THE STRONG
DISCOVERY FUND II
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SEMI-ANNUAL REPORT o JUNE 30, 1999
[PICTURE OF STRONG FUNDS BUILDING]
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 .........................................6
Statements of Changes in Net Assets .............................7
Notes to Financial Statements ...................................8
FINANCIAL HIGHLIGHTS ................................................10
[STRONG LOGO]
STRONG INVESTMENTS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 12427H99
<PAGE>
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THE STRONG DISCOVERY FUND II
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FUND
HIGHLIGHTS
o The Strong Discovery Fund II returned -5.44 percent for the period ended
June 30, 1999.(1)
o As of June 30, 1999, the Fund was invested in companies with an expected
earnings growth rate of 21 percent.(2) On-site meetings with management
confirmed that the vast majority of the Fund's holdings are on track to
achieve their profit targets.
o The Fund emphasized dependable growth companies as a precautionary measure
against a potential slowdown in the U.S. economy, which could result from
the recent rise in interest rates.
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AVERAGE ANNUAL
TOTAL RETURNS(1)
As of 6-30-99
1-year -5.81%
3-year 5.25%
5-year 10.25%
Since Inception 9.69%
(on 5-8-92)
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FIVE LARGEST
STOCK HOLDINGS
As of 6-30-99
SECURITY % OF NET ASSETS
AT&T Corporation 4.5%
Central Garden & Pet Co. 4.2%
Sykes Enterprises, Inc. 3.0%
ITT Educational Services, Inc. 2.6%
Coinmain Laundry Corporation 2.6%
Please see the Schedule of Investments
in Securities for a complete listing of
the Fund's portfolio.
PERSPECTIVES
FROM THE MANAGERS
/s/Richard S. Strong /s/ Chip Paquelet
Richard S. Strong Chip Paquelet
Portfolio Co-manager Portfolio Co-manager
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This year began with a continuation of the market trends that persisted over the
past few years. Large company stocks, and more recently Internet stocks,
performed extraordinarily well while most stocks lost ground. By April, however,
the chronic underperformance of small- and medium-sized company shares staged a
turnaround. Investors are finally beginning to recognize the attractive
valuation and growth opportunities present in the small-cap sector.
The Discovery Fund's performance mirrored this trend--a rough January-March
followed by an improvement in the second quarter. Unfortunately, by mid-year our
performance had fallen short of our broad-based benchmark, the Russell 2000(R)
Index*, and we gave back the outperformance we achieved in 1998.
No single issue explains Discovery's disappointing start in 1999. Rather, it was
the culmination of several factors:
o Large declines in a few of our holdings, although the Fund's broad
diversification diluted their impact.
o Insufficient technology exposure, particularly Internet stocks. At June 30,
1999, 23.4% of the portfolio was invested in technology. In addition, our
focus on companies with proven management and records limited our exposure
to the scores of Internet start-ups, recently the strongest sector of the
market.
o Lack of big winners. While you expect some investments to disappoint, you
also expect to
-------------------------------------
WHILE THE PORTFOLIO
HAD A NUMBER OF
INDIVIDUAL INVESTMENTS
WITH GOOD GAINS OVER
THE PAST TWO QUARTERS,
WE DID NOT HAVE OUR
COMPLEMENT OF STOCKS
THAT SHOT THE LIGHTS OUT.
-------------------------------------
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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, and is not annualized.
2 Earnings growth has been estimated on an annual basis for a projected
five-year period. The Discovery Fund II's earnings growth estimate has been
generated from our own analysis of the portfolio's individual securities as
of June 30, 1999. The earnings growth projection for the S&P 500 has been
based on a consensus of earnings estimates from six Wall Street investment
firms as shown by Bloomberg dated June 30, 1999.
2
<PAGE>
more than offset them with stocks that surprise on the upside. While the
portfolio had a number of individual investments with good gains over the past
two quarters, we did not have our complement of stocks that shot the lights out.
