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===============================================================================
THE STRONG
DISCOVERY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1998
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
Statements of Changes in Net Assets......................................8
Notes to Financial Statements............................................9
FINANCIAL HIGHLIGHTS.........................................................11
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 8282H98
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============================
THE STRONG DISCOVERY FUND II
============================
DURING THIS TWO-YEAR PERIOD, THE MARKET HAS FAVORED THE LARGEST COMPANIES AND IN
MANY CASES HAS IGNORED SMALLER, FASTER-GROWING ONES.
The Strong Discovery Fund II seeks to provide investors with capital growth, a
goal we pursue by investing in a diversified portfolio of small-, medium-, and
larger-size companies. 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 are not reflected in their
historical financial statements or their stock prices.
=================================
ASSET ALLOCATION
=================================
Based on net assets as of 6-30-98
[PIE CHART]
Short-Term Investments 4.3%
Stocks 95.7%
The Fund's asset allocation does
not reflect any futures positions
held by the Fund.
=================================
PROFITABLE COMPANIES
In the past six months, your portfolio managers have personally met with the
management of more than 200 companies. That figure includes more than 75% of the
companies in which the Discovery Fund II currently has an investment. Our trips
out into the field "to kick the tires" have confirmed the Fund is invested in
growing companies that are doing well. With few exceptions, these companies have
been meeting or exceeding their profit targets.
While we are pleased and encouraged by the positive underlying financial
performance of the companies in the portfolio, we are disappointed that this
strength has not yet been fully reflected in the companies' stock prices.
Specifically, the Fund's 1998 first half return of 7.68% did not keep pace with
the 22% average annual earnings growth we expect the companies in the portfolio
to achieve. Ironically, the S&P 500 Index enjoyed much greater gains even though
the profitability of many of the large companies that make up the index is
suffering from weak global markets and foreign currency devaluations. The S&P
reported a return of 17.71% for the first half of the year.*(1)
Relative to the broader market, however, the Fund's performance compared better.
The Russell 2000(reg.tm) Index, which measures the performance of 2000
companies and specifically excludes the performance of the few huge companies
that dominate the S&P 500 Index, gained just 4.93% in 1998's first half.*
A TREND CONTINUES
The pattern of returns in the first half of 1998 marks the continuation of a
trend that has been running since the summer of 1996. During this two-year
period, the market has favored the largest companies and in many cases has
ignored smaller, faster-growing ones. This point is brought into focus when
looking at valuations. Note that the Discovery Fund II's valuation, as measured
by its price/earnings multiple, is lower than that of the S&P 500. This
discrepancy persists, even though the Fund's holdings are increasing their
profits more than three times as fast as the S&P's average.
P/E RATIO ESTIMATED
FUND (1999 EARNINGS) EARNINGS GROWTH(2)
- ------------------------------------------------------------------------------
Strong Discovery Fund II 19.5x 22.0%
S&P 500 Index 22.4x 7.0%
An article in the June 24, 1998 issue of the New York Times further underlines
the attractiveness of smaller-company stocks. The article notes that since 1979,
small stocks have only been cheaper than they are now (relative to the S&P 500)
at two times: in the aftermath of the October 1987 market crash, and during the
1990 recession.
OUR INVESTMENT PHILOSOPHY
Given these recent trends, we believe it is instructive to review the investment
philosophy and strategy we employ when investing your money. Our investment
approach is not based on chasing market euphoria or fads. Rather, we look for
well-managed companies that are in good businesses and offer superior growth
2
<PAGE>
potential--and that can be purchased at attractive prices. We also focus on
companies with products that are used and replaced every day, such as razor
blades and toothpaste. By investing in companies with "razor blade"
characteristics, we attempt to insulate the portfolio from the profit
disappointments that typically accompany economic slowdowns.
