<PAGE>
===============================================================================
THE STRONG INTERNATIONAL
STOCK FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1998
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......................................5
Statement of Operations..................................................6
Statements of Changes in Net Assets......................................6
Notes to Financial Statements............................................7
FINANCIAL HIGHLIGHTS..........................................................8
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 8279H98
<PAGE>
======================================
THE STRONG INTERNATIONAL STOCK FUND II
======================================
THE PORTFOLIO HAS BEEN REDIRECTED WITH A FOCUS ON WESTERN EUROPE, WHICH WE
BELIEVE OFFERS THE BEST GROWTH PROSPECTS IN THE NEXT COUPLE OF YEARS...
The Strong International Stock Fund II invests in non-U.S. stocks that we
believe will outperform their peers for the least amount of risk. We seek to
maximize risk-adjusted after-tax return for the Fund's shareholders, while
keeping turnover to a minimum.
=================================
ASSET ALLOCATION
=================================
Based on net assets as of 6-30-98
[PIE CHART]
Stocks 99.6%
Short-Term Investments 0.4%
=================================
During a period marked by volatility in Asian markets, the Fund finished the
six-month period ended June 30, 1998 with a return of 6.82%.(1)
=======================================
FIVE LARGEST HOLDINGS BY COUNTRY
=======================================
As of 6-30-98
COUNTRY % OF NET ASSETS
- ---------------------------------------
United Kingdom 22.5%
.......................................
France 16.0%
.......................................
Germany 11.1%
.......................................
Italy 9.7%
.......................................
Portugal 7.0%
.......................................
Please see the Schedule of Investments
in Securities for a complete listing of
the Fund's portfolio.
=======================================
MARKET CONDITIONS
In the first half of 1998, the U.S. market continued its global dominance.
However, this did not translate into the best performance in the world. Western
Europe finally outgunned the U.S. stock market in 1998 on a U.S.-dollar basis,
especially those countries participating in the European Monetary Union (EMU).
Among them, those countries whose interest rates were relatively high tended to
benefit most from the secular interest rate decline that was concomitant with
the advent of the EMU.
The Asian markets continued to suffer in the first half of 1998. Asian countries
took a nose dive in the first two weeks of the year, but rebounded strongly
until the beginning of April when these markets took a beeline to retest the new
lows reached in early January. At the same time, these same countries'
currencies mimicked the performance of the respective equity markets--a nose
dive, a rebound, and then a nose dive again. Any portfolio with investments in
these countries would have suffered great losses and volatility during this
period. The Pacific markets of Australia and New Zealand--with their economies
intertwined with those of Japan and Korea--were not spared, and predicted
economic slowdowns. Recently, it was confirmed that New Zealand was heading into
a recession.
South America also suffered. Because investors in general tended to associate
this region with the emerging markets, any turbulence in Asia was immediately
felt in South America.
A LOOK AT PERFORMANCE IN A ROCKY MARKET
Asia's underperformance took a sizable toll on the Strong International Stock
Fund II. Although exposure to this region was significantly lowered during the
first months of 1998, our representation there was still large enough to cause
the Fund's performance to suffer.
The types of stocks the Fund typically emphasized also struggled in an
unfavorable environment. Both the small-capitalization and emerging-market
sectors have significantly underperformed larger, established companies for many
months.
NEW MANAGEMENT AND DIRECTION FOR THE FUND
On May 19, 1998, I assumed the role of portfolio manager of the Strong
International Stock Fund II. In managing the Fund, I'll apply a rigorous
investment strategy that emphasizes selective country allocation, and careful
stock selection.
The Fund's portfolio has been redirected with a focus on Western Europe, which
we believe offers the best growth prospects in the next couple of years as the
EMU begins to exert its positive influence on the economies of the participating
countries.
OUTLOOK FOR THE NEXT SIX MONTHS
The problems in Asia will take time to rectify. They vary from structural issues
in Japan to over-leveraging in Southeast Asia. Hong Kong was living in a
====================================================
FIVE LARGEST STOCK HOLDINGS
====================================================
As of 6-30-98
SECURITY % OF NET ASSETS
- ----------------------------------------------------
Telecel-Comunicacoes Pessoais SA 3.1%
....................................................
Lloyds TSB Group PLC 3.1%
....................................................
Banco Santander SA 3.1%
....................................................
Banque Nationale de Paris 3.0%
....................................................
Legal & General Group PLC 2.9%
....................................................
Please see the Schedule of Investments in Securities
for a complete listing of the Fund's portfolio.
====================================================
2
<PAGE>
property bubble that finally burst. Despite a 40% correction in residential real
estate prices, they still rank among the most expensive in the world. The sharp
decline in real estate prices led to a slowdown in the economy and a
historically high unemployment rate. I believe that the gravity of these
problems precludes any attractive risk-adjusted returns from the equity markets
of this region in the next 12 months.