On the positive side, in February and March we increased the Fund's energy
exposure just prior to the recovery in oil prices. We also made several
investments in cable companies as a way of capturing the growth of the Internet
to the residential market.
Looking forward, we plan to emphasize those sectors of the market with the
greatest growth potential, including technology, consumer products/services, and
healthcare. We also intend to continue capitalizing on turning points in other
industries, such as energy. As in the past, individual company research,
including on-site visits with management, will continue to be an integral part
of our investment process.
Please understand that, above all else, we value and appreciate the enormous
trust you have invested in us. We absolutely abhor having to report poor results
to you. And rest assured, we have every intention of improving the job we do on
your behalf. We will keep you posted.
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 6-30-99
[GRAPH]
Lipper Capital
THE STRONG Russell Appreciation
DISCOVERY FUND II 2000(R) Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 10,887 11,377 11,024
12-93 13,285 13,528 12,760
12-94 12,569 13,282 12,447
12-95 17,001 17,059 16,379
12-96 17,138 19,873 18,829
12-97 19,090 24,317 22,589
12-98 20,476 23,698 27,103
6-99 19,363 25,898 31,161
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with the performance of the
Russell 2000(R) Index 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.
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* The Russell 2000(R) Index is an unmanaged index generally representative of
the U.S. market for small capitalization stocks. The Lipper Capital
Appreciation Funds Index is an equally-weighted performance index of the
largest qualifying funds in this Lipper category. Source of the Russell
index data is Standard & Poor's Micropal. Source of the Lipper index data
is Lipper Inc.
YOUR FUND'S
APPROACH
THE STRONG DISCOVERY FUND II SEEKS TO PROVIDE INVESTORS WITH CAPITAL GROWTH, A
GOAL WE PURSUE BY INVESTING IN A DIVERSIFIED PORTFOLIO OF SMALL-, MEDIUM-, AND
LARGER- SIZE COMPANIES. OUR INVESTMENT APPROACH COMBINES NUMBER CRUNCHING
ANALYSIS WITH DIRECT RESEARCH, INCLUDING ON-SITE VISITS. THROUGH FREQUENT
DISCUSSIONS WITH MANAGEMENT, SUPPLIERS, CUSTOMERS AND COMPETITORS, WE BELIEVE WE
CAN IDENTIFY VITAL ASPECTS OF COMPANIES THAT ARE NOT REFLECTED IN THEIR
HISTORICAL FINANCIAL STATEMENTS OR THEIR STOCK PRICES.
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MARKET
HIGHLIGHTS
o In the second quarter of 1999, small-cap stocks staged a comeback following
three years of significant underperformance.
o Large-cap valuations are at historically high levels, while small-cap
valuations remain reasonable.
o Corporate profitability is picking up following several years of anemic
growth. Earnings for the companies in the S&P 500 Index are expected to
advance 15% in 1999, compared to just a 4.5% average annual gain over the
past three years.2
o The U.S. economy remains remarkably healthy in spite of global economic
challenges and, recently, higher interest rates.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES JUNE 30, 1999 (UNAUDITED)
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================================================================================
STRONG DISCOVERY FUND II
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Shares or
