<PAGE>
- -------------------------------------------------------------------------------
THE STRONG
INTERNATIONAL
STOCK FUND II
ANNUAL REPORT * DECEMBER 31, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING STOCKS]
[STRONG FUNDS LOGO]
STRONG FUNDS
<PAGE>
- -------------------------------------------------------------------------------
THE STRONG INTERNATIONAL
STOCK FUND II
ANNUAL REPORT * DECEMBER 31, 1997
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong International Stock Fund II...................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities....................................4
Statement of Assets and Liabilities......................................7
Statement of Operations..................................................8
Statements of Changes in Net Assets......................................9
Notes to Financial Statements...........................................10
FINANCIAL HIGHLIGHTS.........................................................12
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. 6957A98
<PAGE>
THE STRONG INTERNATIONAL STOCK FUND II
A MORE NEUTRAL COUNTRY ALLOCATION GIVES OUR STOCK-PICKING ABILITY MORE ROOM TO
INFLUENCE PERFORMANCE.
The Strong International Stock Fund II pursues capital growth by investing
primarily in the stocks of companies based outside the United States. The Fund
provides access to growth opportunities worldwide that may offer greater return
potential than U.S. companies.
===================================
ASSET ALLOCATION
===================================
Based on net assets as of 12-31-97
[PIE CHART]
Stocks 84.2%
Short-Term Investments 15.8%
===================================
ADAPTING TO CURRENT CONDITIONS
Whenever a fund has endured a rocky period, it is essential to determine what
the roots of the problem have been and correct them. However difficult the past
year has been, the roots of the Fund's underperformance are identifiable, and
therefore we have been able to take appropriate steps to address them.
First, the Fund had an overweighting in Asia. The steep declines this region
suffered therefore significantly hurt performance. This drop has proven to be
deeper, broader, and more protracted than we had anticipated.
===========================================
FIVE LARGEST HOLDINGS BY COUNTRY
===========================================
As of 12-31-97
COUNTRY % OF NET ASSETS
-----------------------------------------
Italy 9.9%
-----------------------------------------
United Kingdom 9.8%
-----------------------------------------
Japan 9.7%
-----------------------------------------
France 7.2%
-----------------------------------------
New Zealand 4.6%
-----------------------------------------
Please see the Schedule of Investments in
Securities for a complete listing of
the Fund's portfolio.
===========================================
Second, the biggest movers in Europe's more successful markets were primarily
the largest, most liquid, and best-known names. While we do hold some of these
companies in the portfolio, and thus enjoyed their gains, we primarily focused
on smaller, lesser-known companies that may not yet be fully valued by the
markets. Although this strategy has succeeded in the past, it didn't find favor
in this environment. For the 12 months ended December 31, 1997, the Fund
posted a loss of 13.52%, while its benchmark, the Morgan Stanley Capital
International Europe, Australasia, and Far East (EAFE) Index, posted a modest
gain of 1.78%.* (1)
FOCUSING ON STOCK PICKING
We have made changes to address both issues. First, in Asia, the majority of
the Fund's problems have come from our allocation of assets to countries and
regions. By bringing the Fund's Asia weighting back in line with its
benchmark's and its peer group's, we have again made stock selection, not
country allocation, the driver of the Fund's performance. The stocks picked by
region that we owned in Asia actually performed reasonably well, relative to
other companies in the region. Second, in Europe we were also able to pick
solid stocks in Europe and Latin America--we just didn't give ourselves room
to pick enough of them.
To change that, we have rebalanced the portfolio substantially. Where our Asia
allocation (ex Japan) was nearly 25% earlier in the year, it is now down to
less than 8%. And Europe, already a major allocation earlier in the year, now
accounts for more than 40% of the portfolio. In all, these changes reflect a
more coventional country and regional breakdown for the Fund.
These changes do not alter the fundamental characteristics of the Fund.
