<PAGE>
THE STRONG
DISCOVERY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING STOCKS]
[STRONG LOGO]
STRONG FUNDS
<PAGE>
THE STRONG
DISCOVERY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Discovery Fund II .........................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities ................................4
Statement of Assets and Liabilities ..................................6
Statement of Operations ..............................................7
Statement of Changes in Net Assets ...................................8
Notes to Financial Statements ........................................9
FINANCIAL HIGHLIGHTS .....................................................11
<PAGE>
THE STRONG DISCOVERY FUND II
OVERALL, THE RECENT MARKET ENVIRONMENT REMINDS US OF 1990 AND 1991.
The Strong Discovery Fund II seeks to provide investors with capital growth, a
goal we pursue by investing in a diversified portfolio of small-, mid-, and
larger-cap stocks. Our investment approach combines number-crunching analysis
with direct research, including on-site visits. Through frequent discussions
with management, suppliers, customers and competitors, we believe we can
identify vital aspects of companies that aren't reflected in their historical
financial statements--or their stock prices.
=======================================
ASSET ALLOCATION
Based on net assets as of 6-30-97
=======================================
[PIE CHART]
Stocks 94.5%
Short-Term Investments 5.5%
=======================================
Discovery Fund II's portfolio measures up well under the key criteria we use
when selecting stocks--good businesses, good managements and attractive
valuations. In general, we are pleased with the quality and performance of the
companies in the portfolio. With few exceptions, they have been meeting or
exceeding their profit targets. We are also pleased with the valuation of the
portfolio, especially compared with the high valuations being accorded the large
companies that dominate the S&P 500 Index. As the following table illustrates,
the Fund's average valuation--as measured by its price/earnings ratio--is
slightly below the S&P 500's. Based on our analysis of the companies in the
portfolio, we estimate the portfolio's earnings growth potential to be more than
three times that of the S&P 500. By concentrating on companies with superior
growth potential, we seek to produce superior investment results over time.
P/E RATIO ESTIMATED
FUND (1998 EARNINGS) EARNINGS GROWTH(1)
- --------------------------------------------------------------------------------
Strong Discovery Fund II 17.9x 24.3%
S&P 500 Index 18.8x 7.8%
In our investment process, we make forward-looking decisions. Our job is to
position the portfolio for what we expect to happen, not to chase after the
market sectors or stocks that have recently performed best. We continue to
believe that small- and medium-size growth stocks offer the most opportunity
looking forward. In hindsight, however, our decision to emphasize this group was
premature. As a result, our 4.26% total return for the first half of 1997
trailed the 20.61% return of the S&P 500 and the 10.16% return of our peer
group, the Lipper Capital Appreciation Funds Index.*(2)
2
<PAGE>
Overall, the recent market environment reminds us of 1990 and 1991. Then, as
now, investors moved toward indexation--trying to replicate the S&P 500 without
regard for the merits of the individual companies or their prices. Eventually
this cycle came to an end, creating an opportunity for investors willing to
consider stocks outside the S&P 500's largest. We have currently positioned the
Fund to benefit from what may be a similar scenario.
Thank you for your investment in the Strong Discovery Fund II. We appreciate
your support, and are committed to earning it.
Sincerely,
/s/Richard S. Strong
Richard S. Strong
/s/ Chip Paquelet
Charles A. Paquelet
Portfolio Managers
[PHOTO OF RICHARD S. STRONG & CHARLES A. PAQUELET]
================================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 6-30-97
================================================================================
[GRAPH]
THE STRONG Lipper Capital
DISCOVERY II S & P 500 Appreciation
FUND Stock Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 10,886 10,680 11,024
12-93 13,284 11,756 12,760
12-94 12,569 11,911 12,446
12-95 17,000 16,387 16,379
12-96 17,138 20,150 18,827
6-97 17,868 24,303 20,741
This graph, provided 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 ("S&P 500") and the Lipper Capital
Appreciation 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. To equalize time periods, the indexes'
performance was prorated for the month of May 1992.
