<PAGE>
- -------------------------------------------------------------------------------
THE STRONG
DISCOVERY FUND II
ANNUAL REPORT * DECEMBER 31, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING STOCKS]
[STRONG FUNDS LOGO]
STRONG FUNDS
<PAGE>
- -------------------------------------------------------------------------------
THE STRONG
DISCOVERY FUND II
ANNUAL REPORT * DECEMBER 31, 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
Statements of Changes in Net Assets......................................8
Notes to Financial Statements............................................9
FINANCIAL HIGHLIGHTS.........................................................11
REPORT OF INDEPENDENT ACCOUNTANTS............................................12
[STRONG FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 * Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 7013A98
<PAGE>
THE STRONG DISCOVERY FUND II
WE MAINTAINED THE FUND'S HISTORIC FOCUS ON SMALL- AND MEDIUM- SIZED GROWTH
COMPANIES. WE BELIEVE THESE STOCKS OFFER THE GREATEST OPPORTUNITIES GOING
FORWARD.
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 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 aren't reflected in their
historical financial statements--or their stock prices.
==================================
ASSET ALLOCATION
==================================
Based on net assets as of 12-31-97
[PIE CHART]
Short-Term Investments 8.1%
Stocks 91.9%
==================================
As your investment managers, we are not accustomed to producing disappointing
investment results. Over our respective careers, we have experienced success
in various market environments. We are acutely aware that our recent results
have not been up to par, and remain dedicated to improving the Fund's
performance going forward.
Although the Strong Discovery Fund II's recent investment returns have not kept
pace with the S&P 500's, its 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 valuations being accorded the companies that comprise the S&P 500
Index. As the following table illustrates, the Fund's average valuation--as
measured by its price/earnings ratio--is the same as the S&P 500's.
However, we estimate the portfolio's earnings growth potential to be more than
three times that of the S&P 500. We seek to produce superior investment results
over time by concentrating on companies with superior growth potential.
P/E RATIO ESTIMATED
FUND (1998 EARNINGS) EARNINGS GROWTH(1)
- ----------------------------------------------------------------
Strong Discovery Fund II 20.1x 22%
S&P 500 Index 20.1x 7%
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.
To that end, we maintained the Fund's historic focus on small- and medium- size
growth companies. We believe that these stocks offer the greatest opportunities
going forward. In recent months, however, the market has heavily favored the
largest, most established firms, as uncertainty in Asian markets has driven a
flight to quality. As a result, our 11.39% total return for 1997 trailed the
33.36% return of the S&P 500 and the 19.86% return of our peer group, the
Lipper Capital Appreciation Funds Index.*(2)
2
<PAGE>
Despite recent setbacks, we continue to find reason for optimism in the current
market environment. The prevailing conditions remind 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 were able to apply
our investment strategy effectively in this environment. Drawing on our
combined 40 years of investment experience, 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.
Sincerely,
/s/ Richard S. Strong
Richard S. Strong
/s/ Chip Paquelet
Charles A. Paquelet
Portfolio Co-managers
[PHOTO OF RICHARD S. STRONG AND CHARLES A. PAQUELET]
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 5-8-92 to 12-31-97
[GRAPH]
THE STRONG S & P 500 Lipper Capital
DISCOVERY FUND II Stock Index Appreciation 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 18,828
12-97 19,090 26,874 22,567
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 12-31-97
1-YEAR 11.39%
3-YEAR 14.95%
5-YEAR 11.89%
SINCE INCEPTION 12.13%
(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 Standard & Poor's Micropal. Source of the Lipper index data is Lipper
Analytical Services, Inc.
1 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 December 31, 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 December 31, 1997.
