Common & Preferred Stocks 81.2%
This allocation is presented as a percentage of net assets and does not reflect
any options or futures positions held by the Fund. Please see the Schedule of
Investments in Securities for a complete listing of the Fund's portfolio.
<TABLE>
<CAPTION>
Growth of an Assumed $10,000 Investment
from 5-8-92 to 12-31-95
The Strong Discovery Fund II S&P 500 Stock Index
<S> <C> <C>
5-92 $10,000 $10,000
6-92 9,591 9,857
12-92 10,887 10,680
6-93 11,392 11,201
12-93 13,285 11,756
6-94 11,885 11,358
12-94 12,569 11,912
6-95 14,658 14,319
12-95 $17,001 $16,388
</TABLE>
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
Standard & Poor's 500 Stock Index, an unmanaged index generally representative
of the U.S. stock market. Results include the reinvestment of all dividends and
capital gains distributions. Source for the index data is Micropal. 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.
* The Fund's returns include the effect of deducting the Fund's expenses, but
do not include charges and expenses attributable to any particular insurance
product. Excluding such fees and expenses from the Fund's return quotations has
the effect of increasing the performance quoted.
Average Annual Total Returns*
through 12-31-95
1-year 35.26%
3-year 16.02%
Since inception 15.66%
(on 5-8-92)
<PAGE> 5
SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1995
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
--------- --------------
<S> <C> <C>
COMMON STOCKS 80.3%
AUTO & TRUCK PARTS 1.4%
Bandag, Inc. Class A 3,200 $ 170
Exide Corporation 37,200 1,707
Thompson PBE, Inc. (b) 108,500 1,519
Transpro, Inc. 4,012 43
------
3,439
AUTOMOBILE 1.5%
Chrysler Corporation 66,400 3,677
BANK - MONEY CENTER 7.0%
Bank of Tokyo, Ltd. 54,000 946
Bank of Tokyo, Ltd. ADR 1,500 263
Citicorp 28,000 1,883
Dai-Ichi Kangyo Bank, Ltd. Japan 53,000 1,041
Dai-Ichi Kangyo Bank, Ltd. Japan ADR 1,900 374
Fuji Bank, Ltd. 43,000 949
Fuji Bank, Ltd. ADR 1,200 265
HSBC Holdings PLC ADR 6,900 1,044
Long-Term Credit Bank of Japan 86,000 732
Mitsubishi Bank, Ltd. Japan 125,000 2,939
Mitsubishi Bank, Ltd. Japan ADR 14,500 353
Mitsubishi Trust & Banking Corporation 50,000 832
Mitsubishi Trust & Banking Corporation ADR 1,500 250
Mitsui Trust & Banking Company, Ltd. 118,000 1,290
Sakura Bank, Ltd. 103,000 1,306
Sakura Bank, Ltd. ADR 2,900 368
Sumitomo Trust & Banking, Ltd. 83,000 1,173
Yasuda Trust & Banking, Ltd. 126,000 745
Yasuda Trust & Banking, Ltd. ADR 5,000 296
------
17,049
BEVERAGE - ALCOHOLIC 1.1%
Canandaigua Wine Company, Inc. (b) 61,400 2,003
MSC Industrial Direct Company Class A (b) 28,400 781
-----
2,784
BROKERAGE & INVESTMENT MANAGEMENT 3.9%