================================================================================
=======================
AVERAGE ANNUAL
TOTAL RETURNS(2)
As of 6-30-97
=======================
1-YEAR 7.58%
3-YEAR 14.56%
5-YEAR 13.25%
SINCE INCEPTION 11.94%
(on 5-8-92)
=======================
- --------------------------------------------------------------------------------
* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market, without regard to company size. The Lipper Capital
Appreciation Funds Index is an equally-weighted performance index of the
largest qualifying funds in this Lipper category. Source of the S&P 500
index data is Micropal. Source of the Lipper index data is Lipper
Analytical Services, Inc.
1 Earnings growth has been estimated for a projected five-year period. The
Discovery Fund II's earnings growth estimate has been generated from our
own analysis of the portfolio's individual securities as of June 30, 1997.
The earnings growth projection for the S&P 500 has been based on a
consensus of earnings estimates from six Wall Street investment firms as
shown by Bloomberg dated June 30, 1997.
2 Average annual total return and total return measure change in the value of
an investment, assuming reinvestment of all dividends and capital gains.
Average annual total return reflects annualized change, while total return
reflects aggregate change. 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
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
COMMON STOCKS 94.5%
AEROSPACE & DEFENSE 0.8%
Hexcel Corporation (b) 71,600 $ 1,235,100
UNC, Inc. (b) 25,000 365,625
-----------
1,600,725
BANK - MONEY CENTER 2.2%
BankAmerica Corporation 16,700 1,078,194
Chase Manhattan Corporation 17,121 1,661,807
Citicorp 16,125 1,944,070
-----------
4,684,071
COMMERCIAL SERVICE 7.3%
Accustaff, Inc. (b) 71,051 1,683,020
American Oncology Resources, Inc. (b) 16,600 280,125
Bacou U.S.A., Inc. (b) 46,250 751,562
Budget Group, Inc. Class A (b) 25,200 869,400
Consolidated Graphics, Inc. (b) 64,950 2,711,662
Getty Communications PLC Sponsored ADR (b) 77,700 1,146,075
Individual, Inc. (b) 68,100 272,400
Iron Mountain, Inc. (b) 7,900 237,000
Lason Holdings, Inc. (b) 1,825 51,328
Outdoor Systems, Inc. (b) 43,950 1,681,087
Pittston Company Brinks Group 42,300 1,269,000
Registry, Inc. (b) 14,300 657,800
Rollins Truck Leasing Corporation 41,300 614,338
The Sabre Group Holdings, Inc. (b) 100 2,713
Sitel Corporation (b) 76,900 1,586,063
Universal Outdoor Holdings, Inc. (b) 44,675 1,558,041
-----------
15,371,614
COMPUTER - MAINFRAME 1.7%
International Business Machines Corporation 40,200 3,625,537
COMPUTER - PERIPHERAL EQUIPMENT 0.9%
MICROS Systems, Inc. (b) 20,500 861,000
Storage Technology Corporation (b) 24,900 1,108,050
-----------
1,969,050
COMPUTER - PERSONAL & WORKSTATION 1.4%
Compaq Computer Corporation (b) 29,000 2,878,250
COMPUTER SERVICE 2.7%
America Online, Inc. (b) 35,900 1,996,938
Ceridian Corporation (b) 4,000 169,000
Fiserv, Inc. (b) 35,850 1,599,806
National Techteam, Inc. (b) 29,600 632,700
Sykes Enterprises, Inc. (b) 45,425 1,181,050
-----------
5,579,494
COMPUTER SOFTWARE 3.8%
Ascend Communications, Inc. (b) 6,100 240,187
