<PAGE>
THE STRONG
ADVANTAGE FUND II
ANNUAL REPORT o DECEMBER 31, 1996
TABLE OF CONTENTS
INVESTMENT REVIEW
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 ................................ 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.
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THE STRONG ADVANTAGE FUND II
THE STRONG ADVANTAGE FUND II SEEKS CURRENT INCOME WITH A VERY LOW DEGREE OF
SHARE-PRICE FLUCTUATION.
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.
PERFORMANCE WRAP-UP FOR 1996
The Strong Advantage Fund II posted a total return in 1996 of 4.92%, which
compared favorably with the 4.79% total return achieved by the average money
market fund as tracked by the Lipper Money Market Funds Average. (Of course,
unlike a money fund, the Advantage Fund's share price will vary. The Fund also
has a slightly longer maturity and may invest in lower quality bonds than can
money funds.) The Fund slightly underperformed its peer group, as measured by
the Lipper Ultra Short Obligation Average, which returned 5.29% for the
period.(1)*
ASSET ALLOCATION
Based on net assets as of 12-31-96
[PIE CHART]
Corporate Bonds 47.9%
Non-Agency Mortgage
and Asset-Backed Securities 35.7%
Short-Term Investments 16.4%
SHORT-TERM RATES ROSE ON STRONGER ECONOMIC DATA
Short-term interest rates ended higher in 1996, with most of the increase taking
place in the first quarter of the year. Going into February 1996, rates were
down and longer-term bond prices were riding high, reflecting expectations for
tepid economic growth, and optimistic projections for everything from a balanced
budget agreement to meaningful progress on a potential "flat tax" package.
As of 12-31-96
30-Day Annualized Yield(2) 1.70%
Average Maturity 0.24 years
Average Quality Rating(3) A
This euphoria abruptly reversed when February's employment report was
dramatically stronger than expected, indicating that the economy might be
growing faster than consensus expectations. This report, and subsequent data
which also suggested that the economy was strengthening, prompted investors to
anticipate rising interest rates, resulting in a sharp price correction,
particularly on longer-term bonds. This correction continued, in fits and
starts, through August.
Rates remained basically unchanged through the third quarter, and declined
somewhat in the fourth quarter as economic data indicated that the economy's
growth was not inducing meaningfully higher levels of inflation.
OUR STRATEGY: STAY THE COURSE
The Fund's ultra-short maturity helped shield the Fund from the majority of the
market turbulence that followed in the wake of the first quarter's surprising
economic data. Also helpful was our emphasis on income generation -
lower-quality, high-yield bonds, in which we are able to invest on a limited
basis, are typically less affected by interest rate changes than their
higher-quality counterparts.
Because the portfolio was well positioned to weather the ripples that affected
the short end of the market, we made few changes to the Fund's asset allocation
during the period. Toward the end of the year, we modified the Fund's sector
allocation modestly to increase our weighting in corporate bonds. This was done
in response to the issuance of bank and finance securities with very attractive
yields. As a result, we were able to enhance the Fund's income earning power
without adding a significant amount of credit risk.
2
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WE EXPECT RATES TO STAY NEAR THEIR CURRENT LEVEL
While economic indicators continue to suggest modest economic growth, there
appears to be little evidence of pent-up demand or a ground swell of underlying
strength that could lead to higher inflation long term. Therefore, we expect the
market to continue to focus on short-term data, leading to ups and downs within
a fairly confined range.
Such a choppy rate environment would likely prompt us to maintain an average
maturity near our current, moderate position, and to look for value on an
individual bond basis. As always, we will focus on those bonds that we believe
will enable us to maintain our yield advantage over money funds without adding
to potential share-price volatility.
Thank you for your investment in the Strong Advantage Fund II. We appreciate
your continued confidence.
Sincerely,
/s/ Jeffrey A. Koch
Jeffrey A. Koch
Portfolio Manager
[PHOTO OF JEFFREY A. KOCH]
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS(1)
As of 12-31-96
1-year 4.92%
Since Inception 5.24%
(on 11-30-95)
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 11-30-95 to 12-31-96
[GRAPH]
Saloman Brothers Lipper Ultra
1-Year Treasury Short
The Strong Benchmark-on-the Obligations
Advantage Fund II Run Index* Average*
10-95 10,000 10,000 10,000
12-95 10,076 10,061 10,056
3-96 10,168 10,170 10,164
6-96 10,357 10,303 10,286
9-96 10,502 10,461 10,436
12-96 10,572 10,630 10,588
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 Obligation Average. 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
November 1995.
- --------------------------------------------------------------------------------
* The Lipper Money Market Funds Index is an equally-weighted performance
index, adjusted for capital gains and distributions and income dividends of
the largest qualifying funds in this Lipper category. The Salomon Brothers
1-Year Treasury Bill Index is an unmanaged index generally representative
of the average yield of 1-Year Treasury Bills. The Lipper Ultra Short
Obligation Average represents funds that 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
the Salomon 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.