At the present time, we believe the portfolio is positioned well relative to
these attributes. It has been our experience that stock prices eventually track
earnings growth, but there is precedent for this relationship to lapse from
time to time. When this happens, as we believe it currently has, the ignored
stocks with good earnings tend to catch up quickly when the market changes
direction. The most recent example of this was in 1991, when the S&P 500
returned 30.47%, while the broader Russell 2000 delivered a return of 46.05%.
Going forward, we will make adjustments to the portfolio, where appropriate, as
part of our continuous effort to upgrade the quality of the Fund's holdings.
Successful investing requires confidence and patience. Yours is appreciated.
Thank you for your investment in the Strong Discovery Fund II.
[PHOTO OF RICHARD S. STRONG AND CHARLES A. PAQUELET]
Sincerely,
/s/ Richard S. Strong
Richard S. Strong
/s/ Chip Paquelet
Charles A. Paquelet
Portfolio Co-managers
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 5-8-92 to 6-30-98
[GRAPH]
THE STRONG Lipper Capital
DISCOVERY S&P 500 Appreciation
FUND II Stock Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 10,887 10,680 11,024
12-93 13,285 11,756 12,760
12-94 12,569 11,912 12,447
12-95 17,001 16,388 16,379
12-96 17,138 20,151 18,829
12-97 19,090 26,874 22,589
6-98 20,557 31,633 25,907
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(1)
=================================
As of 6-30-98
1-YEAR 15.05%
3-YEAR 11.93%
5-YEAR 12.53%
SINCE INCEPTION 12.44%
(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 Russell 2000(reg.tm) Index is an
unmanaged index generally representative of the U.S. stock market for small
cap stocks. 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 and Russell index data is Standard & Poor's 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 in the Fund's return
quotations has the effect of decreasing the performance quoted. Average annual
total return and total return measure change in the value of an investment in
the Fund, assuming reinvestment of all dividends and capital gains. Average
annual total return reflects annualized change, while total return reflects
aggregate change.
2 Earnings growth has been estimated on an annual basis 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, 1998. 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, 1998.
3
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SCHEDULE OF INVESTMENTS IN SECURITIES JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
===============================================================================
COMMON STOCKS 95.7%
BANK - MONEY CENTER 0.7%
Citicorp 9,825 $ 1,466,381
BROKERAGE & INVESTMENT MANAGEMENT 1.0%
Kansas City Southern Industries, Inc. 14,200 704,675
Waddell & Reed Financial, Inc. 58,750 1,406,328
-----------
2,111,003
COMMERCIAL SERVICE 15.9%
Accustaff, Inc. (b) 41,601 1,300,031
Avis Rent A Car, Inc. (b) 13,250 327,938
H & R Block, Inc. 19,875 837,234
Coinmach Laundry Corporation (b) 279,050 6,592,556
Consolidated Graphics, Inc. (b) 41,200 2,430,800
Corrections Corporation America (b) 154,400 3,628,400
Edutrek International, Inc. (Acquired 4/17/98;
Cost $2,018,088) (b) (d) 74,744 1,831,228
ITT Educational Services, Inc. (b) 87,850 2,833,162
Lamar Advertising Company (b) 80,350 2,882,556
Lason Holdings, Inc. (b) 27,900 1,520,550
Outdoor Systems, Inc. (b) 82,030 2,296,840
Pittston Company Brinks Group 58,550 2,159,031
The Profit Recovery Group International, Inc. (b) 71,000 1,983,563
Rollins Truck Leasing Corporation 48,900 605,138