South America is unfairly treated as birds of a feather with Southeast Asia.
This perception is unlikely to change in the near future. Hence, I don't believe
that the South American equity markets will be judged on their own merits in
the coming months.
Western Europe performed exceptionally in the first half of 1998. However, no
market can ascend forever, and a healthy correction in May was more than welcome
and was deemed to be necessary in order for these markets to attempt to scale
new heights in the second half of 1998. In fact, some of the peripheral markets
such as Spain, Italy, and Portugal have pulled back by 15% on a U.S.-dollar
basis from the peak established in April. I expect these markets to retest their
all-time highs in the second half of the year. The prospects for Europe have
never been brighter. The driving forces are overwhelming and potent. They
include but are not limited to strong GDP growth, falling unemployment, rising
consumption, welfare reforms, inflation and deficit control, industry
consolidation and restructuring, shareholder activism, unwinding of cross
shareholdings, stock buyback, privatization and deregulation. The portfolio is
now positioned to take advantage of the expected outperformance of the Western
European markets in the second half of 1998.
Thank you for your investment in the Strong International Stock Fund II.
[PHOTO OF DAVID LUI]
Sincerely,
/s/ David Lui
David Lui
Portfolio Manager
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 10-20-95 to 6-30-98
[GRAPH]
THE STRONG Lipper
INTERNATIONAL MSCI EAFE International
STOCK FUND II Index* Funds Index*
9-95 10,000 10,000 10,000
12-95 10,261 10,491 10,321
6-96 11,642 10,965 11,215
12-96 11,327 11,126 11,810
6-97 12,307 12,373 13,457
12-97 9,795 11,324 12,666
6-98 10,464 13,127 14,668
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") 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 indices' performance was prorated for the month of
October 1995.
================================
AVERAGE ANNUAL
TOTAL RETURNS(1)
================================
As of 6-30-98
1-YEAR -14.98%
SINCE INCEPTION 1.69%
(on 10-20-95)
================================
- --------------------------------------------------------------------------------
* The MSCI EAFE is an unmanaged index generally representative of major overseas
stock markets. MSCI EAFE 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. 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.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
COMMON STOCKS 98.9%
AUSTRALIA 1.6%
AMP, Ltd. (b) 60,000 $ 702,286
Tab, Ltd. (b) 118,000 173,924
----------
876,210
BELGIUM 1.5%
KBC Bancassurance Holding NV 9,600 857,510
BRAZIL 0.4%
Telecommunicacoes Brasileiras SA Sponsored ADR 1,900 207,456
CANADA 2.1%
Bank of Montreal 21,600 1,203,271
EGYPT 0.0%
Suez Cement 105 1,944
FINLAND 1.7%
Merita PLC 'A Shares' 46,000 303,088
Tieto Corporation 'B Shares' 8,640 655,773
----------
958,861
FRANCE 16.0%
Alcatel Alsthom 5,400 1,096,750
Atos SA (b) 1,600 382,775
Axa-UAP (b) 7,300 819,008
Banque Nationale de Paris 20,600 1,678,997
Cap Gemini SA 2,500 391,850
Galeries Lafayette 300 298,466
Groupe Danone 2,700 742,600
Pinault-Printemps-Redoute SA 765 638,657
Rhodia SA (b) 24,000 667,613
Scor 4,700 297,385
Societe Generale (b) 6,250 1,296,197
Suez Lyonnaise des Eaux 4,200 689,490
----------
8,999,788
GERMANY 11.1%
Adidas AG 5,200 904,485
Bayerische Motoren Werke AG 1,600 1,611,415
Bayerische Motoren Werke AG - New (b) 133 133,728
Deutsche Bank AG 9,100 768,022
Deutsche Lufthansa AG - Registered Shares 24,000 603,285
Mannesmann AG 10,000 1,025,939
Metro AG 9,500 572,701
Muenchener Rueckversicherungs-Gesellschaft AG -
Registered Shares 1,300 644,212
----------
6,263,787
HONG KONG 0.0%
Peregrine Investment Holdings, Ltd. 236,000 0
INDIA 0.4%
The Indian Smaller Companies Fund, Ltd. (b) 20,811 166,488
UTI-Mastergrowth 93 Fund (b) 195,100 47,968
----------
214,456
INDONESIA 0.0%
Siloam Gleneagles Health Care PT (Acquired 3/12/97;
Cost $265,776) (b) (c) 216,000 9,583
ITALY 9.0%
Banca Fideuram Spa 122,000 695,489
Banca Poplare di Brescia 30,000 564,879
Istituto Nazionale delle Assicurazioni 279,000 793,137
La Fondiaria Assicurazioni (b) 111,000 636,271
La Rinascente Spa 58,500 570,515
Mediaset Spa 88,000 557,004
Telecom Italia Mobile Spa 202,000 1,230,147
----------
5,047,442
KAZAKHSTAN 0.5%
Firebird Republics Fund (Acquired 8/29/97;
Cost $243,532) (b) (c) 1,280 175,089