2 Yield is annualized for the 30 days ended 12-31-96, is historical, and will
vary. The Fund's Advisor temporarily waived 0.60% in management fees and
absorbed 0.68% in expenses for the Fund. Otherwise, the yield would have
been 0.42% and returns would have been lower.
3 For purposes of this average rating, the Fund's short-term debt obligations
have been assigned a long-term rating by the Advisor.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1996
- --------------------------------------------------------------------------------
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
CORPORATE BONDS 47.9%
American Reinsurance Corporation Senior
Subordinated Debentures, 10.875%, Due 9/15/04 $20,000 $ 21,548
American Standard, Inc. Senior Debentures,
11.375%, Due 5/15/04 20,000 21,550
Bank of Scotland Variable Rate Subordinated
Notes, 6.50%, Due 8/29/49 40,000 39,950
Cablevision Industries Corporation Senior Notes,
10.75%, Due 1/30/02 20,000 21,147
Caesars World, Inc. Senior Subordinated
Debentures, 8.875%, Due 8/15/02 20,000 20,850
Citicorp Floating Rate Notes, 6.50%, Due 5/01/04 13,000 13,082
First Bank System, Inc. Floating Rate Subordinated
Notes, 5.6875%, Due 11/30/10 (Putable at 100
on 11/30/00) 20,000 20,122
Global Marine, Inc. Senior Secured Notes, 12.75%,
Due 12/15/99 25,000 27,000
Hook-SupeRx, Inc. Senior Notes, 10.125%,
Due 6/01/02 20,000 21,243
NBD Bancorp, Inc. Floating Rate Subordinated
Notes, 5.75%, Due 12/18/05 25,000 24,932
Tele Communications, Inc. Medium Term Notes,
Tranche #59, 6.293%, Due 12/20/00 25,000 24,672
Wolverine Tube, Inc. Senior Subordinated Notes,
10.125%, Due 9/01/02 24,000 25,320
--------
TOTAL CORPORATE BONDS (COST $280,357) 281,416
NON-AGENCY MORTGAGE & ASSET-BACKED
SECURITIES 35.7%
Fund America Investors Corporation Variable Rate
Senior Pass-Thru Certificates, Series 1993-A,
Class A-1, 7.4588%, Due 6/25/23 21,426 22,149
Merrill Lynch Mortgage Investors, Inc. Variable
Rate Senior Subordinated Pass-Thru
Certificates, Series 1994-F, Class M, 6.375%,
Due 4/15/19 25,000 24,145
Morgan Stanley Capital I, Inc. Collateralized
Mortgage Obligations, Series 86-C, Class C-4,
9.00%, Due 5/01/16 18,780 19,158
RTC Mortgage Pass-Thru Securities, Inc.,
Series 1991-7, Class A, 7.75%, Due 12/25/18 19,778 19,395
RTC Variable Rate Mortgage Pass-Thru
Securities, Inc., Series 1992-6:
Class A-3, 7.6529%, Due 1/25/26 30,557 31,092
Class B-9, 6.2975%, Due 11/25/26 30,042 30,156
Ryland Mortgage Securities Corporation Mortgage
Participation Securities, Series 1991-1, 7.2832%,
Due 3/25/20 22,466 22,940
Ryland Mortgage Securities Corporation Variable
Rate Mortgage Participation Securities,
Series 1992-3, Class A-2, 7.3675%, Due 6/25/20 21,434 21,648
Suncoast Collateralized Mortgage Obligation
Trust III, Class C, 8.75%, Due 2/27/18 18,858 18,969
--------
TOTAL NON-AGENCY MORTGAGE & ASSET-BACKED
SECURITIES (COST $208,355) 209,652
SHORT-TERM INVESTMENTS (a) 15.8%
COMMERCIAL PAPER
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc.,
5.51% 28,300 28,300
Johnson Controls, Inc., 5.53% 28,300 28,300
Pitney Bowes Credit Corporation, 5.51% 28,300 28,300
Wisconsin Electric Power Company, 5.55% 7,900 7,900
--------
TOTAL SHORT-TERM INVESTMENTS (COST $92,800) 92,800
--------
TOTAL INVESTMENTS IN SECURITIES
(COST $581,512) 99.4% 583,868
Other Assets and Liabilities, Net 0.6% 3,747
--------
NET ASSETS 100.0% $587,615
========
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
- --------------------------------------------------------------------------------
Non-Agency Single Family ........................... 24.0%
Bank - Regional .................................... 10.2
Diversified Operations ............................. 8.5
Insurance - Property & Casualty .................... 8.5
Media - Radio/TV ................................... 7.8
Non-Agency Asset-Backed ............................ 7.6
Office Automation .................................. 4.8
Oil - North American Integrated .................... 4.6
Bank - Super Regional .............................. 4.3
Metal Products and Fabrication ..................... 4.3
Non-Agency Manufactured Housing .................... 4.1
Retail - Drug Store ................................ 3.6
Leisure Service .................................... 3.6
Bank - Money Center ................................ 2.2
Electric Power ..................................... 1.3
Other Assets and Liabilities, Net .................. 0.6
-----
Total 100.0%
=====
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
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United States ...................................... 92.6%
United Kingdom ..................................... 6.8
Other Assets and Liabilities, Net .................. 0.6
-----
Total 100.0%
=====
LEGEND
------
(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.