The ServiceMaster Company 61,500 2,340,844
Transcrypt International, Inc. (b) 71,800 251,300
-----------
33,821,171
COMPUTER - MAINFRAME 1.5%
International Business Machines Corporation 27,550 3,163,084
COMPUTER - PERIPHERAL EQUIPMENT 2.1%
Lexmark International Group, Inc. Class A (b) 35,100 2,141,100
Storage Technology Corporation (b) 52,400 2,272,850
-----------
4,413,950
COMPUTER SERVICE 1.3%
Pierce Leahy Corporation (b) 86,200 2,004,150
Sykes Enterprises, Inc. (b) 41,400 830,588
-----------
2,834,738
COMPUTER SOFTWARE 1.0%
America Online, Inc. (b) 11,800 1,250,800
Computer Associates International, Inc. 17,575 976,511
-----------
2,227,311
CONSUMER - MISCELLANEOUS 2.8%
Equity Corporation International (b) 194,500 4,668,000
Service Corporation International 30,800 1,320,550
-----------
5,988,550
ELECTRICAL EQUIPMENT 2.1%
Berg Electronics Corporation (b) 233,875 4,575,180
ELECTRONIC PRODUCTS - MISCELLANEOUS 1.3%
Rayovac Corporation (b) 122,225 2,772,980
FINANCE - MISCELLANEOUS 0.9%
American Express Company 12,300 1,402,200
NOVA Corporation (b) 15,500 554,125
-----------
1,956,325
HEALTHCARE - DRUG/DIVERSIFIED 1.0%
Halsey Drug Company, Inc. (b) 305,000 724,375
Jones Medical Industries, Inc. 20,500 679,062
Pfizer, Inc. 5,900 641,256
-----------
2,044,693
HEALTHCARE - INSTRUMENTATION 1.3%
Arterial Vascular Engineering, Inc. (b) 29,200 1,043,900
Datascope Corporation (b) 20,500 544,531
Medtronic, Inc. 17,600 1,122,000
-----------
2,710,431
HEALTHCARE - MEDICAL SUPPLY 6.4%
Cohr, Inc. (b) 297,200 1,523,150
McKesson Corporation 13,450 1,092,812
PSS World Medical, Inc. (b) 134,700 1,969,988
Henry Schein, Inc. (b) 53,943 2,488,121
Steris Corporation (b) 7,250 461,055
Sybron International Corporation (b) 242,475 6,122,494
-----------
13,657,620
HEALTHCARE - PATIENT CARE 1.9%
Compdent Corporation (b) 87,800 1,371,875
Kendle International, Inc. (b) 41,300 1,249,325
United Dental Care, Inc. (b) 73,500 1,417,172
-----------
4,038,372
HEALTHCARE - PRODUCT 1.2%
Cytyc Corporation (b) 75,050 1,224,253
Sabratek Corporation (b) 57,900 1,317,225
-----------
2,541,478
INSURANCE - LIFE 0.3%
Torchmark Corporation 11,700 535,275
INSURANCE - PROPERTY & CASUALTY 2.1%
MGIC Investment Corporation 79,300 4,525,056
LEISURE PRODUCT 3.5%
Action Performance Companies, Inc. (b) 102,475 3,298,414
Harley-Davidson, Inc. 69,050 2,675,687
SCP Pool Corporation (b) 62,075 1,520,838
-----------
7,494,939
LEISURE SERVICE 3.3%
American Skiing Company (b) 99,600 1,294,800
Bally Total Fitness Holding Corporation (b) 87,900 3,164,400
Candlewood Hotel Company, Inc. (b) 18,800 141,000
International Game Technology 60,750 1,473,187
Promus Hotel Corporation (b) 22,025 847,963
-----------
6,921,350
MACHINE TOOL 0.8%
Applied Power, Inc. 49,250 1,692,969
MACHINERY - TRANSPORTATION EQUIPMENT & PARTS 0.2%
Dana Corporation 7,700 411,950
MEDIA - PUBLISHING 0.5%
Harcourt General, Inc. 9,450 562,275
School Specialty, Inc. (b) 26,400 432,300
-----------
994,575
MEDIA - RADIO/TV 3.6%
Chancellor Media Corporation (b) 49,250 2,445,570
Clear Channel Communications, Inc. (b) 38,128 4,160,718
Viacom International, Inc. (b) 19,300 1,124,225
-----------
7,730,513
OFFICE AUTOMATION 1.7%
Global Imaging Systems, Inc. (b) 105,900 1,482,600
Xerox Corporation 20,500 2,083,313
-----------
3,565,913
OIL - NORTH AMERICAN EXPLORATION & PRODUCTION 2.6%
Ocean Energy, Inc. (b) 120,146 2,350,356
Union Pacific Resources Group, Inc. 183,875 3,229,305
-----------
5,579,661
4
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Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