Principal Value
Amount (Note 2)
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COMMON STOCKS 98.3%
AEROSPACE & DEFENSE 0.2%
AVTEAM, Inc. Class A (b) 39,000 $ 285,188
BANK - MONEY CENTER 1.4%
Citigroup, Inc. 44,250 2,101,875
BANK - SUPER REGIONAl 0.6%
Bank One Corporation 15,300 911,306
BROKERAGE & INVESTMENT MANAGEMENT 1.3%
Waddell & Reed Financial, Inc. Class A 73,950 2,029,003
COMMERCIAL SERVICE 16.3%
Coinmach Laundry Corporation (b) 311,450 3,951,522
Consolidated Graphics, Inc. (b) 43,950 2,197,500
The Hertz Corporation 50,550 3,134,100
ITT Educational Services, Inc. (b) 153,100 3,990,169
Lamar Advertising Company (b) 11,700 478,969
Lason Holdings, Inc. (b) 20,500 1,017,312
Merkert American Corporation (b) 161,900 1,538,050
Outdoor Systems, Inc. (b) 70,080 2,557,920
The ServiceMaster Company 47,125 883,594
Sykes Enterprises, Inc. (b) 137,150 4,577,381
Valassis Communications, Inc. (b) 17,950 657,419
-----------
24,983,936
COMPUTER - MAINFRAME 2.8%
Hewlett-Packard Company 16,400 1,648,200
International Business Machines Corporation 21,100 2,727,175
-----------
4,375,375
COMPUTER - PERIPHERAL EQUIPMENT 2.2%
Lexmark International Group, Inc. Class A (b) 44,400 2,933,175
Microchip Technology, Inc. (b) 9,100 431,113
-----------
3,364,288
COMPUTER - PERSONAL & WORKSTATION 0.4%
Security Dynamics Technologies, Inc. (b) 27,650 587,563
COMPUTER SERVICE 2.8%
Acxiom Corporation (b) 6,300 157,106
CSG Systems International, Inc. (b) 11,900 311,631
Fiserv, Inc. (b) 22,200 695,138
Pierce Leahy Corporation (b) 94,950 2,344,078
Sungard Data Systems, Inc. (b) 22,400 772,800
-----------
4,280,753
COMPUTER SOFTWARE 2.8%
Cisco Systems, Inc. (b) 16,400 1,057,800
Electronics for Imaging, Inc. (b) 34,200 1,757,025
Microsoft Corporation (b) 9,400 847,763
Oracle Systems Corporation (b) 16,400 608,850
-----------
4,271,438
CONSUMER - MISCELLANEOUS 1.3%
Carriage Services, Inc. Class A (b) 102,900 1,929,375
DIVERSIFIED OPERATIONS 0.7%
Tyco International, Ltd. 11,000 1,042,250
ELECTRICAL EQUIPMENT 0.8%
Methode Electronics, Inc. Class A 29,050 664,519
PRI Automation, Inc. (b) 14,000 507,500
-----------
1,172,019
ELECTRONIC PARTS DISTRIBUTION 0.5%
Kent Electronics Corporation (b) 40,000 792,500
ELECTRONIC PRODUCTS - MISCELLANEOUS 1.9%
Rayovac Corporation (b) 125,750 2,852,953
ELECTRONICS - SEMICONDUCTOR/COMPONENT 0.3%
Applied Materials, Inc. (b) 6,400 472,800
ENERGY - ALTERNATE SOURCE 0.1%
KTI, Inc. (b) 8,900 126,825
FINANCE - MISCELLANEOUS 0.5%
NOVA Corporation (b) 31,600 790,000
HEALTHCARE - DRUG/DIVERSIFIED 0.4%
Jones Medical Industries, Inc. 16,475 648,703
HEALTHCARE - INSTRUMENTATION 0.3%
Medtronic, Inc. 5,650 439,994
HEALTHCARE - MEDICAL SUPPLY 5.2%
Ocular Sciences, Inc. (b) 69,900 1,214,512
PSS World Medical, Inc. (b) 94,100 1,052,744
Henry Schein, Inc. (b) 66,400 2,104,050
Sybron International Corporation (b) 132,300 3,646,519
-----------
8,017,825
HEALTHCARE - PATIENT CARE 1.1%
Covance, Inc. (b) 35,675 853,970
Lincare Holdings, Inc. (b) 18,200 455,000
Renal Care Group, Inc. (b) 12,200 315,675
-----------
1,624,645
HEALTHCARE - PRODUCT 0.5%
Cytyc Corporation (b) 8,600 167,700
Hanger Orthopedic Group, Inc. (b) 44,700 634,181
-----------
801,881
INSURANCE - LIFE 0.5%
Protective Life Corporation 22,100 729,300
LEISURE PRODUCT 2.1%
Action Performance Companies, Inc. (b) 22,375 738,375
Harley-Davidson, Inc. 11,300 614,438
SCP Pool Corporation (b) 70,037 1,812,207