Computer Associates International, Inc. 29,300 1,631,644
Emulex Corporation (b) 9,800 149,450
Hummingbird Communications, Ltd. (b) 38,800 996,675
IONA Technologies PLC ADR (b) 23,600 466,100
McAfee Associates, Inc. (b) 32,550 2,054,719
Microsoft Corporation (b) 8,300 1,048,912
Sterling Commerce, Inc. (b) 43,300 1,423,488
-----------
8,011,175
CONSUMER - MISCELLANEOUS 1.1%
Equity Corporation International (b) 16,200 391,838
Service Corporation International 42,950 1,411,981
Stewart Enterprises, Inc. Class A 10,000 420,000
-----------
2,223,819
DIVERSIFIED OPERATIONS 0.1%
National Service Industries, Inc. 4,600 223,962
ELECTRICAL EQUIPMENT 0.7%
Berg Electronics Corporation (b) 30,200 1,085,313
Westinghouse Electric Corporation 18,000 416,250
-----------
1,501,563
ELECTRONIC PARTS DISTRIBUTION 1.3%
Kent Electronics Corporation (b) 77,000 2,824,937
ELECTRONICS - SEMICONDUCTOR/COMPONENT 0.8%
General Cable Corporation (b) 11,250 288,281
Intel Corporation 6,975 989,142
Micron Technology, Inc. (b) 6,600 263,588
Uniphase Corporation (b) 2,600 151,450
-----------
1,692,461
FINANCE - MISCELLANEOUS 1.9%
American Express Company 27,400 2,041,300
Checkfree Corporation (b) 43,400 764,925
PMT Services, Inc. (b) 72,300 1,102,575
Providian Financial Corporation (b) 2,500 80,313
-----------
3,989,113
FOOD 0.1%
Lancaster Colony Corporation 4,400 212,850
HEALTHCARE - DRUG/DIVERSIFIED 1.4%
Halsey Drug Company, Inc. (b) 440,400 2,036,850
Ivax Corporation (b) 76,300 853,606
-----------
2,890,456
HEALTHCARE - MEDICAL SUPPLY 10.1%
Becton, Dickinson & Company 14,750 746,719
Cohr, Inc. (b) 108,150 2,027,813
Covance, Inc. (b) 37,000 714,562
Dentsply International, Inc. 75,250 3,687,250
McKesson Corporation 51,250 3,971,875
NCS Healthcare, Inc. Class A (b) 26,650 809,494
Omnicare, Inc. 13,650 428,269
Steris Corporation (b) 77,100 2,881,612
Suburban Ostomy Supply Company, Inc. (b) 259,000 2,428,125
Sybron International Corporation (b) 91,775 3,659,528
-----------
21,355,247
HEALTHCARE - PATIENT CARE 1.3%
United Dental Care, Inc. (b) 174,700 2,620,500
HEALTHCARE - PRODUCT 1.3%
Baxter International, Inc. 7,650 399,713
Boston Scientific Corporation (b) 19,700 1,210,319
Cytyc Corporation (b) 8,300 225,137
Sabratek Corporation (b) 35,000 980,000
-----------
2,815,169
HOUSEHOLD APPLIANCES & FURNISHINGS 0.7%
Harman International Industries, Inc. 27,450 1,156,331
Newell Companies, Inc. 4,300 170,388
Sunbeam Corporation 5,200 196,300
-----------
1,523,019
HOUSING RELATED 0.7%
Watsco, Inc. 59,900 1,497,500
INSURANCE - LIFE 0.4%
Conseco, Inc. 22,800 843,600
INSURANCE - MULTI-LINE 0.4%
MGIC Investment Corporation 15,400 738,237
INSURANCE - PROPERTY & CASUALTY 0.1%
Hartford Financial Services Group, Inc. 3,250 268,937
LEISURE PRODUCT 1.8%
Action Performance Companies, Inc. (b) 5,400 130,950
Harley-Davidson, Inc. 65,225 3,126,723
SCP Pool Corporation (b) 23,150 489,044
-----------
3,746,717
LEISURE SERVICE 2.3%
Candlewood Hotel Company, Inc. (b) 79,000 661,625
Host Marriott Corporation (b) 23,350 415,922
International Game Technology 107,400 1,906,350
Promus Hotel Corporation (b) 19,900 771,125
Regal Cinemas, Inc. (b) 30,300 999,900