Although the market recently has focused on the largest, best-known companies,
we still believe that picking underfollowed stocks around the world is a sound
approach. We are seeking to enhance the Fund's strategy by allowing its
performance to benefit from what we do well--stock selection-- and not be
overrun by world events.
======================================================
FIVE LARGEST STOCK HOLDINGS
======================================================
As of 12-31-97
SECURITY % OF NET ASSETS
-----------------------------------------------------
Telecom Italia Spa Preferred 1.8%
-----------------------------------------------------
IFI Istituto Finanziario Preferred 1.4%
-----------------------------------------------------
Guinness Peat Group PLC 1.3%
-----------------------------------------------------
Games Workshop Group PLC 1.2%
-----------------------------------------------------
Csp International Industria Calze Spa 1.1%
-----------------------------------------------------
Please see the Schedule of Investments in Securities
for a complete listing of the Fund's portfolio.
======================================================
2
<PAGE>
OUR OUTLOOK
Now that many of the world's markets have made their large moves, at some point
these markets will become more selective. That means that individual stocks
will rise and fall more on their own merits, rather than those of the countries
in which they're domiciled. In this setting, our stock-specific approach makes
sense.
The Fund's more balanced approach to all the world's markets has already
allowed it to benefit from a larger position in developed European markets,
particularly Italy which now accounts for nearly 10% of the portfolio. Other
substantial European holdings in the Fund are in France and the United Kingdom.
We are also pleased with opportunities we are identifying in Eastern Europe and
in Latin America.
Despite the difficulties, we are not writing off Asia. It remains a region
where big moves upward are possible. When things go wrong there it happens in
a big way, but the same can be true when things go right. The portfolio is now
anchored in western Europe, yet remains aggressive enough to take advantage of
the opportunities in less developed areas of the world.
Of course, this Fund is likely to be more volatile than a fund that invests
solely in U.S. stocks. Changes in market conditions, currency values, interest
rates, local regulations, and economic and political conditions can have quick,
sharp impact on foreign markets. Given the value currently available
internationally, however, we believe foreign equities offer long-term investors
an attractive opportunity.
Thank you for your investment in the Strong International Stock Fund II. We
look forward to earning your continued confidence.
Sincerely,
/s/ Anthony L.T. Cragg
Anthony L.T. Cragg
Portfolio Manager
[PHOTO OF ANTHONY L.T. CRAGG]
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 10-20-95 to 12-31-97
[GRAPH]
THE STRONG INTERNATIONAL Lipper International
STOCK FUND II MSCI EAFE Index* Funds Index*
9-95 10,000 10,000 10,000
12-95 10,261 10,491 10,321
3-96 10,964 10,795 10,776
6-96 11,642 10,965 11,217
9-96 11,196 10,952 11,227
12-96 11,327 11,126 11,810
3-97 11,627 10,952 12,107
6-97 12,307 12,373 13,461
9-97 11,372 12,286 13,716
12-97 9,795 11,324 12,668
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
Morgan Stanley Capital International Europe, Australasia, and Far East Index
("MSCI EAFE(tm)") and the Lipper International 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
October 1995.