-----------
3,165,020
LEISURE SERVICE 3.7%
Bally Total Fitness Holding Corporation (b) 86,450 2,453,019
Mandalay Resort Group (b) 32,000 676,000
Park Place Entertainment Corporation (b) 263,400 2,551,687
-----------
5,680,706
MACHINE TOOL 0.3%
Applied Power, Inc. 17,300 472,506
MEDIA - PUBLISHING 1.1%
School Specialty, Inc. (b) 102,900 1,652,831
MEDIA - RADIO/TV 7.9%
Adelphia Communications Corporation Class A (b) 28,300 1,800,587
Chancellor Media Corporation (b) 71,600 3,946,950
Clear Channel Communications, Inc. (b) 38,100 2,626,519
Infinity Broadcasting Corporation Class A (b) 22,300 663,425
Viacom International, Inc. (b) 69,250 3,047,000
-----------
12,084,481
OFFICE AUTOMATION 0.7%
Xerox Corporation 19,050 1,125,141
OIL - NORTH AMERICAN EXPLORATION &
PRODUCTION 1.4%
Ocean Energy, Inc. (b) 220,600 2,123,275
OIL WELL EQUIPMENT & SERVICE 3.6%
BJ Services Company (b) 47,200 1,389,450
Cooper Cameron Corporation (b) 23,900 885,794
4
<PAGE>
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================================================================================
STRONG DISCOVERY FUND II (CONTINUED)
================================================================================
Shares or
Principal Value
Amount (Note 2)
- --------------------------------------------------------------------------------
Marine Drilling Companies, Inc. (b) 22,400 $ 306,600
Nabors Industries, Inc. (b) 87,100 2,128,506
Noble Drilling Corporation (b) 44,100 868,219
------------
5,578,569
PERSONAL & COMMERCIAL LENDING 1.5%
Associates First Capital Corporation 24,650 1,092,303
Household International, Inc. 25,600 1,212,800
------------
2,305,103
POLLUTION CONTROL 3.8%
Allied Waste Industries, Inc. (b) 110,600 2,184,350
Casella Waste Systems, Inc. (b) 28,300 735,800
Republic Services, Inc. (b) 78,900 1,952,775
Superior Services, Inc. (b) 18,950 505,728
Waste Management, Inc. 9,335 501,756
------------
5,880,409
RAILROAD 0.5%
Burlington Northern Santa Fe Corporation 25,400 787,400
REAL ESTATE 0.8%
Sunstone Hotel Investors, Inc. 147,800 1,256,300
RETAIL - DEPARTMENT STORE 0.3%
Federated Department Stores, Inc. (b) 8,500 449,969
RETAIL - FOOD CHAIN 0.3%
US Foodservice (b) 9,775 416,659
RETAIL - RESTAURANT 0.8%
Papa John's International, Inc. (b) 7,225 322,867
Rainforest Cafe, Inc. (b) 176,000 891,000
------------
1,213,867
RETAIL - SPECIALTY 14.2%
Best Buy Company, Inc. (b) 11,300 762,750
Central Garden & Pet Company (b) 621,400 6,369,350
Global Imaging Systems, Inc. (b) 66,600 1,215,450
Insight Enterprises, Inc. (b) 56,300 1,393,425
Movie Gallery, Inc. (b) 254,675 1,368,878
Office Depot, Inc. (b) 66,150 1,459,435
Pier 1 Imports, Inc. 69,400 780,750
Regis Corporation 118,037 2,264,835
Rent-A-Center, Inc. (b) 98,725 2,369,400
Sunglass Hut International, Inc. (b) 193,100 3,318,906
United Stationers, Inc. (b) 19,200 422,400
------------
21,725,579
SAVINGS & LOAN 1.5%
Dime Bancorp, Inc. 12,400 249,550
TCF Financial Corporation 72,600 2,023,725
------------
2,273,275
TELECOMMUNICATION EQUIPMENT 1.7%
American Tower Corporation Class A (b) 14,150 339,600
Pinnacle Holdings, Inc. (b) 91,200 2,234,400
------------
2,574,000
TELECOMMUNICATION SERVICE 7.2%
AT&T Corporation 122,550 6,839,822
Davel Communications, Inc. (b) 148,525 798,322
MCI WorldCom, Inc. (b) 6,500 560,625
MediaOne Group, Inc. (b) 34,100 2,536,187
Teleglobe, Inc. 12,500 371,875
------------
11,106,831