OIL - NORTH AMERICAN INTEGRATED 0.7%
Transmontaigne Oil Company (b) 101,100 $ 1,503,863
OIL WELL EQUIPMENT & SERVICE 1.8%
ENSCO International, Inc. 29,900 519,512
Marine Drilling Companies, Inc. (b) 89,650 1,434,400
Noble Drilling Corporation (b) 79,050 1,902,141
------------
3,856,053
PERSONAL & COMMERCIAL LENDING 7.7%
Associates First Capital Corporation 106,925 8,219,859
Beneficial Corporation 53,100 8,134,256
------------
16,354,115
POLLUTION CONTROL 3.2%
Superior Services, Inc. (b) 85,500 2,570,344
Waste Management, Inc. 120,100 4,203,500
------------
6,773,844
RAILROAD 1.4%
Burlington Northern Santa Fe Corporation 29,625 2,908,805
REAL ESTATE 1.8%
Sunstone Hotel Investors, Inc. 284,000 3,780,750
RETAIL - DRUG STORE 0.7%
Rite Aid Corporation 38,900 1,461,181
RETAIL - FOOD CHAIN 0.3%
US Foodservice (b) 16,300 571,519
RETAIL - RESTAURANT 2.2%
PJ America, Inc. (b) 58,900 1,074,925
Papa John's International, Inc. (b) 18,200 717,763
Rainforest Cafe, Inc. (b) 203,500 2,823,563
------------
4,616,251
RETAIL - SPECIALTY 10.9%
Black Box Corporation (b) 77,500 2,572,031
Central Garden & Pet Company (b) 165,850 5,162,081
Fastenal Company 4,300 199,681
MSC Industrial Direct Company, Inc. Class A (b) 71,700 2,043,450
Movie Gallery, Inc. (b) 355,200 2,575,200
Pier I Imports, Inc. 33,000 787,875
Regis Corporation 38,400 1,135,200
Renters Choice, Inc. (b) 107,300 3,044,637
Staples, Inc. (b) 55,675 1,611,095
United Stationers, Inc. (b) 10,400 673,400
Wilmar Industries, Inc. (b) 112,800 2,876,400
Zale Corporation (b) 11,700 372,206
------------
23,053,256
SAVINGS & LOAN 0.9%
TCF Financial Corporation 64,725 1,909,388
SHOE & APPAREL MANUFACTURING 0.1%
Rocky Shoes & Boots, Inc. (b) 15,300 218,025
TELECOMMUNICATION SERVICE 1.3%
Davel Communications Group, Inc. (b) 34,750 847,031
MediaOne Group, Inc. (b) 10,000 439,375
WorldCom, Inc. (b) 30,700 1,487,031
------------
2,773,437
TOBACCO 0.7%
800-JR CIGAR, Inc. (b) 37,600 742,600
Philip Morris Companies, Inc. 17,600 693,000
------------
1,435,600
TRANSPORTATION SERVICE 1.0%
Hub Group, Inc. Class A (b) 97,125 2,051,766
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $187,873,992) 203,043,321
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 4.0%
COMMERCIAL PAPER 0.3%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.25% $ 100 100
General Mills, Inc., 5.26% 378,500 378,500
Johnson Controls, Inc., 5.26% 247,200 247,200
------------
625,800
REPURCHASE AGREEMENT 3.1%
Barclays Capital, Inc. (Dated 6/30/98), 5.50%,
Due 7/01/98 (Repurchase proceeds $6,601,008);
Collateralized by: $6,580,000 United States
Treasury Notes, 8.875%, Due 11/15/98 (Market
Value $6,736,834) (e) 6,600,000 6,600,000
UNITED STATES GOVERNMENT ISSUES 0.6%
United States Treasury Bills, Due 9/03/98 thru
9/10/98 (c) 1,185,000 1,173,694
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $8,399,316) 8,399,494
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $196,273,308) 99.7% 211,442,815
Other Assets and Liabilities, Net 0.3% 590,884
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $212,033,699
==============================================================================
FUTURES
- ------------------------------------------------------------------------------
Underlying
Expiration Face Amount Unrealized
Date at Value Appreciation
- ------------------------------------------------------------------------------
Purchased:
33 S&P 500 9/98 $9,429,750 $21,986
LEGEND
- ------------------------------------------------------------------------------
(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Non-income producing security.
