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THE STRONG
ASSET ALLOCATION FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
TABLE OF CONTENTS
FINANCIAL INFORMATION
Schedule of Investments in Securities ................................2
Statement of Assets and Liabilities ..................................2
Statement of Operations ..............................................3
Statement of Changes in Net Assets ...................................3
Notes to Financial Statements ........................................4
FINANCIAL HIGHLIGHTS ......................................................5
[STRONG FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201 5568G97
Strong Funds are offered by prospectus only.
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SCHEDULE OF INVESTMENTS IN SECURITIES June 30, 1997 (Unaudited)
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PRINCIPAL VALUE
AMOUNT (Note 2)
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UNITED STATES GOVERNMENT ISSUES 28.1%
United States Treasury Notes, 6.25%,
Due 10/31/01 (b) $105,000 $104,574
United States Treasury Notes, 5.875%,
Due 11/15/05 (b) 50,000 47,859
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TOTAL UNITED STATES GOVERNMENT ISSUES
(COST $153,563) 152,433
SHORT-TERM INVESTMENTS (a) 72.9%
COMMERCIAL PAPER 34.3%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.29% 25,000 25,000
Eli Lilly & Company, 5.09% 26,300 26,300
General Mills, Inc., 5.27% 25,000 25,000
Johnson Controls, Inc., 5.31% 25,700 25,700
Pitney Bowes Credit Corporation, 5.29% 23,000 23,000
Sara Lee Corporation, 5.27% 9,300 9,300
Warner Lambert Company, 5.26% 24,900 24,900
Wisconsin Electric Power Company, 5.33% 26,900 26,900
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186,100
REPURCHASE AGREEMENT 18.5%
Goldman, Sachs & Company (Dated 6/30/97),
5.75%, Due 7/01/97 (Repurchase proceeds
$100,016); Collateralized by: $85,000 United
States Treasury Bonds, 8.875%, Due 2/15/19
(Market Value $107,355)(c) 100,000 100,000
UNITED STATES GOVERNMENT ISSUES 20.1%
United States Treasury Bills
Due 8/07/97 thru 9/25/97 (b) 110,000 109,090
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TOTAL SHORT-TERM INVESTMENTS
(COST $395,202) 395,190
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TOTAL INVESTMENTS IN SECURITIES
(COST $548,765) 101.0% 547,623
Other Assets and Liabilities, Net (1.0%) (5,717)
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NET ASSETS 100.0% $541,906
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FUTURES
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UNDERLYING
EXPIRATION FACE AMOUNT UNREALIZED
DATE AT VALUE APPRECIATION
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Purchased:
1 S&P 500 9/97 $391,975 $53,137
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
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U.S. Government ....................................... 66.7%
Healthcare - Drug/Diversified ......................... 9.5
Food .................................................. 6.3
Electric Power ........................................ 5.0
Diversified Operations ................................ 4.7
Insurance - Property & Casualty ....................... 4.6
Office Automation ..................................... 4.2
Other Assets and Liabilities, Net ..................... (1.0)
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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.
(b) All or a portion of security pledged to cover margin requirements for
futures contracts.
(c) The Fund may engage in repurchase agreements where the underlying
collateral consists of U.S. government securities which are maintained in a
segregated account with a custodian. The market value of the collateral
must exceed the principal amount by at least two percent on a daily basis.
Percentages are stated as a percent of net assets.
STATEMENT OF ASSETS AND LIABILITIES
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June 30, 1997 (Unaudited)
ASSETS:
Investments in Securities, at Value
(Including Repurchase Agreement of $100,000)
(Cost of $548,765) $547,623
Interest Receivable 2,159
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Total Assets 549,782
ACCRUED OPERATING EXPENSES AND OTHER LIABILITIES 7,876
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NET ASSETS $541,906
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NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in surplus) 476,728
Undistributed Net Investment Income 356
Undistributed Net Realized Gain 12,827
Net Unrealized Appreciation 51,995
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Net Assets $541,906
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Capital Shares Outstanding (Unlimited Number Authorized) 49,025
NET ASSET VALUE PER SHARE $11.05
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See notes to financial statements.