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Total Common Stocks (Cost $147,210,246) 150,503,716
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SHORT-TERM INVESTMENTS (a) 2.2%
COMMERCIAL PAPER 0.5%
INTEREST BEARING, DUE UPON DEMAND
General Mills, Inc., 4.82% $ 532,000 532,000
Warner Lambert Company, 4.91% 100 100
Wisconsin Electric Power Company, 4.91% 233,900 233,900
------------
766,000
REPURCHASE AGREEMENT 0.9%
ABN-AMRO Inc. (Dated 6/30/99), 4.78%, Due 7/01/99
(Repurchase proceeds $1,300,173); Collateralized by:
SLMA Notes, FNMA Notes, FHLMC Notes, Federal
Home Loan Bank Bonds, Federal Farm Credit Bank
Notes, Tennessee Valley Authority Bonds, and
Resolution Funding Corporation Bonds (c) 1,300,000 1,300,000
UNITED STATES GOVERNMENT ISSUES 0.8%
United States Treasury Bills,
Due 7/01/99 thru 9/09/99 1,235,000 1,227,200
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TOTAL SHORT-TERM INVESTMENTS (Cost $3,293,107) 3,293,200
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- --------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (Cost $150,503,353) 100.5% 153,796,916
Other Assets and Liabilities, Net (0.5%) (754,702)
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NET ASSETS 100.0% $153,042,214
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LEGEND
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(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Non-income producing security.
(c) See Note 2(I) of Notes to Financial Statements.
Percentages are stated as a percent of net assets.
See Notes to Financial Statements.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
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June 30, 1999 (Unaudited)
Strong Discovery
Fund II
----------------
ASSETS:
Investments in Securities, at Value (Cost of $150,503,353) $153,796,916
Receivable for Securities Sold 1,676,542
Dividends Receivable 53,102
------------
Total Assets 155,526,560
LIABILITIES:
Payable for Securities Purchased 2,333,922
Accrued Operating Expenses and Other Liabilities 150,424
------------
Total Liabilities 2,484,346
------------
NET ASSETS $153,042,214
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) 158,523,850
Accumulated Net Investment Loss (186,439)
Accumulated Net Realized Loss (8,588,760)
Net Unrealized Appreciation 3,293,563
------------
Net Assets $153,042,214
============
Capital Shares Outstanding (Unlimited Number Authorized) 14,949,304
NET ASSET VALUE PER SHARE $10.24
======
STATEMENT OF OPERATIONS
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For the Six Months Ended June 30, 1999 (Unaudited)
Strong Discovery
Fund II
----------------
INCOME:
Dividends $ 631,282
Interest 113,090
-----------
Total Income 744,372
EXPENSES:
Investment Advisory Fees 819,456
Custodian Fees 28,932
Shareholder Servicing Costs 75,249
Other 7,174
-----------
Total Expenses 930,811
-----------
NET INVESTMENT LOSS (186,439)
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 1,147,503
Futures Contracts and Options (5,721,416)
-----------
Net Realized Loss (4,573,913)
Net Change in Unrealized Appreciation/Depreciation on:
Investments (6,423,767)
Futures Contracts (223,155)
-----------
Net Change in Unrealized Appreciation/Depreciation (6,646,922)
-----------
NET LOSS ON INVESTMENTS (11,220,835)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($11,407,274)
============
See Notes to Financial Statements.
