<PAGE>
THE STRONG
ADVANTAGE FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1996
[PHOTO OF 3 CHILDREN]
DESIGNED TO SEEK CURRENT INCOME
WITH A VERY LOW DEGREE OF
SHARE-PRICE FLUCTUATION
[STRONG FUNDS LOGO]
STRONG FUNDS
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THE STRONG
ADVANTAGE FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1996
Table of Contents
INVESTMENT REVIEWS
The Strong Advantage Fund II..........................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities.................................4
Statement of Operations...............................................5
Statement of Assets and Liabilities...................................5
Statement of Changes in Net Assets....................................6
Notes to Financial Statements.........................................6
FINANCIAL HIGHLIGHTS.........................................................8
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The Strong ADVANTAGE FUND II
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The Strong Advantage Fund II seeks current income with a very low degree of
share-price fluctuation. The Fund invests primarily in ultra short-term,
investment-grade debt obligations, and its average effective portfolio maturity
will normally be one year or less.
AS OF 6-28-96(2)
ANNUALIZED 30-DAY YIELD
5.66%
AVERAGE EFFECTIVE MATURITY
0.6 years
AVERAGE QUALITY RATING(3)
A
INTEREST RATES ROSE SIGNIFICANTLY THROUGH THE FIRST HALF
Rising interest rates and volatility in the bond market during the first half of
the year provided a difficult backdrop for the Fund's first full six-month
period. Despite this volatility, the Fund gained 2.79%, as measured by total
return, for the six months ended 6-30-96. The return was in line with its
benchmark index--the Lipper Ultra Short Obligations "Average"--which posted a
gain of 2.29% over the same period.(1)
1996 UPDATE
Yields on fixed-income investments rose across all maturities during this
reporting period, as market sentiment experienced a dramatic turnaround. At the
beginning of the year, the consensus was bullish on bonds, with many economists
and analysts predicting flat or falling interest rates. However, the economy
showed signs of stronger-than-expected growth early in the year, and the
consensus shifted from anticipation of further rate cuts by the Federal Reserve
Board to the possibility of Fed tightening.
One of the first signs of strong growth was the announcement of a surprisingly
large number of new jobs created in February, which eliminated the chance that
the Fed would lower interest rates at their March meeting. Subsequent job
creation numbers were also higher than expected, gold prices surged temporarily,
and the price of several key commodities--including oil and grain--rose.
The market reacted by pushing rates higher, although longer-term rates were
affected more significantly than short-term rates. The yield on the 5-year
Treasury note increased by more than one percentage point over the six-month
period to finish June at 6.47%, while the one-year Treasury bill rose by just
over one-half percentage point, finishing June with a yield of 5.68%.
ASSET ALLOCATION
as of 6-30-96
Short-Term Investments 23.8%
Non-Agency Mortgage Backed Securities 27.5%
Corporate Bonds 48.7%
This asset allocation is presented as a percentage of net assets. Please see the
Schedule of Investments in Securities for a complete listing of the Fund's
portfolio.
2
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OUR OUTLOOK FOR BONDS
Economic growth was stronger than expected over the first half of the year, and
we expect to see the Federal Reserve Board tighten interest rates over the next
three to six months, causing bond yields to move even higher.
In anticipation of higher rates, we have shortened the Fund's duration to allow
investors to benefit if interest rates continue to rise over the remainder of
the year. And, we continue to favor mortgage and corporate bonds versus Treasury
securities in order to pick up additional yield. We believe that at the short
end of the market, active management and careful research provide superior
results, and that is the investment approach we will continue to follow.
Thank you for your investment in the Strong Advantage Fund II. We appreciate the
confidence you have placed in us.