Kazakhstan Investment Fund, Ltd. (b) 26,000 123,500
----------
298,589
NETHERLANDS 5.7%
Getronics NV 23,100 1,195,570
ING Groep NV 11,900 777,610
Vedior NV 9,374 264,426
Vendex International NV 9,500 356,530
Verenigd Bezit VNU NV 17,000 616,317
----------
3,210,453
NORWAY 0.8%
Merkantildata ASA 37,000 468,244
PERU 0.2%
Telefonica del Peru SA Sponsored ADR
(Representing Class B Shares) 4,700 96,056
PORTUGAL 7.0%
Brisa-Auto Estradas de Portugal SA
(Acquired 5/21/98; Cost $594,904) (c) 12,800 546,358
Portugal Telecom SA - Registered Shares 31,200 1,650,357
Telecel-Comunicacoes Pessoais SA 10,000 1,772,207
----------
3,968,922
ROMANIA 0.4%
The Romanian Investment Fund, Ltd.
(Acquired 5/08/97; Cost $300,000) (b) (c) 300 243,750
SPAIN 6.2%
Banco Popular Espanol SA 7,000 596,715
Banco Santander SA 68,188 1,744,251
Telefonica de Espana SA 25,500 1,178,278
----------
3,519,244
SWEDEN 4.6%
Hennes & Mauritz AB 'B Shares' 5,100 324,751
Skandia Forsakrings AB 45,800 653,181
Svenska Handelsbanken 'A Shares' 20,300 939,638
Volvo AB 'B Shares' 22,000 653,656
----------
2,571,226
SWITZERLAND 6.7%
Adecco SA 700 315,000
Credit Suisse Group - Registered Shares 2,650 588,405
Mettler-Toledo International, Inc. (b) 14,000 280,875
Schweizerische Lebensversicherungs und Rentenanstalt 725 612,435
Schweizerische Rueckversicherungs-Gesellschaft
Registered Shares 540 1,362,789
Zurich Versicherungsgesellschaft 950 605,000
----------
3,764,504
THAILAND 0.0%
Ruang Khao Fund Units (b) 284,300 17,557
UKRAINE 0.4%
Ukrainian Opportunity Fund (Acquired 3/21/97;
Cost $300,000) (b) (c) 29,700 222,750
UNITED KINGDOM 22.5%
Bluebird Toys PLC 214,000 408,514
British Aerospace PLC 140,000 1,071,344
Cable & Wireless Communications PLC (b) 79,000 799,472
EMAP PLC 28,800 590,109
4
<PAGE>
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
GKN PLC 39,500 $ 502,798
Great Universal Stores PLC 24,000 316,101
Kingfischer PLC 65,000 1,045,751
Legal & General Group PLC 155,000 1,652,570
Lloyds TSB Group PLC 125,000 1,753,687
LucasVarity PLC 153,000 607,094
National Express Group PLC 62,000 997,486
Siebe PLC 24,700 492,923
Stagecoach Holdings PLC 29,000 616,447
Vodafone Group PLC 47,000 595,916
Whitbread PLC 36,000 585,787
WPP Group PLC 93,000 608,957
-----------
12,644,956
VIETNAM 0.1%
Vietnam Frontier Fund (b) 8,406 37,827
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $55,700,175) 55,704,386
- ------------------------------------------------------------------------------
WARRANTS 0.0%
GERMANY
Metro AG Rights (b) 9,500 657
- ------------------------------------------------------------------------------
TOTAL WARRANTS (COST $0) 657
- ------------------------------------------------------------------------------
PREFERRED STOCKS 0.7%
ITALY
Telecom Italia Spa 82,000 398,213
- ------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $326,020) 398,213
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 0.0%
COMMERCIAL PAPER
INTEREST BEARING, DUE UPON DEMAND
United States Cayman Eurodollar Call Deposit, 4.50% $1,000 1,000
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $1,000) 1,000
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $56,027,195) 99.6% 56,104,256
Other Assets and Liabilities, Net 0.4% 229,286
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $56,333,542
==============================================================================
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
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $56,027,195) $56,104,256
Receivable for Securities and Forward Foreign Currency
Contracts Sold 742,326
Dividends and Interest Receivable 144,458
-----------
Total Assets 56,991,040
LIABILITIES:
Payable for Securities Purchased 280,000
Accrued Operating Expenses and Other Liabilities 377,498
-----------
Total Liabilities 657,498
-----------
NET ASSETS $56,333,542
===========
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $64,021,971
Accumulated Net Investment Loss (75,935)
Accumulated Net Realized Loss (7,686,621)
Net Unrealized Appreciation 74,127
-----------
Net Assets $56,333,542
===========
Capital Shares Outstanding (Unlimited Number Authorized) 5,717,709
NET ASSET VALUE PER SHARE $9.85
=====
5
See notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Six Months Ended June 30, 1998 (Unaudited)
INCOME:
Dividends $ 685,260
Interest 120,214
----------
Total Income 805,474
EXPENSES:
Investment Advisory Fees 297,934
Custodian Fees 165,953
Shareholder Servicing Costs 41,189