2
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STATEMENT OF OPERATIONS
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For the Six Months Ended June 30, 1997 (Unaudited)
INTEREST INCOME: $16,219
EXPENSES:
Investment Advisory Fees 2,589
Custodian Fees 2,147
Professional Fees 2,413
Reports to Shareholders 3,365
Other 750
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Total Expenses before Waivers and Absorptions 11,264
Involuntary Expense Waivers and Absorptions by Advisor (5,211)
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Expenses, Net 6,053
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NET INVESTMENT INCOME 10,166
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments (683)
Futures Contracts 2,837
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Net Realized Gain 2,154
Change in Unrealized Appreciation/Depreciation on:
Investments 1,164
Futures Contracts 63,781
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Net Change in Unrealized Appreciation/Depreciation 64,945
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NET GAIN 67,099
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $77,265
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STATEMENT OF CHANGES IN NET ASSETS
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SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
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(UNAUDITED)
OPERATIONS:
Net Investment Income $ 10,166 $ 16,117
Net Realized Gain 2,154 60,631
Change in Unrealized Appreciation/Depreciation 64,945 (11,885)
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Increase in Net Assets Resulting from Operation 77,265 64,863
DISTRIBUTIONS:
From Net Investment Income (9,780) (16,070)
From Net Realized Gains (16,182) (33,839)
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Total Distributions (25,962) (49,909)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 481,187 344,372
Proceeds from Reinvestment of Dividends 20,817 19,720
Payments for Shares Redeemed (577,488) (311,880)
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Increase (Decrease) in Net Assets from Capital
Share Transactions (75,484) 52,212
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TOTAL INCREASE (DECREASE) IN NET ASSETS (24,181) 67,166
NET ASSETS:
Beginning of Period 566,087 498,921
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End of Period $541,906 $566,087
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TRANSACTIONS IN SHARES OF THE FUND:
Sold 45,640 32,643
Issued in Reinvestment of Dividends 1,961 1,888
Redeemed (53,468) (29,639)
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Increase (Decrease) in Shares of the Fund (5,867) 4,892
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See notes to financial statements.
3
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NOTES TO FINANCIAL STATEMENTS
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June 30, 1997 (Unaudited)
1. ORGANIZATION
The Strong Asset Allocation 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 valuations obtained from a
commercial pricing service, otherwise sale or bid prices are used.
Securities for which market quotations are not readily available, when
held by the Fund, 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.
(D) Futures -- Upon entering into a futures contract, the Fund pledges to
the broker cash or other investments equal to the minimum "initial
margin" requirements of the exchange. The Fund also receives from or
pays to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin," and are recorded as unrealized gains or losses.
When the futures contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(E) Options -- 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.
4
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(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets, forward foreign currency exchange
contracts and other similar instruments 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) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
(J) Other -- Investment security transactions are recorded 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. 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 0.85%
of the first $35 million and 0.80% thereafter 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 Fund may invest cash reserves in money market funds sponsored and
managed by Strong Capital Management, Inc., 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, the
Advisor remits to the Fund an amount equal to all fees otherwise due to it
under its investment advisory agreement for the assets invested in such
money market funds.
Unaffiliated directors' fees, excluding the effects of waivers and
reimbursements, for the six months ended June 30, 1997 were $750.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1997 were $201,494 and $97,883, respectively.
5. INCOME TAX INFORMATION
At June 30, 1997, the cost of investments in securities for federal income
tax purposes was $548,765. Net unrealized depreciation of securities was
$1,142, consisting of gross unrealized appreciation and depreciation of
$1,553 and $2,695, respectively.
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FINANCIAL HIGHLIGHTS
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<CAPTION>
SELECTED PER-SHARE DATA (a)
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INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
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Net Realized
Net Asset and Unrealized Total Net Asset
Value, Net Gains from From Net From Net Value,
Beginning Investment (Losses) on Investment Investment Realized Total End of
of Period Income Investments Operations Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997 (b) $10.31 $0.20 $1.02 $1.22 ($0.19) ($0.29) ($0.48) $11.05
Dec. 31, 1996 9.98 0.31 0.97 1.28 (0.31) (0.64) (0.95) 10.31
Dec. 31, 1995 (c) 10.00 0.04 (0.02) 0.02 (0.04) --- (0.04) 9.98
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FINANCIAL HIGHLIGHTS (continued)
RATIOS AND SUPPLEMENTAL DATA
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Net Ratio of Net
Assets, Ratio of Investment
End of Expenses Income Portfolio
Total Period (In to Average to Average Turnover
Return Thousands) Net Assets Net Assets Rate
June 30, 1997 (b) +12.1% $542 2.0%* 3.4%* 92.2%
Dec. 31, 1996 +12.9% 566 2.0% 3.1% 0.0%
Dec. 31, 1995 (c) +0.2% 499 1.6%* 4.3% 0.0%
* 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 six months ended June 30, 1997 (Unaudited). Total return and
portfolio turnover rate are not annualized.
(c) Inception date is November 30, 1995. Total return is not annualized.
5
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NOTES
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6
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DIRECTORS
Richard S. Strong
John Dragisic
Willie D. Davis
Stanley Kritzik
Marvin E. Nevins
William F. Vogt
OFFICERS
Richard S. Strong, Chairman of the Board
John Dragisic, President
Lawrence A. Totsky, Vice President
Thomas P. Lemke, Vice President
John S. Weitzer, Vice President
Stephen J. Shenkenberg, Vice President and Secretary
John A. Flanagan, Treasurer
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
AUDITOR
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
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