===============================================================================
===================================
AVERAGE ANNUAL
TOTAL RETURNS(1)
===================================
As of 12-31-97
1-YEAR -13.52%
SINCE INCEPTION -0.94%
(ON 10-20-95)
===================================
- -------------------------------------------------------------------------------
* The MSCI EAFE(tm) is an unmanaged index generally representative of major
overseas stock markets. MSCI EAFE(tm) data is dollar adjusted. The
Lipper International Funds Index is an equally-weighted performance index
of the largest qualifying funds in this Lipper category. Source of the MSCI
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.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES DECEMBER 31, 1997
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
COMMON STOCKS 79.3%
ARGENTINA 0.9%
Banco Rio de La Plata SA ADR (b) 15,200 $ 212,800
Dragados y Construcciones Argentina 34,500 150,105
Quilmes Industrial SA ADR 13,300 182,044
----------
544,949
AUSTRALIA 3.7%
Cinema Plus, Ltd. 216,000 210,762
Foster's Brewing Group, Ltd. 266,000 505,256
Normandy Mining, Ltd. 556,508 539,393
Simeon Wines, Ltd. 142,000 383,340
Sydney Aquarium, Ltd. 223,900 538,894
----------
2,177,645
BELGIUM 0.7%
Virgin Express Holdings PLC Sponsored ADR (b) 20,000 415,000
BRAZIL 0.6%
Avipal SA Avicultura e Agropecuaria 41,669,000 100,065
Companhia de Saneamento Basico do Estado
de Sao Paulo 1,104,142 262,184
----------
362,249
CANADA 0.8%
Cae Industries, Ltd. 63,400 501,238
CHILE 1.7%
Distribucion y Servicio SA ADR (b) 11,000 204,188
Quimica y Minera Chile SA Sponsored ADR 8,300 365,200
Quinenco SA ADR (b) 23,000 264,500
Santa Isabel SA Sponsored ADR 11,275 197,313
----------
1,031,201
CHINA 1.0%
First Tractor Company, Ltd. 'H Shares' (b) 252,000 152,066
New World Infrastructure, Ltd. (b) 133,000 299,569
Shanghai Industrial Holdings, Ltd.
(Acquired 4/10/97 - 10/29/97; Cost $160,146) (c) 43,000 159,849
----------
611,484
CZECH REPUBLIC 0.4%
Restitucni Investment Fund Ceske 9,000 235,423
EGYPT 0.8%
Al-Ahram Beverages Company SAE (b) 12,400 348,440
Nile for Matches (b) 370 2,561
Suez Cement 6,937 140,988
----------
491,989
FINLAND 0.6%
Valmet Oyj 26,500 365,487
FRANCE 7.2%
Accor SA 1,400 260,103
Alliance Et Gestion Comm 3,760 166,681
Axa-UAP 3,700 286,085
Castorama Dubois Investissement SA 4,800 581,770
Edap Tms SA ADR (b) 37,000 259,000
Esker SA (b) 10,000 159,389
Genset SA Sponsored ADR (b) 31,900 630,025
Groupe Danone 3,400 606,840
Pernod Ricard 1,886 110,849
SEFIMEG (Societe Francaise d'Investissements
Immobiliers et de Gestion) 6,000 298,854
Sabeton SA 1,769 193,847
Skis Rossignol SA 3,905 69,633
Societe Generale 3,100 422,049
Sylea 2,800 267,309
----------
4,312,434
GERMANY 1.2%
Holsten-Brauerei AG 2,120 430,367
Leica Camera AG 16,800 275,639
----------
706,006
HONG KONG 0.9%
CDL Hotels International, Ltd. 407,072 123,478
Glorious Sun Enterprises 541,000 141,407
Jardine Strategic Holdings, Ltd. 48,000 126,720
Peregrine Investment Holdings, Ltd. 236,000 167,542
----------
559,147
HUNGARY 0.2%
Euronet Services, Inc. (b) 15,500 120,125
INDIA 3.5%
Bajaj Auto, Ltd. 13,000 201,151
IS Himilayan Fund NV (b) 12,200 130,540
The India Public Sector Fund, Ltd.