Sincerely,
/s/ Jeffrey A. Koch
Jeffrey A. Koch
Portfolio Manager
[PHOTO OF JEFFREY A. KOCH]
GROWTH OF AN ASSUMED $10,000 INVESTMENT
from 11-30-95 to 6-30-96
The Strong Advantage Brothers 1-Year Lipper Ultra Short
Fund II Treasury Benchmark- Obligations
on-the-Run Index "Average"
10-95 10,000 10,000 10,000
11-95 10,002 10,002 10,002
12-95 10,076 10,061 10,056
1-96 10,140 10,125 10,110
2-96 10,152 10,138 10,132
3-96 10,168 10,170 10,165
4-96 10,233 10,205 10,196
5-96 10,304 10,246 10,238
6-96 10,357 10,303 10,286
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with similar investments in the
Salomon Brothers 1-Year Treasury Benchmark-on-the-Run Index ("1-Year Treasury
Bill") and the Lipper Ultra Short Obligations "Average". The Salomon Brothers
1-Year Treasury Bill Index is an unmanaged index generally representative of the
performance of a Treasury security with approximately one year to maturity. The
Lipper Ultra Short Obligations "Average" invests at least 65% of assets in
investment-grade debt issues, or better, and maintains a portfolio
dollar-weighted average maturity between 91 days and 365 days. 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.
Source of the Salomon Brothers index data is Micropal. Source of the Lipper
index data is Lipper Analytical Services, Inc. To equalize time periods, the
indexes' performance was prorated for the month of November, 1995.
TOTAL RETURNS(1)
as of 6-30-96
6-MONTH
2.79%
SINCE INCEPTION
(on 11-30-95)
3.57%
(1) Total return measures aggregate change in the value of an investment in
the Fund, assuming reinvestment of dividends and capital gains.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.The Lipper Ultra Short
Obligations "Average" invest at least 65% of assets in investment-grade
debt issues, or better, and maintains a portfolio dollar-weighted average
maturity between 91 days and 365 days. Source of index data is Lipper
Analytical Services, Inc.
(2) Yields are annualized for the 30 days ended 6-28-96, are historical, and
will vary.
(3) For purposes of this average rating, the Fund's short-term debt
obligations have been assigned long-term ratings by the Advisor.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
CORPORATE BONDS 48.7%
American Reinsurance Corporation Senior
Subordinated Debentures, 10.875%, Due 9/15/04 $20,000 $21,855
American Standard, Inc. Senior Debentures,
11.375%, Due 5/15/04 20,000 21,650
Bank of Scotland Variable Rate Subordinated
Notes, 6.50%, Due 8/29/49 40,000 39,750
Cablevision Industries Corporation Senior Notes,
10.75%, Due 1/30/02 20,000 21,500
Caesars World, Inc. Senior Subordinated
Debentures, 8.875%, Due 8/15/02 20,000 21,100
Citicorp Floating Rate Notes, 6.50%, Due 5/01/04 13,000 13,029
Citicorp Subordinated Floating Rate Notes, 5.60%,
Due 10/25/05 20,000 19,659
First Bank System, Inc. Subordinated Floating
Rate Notes, 5.625%, Due 11/30/10
(Putable at 100 on 11/30/00) 20,000 20,092
Hook-SupeRx, Inc. Senior Notes, 10.125%,
Due 6/01/02 20,000 21,376
MGM Grand Hotel Finance Corporation First
Mortgage Notes, 12.00%, Due 5/01/02 20,000 21,900
Magma Copper Company Senior Subordinated
Notes, 12.00%, Due 12/15/01 20,000 21,669
NBD Bancorp, Inc. Subordinated Floating Rate
Notes, 5.75%, Due 12/18/05 25,000 24,755
Purity Supreme, Inc. Senior Secured Notes,
Series B, 11.75%, Due 8/01/99 20,000 21,625
------
TOTAL CORPORATE BONDS (COST $290,039) 289,960
NON-AGENCY MORTGAGE & ASSET-BACKED
