<PAGE>
THE STRONG
ASSET ALLOCATION FUND II
ANNUAL REPORT o DECEMBER 31, 1996
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Asset Allocation Fund II ................................ 2
FINANCIAL INFORMATION
Schedule of Investments in Securities .............................. 4
Statement of Operations ............................................ 4
Statement of Assets and Liabilities ................................ 5
Statement of Changes in Net Assets ................................. 5
Notes to Financial Statements ...................................... 6
FINANCIAL HIGHLIGHTS .................................................... 8
REPORT OF INDEPENDENT ACCOUNTANTS ....................................... 8
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
http://www.strong-funds.com
Strong Funds are offered by prospectus only. 4691A97
<PAGE>
THE STRONG ASSET ALLOCATION FUND II
THE STRONG ASSET ALLOCATION FUND II SEEKS HIGH TOTAL RETURN CONSISTENT WITH
REASONABLE RISK OVER THE LONG TERM.
The Strong Asset Allocation Fund II seeks high total return consistent with
reasonable risk over the long term. The Fund allocates its assets globally among
a diversified portfolio of equity securities, bonds, and short-term fixed-income
securities.
THE FUND'S BENCHMARK ADJUSTED JULY 1
As reported in the Fund's semi-annual report, the normal benchmark allocations
for the Fund were changed on July 1 to allow for a larger weighting in equities.
Previously, the Fund's benchmark allocations to stocks, bonds and cash had been
40%, 40%, and 20%, respectively. The new benchmark allocations are 60%, 35%, and
5%. The Fund's allowable maximum and minimum ranges were modified as follows:
RANGE PRIOR TO JULY 1 RANGES AFTER JULY 1
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Stocks 10%-60% 30%-70%
Bonds 20%-60% 20%-70%
Cash 0%-70% 0%-50%
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This expanded ability to invest in stocks gives the Fund the potential for
higher total returns than did its prior benchmark allocation. Of course, this
change increased the Fund's potential share-price volatility.
A YEAR OF DIVERSE PERFORMANCE FOR THE MARKETS
Overall, the stock market performed well during the year, while bonds
experienced more challenging conditions. In early 1996, many investors and
analysts expected weak economic growth to continue in the U.S. In fact, the
Federal Reserve cut the federal funds rate in January 1996, a continuation of
the easing it began the previous July, and a sign that the Fed believed the
economy needed at least modest stimulus.
However, in February, an unexpectedly large number of new jobs - and subsequent
indications of a strengthening economy led many to believe that economic growth
was accelerating rather than weakening. In response, interest rates across all
maturities reversed direction and headed higher, producing price declines in
most sectors of the bond market. Stocks, for the most part, ignored the effect
of rising rates and continued higher.
Through June and July, however, stocks experienced a brief but sharp correction
as equity investors, too, began to worry about the effect of higher rates on
stock valuations. But as the year drew to a close, stock and bond investors
seemed to become more comfortable with the underlying fundamentals of the
economy. Despite slightly stronger growth, inflation remained subdued and it
appeared that economic growth was unlikely to top 3% annually. Against this
backdrop, the chances of substantially higher rates diminished, the Federal
Reserve left the fed funds rate unchanged, and stocks rebounded to new highs.
OVERALL, THE NEW PORTFOLIO POSITIONING WORKED WELL
In general, the Fund's new benchmark allocation performed well. Unfortunately,
the timing of the change was slightly off, as we increased the portfolio's
equity weighting at what turned out to be a high point in the market, and
reduced the bond position when bonds were in the midst of a short-term
correction.
After the July 1 reallocation, we tended to keep the portfolio between 50% and
60% weighted in equities through the use of futures contracts. This helped the
portfolio perform fairly well as stock prices rallied during the last five
months of the year. We tended to keep the bond portion neutrally positioned,
which helped the Fund during the end of the fiscal year, when interest rates
began to decline, resulting in higher bond prices.
2
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WE'LL LIKELY REMAIN NEUTRAL FOR THE NEAR TERM
For the near term, we will likely maintain the Fund fairly close to its
benchmark allocation - about 60% invested in stocks, with the remainder in bonds
and cash. While the financial markets have performed quite well recently, there
is still some uncertainty regarding the economy's real strength, and whether it
can maintain its current growth rate. As the year ended, the markets held a
fairly rosy view of the economy - slow growth, low inflation, and the
possibility of lower interest rates. This scenario may, in fact, occur. But
there are likely to be some occasional bouts of volatility along the way.
That said, there are fundamental reasons for optimism. The Federal Reserve
remains vigilant against inflation, and we still have in place a balance between
the President and Congress that so far has benefited financial markets.