(Acquired 11/03/97; Cost $309,000) (c) 30,000 292,500
Indian Hotels Company, Ltd. 40,000 637,340
The Indian Smaller Companies Fund, Ltd. (b) 34,811 238,107
Larsen & Toubro, Ltd. 48,000 248,900
Marico Industries, Ltd. 22,000 145,166
UTI-Mastergrowth 93 Fund (b) 710,000 219,719
----------
2,113,423
INDONESIA 0.1%
Siloam Gleneagles Health Care PT
(Acquired 3/12/97; Cost $265,776) (b) (c) 216,000 80,000
IRELAND 0.5%
Fyffes PLC 175,000 273,814
ITALY 6.8%
Assicurazioni Generali 19,000 467,665
Csp International Industria Calze Spa (b) 58,000 654,265
Eni Spa 97,000 554,066
Filatura del Brembo Spa 40,000 378,389
Industrie Natuzzi Spa Sponsored ADR 30,200 622,875
Ittierre Holding Spa (b) 134,000 401,572
Pirelli Spa 153,000 405,653
Zucchini Spa 79,000 567,256
----------
4,051,741
JAPAN 9.6%
Fidelity Japan OTC and Regional Markets
Fund, Ltd. (b) 53,000 192,390
Fontaine Company, Ltd. 10,000 170,433
H I S Company, Ltd. 5,500 95,634
Higashi Nihon House 21,000 95,710
Horipro, Inc. 32,000 196,093
Jafco Company, Ltd. 7,000 249,330
Japan OTC Equity Fund, Inc. (b) 360 117,000
Mitsubishi Corporation 59,000 465,492
Mitsubishi Motors Corporation 69,000 232,555
Miyota Company, Ltd. 30,000 282,650
Mizuno Corporation 71,000 214,822
Nippon Broadcasting System 8,000 316,201
Nippon Shinpan Company 132,000 148,633
Nippon Telegraph & Telephone Corporation 52 446,113
Nittetsu Mining 43,000 174,569
Nomura Securities Company, Ltd. 45,000 599,770
Ohmoto Gumi Company, Ltd. 9,000 38,606
Oriental Land Company, Ltd. 6,000 275,756
Softbank Corporation 9,000 234,393
Sony Corporation 2,700 239,908
Takihyo Company, Ltd. 7,000 30,563
Toho Company 2,900 308,771
4
<PAGE>
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
Tokio Marine & Fire Insurance Company 39,000 $ 442,129
Tokushu Paper Manufacturing Company, Ltd.
Warrants, Expire 4/26/01 (b) 1,900 145,604
----------
5,713,125
KAZAKHSTAN 0.6%
Firebird Republics Fund (b) 1,300 217,455
Kazakhstan Investment Fund, Ltd. (b) 38,000 157,700
----------
375,155
MALAYSIA 0.3%
Malaysia International Shipping BHD (Fgn Reg) 132,000 193,918
MALI O.2%
Randgold Resources, Ltd. GDR (Acquired 6/26/97;
Cost $313,500) (c) 19,000 95,000
MEXICO 1.6%
Cemex SA de CV CPO (b) 48,000 217,533
Grupo Cementos Chihuah SA de CV 'B Shares' 93,000 113,699
Grupo Financiero Banamex Accival SA de CV (b) 89,000 265,952
Kimberly-Clark de Mexico SA de CV 5,000 117,500
Organizacion Soriana SA de CV 'B Shares' 61,000 266,237
----------
980,921
MIDDLE EAST 0.2%
The Foreign & Colonial Emerging Middle East
Fund, Inc. 7,000 117,250
NAMIBIA 0.6%
Namibia Breweries (b) 175,300 108,121
Namibian Minerals Corporation (b) 75,000 225,000
----------
333,121
NETHERLANDS 1.9%
Content Beheer NV 500 12,340
Heineken NV 2,400 418,164
Hunter Douglas NV 7,600 266,338
ING Groep NV 10,400 438,381
----------
1,135,223
NEW ZEALAND 4.6%
Air New Zealand, Ltd. Class B 183,000 366,625
CDL Hotels New Zealand, Ltd. 691,000 116,366
Corporate Investments, Ltd. (b) 479,800 253,544
Evergreen Forests, Ltd. (b) 969,600 270,262
Guinness Peat Group PLC 1,538,256 786,073
Pacific Capital Assets, Ltd. (Acquired
8/19/97 - 10/28/97; Cost $150,057) (b) (c) 509,000 115,274
Restaurant Brands New Zealand, Ltd. (b) 228,000 225,079
Shortland Properties, Ltd. 771,875 392,200
Sky Network Television, Ltd. (b) 148,000 222,594
----------
2,748,017
NORWAY 1.0%
Fred Olsen Energy ASA (b) 14,500 291,101
Tandberg ASA (b) 14,500 310,770
----------
601,871
PERU 1.0%
Compania de Minas Buenaventura SA
Sponsored ADR 11,500 184,000
Telefonica del Peru SA Sponsored ADR
Representing Class B Shares 7,000 163,188
Union de Cervecerias Peruanas 288,801 265,150
----------
612,338
PHILIPPINES 0.5%
Cosmos Bottling Corporation (b) 3,200,000 264,000
Empire East Land Holdings, Inc. (b) 1,548,800 22,845
----------
286,845
POLAND 0.1%
@Entertainment, Inc. (b) 6,000 66,750
PORTUGAL 0.1%
Telecel-Comunicacoes Pessoais SA (b) 500 53,303
ROMANIA 0.6%
The Romanian Investment Fund, Ltd.
