<PAGE>
THE STRONG
SHORT-TERM BOND FUND II
ANNUAL REPORT o DECEMBER 31, 1996
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Short-Term Bond 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.
4689A97
<PAGE>
THE STRONG SHORT-TERM BOND FUND II
THE STRONG SHORT-TERM BOND FUND II SEEKS TOTAL RETURN BY INVESTING FOR A HIGH
LEVEL OF CURRENT INCOME WITH A LOW DEGREE OF SHARE-PRICE FLUCTUATION.
The Strong Short-Term Bond Fund II seeks total return by investing for a high
level of current income with a low degree of share-price fluctuation. The Fund
invests primarily in short- and intermediate-term, investment-grade debt
obligations, and its average portfolio maturity will normally be between one and
three years.
THE FUND'S FIRST FOUR MONTHS
The Strong Short-Term Bond Fund II achieved a total return of 1.06% for the four
months between its inception on August 30, 1996 and December 31, 1996.(1)
ASSET ALLOCATION
Based on net assets as of 12-31-96
[PIE CHART]
Non-Agency Mortgage-Backed Securities 4.0%
Short-Term Investments 96.0%
THE MARKET WAS MIXED
The Strong Short-Term Bond Fund II was launched late in a skittish year. During
the months just prior to the Fund's opening, the bond market was recovering from
a run-up in rates spawned by indications of a strengthening economy earlier in
the year.
Through the summer and into the fall, however, the market seemed to become more
comfortable with the underlying fundamentals of the economy. Despite slightly
stronger growth, inflation remained subdued and it appeared that the economy was
unlikely to grow faster than 3%. Against this backdrop, the chances of
substantially higher rates diminished, the Federal Reserve left the Fed Funds
rate unchanged, and interest rates began to move lower late in the year.
OUR VIEW CHANGED LITTLE
While the market's psychology shifted several times during the year, our outlook
remained fundamentally unchanged. We saw little justification to expect a
sustained rise in interest rates. This view was vindicated by short-term
interest rates (as measured by 1-year Treasury Bills) generally remaining in a
range between 5% and 6% throughout the year.
WE ANTICIPATE CURRENT CONDITIONS WILL REMAIN IN PLACE
The market appears to have settled down in anticipation of slow, steady economic
growth. There are severalreasons why we anticipate these conditions will remain
in place for the near term. First, it's unlikely that inflation will pick up if
the economy's growth rate remains between 2% and 3%. Second, the market appears
fairly valued, given a slow growth outlook. That should help stabilize prices.
And finally, we still have the balance between a Republican Congress and a
Democratic President that so far has been beneficial for the financial markets.
As of 12-31-96
30-DAY ANNUALIZED YIELD(2) 3.34%
AVERAGE MATURITY 0.2 YEARS
AVERAGE QUALITY RATING(3) AAA
2
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Overall, the current environment appears favorable for bond investors.
We appreciate your investment in the Strong Short-Term Bond Fund II.
Sincerely
/s/Bradley C. Tank
Bradley C. Tank
Portfolio Manager
/s/Lyle J. Fitterer
Lyle J. Fitterer
Portfolio Manager
[PHOTO OF BRADLEY C. TANK AND LYLE J. FITTERER]
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TOTAL RETURN(1)
As of 12-31-96
SINCE INCEPTION 1.06%
(on 8-30-96)
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 8-30-96 to 12-31-96
[GRAPH]
The Strong Lehman Brothers Lipper Short
Short-Term 1-3 Year Government/ Investment Grade
Bond Fund II Corporate Bond Index* Debt Funds Index*
8-96 10,000 10,000 10,000
9-96 10,026 10,092 10,089
10-96 10,052 10,206 10,194
11-96 10,078 10,282 10,277
12-96 10,106 10,285 10,277
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
Lehman Brothers 1-3 Year Government/Corporate Bond Index and the Lipper Short
Investment Grade Debt 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.
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* The Lehman Brothers 1-3 Year Government/Corporate Bond Index is an
unmanaged index generally representative of all U.S. government agency and
Treasury securities and all investment-grade corporate debt securities with
maturities of one to three years. The Lipper Short Investment Grade Debt
Funds Index is an equally-weighted performance index of the largest
qualifying funds in this Lipper category. Source of the Lehman index data
is Bloomberg. Source of the Lipper index data is Lipper Analytical
Services, Inc.