-----------
4,754,922
MACHINE TOOL 1.2%
Applied Power, Inc. 47,500 2,452,188
See notes to financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
MACHINERY - MISCELLANEOUS 0.9%
Greenwich Air Services, Inc. 67,075 $1,949,367
MACHINERY - TRANSPORTATION EQUIPMENT
& PARTS 0.8%
Miller Industries, Inc. (b) 109,250 1,748,000
MEDIA - RADIO/TV 1.0%
Clear Channel Communications, Inc. (b) 33,100 2,035,650
NATURAL GAS DISTRIBUTION 0.1%
WICOR, Inc. 7,425 289,111
OFFICE AUTOMATION 5.1%
Danka Business Systems PLC Sponsored ADR 249,225 10,187,072
Xerox Corporation 7,300 575,787
------------
10,762,859
OIL - INTERNATIONAL INTEGRATED 0.3%
Santa Fe International Corporation (b) 17,800 605,200
OIL - NORTH AMERICAN EXPLORATION &
PRODUCTION 6.0%
Ocean Energy, Inc. (b) 211,375 9,776,094
Union Pacific Resources Group, Inc. 118,000 2,935,250
------------
12,711,344
OIL WELL EQUIPMENT & SERVICE 5.7%
Cooper Cameron Corporation (b) 20,900 977,075
ENSCO International, Inc. (b) 28,850 1,521,837
Global Marine, Inc. (b) 28,950 673,088
Marine Drilling Companies, Inc. (b) 91,250 1,790,781
Nabors Industries, Inc. (b) 55,850 1,396,250
Noble Drilling Corporation (b) 156,200 3,524,263
Rowan Companies, Inc. (b) 9,900 279,056
Schlumberger, Ltd. 14,950 1,868,750
------------
12,031,100
PERSONAL & COMMERCIAL LENDING 1.9%
Associates First Capital Corporation 55,400 3,074,700
Household International, Inc. 7,700 904,269
------------
3,978,969
POLLUTION CONTROL 0.0%
Waste Industries, Inc. (b) 4,800 84,600
RAILROAD 1.0%
Burlington Northern Santa Fe Corporation 24,100 2,165,988
REAL ESTATE 0.1%
Charles E. Smith Residential Realty, Inc. 7,450 215,119
RETAIL - DISCOUNT & VARIETY 1.5%
Consolidated Stores Corporation (b) 69,987 2,432,066
ShopKo Stores, Inc. 26,000 663,000
------------
3,095,066
RETAIL - DRUG STORE 0.5%
CVS Corporation 1 51
Rite Aid Corporation 21,400 1,067,325
------------
1,067,376
RETAIL - RESTAURANT 2.9%
Casa Ole Restaurants, Inc. (b) 72,600 671,550
Quality Dining, Inc. (b) 181,500 850,781
Rainforest Cafe, Inc. (b) 182,800 4,638,550
------------
6,160,881
RETAIL - SPECIALTY 12.2%
Borders Group, Inc. (b) 44,200 1,066,325
CUC International, Inc. (b) 84,250 2,174,703
Casey's General Stores, Inc. 16,600 357,419
Central Garden & Pet Company (b) 190,000 4,750,000
Eagle Hardware & Garden, Inc. (b) 39,100 894,413
Goody's Family Clothing, Inc. (b) 24,850 680,269
The Hertz Corporation (b) 63,450 2,284,200
Just For Feet, Inc. (b) 68,150 1,188,366
MSC Industrial Direct Company, Inc. Class A (b) 18,900 758,362
Movie Gallery, Inc. (b) 408,400 2,603,550
Regis Corporation 20,400 481,950
Renters Choice, Inc. (b) 89,000 1,768,875
Staples, Inc. (b) 66,750 1,551,937
U.S. Office Products Company (b) 18,700 571,519
Wilmar Industries, Inc. (b) 105,450 2,570,344
Zale Corporation (b) 100,500 1,991,156
------------
25,693,388
SAVINGS & LOAN 2.2%
TCF Financial Corporation 92,500 4,567,187
TELECOMMUNICATION EQUIPMENT 1.2%
Aware, Inc. (b) 16,700 246,325
Belden, Inc. 33,700 1,147,906
Communications Central, Inc. (b) 25,950 285,450
General Instrument Corporation (b) 15,300 382,500
Scientific-Atlanta, Inc. 17,800 389,375
------------
2,451,556
TOBACCO 0.7%