(Acquired 5/08/97; Cost $400,000) (b) (c) 400 370,000
RUSSIA 0.7%
Irkutsk Electrosvyaz (b) 48,000 50,400
KamAZ (b) 100,000 182,500
Red October Russian Depository Trust
Certificates (Acquired 8/14/96 - 8/27/96;
Cost $143,750) (b) (c) 2 175,000
----------
407,900
SINGAPORE 3.1%
Cycle & Carriage, Ltd. 16,000 66,151
Jurong Shipyards, Ltd. 85,000 404,521
Osprey Maritime, Ltd. 418,000 335,693
Overseas Union Bank, Ltd. 52,000 199,524
Sembawang Corporation, Ltd. 79,000 169,185
Tat Lee Bank, Ltd. 101,000 150,208
United Overseas Bank, Ltd. 66,000 367,103
United Overseas Land, Ltd. 224,000 189,221
----------
1,881,606
SOUTH AFRICA 0.7%
Baring Simba Fund (b) 20,000 167,500
Baring Simba Fund Warrants, Expire 9/30/00 (b) 23,000 11,615
De Beers Centenary Linked Units 12,000 244,243
----------
423,358
SOUTH KOREA 0.4%
Korea Electric Power Corporation Sponsored ADR 21,150 212,822
SPAIN 1.4%
Baron de Ley SA (b) 20,000 377,953
Sol Melia SA 12,000 480,315
----------
858,268
SRI LANKA 1.0%
John Keells Holdings, Ltd. (b) 52,000 283,177
National Development Bank, Ltd. (b) 40,000 148,946
Sri Lanka Growth Fund (b) 40,000 185,000
----------
617,123
SWEDEN 1.3%
Nordbanken Holding AB (b) 99,000 560,429
Pricer AB 'B Shares' (b) 11,000 203,868
----------
764,297
SWITZERLAND 4.1%
Adecco SA 1,600 463,633
Liechtenstein Global Trust AG 400 247,691
Moevenpick Holding AG 800 323,503
SGS (Societe Generale de Surveillance) Holdings SA 250 478,960
SMH (Suisse Microelectronique et d'Horlogerie) 800 441,191
Zurich Versicherungsgesellschaft 1,000 476,223
----------
2,431,201
THAILAND 0.1%
Ruang Khao Fund Units (b) 1,181,800 88,762
UKRAINE 0.6%
Ukrainian Opportunity Fund (b) 29,700 331,749
UNITED KINGDOM 9.8%
Barclays PLC 9,900 264,275
Bluebird Toys PLC 214,000 315,450
Burton Group PLC 235,000 526,381
Diageo PLC (b) 39,500 362,365
5
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) DECEMBER 31, 1997
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
Eidos PLC (b) 46,000 $ 500,029
Games Workshop Group PLC 72,000 693,716
General Electric Company PLC 93,000 604,260
Hamleys PLC 68,000 293,430
Low & Bonar PLC 64,000 339,414
LucasVarity PLC 169,000 598,437
Pearson PLC 20,000 260,555
Pilkington PLC 49,000 102,896
Schroders PLC 9,200 289,865
W.H. Smith Group PLC 33,000 211,425
Trocadero PLC (b) 575,000 179,935
Vickers PLC 77,000 299,293
-----------
5,841,726
VENEZUELA 0.3%
Compania La Electricidad de Caracas 128,612 154,447
VIETNAM 0.1%
Vietnam Frontier Fund (b) 11,000 66,000
OTHER 1.2%
Apex Silver Mines, Ltd. (b) 28,000 357,000
Morgan Stanley Emerging Markets Fund, Inc. 19,000 248,188
The Regent Central Asia Investments (b) 12,000 124,500
-----------
729,688
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $54,184,261) 47,445,139
- -----------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS 0.2%
JAPAN 0.1%
Fuji International Finance Trust 0.25% (b) 24,000,000 71,237
SINGAPORE 0.1%
Osprey Maritime, Ltd. (b) 81,000 37,103
- -----------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS (COST $251,848) 108,340
- -----------------------------------------------------------------------------
PREFERRED STOCKS 4.7%
BRAZIL 0.4%
Companhia Antartica Paulista - Industria
Brasileira de Bebidas e Conexos 3,100 165,264
Telecomunicacoes de Sao Paulo SA 172,311 45,855
-----------
211,119
GERMANY 1.2%
Friedrich Grohe AG 1,010 244,917
Porsche AG Non-Voting 300 500,556
-----------
745,473
ITALY 3.1%