CWM Mortgage Holdings, Inc. 86,200 1,465
Daiwa Securities Company, Ltd. 85,000 1,299
Daiwa Securities Company, Ltd. ADR 1,700 260
Kankaku Securities Company (b) 94,000 400
New Japan Securities, Ltd. (b) 20,000 129
New Japan Securities, Ltd. ADR (b) 4,400 284
Nikko Securities Company, Ltd. Japan 25,000 322
Nikko Securities Company, Ltd. Japan ADR (b) 3,000 387
Nomura Securities Company, Ltd. 109,000 2,373
Nomura Securities Company, Ltd. ADR 4,400 960
The Quick & Reilly Group, Inc. 52,962 1,086
Sanyo Securities, Ltd. (b) 30,000 126
Yamaichi Securities, Ltd. 39,000 303
Yamaichi Securities, Ltd. ADR 4,000 311
-----
9,705
CHEMICAL 0.1%
Monsanto Company 1,500 184
COMMERCIAL SERVICE 5.4%
Accustaff, Inc. (b) 126,300 5,557
Career Horizons Corporation (b) 25,075 846
Consolidated Graphics, Inc. (b) 46,000 1,196
Corestaff, Inc. (b) 6,300 230
Education Alternatives, Inc. (b) 61,475 277
HA-LO Industries, Inc. (b) 36,700 1,129
Paychex, Inc. 18,400 918
Sensormatic Electronics Corporation 171,550 2,981
------
13,134
COMPUTER - PERIPHERAL EQUIPMENT 1.2%
Dialogic Corporation (b) 37,800 1,455
Seagate Technology, Inc. (b) 5,100 242
VideoServer, Inc. (b) 39,500 1,244
------
2,941
COMPUTER - PERSONAL & WORKSTATION 0.3%
Sun Microsystems, Inc. (b) 16,800 766
COMPUTER SERVICE 0.4%
America Online, Inc. (b) 28,500 1,069
COMPUTER SOFTWARE 13.4%
Access Health, Inc. (b) 30,700 1,358
Adobe Systems, Inc. 3,000 186
Ascend Communications, Inc. (b) 32,800 2,661
Avant! Corporation (b) 43,000 828
CBT Group PLC ADR (b) 52,300 2,772
Cheyenne Software, Inc. (b) 53,300 1,392
Cisco Systems, Inc. (b) 750 56
Computer Associates International, Inc. 83,225 4,733
Diamond Multimedia Systems, Inc. (b) 15,900 570
Enterprise Systems, Inc. (b) 21,300 650
FORE Systems, Inc. (b) 63,000 3,748
Informix Corporation (b) 19,300 579
McAfee Associates, Inc. (b) 53,250 2,336
NTT Data Communications Systems Company 120 4,029
NETCOM On-Line Communication Services, Inc. (b) 55,575 2,001
Netscape Communications Corporation 3,800 528
Network Equipment Technologies, Inc. (b) 29,875 818
Network General Corporation (b) 17,550 586
SQA, Inc. (b) 2,500 48
Spyglass, Inc. (b) 22,300 1,271
Sybase, Inc. (b) 29,700 1,069
3Com Corporation (b) 13,050 608
------
32,827
COMPUTER SYSTEMS 3.9%
System Software Associates, Inc. 439,088 9,550
CONGLOMERATE 0.5%
Marubeni Corporation 197,000 1,066
Marubeni Corporation ADR 4,500 244
------
1,310
CONSUMER - MISCELLANEOUS 2.1%
The Loewen Group, Inc. 205,700 5,207
DIVERSIFIED OPERATIONS 0.1%
Jason, Inc. (Acquired 1/21/94; Cost $230) (b)(d) 26,125 149
ELECTRICAL EQUIPMENT 0.1%
Toshiba Corporation 45,000 352
</TABLE>
4
See notes to financial statements.