1 Total return is not annualized. A Fund's performance, especially for very
short time periods, should not be the sole factor in making your investment
decision. 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 has waived its management fee of 0.625% and
absorbed expenses of 2.715%. Otherwise, the yield would have been 0.00% 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
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PRINCIPAL VALUE
AMOUNT (NOTE 2)
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NON-AGENCY MORTGAGE-BACKED SECURITIES 4.0%
SML Commercial Mortgage Trust Variable Rate
Pass-Thru Certificates, Series 1994-C1, Class A-1,
6.375%, Due 9/18/99 (COST $10,011) $ 10,000 $ 10,012
SHORT-TERM INVESTMENTS (a) 96.9%
COMMERCIAL PAPER 2.7%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.51% 100 100
Johnson Controls, Inc., 5.53% 6,800 6,800
--------
6,900
UNITED STATES GOVERNMENT ISSUES 94.2%
United States Treasury Bills, Due 3/27/97 240,000 237,256
--------
TOTAL SHORT-TERM INVESTMENTS
(COST $244,131) 244,156
--------
TOTAL INVESTMENTS IN SECURITIES
(COST $254,142) 100.9% 254,168
Other Assets and Liabilities, Net (0.9%) (2,191)
--------
NET ASSETS 100.0% $251,977
========
PERCENTAGE OF
INDUSTRY DIVERSIFICATION NET ASSETS
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U.S. Government .................................... 94.2%
Non-Agency Commercial .............................. 4.0
Diversified Operations ............................. 2.7
Other Assets and Liabilities, Net .................. (0.9)
------
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.
STATEMENT OF OPERATIONS
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For the Period Ended December 31, 1996 (Note 1)
INTEREST INCOME $4,318
EXPENSES:
Investment Advisory Fees 536
Custodian Fees 263
Legal Fees 1,008
Audit Fees 4,865
Other 926
------
Total Expenses before Waivers and Absorptions 7,598
Involuntary Expense Waivers and Absorptions by Advisor (5,922)
------
Expenses, Net 1,676
------
NET INVESTMENT INCOME 2,642
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Loss on Investments (1)
Change in Unrealized Appreciation/Depreciation on Investments 26
------
NET GAIN 25
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,667
======
4
See notes to financial statements.
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STATEMENT OF ASSETS AND LIABILITIES
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December 31, 1996
ASSETS:
Investments in Securities, at Value (Cost of $254,142) $254,168
Interest Receivable 77
Other Assets 7,443
--------
Total Assets 261,688
LIABILITIES:
Dividends Payable 690
Accrued Operating Expenses and Other Liabilities 9,021
--------
Total Liabilities 9,711
--------
NET ASSETS $251,977
========
Capital Shares Outstanding (Unlimited Number Authorized) 25,195
NET ASSET VALUE PER SHARE $10.00
======
STATEMENT OF CHANGES IN NET ASSETS
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PERIOD ENDED
DEC. 31, 1996
-------------
(NOTE 1)
OPERATIONS:
Net Investment Income $ 2,642
Net Realized Loss (1)
Change in Unrealized Appreciation/Depreciation 26
--------
Increase in Net Assets Resulting from Operations 2,667
CAPITAL SHARE TRANSACTIONS 251,952
DISTRIBUTIONS FROM NET INVESTMENT INCOME (2,642)
--------
TOTAL INCREASE IN NET ASSETS 251,977
NET ASSETS:
Beginning of Period --
--------
End of Period $251,977
========
5
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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December 31, 1996
1. ORGANIZATION
The Strong Short-Term Bond Fund II commenced operations on August 30, 1996,
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 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.
6
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(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 $251,952
Undistributed Net Realized Loss (1)
Net Unrealized Appreciation 26
--------
$251,977
========
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period ended December 31, 1996
were as follows:
SHARES DOLLARS
------ -------
Shares Sold 25,000 $250,000
Dividends Reinvested 195 1,952
Shares Redeemed __ __
------ --------
25,195 $251,952
====== ========
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 0.625%
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 effect of waivers and
reimbursements, for 1996 were $400. The Advisor owns all of the outstanding
shares of the Fund as of December 31, 1996.
6. INVESTMENT TRANSACTIONS
The aggregate purchases of long-term securities for the period ended
December 31, 1996 were $10,013.
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 $254,142
========
Aggregate Unrealized:
Appreciation $ 26
Depreciation __
--------
$ 26
========
7
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FINANCIAL HIGHLIGHTS
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12-31-96(b)
-----------
SELECTED PER-SHARE DATA(a)
- --------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00
Net Investment Income 0.11
Dividends From Net Investment Income (0.11)
--------
NET ASSET VALUE, END OF PERIOD $ 10.00
========
TOTAL RETURN +1.1%
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------
Net Assets, End of Period (In Thousands) $ 252
Ratio of Expenses to Average Net Assets 2.0%*
Ratio of Net Investment Income to Average Net Assets 3.1%*
Portfolio Turnover Rate 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 August 30, 1996. Total return is not annualized.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Short-Term Bond Fund II
We have audited the accompanying statement of assets and liabilities of Strong
Short-Term Bond 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 statements of operations and changes in
net assets, and the financial highlights for the period from August 30, 1996
(inception) to December 31, 1996. 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 audit.
We conducted our audit 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
audit provides 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
Short-Term Bond Fund II as of December 31, 1996, the results of its operations,
the changes in its net assets, and the financial highlights for the period from
August 30, 1996 to December 31, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 3, 1997