IFI Istituto Finanziario 73,000 824,998
Telecom Italia Spa 239,000 1,050,435
-----------
1,875,433
- -----------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $2,733,140) 2,832,025
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 19.8%
COMMERCIAL PAPER 0.1%
United States Cayman Eurodollar Call Deposit,
4.50% $ 25,000 25,000
TIME DEPOSITS 19.7%
UNITED STATES
Bank of Montreal Time Deposit, 6.25%,
Due 1/02/98 2,900,000 2,900,000
Bank Paribas Nationale Time Deposit, 5.50%,
Due 1/02/98 2,900,000 2,900,000
Republic National Bank, 6.25%, Due 1/02/98 2,900,000 2,900,000
United Bank of Switzerland Time Deposit, 5.75%,
Due 1/02/98 $ 200,000 $ 200,000
Wachovia Grand Cayman Time Deposit, 5.90%,
Due 1/02/98 2,900,000 2,900,000
-----------
11,800,000
- -----------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $11,825,000) 11,825,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(COST $68,994,249) 104.0% 62,210,504
Other Assets and Liabilities, Net (4.0%) (2,389,651)
- -----------------------------------------------------------------------------
NET ASSETS 100.0% $59,820,853
=============================================================================
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- ------------------------------------------------------------
Unrealized
Settlement Value Appreciation
Date in USD (Depreciation)
- ------------------------------------------------------------
Sold:
1,441,360 DEM 1/26/98 ($ 803,520) ($ 3,520)
1,966,721 GBP 5/12/98 (3,218,420) 81,580
377,100,000 JPY 6/12/98 (2,959,049) 40,951
2,004,480 SGD 6/17/98 (1,180,573) (20,573)
INDUSTRY DIVERSIFICATION
- ------------------------------------------------------------
Percentage of Net Assets
- ------------------------------------------------------------
Conglomerate............................................7.4%
Beverage - Alcoholic....................................6.1
Closed-End Fund.........................................5.9
Bank - Money Center.....................................5.7
Leisure Service.........................................4.6
Telecommunication Service...............................2.9
Auto & Truck Parts......................................2.8
Insurance - Diversified.................................2.8
Retail - Major Chain....................................2.7
Automobile..............................................2.5
Real Estate.............................................2.5
Engineering & Construction..............................2.4
Finance - Miscellaneous.................................2.1
Shoe & Apparel Manufacturing............................2.1
Retail - Specialty......................................2.0
Food....................................................1.9
Media - Radio/TV........................................1.9
Shipping................................................1.9
Consumer - Miscellaneous................................1.7
Household Appliances & Furnishings......................1.5
Metals & Mining.........................................1.5
Precious Metal/Gem/Stone................................1.5
Oil - International Integrated..........................1.4
Airline.................................................1.3
Brokerage & Investment Management.......................1.3
Paper & Forest Products.................................1.3
Computer Software.......................................1.2