Other 18,887
----------
Expenses, Net 523,963
----------
NET INVESTMENT INCOME 281,511
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments (2,999,543)
Forward Foreign Currency Contracts 205,975
Foreign Currencies (4,300)
----------
Net Realized Loss (2,797,868)
Change in Unrealized Appreciation/Depreciation on:
Investments 6,860,806
Forward Foreign Currency Contracts (98,437)
Foreign Currencies (2,160)
----------
Net Change in Unrealized Appreciation/Depreciation 6,760,209
----------
NET GAIN 3,962,341
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,243,852
==========
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DEC. 31, 1997
---------------- -------------
(UNAUDITED)
OPERATIONS:
Net Investment Income $ 281,511 $ 468,442
Net Realized Loss (2,797,868) (3,983,154)
Change in Unrealized Appreciation/Depreciation 6,760,209 (5,890,715)
----------- -----------
Increase (Decrease) in Net Assets Resulting
from Operations 4,243,852 (9,405,427)
DISTRIBUTIONS:
From Net Investment Income (641,003) (468,442)
In Excess of Net Investment Income -- (835,402)
From Net Realized Gains -- (1,952,335)
----------- -----------
Total Distributions (641,003) (3,256,179)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 23,185,115 49,323,565
Proceeds from Reinvestment of Distributions 641,002 3,256,179
Payment for Shares Redeemed (30,916,277) (55,248,543)
----------- -----------
Decrease in Net Assets from Capital Share
Transactions (7,090,160) (2,668,799)
----------- -----------
TOTAL DECREASE IN NET ASSETS (3,487,311) (15,330,405)
NET ASSETS:
Beginning of Period 59,820,853 75,151,258
----------- -----------
End of Period $56,333,542 $59,820,853
=========== ===========
TRANSACTIONS IN SHARES OF THE FUND:
Sold 2,322,755 4,419,239
Issued in Reinvestment of Distributions 62,874 288,891
Redeemed (3,084,897) (4,980,333)
--------- ---------
Decrease in Shares of the Fund (699,268) (272,203)
========= =========
6
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
1. ORGANIZATION
The Strong International Stock 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 90% 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 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,
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 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 $1,704,212 and $1,197,530, respectively, representing 2.1%
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.
(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.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
(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 June 30, 1998 and unaffiliated
directors' fees for the six months then ended were $4,138 and $750,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six months
ended June 30, 1998 were $97,416,242 and $95,567,017, respectively..
5. INCOME TAX INFORMATION
At June 30, 1998, the cost of investments in securities for federal income
tax purposes was $56,027,195. Net unrealized appreciation of securities was
$77,061, consisting of gross unrealized appreciation and depreciation of
$2,907,089 and $2,830,028, respectively. At December 31, 1997, the Fund had
a capital loss carryover of $4,786,493, which expires in 2005.
<TABLE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA (a)
-------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- -----------------------------------------------
<CAPTION>
Net Realized
Net Asset and Unrealized Total In Excess Net Asset
Value, Net Gains from From Net of Net From Net Value,
Beginning Investment (Losses) on Investment Investment Investment Realized Total End of
Period Ended of Period Income Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1998 (c) $ 9.32 $0.05 $0.59 $0.64 ($0.11) -- -- ($0.11) $ 9.85
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 (d) 10.00 0.01 0.25 0.26 (0.01) (0.03) -- (0.04) 10.22
</TABLE>
<TABLE>
RATIOS AND SUPPLEMENTAL DATA
------------------------------------------------------------------
<CAPTION>
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income 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) +6.8% $56 1.8%* 0.9%* 170.5% $0.0008
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 (d) +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) For the six months ended June 30, 1998 (Unaudited). Total return and portfolio turnover rate are not annualized.
(d) Inception date is October 20, 1995. Total return and portfolio turnover rate are not annualized.
</TABLE>
8