<PAGE> 6
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
--------- --------------
<S> <C> <C>
ELECTRONIC PARTS DISTRIBUTION 1.4%
Kent Electronics Corporation (b) 10,150 $ 593
Marshall Industries (b) 85,650 2,752
-----
3,345
ELECTRONIC PRODUCTS - MISCELLANEOUS 0.5%
Mitsumi Electric Company, Ltd. 15,000 361
Rohm Company, Ltd. 16,000 903
-----
1,264
ELECTRONICS - SEMICONDUCTOR/COMPONENT 0.4%
Dallas Semiconductor Corporation 5,150 107
Uniphase Corporation (b) 7,400 265
Xilinx, Inc. (b) 20,900 637
-----
1,009
FINANCE - MISCELLANEOUS 1.3%
American Express Company 11,400 472
Capital One Financial Corporation 5,900 141
Medaphis Corporation (b) 35,450 1,312
Mercury Finance Company 76,325 1,011
Sunamerica, Inc. 5,250 249
-----
3,185
HEALTHCARE - DRUG/DIVERSIFIED 1.8%
Pharmacia & Upjohn, Inc. (b) 115,370 4,471
HEALTHCARE - MEDICAL SUPPLY 2.8%
Amerisource Distribution Corporation Class A(b) 5,500 182
Dentsply International, Inc. 35,700 1,428
Gulf South Medical Supply, Inc. (b) 22,800 690
Laboratory Corporation of America Holdings
Warrants, Expire 4/28/00 (b) 9,801 7
Omnicare, Inc. 31,275 1,400
Physician Sales & Service, Inc. (b) 84,800 2,417
Sybron International Corporation (b) 27,800 660
-----
6,784
HEALTHCARE - PATIENT CARE 6.0%
American Oncology Resources, Inc. (b) 20,400 992
Community Care of America, Inc. (b) 15,350 161
Compdent Corporation (b) 8,200 340
Coram Healthcare Corporation (b) 16,700 73
Home Health Corporation of America (b) 59,100 650
Humana, Inc. (b) 46,675 1,278
Oxford Health Plans, Inc. (b) 49,200 3,635
PhyCor, Inc. (b) 5,700 288
Physicians Health Services, Inc. Class A (b) 14,300 529
Sheridan Healthcare, Inc. (b) 181,000 2,195
United Dental Care, Inc. (b) 70,900 2,925
U.S. Healthcare, Inc. 12,400 577
Vencor, Inc. (b) 22,634 736
WellPoint Health Networks, Inc. Class A (b) 10,500 337
-----
14,716
HOUSEHOLD APPLIANCE & FURNISHINGS 0.6%
Fedders Corporation Class A 280,400 1,192
Matsushita-Kotobuki Electronics Industries, Ltd.
16,000 406
-----
1,598
INSURANCE - PROPERTY & CASUALTY 0.8%
Risk Capital Holdings, Inc. (b) 80,800 1,889
LEISURE PRODUCT 3.3%
Custom Chrome, Inc. (b) 28,400 657
Harley-Davidson, Inc. 236,100 6,788
Oakley, Inc. (b) 17,100 581
-----
8,026
LEISURE SERVICE 1.2%
The Walt Disney Company 9,650 569
Harrahs Entertainment, Inc. (b) 82,400 1,998
Promus Hotel Corporation (b) 9,250 206
Sholodge, Inc. (b) 13,400 127
-----
2,900
MACHINE TOOL 0.6%
Applied Power, Inc. 48,600 1,458
MACHINERY - AGRICULTURE 0.1%
Deere & Company 7,300 257
MEDIA - RADIO/TV 0.6%
CAI Wireless Systems, Inc. 8,700 84
Evergreen Media Corporation Class A (b) 21,100 675
Heartland Wireless Communications, Inc. (b) 16,700 497
Infinity Broadcasting Corporation (b) 2,600 97
People's Choice TV Corporation 7,000 133
-----
1,486
METAL PRODUCTS & FABRICATION 0.6%
Sync Research, Inc. (b) 30,400 1,376
MORTGAGE & RELATED SERVICE 0.1%
North American Mortgage Company 7,200 153
OFFICE AUTOMATION 5.3%
Canon, Inc. 62,000 1,122
Canon, Inc. ADR 3,000 274
Danka Business Systems PLC ADR 234,975 8,694
Nu-Kote Holding, Inc. Class A (b) 91,400 1,554
Xerox Corporation 9,300 1,274
-----
12,918
OIL - NORTH AMERICAN EXPLORATION
& PRODUCTION 0.7%
Flores & Rucks, Inc. (b) 114,400 1,659
PAPER & FOREST PRODUCTS 0.5%
Buckeye Cellulose Corporation (b) 52,400 1,153
PERSONAL & COMMERCIAL LENDING 0.4%
National Auto Credit, Inc. (b) 61,300 996
RAILROAD 1.4%
Burlington Northern Santa Fe Corporation 10,273 801
East Japan Railway Company 95 461
Kansas City Southern Industries, Inc. 45,700 2,091
-----
3,353
REAL ESTATE 0.4%
Mitsui Fudosan 87,000 1,069
</TABLE>
5
See notes to financial statements.