2 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.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES DECEMBER 31, 1997
- --------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
COMMON STOCKS 91.9%
AEROSPACE & DEFENSE 0.8%
The Boeing Company 7,400 $ 362,138
Hexcel Corporation (b) 55,450 1,382,784
-----------
1,744,922
BANK - MONEY CENTER 1.8%
BankAmerica Corporation 9,800 715,400
Chase Manhattan Corporation 11,921 1,305,349
Citicorp 14,125 1,785,930
-----------
3,806,679
COMMERCIAL SERVICE 14.3%
Accustaff, Inc. (b) 62,551 1,438,673
Avis Rent A Car, Inc. (b) 102,700 3,279,981
H & R Block, Inc. 29,000 1,299,563
Budget Group, Inc. Class A (b) 209,700 7,247,756
Coinmach Laundry Corporation (b) 87,700 2,148,650
Consolidated Graphics, Inc. (b) 49,050 2,286,956
Getty Communications PLC Sponsored ADR (b) 46,000 684,250
Lamalie Associates, Inc. (b) 22,000 440,000
Lason Holdings, Inc. (b) 100,250 2,669,156
Mac-Gray Corporation (b) 21,000 328,125
Outdoor Systems, Inc. (b) 45,125 1,731,672
Pittston Company Brinks Group 46,900 1,887,725
Rollins Truck Leasing Corporation 33,600 600,600
Universal Outdoor Holdings, Inc. (b) 87,150 4,531,800
-----------
30,574,907
COMPUTER - MAINFRAME 1.6%
International Business Machines Corporation 33,600 3,513,300
COMPUTER - PERIPHERAL EQUIPMENT 1.1%
Storage Technology Corporation (b) 37,700 2,335,044
COMPUTER SERVICE 2.0%
America Online, Inc. (b) 10,300 918,631
Ceridian Corporation (b) 8,700 398,569
Fiserv, Inc. (b) 10,300 505,988
Pierce Leahy Corporation (b) 111,000 2,275,500
USWeb Corporation (b) 19,300 180,937
-----------
4,279,625
COMPUTER SOFTWARE 1.9%
Computer Associates International, Inc. 17,275 913,416
Hummingbird Communications, Ltd. (b) 47,425 1,496,851
Phoenix International, Inc. (b) 50,400 743,400
Sterling Commerce, Inc. (b) 15,500 595,781
Tecnomatix Technologies, Ltd. (b) 6,000 202,500
Versant Object Technology Corporation (b) 13,100 180,944
-----------
4,132,892
CONSUMER - MISCELLANEOUS 1.5%
Equity Corporation International (b) 46,800 1,082,250
Service Corporation International 59,350 2,192,241
-----------
3,274,491
ELECTRICAL EQUIPMENT 1.4%
Berg Electronics Corporation (b) 133,525 3,037,694
ELECTRONIC INSTRUMENTATION 0.4%
Molecular Dynamics, Inc. (b) 5,500 89,375
VWR Scientific Products Corporation (b) 23,800 672,350
-----------
761,725
ELECTRONIC PARTS DISTRIBUTION 0.8%
Kent Electronics Corporation (b) 67,100 1,685,887
ELECTRONICS - SEMICONDUCTOR/COMPONENT 0.6%
General Cable Corporation 33,600 1,215,900
FINANCE - MISCELLANEOUS 1.0%
American Express Company 17,500 1,561,875
CheckFree Corporation (b) 19,000 513,000
-----------
2,074,875
FOOD 0.3%
Lancaster Colony Corporation 9,800 552,475
HEALTHCARE - BIOMEDICAL/GENETIC 0.1%
Pharmacopeia, Inc. (b) 8,000 128,000
HEALTHCARE - DRUG/DIVERSIFIED 0.3%
Halsey Drug Company, Inc. (b) 394,600 616,562
HEALTHCARE - INSTRUMENTATION 0.5%
Arterial Vascular Engineering, Inc. (b) 10,800 702,000
Datascope Corporation (b) 16,500 426,938
-----------
1,128,938
HEALTHCARE - MEDICAL SUPPLY 8.0%
Cohr, Inc. (b) 105,100 1,340,025
Covance, Inc. (b) 31,100 618,112
Dentsply International, Inc. 25,820 787,510
Gulf South Medical Supply, Inc. (b) 34,100 1,270,225
McKesson Corporation 15,525 1,679,611
Henry Schein, Inc. (b) 95,743 3,351,005
Steris Corporation (b) 30,950 1,493,338
Suburban Ostomy Supply Company, Inc. (b) 144,200 1,676,325
Sybron International Corporation (b) 104,475 4,903,795
-----------
17,119,946
HEALTHCARE - PATIENT CARE 0.2%
Coram Healthcare Corporation (b) 294 992
United Dental Care, Inc. (b) 49,100 527,825
-----------
528,817
HEALTHCARE - PRODUCT 1.1%
Boston Scientific Corporation (b) 44,650 2,048,319
Sabratek Corporation (b) 7,000 201,250
-----------
2,249,569
HOUSEHOLD APPLIANCES & FURNISHINGS 0.8%
Harman International Industries, Inc. 39,050 1,657,184