6
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<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
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<CAPTION>
Strong Discovery Fund II
----------------------------------
Six Months Ended Year Ended
June 30, 1999 Dec. 31, 1998
---------------- -------------
(Unaudited)
OPERATIONS:
<S> <C> <C>
Net Investment Loss ($ 186,439) ($ 591,479)
Net Realized Gain (Loss) (4,573,913) 22,745,346
Net Change in Unrealized Appreciation/Depreciation (6,646,922) (8,638,452)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations (11,407,274) 13,515,415
DISTRIBUTIONS:
From Net Realized Gains (23,035,922) (3,179,809)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 35,897,643 71,710,705
Proceeds from Reinvestment of Distributions 23,027,652 3,178,862
Payment for Shares Redeemed (67,612,414) (102,946,444)
------------ ------------
Net Decrease in Net Assets from Capital Share Transactions (8,687,119) (28,056,877)
------------ ------------
TOTAL DECREASE IN NET ASSETS (43,130,315) (17,721,271)
NET ASSETS:
Beginning of Period 196,172,529 213,893,800
------------ ------------
End of Period $153,042,214 $196,172,529
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 3,218,585 5,844,176
Issued in Reinvestment of Distributions 2,431,642 241,739
Redeemed (6,119,465) (8,445,910)
------------ ------------
Net Decrease in Shares of the Fund (469,238) (2,359,995)
============ ============
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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June 30, 1999 (Unaudited)
1. ORGANIZATION
The Strong Discovery Fund II is a diversified series of Strong Variable
Insurance Funds, Inc., an open-end management investment company registered
under the Investment Company Act of 1940. The Fund offers and sells its
shares only to separate accounts of insurance companies for the purpose of
funding variable annuity and variable life insurance contracts. At June 30,
1999, approximately 96% 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. Debt securities not traded on a principal
securities exchange are valued through valuations obtained from a
commercial pricing service, otherwise last sale or bid prices are
used. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith under
consistently applied procedures established by and under the general
supervision of the Board of Directors. Securities which are purchased
within 60 days of their stated maturity are valued at amortized cost,
which approximates fair 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 June 30, 1999.
(B) Federal Income and Excise Taxes and Distributions to Shareholders --
The Fund intends 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 for financial statement
purposes 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.
The Fund generally pays dividends from net investment income and
distributes any net capital gains that it realizes annually.
(C) Realized Gains and Losses on Investment Transactions -- Investment
security transactions are recorded as of the trade date. Gains or
losses realized on investment transactions are determined on a
first-in, first-out basis.
(D) Certain 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.
Investments in foreign denominated assets or forward foreign currency
contracts may involve greater risks than domestic investments, due to
currency, political and economic, regulatory and market risks.
(E) 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. Additional securities held by
the Fund may be designated as collateral on open futures contracts.
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.
(F) Options -- The Fund may write put or call options. Premiums received
by the Fund upon writing put or call options are recorded as an asset
with a corresponding liability which is subsequently adjusted to the
current market value of the option. When an option expires, is
exercised, or is closed, the Fund realizes a gain or loss, and the
liability is eliminated. The Fund continues to bear the risk of
adverse movements in the price of the underlying asset during the
period of the option, although any potential loss during the period
would be reduced by the amount of the option premium received.
8
<PAGE>
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(G) 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.
(H) 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.
(I) Repurchase Agreements -- The Fund may enter into repurchase agreements
with institutions that the Fund's investment advisor, Strong Capital
Management, Inc. ("the Advisor"), has determined are creditworthy
pursuant to criteria adopted by the Board of Directors. Each
repurchase agreement is recorded at cost. The Fund requires that the
collateral, represented by securities (primarily U.S. Government
securities), in a repurchase transaction be maintained in a segregated
account with a custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default of the issuer of the
repurchase agreement. On a daily basis, the Advisor monitors each
repurchase agreement to ensure the value of the collateral, including
accrued interest, is at least equal to the amount owed to the Fund
under each repurchase agreement.
(J) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts in these financial statements. Actual results could differ
from those estimates.
(K) Other -- Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recorded on the
accrual basis and includes amortization of premium and discounts.