(c) All or a portion of security pledged to cover margin requirements for
future contracts.
(d) Restricted security.
(e) See Note 2(H) of notes to financial statements.
Percentages are stated as a percent of net assets.
See notes to financial statements.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $196,273,308) $211,442,815
Receivable for Securities Sold 3,915,203
Dividends and Interest Receivable 50,209
------------
Total Assets 215,408,227
LIABILITIES:
Payable for Securities Purchased 3,277,209
Accrued Operating Expenses and Other Liabilities 97,319
------------
Total Liabilities 3,374,528
------------
NET ASSETS $212,033,699
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $180,533,677
Accumulated Net Investment Loss (467,276)
Undistributed Net Realized Gain 16,775,805
Net Unrealized Appreciation 15,191,493
------------
Net Assets $212,033,699
============
Capital Shares Outstanding (Unlimited Number Authorized) 16,607,069
NET ASSET VALUE PER SHARE $12.77
======
6
See notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Six Months Ended June 30, 1998 (Unaudited)
INCOME:
Dividends $ 434,684
Interest 359,269
-----------
Total Income 793,953
EXPENSES:
Investment Advisory Fees 1,056,316
Custodian Fees 34,417
Shareholder Servicing Costs 167,168
Other 3,328
-----------
Total Expenses 1,261,229
-----------
NET INVESTMENT LOSS (467,276)
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 21,099,003
Futures Contracts (1,190,406)
-----------
Net Realized Gain 19,908,597
Change in Unrealized Appreciation/Depreciation on:
Investments (3,409,430)
Futures Contracts 21,986
-----------
Net Change in Unrealized Appreciation/Depreciation (3,387,444)
-----------
NET GAIN 16,521,153
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,053,877
===========
7
See notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DEC. 31, 1997
---------------- -------------
(UNAUDITED)
OPERATIONS:
Net Investment Loss ($ 467,276) ($ 1,512,488)
Net Realized Gain 19,908,597 18,148,062
Change in Unrealized Appreciation/Depreciation (3,387,444) 6,534,581
------------ ------------
Increase in Net Assets Resulting from Operations 16,053,877 23,170,155
DISTRIBUTIONS:
From Net Realized Gains (3,179,809) --
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 42,677,202 111,653,915
Proceeds from Reinvestment of Distributions 3,178,862 --
Proceeds for Shares Redeemed (60,590,233) (150,342,369)
------------ ------------
Decrease in Net Assets from Capital Share
Transactions (14,734,169) (38,688,454)
------------ ------------
TOTAL DECREASE IN NET ASSETS (1,860,101) (15,518,299)
NET ASSETS:
Beginning of Period 213,893,800 229,412,099
------------ ------------
End of Period $212,033,699 $213,893,800
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 3,359,160 9,567,132
Issued in Reinvestment of Distributions 241,739 --
Redeemed (4,772,366) (13,026,043)
--------- ----------
Net Decrease in Shares of the Fund (1,171,467) (3,458,911)
========= ==========
8
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
1. ORGANIZATION
The Strong Discovery Fund II is a diversified series of Strong Variable
Insurance Funds, Inc., an open-end management investment company registered
under the Investment Company Act of 1940. The Fund offers and sells its
shares only to separate accounts of insurance companies for the purpose of
funding variable annuity and variable life insurance contracts. At June 30,
1998, approximately 96% of the Fund's shares are owned by one insurance
company.