INSURANCE - LIFE 0.5%
Conseco, Inc. 23,800 1,081,412
INSURANCE - MULTI-LINE 1.2%
MGIC Investment Corporation 37,800 2,513,700
LEISURE PRODUCT 2.1%
Action Performance Companies, Inc. 32,300 1,223,362
Harley-Davidson, Inc. 62,250 1,704,094
SCP Pool Corporation (b) 77,775 1,497,169
-----------
4,424,625
LEISURE SERVICE 4.4%
American Skiing Company (b) 185,000 2,751,875
Bally Total Fitness Holding Corporation (b) 107,700 2,355,937
Candlewood Hotel Company, Inc. (b) 54,400 476,000
Host Marriott Corporation (b) 37,150 729,069
International Game Technology 62,000 1,565,500
Metro-Goldwyn-Mayer, Inc. (b) 25,800 516,000
Promus Hotel Corporation (b) 24,325 1,021,650
-----------
9,416,031
MACHINE TOOL 1.1%
Applied Power, Inc. 34,375 2,371,875
MACHINERY - TRANSPORTATION EQUIPMENT & PARTS 0.6%
Miller Industries, Inc. (b) 124,550 1,338,913
4
<PAGE>
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
MEDIA - RADIO/TV 1.8%
CBS Corporation 30,100 $ 886,069
Clear Channel Communications, Inc. (b) 22,100 1,755,569
Sinclair Broadcast Group, Inc. Class A (b) 26,200 1,221,575
-----------
3,863,213
NATURAL GAS DISTRIBUTION 0.1%
WICOR, Inc. 6,925 321,580
OFFICE AUTOMATION 2.3%
Danka Business Systems PLC Sponsored ADR 270,275 4,307,508
Xerox Corporation 7,000 516,687
-----------
4,824,195
OIL - NORTH AMERICAN EXPLORATION & PRODUCTION 5.1%
Ocean Energy, Inc. (b) 117,075 5,773,261
Union Pacific Resources Group, Inc. 216,075 5,239,819
-----------
11,013,080
OIL WELL EQUIPMENT & SERVICE 5.6%
Cooper Cameron Corporation (b) 8,250 503,250
ENSCO International, Inc. 43,950 1,472,325
Global Marine, Inc. (b) 28,850 706,825
Helmerich & Payne, Inc. 4,100 278,288
Marine Drilling Companies, Inc. (b) 95,550 1,982,662
Nabors Industries, Inc. (b) 45,700 1,436,694
Noble Drilling Corporation (b) 115,150 3,526,469
Rowan Companies, Inc. (b) 2,600 79,300
Santa Fe International Corporation 6,850 278,709
Schlumberger, Ltd. 22,100 1,779,050
-----------
12,043,572
PERSONAL & COMMERCIAL LENDING 1.9%
Associates First Capital Corporation 34,375 2,444,922
Household International, Inc. 12,875 1,642,367
-----------
4,087,289
POLLUTION CONTROL 0.3%
Waste Management, Inc. 22,500 618,750
RAILROAD 1.3%
Burlington Northern Santa Fe Corporation 20,400 1,895,925
Wisconsin Central Transportation Corporation (b) 36,300 848,513
-----------
2,744,438
REAL ESTATE 0.7%
Security Capital Group, Inc. Class B (b) 11,000 357,500
Sunstone Hotel Investors, Inc. 64,200 1,107,450
-----------
1,464,950
RETAIL - DISCOUNT & VARIETY 0.9%
Consolidated Stores Corporation (b) 43,887 1,928,285
RETAIL - DRUG STORE 0.7%
Rite Aid Corporation 25,800 1,514,138
RETAIL - FOOD CHAIN 0.2%
JP Foodservice, Inc. (b) 8,800 325,050
RETAIL - RESTAURANT 1.6%
Casa Ole Restaurants, Inc. (b) 33,500 117,250
Logan's Roadhouse, Inc. (b) 26,800 415,400
PJ America, Inc. (b) 54,100 811,500
Rainforest Cafe, Inc. (b) 60,700 2,003,100
-----------
3,347,250
RETAIL - SPECIALTY 13.7%
Black Box Corporation (b) 109,500 3,873,562
Cendant Corporation (b) 69,750 2,397,656
Central Garden & Pet Company (b) 218,500 5,735,625
Cole National Corporation Class A (b) 53,950 1,615,128
Eagle Hardware & Garden, Inc. (b) 113,600 2,201,000
Fingerhut Companies, Inc. 29,900 639,113
Goody's Family Clothing, Inc. (b) 32,200 875,437
The Hertz Corporation 52,700 2,121,175
Just For Feet, Inc. (b) 34,200 448,875
MSC Industrial Direct Company, Inc. Class A (b) 23,300 987,338
Movie Gallery, Inc. (b) 303,200 890,650
Regis Corporation 47,500 1,193,438
Renters Choice, Inc. (b) 91,100 1,867,550
Staples, Inc. (b) 52,550 1,458,263
Wilmar Industries, Inc. (b) 67,150 1,603,206
Zale Corporation (b) 61,500 1,414,500
------------
29,322,516
SAVINGS & LOAN 2.2%
TCF Financial Corporation 140,300 4,761,431
SHOE & APPAREL MANUFACTURING 0.3%
Rocky Shoes & Boots, Inc. (b) 46,700 712,175
TELECOMMUNICATION EQUIPMENT 0.2%