SECURITIES 27.5%
Citicorp Mortgage Securities, Inc. Real Estate
Mortgage Investment Conduit Pass-Thru
Certificates, Series 1990-3, Class A-3, 9.75%,
Due 2/25/05 19,349 19,782
Fund America Investors Corporation Variable Rate
Senior Pass-Thru Certificates, Series 1993-A,
Class A-1, 7.4808%, Due 6/25/23 22,614 23,293
ML Asset Backed Corporation Total Rate Return
Asset Backed Note, Series 1992-1, Class A2,
5.50%, Due 5/15/98 6,264 6,272
Merrill Lynch Mortgage Investors, Inc. Senior
Subordinated Variable Rate Pass-Thru Certificates,
Series 1994-F, Class M, 6.50%, Due 4/15/19 25,000 24,144
Morgan Stanley Capital I, Inc. Collateralized
Mortgage Obligation, Series 86-C, Class C-4,
9.00%, Due 5/01/16 21,185 21,734
RTC Mortgage Pass-Thru Securities, Inc.,
Series 1991-7, Class A, 7.75%, Due 12/25/18 22,386 21,813
Ryland Mortgage Securities Corporation Variable
Rate Mortgage Participation Securities - Boston
Safe Deposit, Series 1991-1, 7.3602%, Due 3/25 25,393 25,755
Suncoast Collateralized Mortgage Obligation
Trust III, Class C, 8.75%, Due 2/27/18 21,405 21,384
------
TOTAL NON-AGENCY MORTGAGE & ASSET-BACKED
SECURITIES (COST $163,555) 164,177
SHORT-TERM INVESTMENTS (a) 20.1%
COMMERCIAL PAPER 16.7%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.15% 77,300 77,300
Wisconsin Electric Power Company, 5.19% 22,150 22,150
------
99,450
CORPORATE OBLIGATION 3.4%
USG Corporation Senior Notes, 8.00%,
Due 12/15/96 20,000 20,125
------
TOTAL SHORT-TERM INVESTMENTS
(COST $119,562) 119,575
-------
TOTAL INVESTMENTS IN SECURITIES
(COST $573,156) 96.3% 573,712
Other Assets and Liabilities, Net 3.7% 22,098
-------
NET ASSETS 100.0% $595,810
=======
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
- --------------------------------------------------------------------------------
Non-Agency Single Family............................ 18.1%
Finance - Miscellaneous............................. 13.0
Bank - Regional..................................... 10.0
Leisure Service..................................... 7.2
Bank - Money Center................................. 5.5
Non-Agency Asset Backed............................. 5.4
Bank - Super Regional............................... 4.2
Non-Agency Manufactured Housing..................... 4.1
Electric Power...................................... 3.7
Insurance - Property & Casualty..................... 3.7
Diversified Operations.............................. 3.6
Food................................................ 3.6
Media - Radio/TV.................................... 3.6
Metals & Mining..................................... 3.6
Retail - Drug Store................................. 3.6
Housing Related..................................... 3.4
Other Assets and Liabilities, Net................... 3.7
-----
Total 100.0%
=====
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- --------------------------------------------------------------------------------
United States....................................... 89.6%
United Kingdom...................................... 6.7
Other Assets and Liabilities, Net................... 3.7
----
Total 100.0%
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LEGEND
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(a) Short-Term Investments include any security which has a maturity of less
than one year.
Percentages are stated as a percent of net assets.
4
See notes to financial statements.