3. RELATED PARTY TRANSACTIONS
The Advisor, with whom certain officers and directors of the Fund are
affiliated, provides investment advisory services 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. Based
on the terms of the Advisory Agreement, advisory fees and other expenses
will be waived by the Advisor if the Fund's operating expenses exceed 2% of
the average daily net assets of the Fund. In addition, the Fund's Advisor
may voluntarily waive or absorb certain expenses at their discretion.
Shareholder recordkeeping and related service fees are based on the lesser
of various agreed-upon contractual percentages of the average daily net
assets of the Fund or a contractually established rate for each participant
account. The Advisor is compensated for certain other services related to
costs incurred for reports to shareholders.
The Fund may invest cash 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, 1999, shareholder servicing
and other expenses paid to the Advisor, and unaffiliated directors' fees
for the six months then ended, were $19,488, $123,020 and $1,543,
respectively.
4. LINE OF CREDIT
The Strong Funds have established a line of credit agreement ("LOC") with
certain financial institutions to be used for temporary or emergency
purposes, primarily for financing redemption payments. Combined borrowings
among all participating Strong Funds are subject to a $350 million cap on
the total line of credit. For individual Funds, borrowings under the LOC
are limited to either the lesser of 15% of the market value of total net
assets or any explicit borrowing limits in the Fund's prospectus.
Borrowings under the LOC bear interest based on prevailing market rates as
defined in the LOC. A commitment fee of .07% per annum is incurred on the
unused portion of the line of credit and is allocated to all participating
Strong Funds. At June 30, 1999, there were no borrowings by the Fund
outstanding under the LOC.
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1999 were $176,624,329 and $197,572,719,
respectively.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
June 30, 1999 (Unaudited)
6. INCOME TAX INFORMATION
At June 30, 1999, the cost of investments in securities for federal income
tax purposes was $155,076,876. Net unrealized depreciation of securities
was $1,279,961, consisting of gross unrealized appreciation and
depreciation of $13,593,799 and $14,873,760, respectively.
For corporate shareholders in the Fund, the percentage of dividend income
distributed for the year ended December 31, 1998 which is designated as
qualifying for the dividends-received deduction was 0.0% (unaudited).
<TABLE>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------------
STRONG DISCOVERY FUND II
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Period Ended
-----------------------------------------------------------------
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Selected Per-Share Data(a) 1999(b) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.72 $12.03 $10.80 $13.44 $10.07 $11.54
Income From Investment Operations
Net Investment Income (Loss) (0.01) (0.04) (0.09) (0.05) (0.03) 0.10
Net Realized and Unrealized Gains (Losses) on Investments (0.82) 0.92 1.32 0.04 3.58 (0.71)
- ----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.83) 0.88 1.23 (0.01) 3.55 (0.61)
Less Distributions
From Net Investment Income -- -- -- -- -- (0.10)
In Excess of Net Investment Income -- -- -- (1.05) (0.18) (0.43)
From Net Realized Gains (1.65) (0.19) -- (1.58) -- (0.33)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.65) (0.19) -- (2.63) (0.18) (0.86)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.24 $12.72 $12.03 $10.80 $13.44 $10.07
==================================================================================================================================
Ratios and Supplemental Data
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return -5.4% +7.3% +11.4% +0.8% +35.3% -5.4%
Net Assets, End of Period (In Millions) $153 $196 $214 $229 $245 $119
Ratio of Expenses to Average Net Assets 1.1%* 1.2% 1.2% 1.2% 1.3% 1.2%
Ratio of Net Investment Income (Loss) to Average Net Assets (0.2%)* (0.3%)(b) (0.7%) (0.3%) (0.3%) 1.1%
Portfolio Turnover Rate 106.3% 194.0% 198.1% 970.0% 542.1% 662.5%
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the Fund outstanding for the entire period.
(b) For the six months ended June 30, 1999 (unaudited).
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
NOTES
- --------------------------------------------------------------------------------
11
<PAGE>