See notes to financial statements.
4
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STATEMENT OF OPERATIONS
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For the Year Ended December 31, 1996
INTEREST INCOME $37,547
EXPENSES:
Investment Advisory Fees 3,429
Custodian Fees 1,022
Professional Fees 4,416
Reports to Shareholders 6,505
Other 1,605
-------
Total Expenses before Waivers & Absorptions 16,977
Involuntary Waivers & Absorptions by Advisor (5,126)
-------
Expenses, Net 11,851
-------
NET INVESTMENT INCOME 25,696
REALIZED AND UNREALIZED GAIN:
Net Realized Gain on Investments 2,188
Change in Unrealized Appreciation/Depreciation on Investments 1,097
-------
NET GAIN 3,285
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $28,981
=======
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1996
ASSETS:
Investments in Securities, at Value (Cost of $581,512) $583,868
Interest Receivable 6,451
Other Assets 97
--------
Total Assets 590,416
LIABILITIES:
Dividends Payable 965
Accrued Operating Expenses and Other Liabilities 1,836
--------
Total Liabilities 2,801
--------
NET ASSETS $587,615
========
Capital Shares Outstanding (Unlimited Number Authorized) 58,559
NET ASSET VALUE PER SHARE $10.03
======
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED PERIOD ENDED
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
(NOTE 1)
<S> <C> <C>
OPERATIONS:
Net Investment Income $ 25,696 $ 2,291
Net Realized Gain 2,188 --
Change in Unrealized Appreciation/Depreciation 1,097 1,259
-------- --------
Increase in Net Assets Resulting from Operations 28,981 3,550
CAPITAL SHARE TRANSACTIONS 85,351 500,000
DISTRIBUTIONS:
From Net Investment Income (25,696) (2,291)
From Net Realized Gains (2,188) --
In Excess of Net Realized Gains (92) --
-------- --------
TOTAL INCREASE IN NET ASSETS 86,356 501,259
NET ASSETS:
Beginning of Period 501,259 --
-------- --------
End of Period $587,615 $501,259
======== ========
</TABLE>
See notes to financial statements.
5
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NOTES TO FINANCIAL STATEMENTS
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December 31, 1996
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, 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 and 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>
(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 $585,351
Undistributed Net Realized Loss (92)
Net Unrealized Appreciation 2,356
--------
$587,615
========
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the year ended December 31, 1996 and
the period ended December 31, 1995 were as follows:
1996 1995
------------------- ------------------
Shares Dollars Shares Dollars
-------- ---------- ------- --------
Shares Sold 137,197 $1,380,639 50,000 $500,000
Dividends Reinvested 657 6,608 -- --
Shares Redeemed (129,295)(1,301,896) -- --
-------- ---------- ------- --------
8,559 $ 85,351 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.
Unaffiliated directors' fees for the year ended December 31, 1996,
excluding the effect of waivers and absorptions, were $1,500.
The Advisor owns 44.8% of the outstanding shares of the Fund at December
31, 1996.
6. INVESTMENT TRANSACTIONS
Aggregate sales of long-term government securities for the year ended
December 31, 1996 were $98,991. Aggregate purchases and sales of other
long-term securities for the year ended December 31, 1996 were $543,759 and
$253,272, respectively.
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 $581,512
========
Aggregate Unrealized:
Appreciation $ 2,828
Depreciation (472)
--------
$ 2,356
========
7
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FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
12-31-96 12-31-95(b)
-------- --------
SELECTED PER-SHARE DATA(a)
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.03 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.44 0.05
Net Realized and Unrealized Gains on Investments 0.04 0.03
-------- --------
Total from Investment Operations 0.48 0.08
LESS DISTRIBUTIONS:
From Net Investment Income (0.44) (0.05)
From Net Realized Gains (0.04) --
-------- --------
Total Distributions (0.48) (0.05)
-------- --------
NET ASSET VALUE, END OF PERIOD $ 10.03 $ 10.03
======== ========
TOTAL RETURN +4.9% +0.8%
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------
Net Assets, End of Period (In Thousands) $588 $501
Ratio of Expenses to Average Net Assets 2.0% 1.0%*
Ratio of Net Investment Income to Average Net Assets 4.3% 5.2%*
Portfolio Turnover Rate 72.2% 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 and portfolio turnover
rate are not annualized.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Advantage Fund II
We have audited the accompanying statement of assets and liabilities of Strong
Advantage 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 statements 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
Advantage 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
<PAGE>