Electronic Products - Miscellaneous.....................1.2
Healthcare - Drug/Diversified...........................1.1
Machinery - Transportation Equipment & Parts............0.9
Retail - Restaurant.....................................0.9
Aerospace & Defense.....................................0.8
Commercial Service......................................0.8
Cosmetic & Personal Care................................0.7
Retail - Food Chain.....................................0.7
Chemical................................................0.6
Electric Power..........................................0.6
Leisure Product.........................................0.6
Machinery - Miscellaneous...............................0.6
6
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INDUSTRY DIVERSIFICATION (continued)
- ------------------------------------------------------------
Percentage of Net Assets
- ------------------------------------------------------------
Beverage - Soft Drink 0.4%
Healthcare - Instrumentation 0.4
Media - Publishing 0.4
Machinery - Agriculture 0.3
Housing 0.2
Healthcare - Patient Care 0.1
Short-Term Investments 19.8
Other Assets and Liabilities, Net (4.0)
- ------------------------------------------------------------
Total 100.0%
- ------------------------------------------------------------
CURRENCY ABBREVIATIONS
- ------------------------------------------------------------
DEM German Mark
GBP British Pound
JPY Japanese Yen
SGD Singapore Dollar
USD United States Dollar
LEGEND
- ------------------------------------------------------------
(a) Short-term investments include any security which has a
maturity of less than one year.
(b) Non-income producing security.
(c) Restricted security.
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 $68,994,249) $62,210,504
Receivable for Securities and
Forward Foreign Currency Contracts Sold 679,269
Dividends and Interest Receivable 54,152
Other Assets 3,233
-----------
Total Assets 62,947,158
LIABILITIES:
Payable for Securities Purchased 3,022,832
Accrued Operating Expenses and Other Liabilities 103,473
-----------
Total Liabilities 3,126,305
-----------
NET ASSETS $59,820,853
===========
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $71,112,131
Undistributed Net Investment Income 283,556
Accumulated Net Realized Loss (4,888,753)
Net Unrealized Depreciation (6,686,081)
-----------
Net Assets $59,820,853
===========
Capital Shares Outstanding (Unlimited Number Authorized) 6,416,977
NET ASSET VALUE PER SHARE $9.32
=====
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Year Ended December 31, 1997
INCOME:
Dividends $1,097,529
Interest 525,319
----------
Total Income 1,622,848
EXPENSES:
Investment Advisory Fees 762,688
Custodian Fees 256,502
Shareholder Servicing Costs 134,735
Other 481
----------
Expenses, Net 1,154,406
----------
NET INVESTMENT INCOME 468,442
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments (4,706,865)
Forward Foreign Currency Contracts 736,445
Foreign Currencies (12,734)
----------
Net Realized Loss (3,983,154)
Change in Unrealized Appreciation/Depreciation on:
Investments (5,848,238)
Forward Foreign Currency Contracts (41,150)
Foreign Currencies (1,327)
----------
Net Change in Unrealized Appreciation/Depreciation (5,890,715)
----------
NET LOSS (9,873,869)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($9,405,427)
==========
See notes to financial statements.