<PAGE> 7
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (IN THOUSANDS)
--------- --------------
<S> <C> <C>
RETAIL - DEPARTMENT STORE 0.3%
Federated Department Stores, Inc. (b) 25,100 $690
RETAIL - RESTAURANT 0.2%
Quality Dining, Inc. (b) 10,100 245
Rainforest Cafe, Inc. (b) 10,600 319
---
564
RETAIL - SPECIALTY 3.5%
CUC International, Inc. (b) 36,550 1,247
Central Garden and Pet Company (b) 177,600 1,687
Corporate Express, Inc. (b) 55,600 1,675
Hollywood Entertainment Corporation (b) 99,000 829
Movie Gallery, Inc. (b) 46,900 1,430
Office Depot, Inc. (b) 90,450 1,786
Viking Office Products, Inc. (b) 400 19
-----
8,673
SHOE & APPAREL MANUFACTURING 0.2%
Sankyo Seiki Manufacturing (b) 46,000 427
TELECOMMUNICATION EQUIPMENT 1.1%
Andrew Corporation (b) 10,200 390
Cascade Communications Corporation (b) 2,400 205
Newbridge Networks Corporation (b) 19,800 819
VTEL Corporation (b) 71,000 1,313
-----
2,727
TELECOMMUNICATION SERVICE 1.8%
DDI Corporation 554 4,288
EqualNet Holding Corporation (b) 26,900 195
-----
4,483
-------
TOTAL COMMON STOCKS (COST $186,340) 196,772
PREFERRED STOCK 0.9%
SAP AG (Cost $2,065) 14,000 2,123
UNITED STATES GOVERNMENT ISSUES 14.0%
United States Treasury Bonds, 6.875%,
Due 8/15/25 (c) (Cost $33,589) $30,375 34,276
CASH EQUIVALENTS (a) 2.6%
COMMERCIAL PAPER
DISCOUNTED 2.2%
Salomon, Inc.
Due 1/02/96 2,870 2,870
Mallinckrodt Group
Due 1/02/96 2,530 2,530
-----
5,400
INTEREST BEARING, DUE UPON DEMAND 0.4%
Sara Lee Corporation, 5.47% 661 661
Southwestern Bell Telephone Company, 5.72% 286 286
Wisconsin Electric Power Company, 5.53% 28 28
-----
975
-----
Total Cash Equivalents (Cost $6,375) 6,375
-----
TOTAL INVESTMENTS IN SECURITIES
(COST $228,369) 97.8% 239,546
Other Assets and Liabilities, Net 2.2% 5,501
-------
NET ASSETS 100.0% $245,047
=======
</TABLE>
FUTURES
- -------
<TABLE>
<CAPTION>
UNDERLYING
FACE AMOUNT UNREALIZED
EXPIRATION AT VALUE DEPRECIATION
DATE (In Thousands) (In Thousands)
---------- -------------- --------------
<S> <C> <C> <C>
Sold:
136 S&P 500 Futures 3/96 $42,055 $ 130
</TABLE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- -------------------------------------------
<TABLE>
<CAPTION>
VALUE UNREALIZED
SETTLEMENT IN USD APPRECIATION
DATE (In Thousands) (In Thousands)
---------- -------------- --------------
<S> <C> <C> <C>
Sold:
3,058,973 DEM 5/17/96 $ 2,145 $ 21
3,640,578,000 JPY 5/13/96 35,232 1,432
</TABLE>
OPTIONS
- -------
<TABLE>
<CAPTION>
PREMIUMS
NUMBER (In Thousands)
------ --------------
<S> <C> <C>
Options outstanding at Beginning of Period -- $ --
Options written during the period 1,097 431
Options cancelled in closing purchase transactions (1,097) (431)
------- -------
Options outstanding at End of Period -- $ --
======= =======
</TABLE>
Exercised and expired options resulted in a capital loss (in thousands) of $87.
<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- -------------
<S> <C>
United States . . . . . . . . . . . . . . . . . . 75.0%
Japan . . . . . . . . . . . . . . . . . . . . . . 14.8%
United Kingdom . . . . . . . . . . . . . . . . . 3.5%
Canada . . . . . . . . . . . . . . . . . . . . . 2.1%
Ireland . . . . . . . . . . . . . . . . . . . . . 1.1%
Germany . . . . . . . . . . . . . . . . . . . . . 0.9%
Hong Kong . . . . . . . . . . . . . . . . . . . . 0.4%
Other Assets and Liabilities, Net . . . . . . . . 2.2%
------
Total . . . . . . . . . . . . . . . . . . . . . . 100.0%
======
</TABLE>
LEGEND
- ------
(a) Cash equivalents include any security which has a maturity of less than
one year.