In addition, one major advantage of the Asset Allocation Fund is that we have
the flexibility to adapt if conditions change. We intend to closely monitor the
investment climate both here and abroad, and make the changes we believe can
benefit the Fund.
We appreciate your confidence in the Strong Asset Allocation Fund II.
Sincerely,
/s/ Bradley C. Tank
Bradley C. Tank
Lead Portfolio Manager
[PHOTO OF BRADLEY C. TANK]
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AVERAGE ANNUAL
TOTAL RETURNS(1)
As of 12-31-96
1-year 12.94%
Since
Inception 12.09%
(on 11-30-95)
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 11-30-95 to 12-31-96
[GRAPH]
The Strong
Asset Lipper Flexible
Allocation S&P 500 Portfolio Funds
Fund II Stock Index* Index*
11-95 10,000 10,000 10,000
12-95 10,019 10,192 10,106
3-96 10,249 10,739 10,429
6-96 10,511 11,221 10,703
9-96 10,689 11,568 10,945
12-96 11,316 12,533 11,526
This graph, prepared in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at the Fund's inception, with a similar investment
in the Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Flexible
Portfolio Funds 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.
- --------------------------------------------------------------------------------
* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market, without regard to company size. The Lipper Flexible Portfolio
Funds Index is an equally-weighted performance index of the largest
qualifying funds in this Lipper category. Source of the S&P index data is
Micropal. Source of the Lipper index data is Lipper Analytical Services,
Inc.
1 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. Including such insurance fees and expenses from the
Fund's return quotations has the effect of decreasing the performance
quoted.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1996
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PRINCIPAL VALUE
AMOUNT (NOTE 2)
UNITED STATES GOVERNMENT ISSUES 8.5%
United States Treasury Notes, 5.875%,
Due 11/15/05 (COST $50,566) $ 50,000 $ 48,250
SHORT-TERM INVESTMENTS (a) 96.2%
COMMERCIAL PAPER 51.4%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.51% 22,900 22,900
Eli Lilly & Company, 5.33% 26,000 26,000
General Mills, Inc., 5.49% 25,000 25,000
Johnson Controls, Inc., 5.53% 27,150 27,150
Pitney Bowes Credit Corporation, 5.51% 22,485 22,485
Sara Lee Corporation, 5.49% 26,000 26,000
Southwestern Bell Telephone Company, 5.49% 26,000 26,000
Warner Lambert Company, 5.48% 96,600 96,600
Wisconsin Electric Power Company, 5.55% 18,600 18,600
--------
290,735
UNITED STATES GOVERNMENT ISSUES 44.8%
United States Treasury Bills:
Due 1/30/97 230,000 229,118
Due 2/20/97 (b) 10,000 9,932
Due 3/13/97 (b) 15,000 14,855
--------
253,905
--------
TOTAL SHORT-TERM INVESTMENTS
(COST $544,630) 544,640
--------
TOTAL INVESTMENTS IN SECURITIES
(COST $595,196) 104.7% 592,890
Other Assets and Liabilities, Net (4.7%) (26,803)
--------
NET ASSETS 100.0% $566,087
========
FUTURES
- -------
UNDERLYING
EXPIRATION FACE AMOUNT UNREALIZED
DATE AT VALUE DEPRECIATION
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Purchased:
1 Five-Year U.S.Treasury Note 3/97 $106,594 ($1,531)
1 S&P 500 3/97 372,250 (9,113)
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
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U.S. Government ..................................... 53.4%
Healthcare - Drug/Diversified ....................... 21.7
Food ................................................ 9.0
Diversified Operations .............................. 4.8
Telecommunication Service ........................... 4.5
Insurance - Property & Casualty ..................... 4.0
Office Automation ................................... 4.0
Electric Power ...................................... 3.3
Other Assets and Liabilities, Net ................... (4.7)
------
Total 100.0%
======
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.
Percentages are stated as a percent of net assets.
STATEMENT OF OPERATIONS
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For the Year Ended December 31, 1996
INTEREST INCOME $26,659
EXPENSES:
Investment Advisory Fees 4,481
Custodian Fees 4,752
Professional Fees 4,946
Reports to Shareholders 6,888
Other 1,539
-------
Total Expenses before Waivers and Absorptions 22,606
Involuntary Expense Waivers and Absorptions by Advisor (12,064)
-------
Expenses, Net 10,542
-------
NET INVESTMENT INCOME 16,117
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain on:
Investments 44
Futures Contracts 60,587
Change in Unrealized Appreciation/Depreciation on:
Investments (2,832)
Futures Contracts (9,053)
-------
NET GAIN 48,746
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $64,863
=======
See notes to financial statements.