8
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996
------------- -------------
OPERATIONS:
Net Investment Income $ 468,442 $ 188,934
Net Realized Gain (Loss) (3,983,154) 2,279,627
Change in Unrealized Appreciation/Depreciation (5,890,715) (828,567)
----------- ------------
Increase (Decrease) in Net Assets Resulting
from Operations (9,405,427) 1,639,994
DISTRIBUTIONS:
From Net Investment Income (468,442) (188,934)
In Excess of Net Investment Income (835,402) (111,137)
From Net Realized Gains (1,952,335) --
----------- ------------
Total Distributions (3,256,179) (300,071)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 49,323,565 118,715,984
Proceeds from Reinvestment of Dividends 3,256,179 300,071
Payment for Shares Redeemed (55,248,543) (47,009,732)
----------- ------------
Increase (Decrease) in Net Assets from Capital
Share Transactions (2,668,799) 72,006,323
----------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (15,330,405) 73,346,246
NET ASSETS:
Beginning of Year 75,151,258 1,805,012
----------- ------------
End of Year $59,820,853 $ 75,151,258
=========== ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 4,419,239 10,737,059
Issued in Reinvestment of Distributions 288,891 26,736
Redeemed (4,980,333) (4,251,177)
--------- ----------
Increase (Decrease) in Shares of the Fund (272,203) 6,512,618
========= ==========
See notes to financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1997
1. ORGANIZATION
The Strong International Stock 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 93% 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, depending on local convention or regulation. Debt
securities not traded on a principal securities exchange are valued
through valuations 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.
Aggregate cost and fair value of these restricted securities held at
December 31, 1997 were $1,742,229 and $1,287,623, respectively,
representing 2.2% 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 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.
10
<PAGE>
- -------------------------------------------------------------------------------
(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 and unaffiliated
directors' fees for the year then ended were $2,445 and $1,500,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year ended
December 31, 1997 were $109,601,858 and $115,435,291, respectively.
5. INCOME TAX INFORMATION
At December 31, 1997, the cost of investments in securities for federal
income tax purposes was $69,033,179. Net unrealized depreciation of
securities was $6,822,675, consisting of gross unrealized appreciation and
depreciation of $3,196,843 and $10,019,518, respectively. At December 31,
1997, the Fund had a capital loss carryover of $4,786,493, which expires in
2005.
11
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELECTED PER-SHARE DATA (a)
-------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------- -----------------------------------------------
Net Asset Net Realized Total In Excess Net Asset
Value, Net and Unrealized from From Net of Net From Net Value,
Beginning Investment Gains on Investment Investment Investment Realized Total End of
Year Ended of Period Income Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dec. 31, 1997 $11.23 $0.06 ($1.50) ($1.44) ($0.06) ($0.12) ($0.29) ($0.47) $ 9.32
Dec. 31, 1996 10.22 0.03 1.03 1.06 (0.03) (0.02) --- (0.05) 11.23
Dec. 31, 1995 (c) 10.00 0.01 0.25 0.26 (0.01) (0.03) --- (0.04) 10.22
</TABLE>
<TABLE>
<CAPTION>
RATIOS AND SUPPLEMENTAL DATA
--------------------------------------------------------------------
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income Portfolio Commission
Total Period (In to Average to Average Turnover Rate
Year Ended Return Millions) Net Assets Net Assets Rate Paid (b)
<S> <C> <C> <C> <C> <C> <C>
Dec. 31, 1997 -13.5% $60 1.5% 0.6% 169.2% $0.0014
Dec. 31, 1996 +10.4% 75 1.9% 0.4% 126.0% 0.0100
Dec. 31, 1995 (c) +2.6% 2 2.0%* 1.0%* 26.9%
* 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) Inception date is October 20, 1995. Total return and portfolio turnover rate are not annualized.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong International Stock Fund II
We have audited the accompanying statement of assets and liabilities of Strong
International Stock 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, the related statement of operations for
the year ended, the statements of changes in net assets for each of the 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 International Stock 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
Brown Brothers Harriman & Company
40 Water Street, Boston, Massachusetts 02109
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 7028B98