(b) Non-income producing security.
(c) All or a portion of security pledged to cover margin requirements for
futures contracts.
(d) Restricted security.
All principal amounts and costs are stated in thousands. Percentages are
stated as a percent of net assets.
CURRENCY ABBREVIATIONS
- ----------------------
DEM German Mark
JPY Japanese Yen
6
See notes to financial statements.
<PAGE> 8
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995 (In Thousands)
<S> <C>
INCOME:
Dividends $ 1,134
Interest 476
-------
Total Income 1,610
EXPENSES:
Investment Advisory Fees 1,677
Custodian Fees 157
Shareholder Servicing Costs 260
Reports to Shareholders 37
Federal and State Registration Fees 21
Other 45
-------
Total Expenses 2,197
-------
NET INVESTMENT LOSS (587)
REALIZED AND UNREALIZED GAIN:
Net Realized Gain on:
Investments 33,729
Futures Contracts, Options, and Hedges 145
Foreign Currencies 1
Change in Unrealized Appreciation/Depreciation on:
Investments 13,860
Futures Contracts, Options, and Hedges 1,323
-------
NET GAIN 49,058
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $48,471
=======
</TABLE>
7
See notes to financial statements.
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
(In Thousands, Except Per Share Amounts)
<TABLE>
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost of $228,369) $239,546
Receivable from Brokers for Securities and
Forward Foreign Currency Contracts Sold 11,287
Dividends and Interest Receivable 2,213
--------
Total Assets 253,046
LIABILITIES:
Payable to Brokers for Securities and
Forward Foreign Currency Contracts Purchased 7,434
Accrued Operating Expenses and Other Liabilities 565
--------
Total Liabilities 7,999
--------
NET ASSETS $245,047
========
Capital Shares
Authorized 300,000
Outstanding 18,233
NET ASSET VALUE PER SHARE $ 13.44
========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended December 31, 1995 and 1994 (In Thousands)
1995 1994
-------- --------
<S> <C> <C>
OPERATIONS:
Net Investment Income (Loss) ($ 587) $ 1,047
Net Realized Gain 33,875 2,742
Change in Unrealized Appreciation/Depreciation 15,183 (8,203)
-------- --------
Increase (Decrease) in Net Assets Resulting
from Operations 48,471 (4,414)
CAPITAL SHARE TRANSACTIONS 80,827 60,218
DISTRIBUTIONS:
From Net Investment Income -- (1,047)
In Excess of Net Investment Income (3,178) (4,473)
From Net Realized Gains -- (3,295)
-------- --------
TOTAL INCREASE IN NET ASSETS 126,120 46,989
NET ASSETS:
Beginning of Year 118,927 71,938
-------- --------
End of Year $245,047 $118,927
======== ========
</TABLE>
See notes to financial statements.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
1. ORGANIZATION
The Strong Discovery Fund II is a diversified series of the Strong Variable
Insurance 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 -- Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean between the latest bid and asked prices where no
last sales price is available. Securities traded over-the-counter are
valued at the mean of the latest bid and asked prices or the last
reported sales price. Debt securities not traded on a principal
securities exchange are valued through valuation obtained from a
commercial pricing service, otherwise sale or bid prices are used.
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 may own certain investment securities which are restricted as
to resale. These securities are valued 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 December 31, 1995 were as follows (in thousands):
Aggregate Cost $230
Aggregate Fair Value 149
Percent of Net Assets 0.1%
(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.
Therefore, 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, U.S. government securities or other liquid,
high-grade debt obligations 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 -- 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> 11
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 1995
(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets and forward foreign currency exchange
contracts for purposes of hedging the Fund's investment portfolio
involves, to varying degrees, elements of market risk in excess of the
amount recognized in the statement of assets and liabilities. The
predominant risk with futures contracts is an imperfect correlation
between the value of the contracts and the underlying securities.