4
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STATEMENT OF ASSETS AND LIABILITIES
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December 31, 1996
ASSETS:
Investments in Securities, at Value (Cost of $595,196) $592,890
Interest Receivable 1,065
--------
Total Assets 593,955
LIABILITIES:
Accrued Operating Expenses and Other Liabilities 27,868
--------
NET ASSETS $566,087
========
Capital Shares Outstanding (Unlimited Number Authorized) 54,892
NET ASSET VALUE PER SHARE $10.31
======
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
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<CAPTION>
YEAR ENDED PERIOD ENDED
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
(NOTE 1)
OPERATIONS:
<S> <C> <C>
Net Investment Income $ 16,117 $ 1,896
Net Realized Gain 60,631 63
Change in Unrealized Appreciation/Depreciation (11,885) (1,065)
-------- --------
Increase in Net Assets Resulting from Operations 64,863 894
CAPITAL SHARE TRANSACTIONS 52,212 500,000
DISTRIBUTIONS:
From Net Investment Income (16,070) (1,896)
In Excess of Net Investment Income -- (77)
From Net Realized Gains (33,839) --
-------- --------
TOTAL INCREASE IN NET ASSETS 67,166 498,921
NET ASSETS:
Beginning of Period 498,921 --
-------- --------
End of Period $566,087 $498,921
======== ========
</TABLE>
5
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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December 31, 1996
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.
(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.
6
<PAGE>
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(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. NET ASSETS
Net assets as of December 31, 1996 were as follows:
Capital Stock $552,212
Undistributed Net Investment Loss (30)
Undistributed Net Realized Gain 26,855
Net Unrealized Depreciation (12,950)
--------
$566,087
========
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the year ended December 31, 1996 and
the period from November 30, 1995 to December 31, 1995 were as follows:
1996 1995
---- ----
Shares Dollars Shares Dollars
------ ------- ------ -------
Shares Sold 32,643 $344,372 50,000 $500,000
Dividends Reinvested 1,888 19,720 -- --
Shares Redeemed (29,639) (311,880) -- --
------- -------- ------ --------
4,892 $ 52,212 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 0.85%
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.
Unaffiliated directors' fees, excluding the effects of waivers and
reimbursements, for 1996 were $1,500. The Advisor owns 71% of the
outstanding shares of the Fund at December 31, 1996.
6. INVESTMENT TRANSACTIONS
There were no purchases or sales of long-term securities for the year ended
December 31, 1996.
7. INCOME TAX INFORMATION
At December 31, 1996, the investment cost and gross unrealized appreciation
and depreciation on investments for Federal income tax purposes were as
follows:
Aggregate Investment Cost $595,196
========
Aggregate Unrealized:
Appreciation $ 14
Depreciation (2,320)
---------
($ 2,306)
=========
7
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FINANCIAL HIGHLIGHTS
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12-31-96 12-31-95(b)
-------- -----------
SELECTED PER-SHARE DATA(a)
- --------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.98 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.31 0.04
Net Realized and Unrealized Gains
(Losses) on Investments 0.97 (0.02)
------- -------
Total from Investment Operations 1.28 0.02
LESS DISTRIBUTIONS:
From Net Investment Income (0.31) (0.04)
From Net Realized Gains (0.64) __
------- -------
Total Distributions (0.95) (0.04)
------- -------
NET ASSET VALUE, END OF PERIOD $ 10.31 $ 9.98
======= =======
TOTAL RETURN +12.9% +0.2%
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------
Net Assets, End of Period (In Thousands) $ 566 $ 499
Ratio of Expenses to Average Net Assets 2.0% 1.6%*
Ratio of Net Investment Income to Average Net Assets 3.1% 4.3%*
Portfolio Turnover Rate 0.0% 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) Inception date is November 30, 1995. Total return is not annualized.
REPORT OF INDEPENDENT ACCOUNTANTS
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To the Shareholders and Board of Directors of the
Strong Asset Allocation Fund II
We have audited the accompanying statement of assets and liabilities of Strong
Asset Allocation Fund II (one of the portfolios constituting the Strong Variable
Insurance Funds, Inc.), including the schedule of investments in securities, as
of December 31, 1996, and the related statement of operations for the year then
ended, and the statement of changes in net assets and the financial highlights
for the year ended December 31, 1996 and for the period from November 30, 1995
(inception) to December 31, 1995. 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
Asset Allocation Fund II as of December 31, 1996, the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for the year ended December 31, 1996 and for the period from November
30, 1995 to December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 3, 1997