Philip Morris Companies, Inc. 33,400 1,482,125
TRANSPORTATION SERVICE 1.9%
Coach USA, Inc. (b) 93,900 2,494,219
Hub Group, Inc. Class A (b) 49,275 1,484,409
------------
3,978,628
------------
TOTAL COMMON STOCKS (COST $184,765,605) 198,968,627
SHORT-TERM INVESTMENTS (a) 1.7%
COMMERCIAL PAPER 0.3%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.29% $ 378,100 378,100
Johnson Controls, Inc., 5.31% 183,900 183,900
Eli Lilly & Company, 5.09% 100 100
------------
Total Commercial Paper 562,100
REPURCHASE AGREEMENT 1.4%
Goldman, Sachs & Company (Dated 6/30/97), 5.75%
Due 7/01/97 (Repurchase proceeds $3,000,479);
Collateralized by $2,505,000 United States
Treasury Bonds, 10.75%, Due 5/15/03 (Market
Value $3,067,066) (c) 3,000,000 3,000,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $3,562,100) 3,562,100
------------
TOTAL INVESTMENTS IN SECURITIES
(COST $188,327,705) 96.2% 202,530,727
Other Assets and Liabilities, Net 3.8% 7,931,407
------------
NET ASSETS 100.0% $210,462,134
============
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- ---------------------------------------------------------------
United States ....................................... 90.2%
United Kingdom ...................................... 5.6
Canada. ............................................. 0.4
Other Assets and Liabilities, Net ................... 3.8
------
Total 100.0%
======
LEGEND
- ------
(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Non-income producing security.
(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.
5
See notes to financial statements.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $188,327,705) $202,530,727
Receivable from Brokers for Securities Sold 9,248,452
Dividends and Interest Receivable 121,295
Other Assets 7,754
------------
Total Assets 211,908,228
LIABILITIES:
Payable to Brokers for Securities Purchased 1,376,562
Accrued Operating Expenses and Other Liabilities 69,532
------------
Total Liabilities 1,446,094
------------
NET ASSETS $210,462,134
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) 206,535,377
Undistributed Net Investment Loss (673,875)
Undistributed Net Realized Loss (9,601,229)
Net Unrealized Appreciation 14,201,861
------------
Net Assets $210,462,134
============
Capital Shares Outstanding (Unlimited Number Authorized) 18,683,469
NET ASSET VALUE PER SHARE $11.26
======
6
See notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (Unaudited)
INCOME:
Dividends $ 444,852
Interest 85,324
----------
Total Income 530,176
EXPENSES:
Investment Advisory Fees 991,844
Custodian Fees 22,657
Shareholder Servicing Costs 173,079
Other 16,471
----------
Total Expenses 1,204,051
----------
NET INVESTMENT LOSS (673,875)
REALIZED AND UNREALIZED GAIN:
Net Realized Gain on:
Investments 6,986,881
Futures Contracts 447
----------
Net Realized Gain 6,987,328
Change in Unrealized Appreciation/Depreciation on:
Investments 2,157,318
Foreign Currencies 186
----------
Net Change in Unrealized Appreciation/Depreciation 2,157,504
----------
NET GAIN 9,144,832
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $8,470,957
==========
7
See notes to financial statements.