Foreign denominated assets and forward foreign currency exchange
contracts may involve greater risks than domestic transactions,
including currency, political and economic, regulatory and market
risks.
(I) Other -- Investment security transactions are recorded as of 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 premium and discounts.
3. NET ASSETS
Net assets as of December 31, 1995 were as follows (in thousands):
<TABLE>
<S> <C>
Capital Stock $204,656
Undistributed Net Investment Loss (234)
Undistributed Net Realized Gain 28,125
Net Unrealized Appreciation 12,500
--------
$245,047
========
</TABLE>
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31, 1995
and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
SHARES DOLLARS SHARES DOLLARS
------ -------- ------- -------
<S> <C> <C> <C> <C>
Shares Sold 11,517 $141,163 9,272 $101,331
Dividends Reinvested 240 3,176 851 8,807
Shares Redeemed (5,338) (63,512) (4,542) (49,920)
------ -------- ------ --------
6,419 $ 80,827 5,581 $ 60,218
</TABLE> ====== ======== ====== ========
5. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and directors of the Fund are affiliated, provides investment advisory
services to the Fund. Investment advisory fees, which are established by
terms of the Advisory Agreement, are based on an annualized rate of 1.00%
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.
The amount payable to the Advisor at December 31, 1995 and unaffiliated
directors' fees for 1995 were (in thousands) $262 and $4, respectively.
6. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year
ended December 31, 1995 were as follows (in thousands):
<TABLE>
<S> <C>
Purchases:
U.S. Government and Agency $ 33,589
Other 929,508
Sales:
U.S. Government and Agency --
Other 873,156
</TABLE>
7. INCOME TAX INFORMATION
At December 31, 1995, the investment cost and gross unrealized appreciation
and depreciation on investments for Federal income tax purposes were as
follows (in thousands):
<TABLE>
<S> <C>
Aggregate Investment Cost $229,273
========
Aggregate Unrealized:
Appreciation $ 21,606
Depreciation (11,333)
--------
$ 10,273
========
</TABLE>
For corporate shareholders in the Fund, the percentage qualifying for the
dividends-received deduction is 20.3%.
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
The following presents information relating to a share of capital stock of the
Fund, outstanding for the entire period.
<TABLE>
<CAPTION>
1995 1994 1993 1992(a)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.07 $ 11.54 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income (0.03) 0.10 0.05 0.04
Net Realized and Unrealized Gains
(Losses) on Investments 3.58 (0.71) 2.09 0.78
---------- --------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 3.55 (0.61) 2.14 0.82
LESS DISTRIBUTIONS
- ------------------
From Net Investment Income -- (0.10) (0.05) (0.04)
In Excess of Net Investment Income (0.18) (0.43) (0.70) --
From Net Realized Gains -- (0.33) -- (0.63)(b)
---------- --------- -------- --------
TOTAL DISTRIBUTIONS (0.18) (0.86) (0.75) (0.67)
---------- --------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 13.44 $ 10.07 $ 11.54 $ 10.15
========== ========= ======== ========
Total Return +35.3% -5.4% +22.0% +8.9%
Net Assets, End of Period (In Thousands) $ 248,047 $ 118,927 $ 71,938 $ 26,739
Ratio of Expenses to Average Net Assets 1.3% 1.2% 1.3% 1.7%*
Ratio of Net Investment Income to Average Net Assets (0.3%) 1.1% 0.5% 0.5%*
Portfolio Turnover Rate 542.1% 662.5% 976.5% 1,149.6%
</TABLE>
* Calculated on an annualized basis.
(a) Inception date is May 8, 1992. Total return and portfolio turnover rate are
not annualized.
(b) Ordinary income distribution for tax purposes.
11
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of the
Strong Discovery Fund II
We have audited the accompanying statement of assets and liabilities of Strong
Discovery Fund II (one of the portfolios constituting the Strong Variable
Insurance Funds, Inc.), including the schedule of investments in securities, as
of December 31, 1995, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of two years in the
period then ended, and the financial highlights for each of the periods
indicated. 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
audits.
We conducted our audits 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, 1995 by correspondence with the custodians and
brokers. 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 audits provide 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 Discovery Fund II as of December 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
January 25, 1996
<PAGE> 14
[STRONG FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
2010A96