Aware, Inc. (b) 18,400 188,600
Communications Central, Inc. (b) 27,150 273,197
------------
461,797
TELECOMMUNICATION SERVICE 0.1%
Mobile Telecommunication Technologies
Corporation (b) 11,300 248,600
TOBACCO 1.4%
800-JR CIGAR, Inc. (b) 66,500 1,662,500
Philip Morris Companies, Inc. 28,500 1,291,406
------------
2,953,906
TRANSPORTATION SERVICE 1.1%
Hub Group, Inc. Class A (b) 81,375 2,420,906
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $177,964,172) 196,543,109
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 1.2%
COMMERCIAL PAPER 0.3%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services, Inc., 5.49% $ 632,000 632,000
Wisconsin Electric Power Company, 5.49% 100 100
------------
632,100
REPURCHASE AGREEMENT 0.9%
Goldman, Sachs & Company (Dated 12/31/97),
6.35%, Due 1/02/98 (Repurchase proceeds
$2,000,706); Collateralized by: $1,530,000 United
States Treasury Bonds, 11.625%, Due 11/15/04
(Market Value $2,047,140) (c) 2,000,000 2,000,000
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,632,100) 2,632,100
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $180,596,272) 93.1% 199,175,209
Other Assets and Liabilities, Net 6.9% 14,718,591
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $213,893,800
==============================================================================
5
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) DECEMBER 31, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COUNTRY DIVERSIFICATION
- -----------------------------------------------------------------------------
Percentage of Net Assets
- -----------------------------------------------------------------------------
United States....................................................... 90.0%
United Kingdom...................................................... 2.3
Canada.............................................................. 0.7
Israel.............................................................. 0.1
Other Assets and Liabilities, Net................................... 6.9
- --------------------------------------------------------------------------
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.
See notes to financial statements.
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1997
ASSETS:
Investments in Securities, at Value (Cost of $180,596,272) $199,175,209
Receivable for Securities Sold 14,676,338
Dividends and Interest Receivable 110,537
Other Assets 3,421
------------
Total Assets 213,965,505
LIABILITIES:
Payable for Securities Purchased 1,844
Accrued Operating Expenses and Other Liabilities 69,861
------------
Total Liabilities 71,705
------------
NET ASSETS $213,893,800
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $195,267,846
Undistributed Net Realized Gain 47,017
Net Unrealized Appreciation 18,578,937
------------
Net Assets $213,893,800
============
Capital Shares Outstanding (Unlimited Number Authorized) 17,778,536
NET ASSET VALUE PER SHARE $12.03
======
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Year Ended December 31, 1997
INCOME:
Dividends (net of withholding taxes of $6,680) $ 815,865
Interest 173,780
-----------
Total Income 989,645
EXPENSES:
Investment Advisory Fees 2,122,746
Custodian Fees 63,151
Shareholder Servicing Costs 280,930
Other 35,306
-----------
Total Expenses 2,502,133
-----------
NET INVESTMENT LOSS (1,512,488)
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 19,792,246
Futures Contracts (1,644,184)
-----------
Net Realized Gain 18,148,062
Change in Unrealized Appreciation/Depreciation on:
Investments 6,533,234
Foreign Currencies 1,347
-----------
Net Change in Unrealized Appreciation/Depreciation 6,534,581
-----------
NET GAIN 24,682,643
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $23,170,155
===========
See notes to financial statements.