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STATEMENT OF OPERATIONS
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For the Six Months Ended June 30, 1996 (Unaudited)
INTEREST INCOME $16,874
EXPENSES:
Investment Advisory Fees 1,584
Custodian Fees 207
Shareholder Servicing Costs 184
Legal Fees 211
Accounting Fees 211
Reports to Shareholders 242
Other 49
Total Expenses 2,688
------
NET INVESTMENT INCOME 14,186
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain on Investments 2,129
Change in Unrealized Depreciation on Investments (703)
------
NET GAIN 1,426
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $15,612
======
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1996 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $573,156) $573,712
Receivable from Brokers for Securities Sold 2,387
Interest Receivable 7,584
Other Assets 15,337
-------
Total Assets 599,020
LIABILITIES:
Dividends Payable 2,514
Accrued Operating Expenses and Other Liabilities 696
Total Liabilities 3,210
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NET ASSETS $595,810
=======
Capital Shares
Authorized 300,000,000
Outstanding 59,324
NET ASSET VALUE PER SHARE $10.04
=====
5
See notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Periods Ended June 30, 1996 (Unaudited) and December 31, 1995 (Note 1)
JUNE 30, 1996 DEC. 31, 1995
------------- -------------
OPERATIONS:
Net Investment Income $ 14,186 $ 2,291
Net Realized Gain 2,129 --
Change in Unrealized Appreciation/Depreciation (703) 1,259
------ -----
Increase in Net Assets Resulting from Operations 15,612 3,550
CAPITAL SHARE TRANSACTIONS 93,125 500,000
DISTRIBUTIONS FROM NET INVESTMENT INCOME (14,186) (2,291)
------- -------
TOTAL INCREASE IN NET ASSETS 94,551 501,259
NET ASSETS:
Beginning of Period 501,259 --
------- -------
End of Period $595,810 $501,259
======= =======
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1996 (Unaudited)
1. ORGANIZATION
The Strong Advantage Fund II commenced operations on November 30, 1995, and
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.
(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.
6
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(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.
(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 June 30, 1996 were as follows:
Capital Stock $593,125
Undistributed Net Realized Gain 2,129
Net Unrealized Appreciation 556
-------
$595,810
=======
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the six months ended June 30, 1996
and the period ended December 31, 1995 were as follows:
1996 1995
--------------- -----------------
SHARES DOLLARS SHARES DOLLARS
------ ------- ------ -------
Shares Sold 14,271 $142,768 50,000 $500,000
Dividends Reinvested 43 434 -- --
Shares Redeemed (4,990) (50,077) -- --
------ ------ ------ -------
9,324 $ 93,125 50,000 $500,000
===== ======== ====== ========
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 0.60%
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 June 30, 1996 and unaffiliated
directors' fees for the six months ended June 30, 1996 were $258 and $750,
respectively.
7
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NOTES TO FINANCIAL STATEMENTS (continued)
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June 30, 1996 (Unaudited)
6. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1996 were as follows:
Purchases:
U.S. Government and Agency $ --
Other 368,780
Sales:
U.S. Government and Agency $ 98,991
Other 161,775
7. INCOME TAX INFORMATION
At June 30, 1996, the investment cost and gross unrealized appreciation and
depreciation on investments for Federal income tax purposes were as
follows:
Aggregate Investment Cost $573,156
=======
Aggregate Unrealized:
Appreciation $ 1,901
Depreciation (1,345)
-------
$ 556
=======
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following presents information relating to a share of capital stock
outstanding for the entire period.
1996(a) 1995(b)
-------- -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income 0.27 0.05
Net Realized and Unrealized Gains on Investments 0.01 0.03
----- -----
TOTAL FROM INVESTMENT OPERATIONS 0.28 0.08
LESS DISTRIBUTIONS
- ------------------
From Net Investment Income (0.27) (0.05)
----- -----
TOTAL DISTRIBUTIONS (0.27) (0.05)
----- -----
NET ASSET VALUE, END OF PERIOD $ 10.04 $ 10.03
===== =====
Total Return +2.8% +0.8%
Net Assets, End of Period (In Thousands) $ 596 $ 501
Ratio of Expenses to Average Net Assets 1.0%* 1.0%*
Ratio of Net Investment Income to Average Net Assets 5.3%* 5.2%*
Portfolio Turnover Rate 57.8% 0.0%
* Calculated on an annualized basis.
(a) For the six months ended June 30, 1996 (Unaudited). Total return and
portfolio turnover rate are not annualized.
(b) Inception date is November 30, 1995. Total return and portfolio
turnover rate are not annualized.
8
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STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
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http://www.strong-funds.com
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