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
---------------- -------------
(UNAUDITED)
OPERATIONS:
<S> <C> <C>
Net Investment Loss ($ 673,875) ($ 646,262)
Net Realized Gain 6,987,328 1,976,658
Change in Unrealized Appreciation/Depreciation 2,157,504 (455,188)
------------ ------------
Increase in Net Assets Resulting from Operations 8,470,957 875,208
DISTRIBUTIONS:
In Excess of Net Investment Income -- (20,605,467)
From Net Realized Gains -- (27,075,722)
------------ ------------
Total Distributions -- (47,681,189)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 40,515,989 99,577,424
Proceeds from Reinvestment of Dividends -- 47,654,898
Proceeds from Shares Redeemed (67,936,911) (116,060,764)
------------ ------------
Increase (Decrease) in Net Assets from Capital Share Transactions (27,420,922) 31,171,558
------------ ------------
TOTAL DECREASE IN NET ASSETS (18,949,965) (15,634,423)
NET ASSETS:
Beginning of Period 229,412,099 245,046,522
------------ ------------
End of Period $210,462,134 $229,412,099
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 3,809,289 8,622,762
Issued in Reinvestment of Dividends -- 4,416,662
Redeemed (6,363,267) (10,034,779)
---------- -----------
Net Increase (Decrease) in Shares of the Fund (2,553,978) 3,004,645
========== ===========
8
See notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
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 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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
(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 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 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.
The amount payable to the Advisor at June 30, 1997, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees
for the six months ended June 30, 1997, were $15,441, $40 and $2,044,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1997 were $211,485,686 and $234,914,522,
respectively.
5. INCOME TAX INFORMATION
At June 30, 1997, the cost of investments in securities for federal income
tax purposes was $189,310,050. Net unrealized appreciation of securities
was $13,220,677, consisting of gross unrealized appreciation and
depreciation of $25,694,877 and $12,474,200, respectively.
At December 31, 1996, net capital loss carryovers, expiring in varying
amounts through 2004, were $15,590,678.
10
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA (a)
---------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------- ------------------------------------------------
<CAPTION>
Net Realized
Net Asset Net and Unrealized Total In Excess From Net Asset
Value, Investment Gains from From Net of Net Net Value,
Beginning Income (Losses)on Investment Investment Investment Realized Total End of
of Period (Loss) Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997 (c) $10.80 ($0.04) $0.50 $0.46 -- -- -- -- $11.26
Dec. 31, 1996 13.44 (0.05) 0.04 (0.01) -- ($1.05) ($1.58) ($2.63) 10.80
Dec. 31, 1995 10.07 (0.03) 3.58 3.55 -- (0.18) -- (0.18) 13.44
Dec. 31, 1994 11.54 0.10 (0.71) (0.61) ($0.10) (0.43) (0.33) (0.86) 10.07
Dec. 31, 1993 10.15 0.05 2.09 2.14 (0.05) (0.70) -- (0.75) 11.54
Dec. 31, 1992 (d) 10.00 0.04 0.78 0.82 (0.04) -- (0.63)(e) (0.67) 10.15
FINANCIAL HIGHLIGHTS (continued)
RATIOS AND SUPPLEMENTAL DATA
----------------------------------------------------------------------
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income Portfolio Commission
Total Period(In to Average to Average Turnover Rate
Return Millions) Net Assets Net Assets Rate Paid (b)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997 (c) +4.3% $210 1.2%* (0.7%)* 107.7% $0.0591
Dec. 31, 1996 +0.8% 229 1.2% (0.3%) 970.0% 0.0292
Dec. 31, 1995 +35.3% 245 1.3% (0.3%) 542.1%
Dec. 31, 1994 -5.4% 119 1.2% 1.1% 662.5%
Dec. 31, 1993 +22.0% 72 1.3% 0.5% 976.5%
Dec. 31, 1992 (d) +8.9% 27 1.7%* 0.5%* 1,149.6%
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the Fund outstanding for the entire period.
(b) Disclosure required, effective for reporting periods beginning after September 1, 1995.
(c) For the six months ended June 30, 1997 (Unaudited). Total return and portfolio turnover rate are not annualized.
(d) Inception date is May 8, 1992. Total return and portfolio turnover rate are not annualized.
(e) Ordinary income distribution for tax purposes.
11
</TABLE>
<PAGE>
NOTES
- --------------------------------------------------------------------------------
12
<PAGE>
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
<PAGE>
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201 5516G97