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 of 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
last sale or bid prices are used. Securities for which market quotations
are not readily available 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.
Aggregate cost and fair value of these restricted securities held at June
30, 1998 were $2,018,088 and $1,831,228, respectively, representing 0.9%
of the net assets of the Fund.
(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 calculated on a first-in,
first-out basis.
(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 -- The Fund may write put or call options (none were written
during the period). 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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
(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) Repurchase Agreements -- The Fund may enter into repurchase agreements
with institutions that the Fund's investment advisor, Strong Capital
Management, Inc. ("the Advisor"), has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each repurchase
agreement is recorded at cost. The Fund requires that the collateral,
represented by securities (primarily U.S. Government securities),
purchased in a repurchase transaction be maintained in a segregated
account with a custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default of the issuer of the
repurchase agreement. On a daily basis, the Advisor monitors the value of
the collateral transferred under each repurchase agreement to ensure the
value of the collateral exceeds the amount owed to the Fund under each
repurchase agreement by at least 2%.
(I) Additional Investment Risks -- The Fund may utilize derivative
instruments including options, futures and other instruments with similar
characteristics to the extent that they are consistent with the Fund's
investment objectives and limitations. The Fund intends to use such
derivative instruments primarily to hedge or protect from adverse
movements in securities prices or interest rates. The use of these
instruments may involve risks such as the possibility of illiquid markets
or imperfect correlation between the value of the instruments and the
underlying securities, or that the counterparty will fail to perform its
obligations.
Foreign denominated assets and forward currency contracts may involve
greater risks than domestic transactions, including currency, political
and economic, regulatory and market risks.
(J) 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.
(K) 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
The Advisor, with whom certain officers and directors of the Fund are
affiliated, provides investment advisory and shareholder recordkeeping and
related 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. Shareholder recordkeeping and related service fees
are based on the lesser of 0.15% of the average daily net assets of the Fund
or a contractually established rate for each participant account.
The Fund may invest cash reserves in money market funds sponsored and managed
by the Advisor, 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, advisory fees of the Fund are
reduced by an amount equal to advisory fees paid to the Advisor under its
investment advisory agreement with the money market funds.
The amount payable to the Advisor at June 30, 1998, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees for
the six months then ended, were $26,669, $78 and $1,788, respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six months
ended June 30, 1998 were $216,471,395 and $227,654,180, respectively.
5. INCOME TAX INFORMATION
At June 30, 1998, the cost of investments in securities for federal income
tax purposes was $196,648,201. Net unrealized appreciation of securities was
$14,794,614, consisting of gross unrealized appreciation and depreciation of
$29,437,040 and $14,642,426, respectively.
10
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA (a)
-------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- -----------------------------------------------
<CAPTION>
Net Realized
Net Asset Net and Unrealized Total In Excess Net Asset
Value, Investment Gains from From Net of Net From Net Value,
Beginning Income (Losses) on Investment Investment Investment Realized Total End of
Period Ended of Period (Loss) Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998 (c) $12.03 ($0.03) $0.96 $0.93 -- -- ($0.19) ($0.19) $12.77
Dec. 31, 1997 10.80 (0.09) 1.32 1.23 -- -- -- -- 12.03
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
</TABLE>
<TABLE>
RATIOS AND SUPPLEMENTAL DATA
---------------------------------------------------------------------
<CAPTION>
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income (Loss) Portfolio Commission
Total Period (In to Average to Average Turnover Rate
Period Ended Return Millions) Net Assets Net Assets Rate Paid (b)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998 (c) +7.7% $212 1.2%* (0.4%)* 108.3% $0.0628
Dec. 31, 1997 +11.4% 214 1.2% (0.7%) 198.1% 0.0604
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%
* 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, 1998 (Unaudited). Total return and portfolio turnover rate are not annualized.
11
</TABLE>