7
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996
-------------- --------------
OPERATIONS:
Net Investment Loss ($ 1,512,488) ($ 646,262)
Net Realized Gain 18,148,062 1,976,658
Change in Unrealized Appreciation/
Depreciation 6,534,581 (455,188)
------------ ------------
Net Increase in Net Assets Resulting
from Operations 23,170,155 875,208
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 111,653,915 99,577,424
Proceeds from Reinvestment of Dividends -- 47,654,898
Proceeds for Shares Redeemed (150,342,369) (116,060,764)
------------ ------------
Increase (Decrease) in Net Assets from
Capital Share Transactions (38,688,454) 31,171,558
------------ ------------
TOTAL DECREASE IN NET ASSETS (15,518,299) (15,634,423)
NET ASSETS:
Beginning of Year 229,412,099 245,046,522
------------ ------------
End of Year $213,893,800 $229,412,099
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 9,567,132 8,622,762
Issued in Reinvestment of Dividends -- 4,416,662
Redeemed (13,026,043) (10,034,779)
---------- ----------
Net Increase (Decrease) in Shares of the Fund (3,458,911) 3,004,645
========== ==========
See notes to financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1997
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. 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 December
31, 1997, approximately 97% of the Fund's shares are owned by the separate
accounts of 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 between the latest bid and asked prices where no last sales
price is available. Securities traded over-the-counter are valued at the
mean of the latest bid and asked prices or the last reported sales price.
Debt securities not traded on a principal securities exchange are valued
through valuations obtained from a commercial pricing service, otherwise
last 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. The
Fund held no restricted securities at December 31, 1997.
(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 -- The Fund may write put or call options (none were written
during 1997). 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)
- -------------------------------------------------------------------------------
December 31, 1997
(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 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.
(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 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 December 31, 1997, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees for
the year ended December 31, 1997, were $26,906, $142 and $4,088,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year ended
December 31, 1997 were $407,418,432 and $450,420,064, respectively. The
aggregate purchases and sales of U.S. Government and Agency securities for
the year ended December 31, 1997 were $751,352 and $754,852, respectively.
5. INCOME TAX INFORMATION
At December 31, 1997, the cost of investments in securities for federal
income tax purposes was $183,730,244. Net unrealized appreciation of
securities was $15,444,965, consisting of gross unrealized appreciation and
depreciation of $34,737,343 and $19,292,378, respectively.
10
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED PER-SHARE DATA (a)
-----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------ -----------------------------------------------
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
Year Ended of Period (Loss) Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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>
<CAPTION>
RATIOS AND SUPPLEMENTAL DATA
--------------------------------------------------------------------
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
Year Ended Return Millions) Net Assets Net Assets Rate Paid (b)
<S> <C> <C> <C> <C> <C> <C>
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%
(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.
</TABLE>
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Discovery Fund II
We have audited the accompanying statement of assets and liabilities of Strong
Discovery Fund II (one of the portfolios constituting the Strong Variable
Insurance Funds, Inc.), including the schedule of investments in securities, as
of December 31, 1997, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of two years in the
period then ended, and the financial highlights for each of the periods
indicated. 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, 1997 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 Discovery Fund II as of December 31, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods indicated, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 4, 1998
12
<PAGE>
DIRECTORS
Richard S. Strong
Willie D. Davis
Stanley Kritzik
Marvin E. Nevins
William F. Vogt
OFFICERS
Richard S. Strong, Chairman of the Board
Mary F. Hoppa, 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 FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 * Milwaukee, WI 53201
