THE STRONG
----------
DISCOVERY
FUND II
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ANNUAL REPORT o DECEMBER 31, 1998
=================================
Table of Contents
Investment Review
The Strong Discovery Fund II ..........................................2
Financial Information
Schedule of Investments in Securities .................................4
Statement of Assets and Liabilities ...................................6
Statement of Operations ...............................................7
Statements of Changes in Net Assets ...................................8
Notes to Financial Statements .........................................9
Financial Highlights .....................................................11
Report of Independent Accountants ........................................11
[STRONG LOGO]
STRONG INVESTMENTS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 10112L98
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THE STRONG DISCOVERY FUND II
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FUND
HIGHLIGHTS
o The Strong Discovery Fund II returned 7.26% in 1998.
o As of December 31, 1998, the Fund was invested in companies with an
expected earnings growth rate of 21.6%. On-site meetings with management
confirm that the vast majority of the Fund's holdings are on track to
achieve their profit targets.
o The Fund emphasizes dependable growth companies as a precautionary measure
against a potential slowdown in the U.S. economy.
- ---------------------------------------
AVERAGE ANNUAL
TOTAL RETURNS(1)
As of 12-31-98
1-year 7.26%
3-year 6.40%
5-year 9.04%
Since Inception 11.38%
(on 5-8-92)
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FIVE LARGEST
STOCK HOLDINGS
As of 12-31-98
SECTOR % OF NET ASSETS
Central Garden & Pet Co. 4.8%
Sybron International Corporation 2.6%
Equity Corporation International 2.2%
Corrections Corporation
America 2.1%
United Stationers, Inc. 2.0%
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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Since June 1996, there have effectively been two stock markets--one consisting
of a handful of large, blue-chip companies and the other containing all
remaining stocks. The few large-company stocks have performed extraordinarily
well, significantly exceeding historical averages. By contrast, the returns on
most stocks have trailed long-term averages. This divergent performance
accelerated in 1998, a year in which the stocks of the 50 largest companies rose
an average of 39.6% (propelling the S&P 500 Stock Index to a 28.58% gain) while
the average stock on the New York Stock Exchange actually declined 2.9%.*
Given that the Strong Discovery Fund II invests primarily in smaller- and
medium-size companies, an important benchmark we use in evaluating our
performance is the Russell 2500(R) Index. This index tracks the performance of
stocks that are most similar to the types of companies in which the Fund
invests. We are pleased that the Fund's 1998 return exceeded that of this index
by 6.88%.*
While exceeding the performance of relevant benchmarks is a goal of ours, we are
disappointed by the Fund's low absolute return in 1998--particularly in light of
the financial strength of most of the Fund's holdings. By our estimates, the
companies in the portfolio are growing their earnings by an average of 21.6% per
year. This significantly exceeds the prospects facing the S&P 500, where
long-term earnings growth is estimated at 5% and the earnings report for 1998 is
likely to show a decline. Additionally, the price we are paying for this
earnings growth, as a multiple of earnings, is below the average for the S&P
500. The Fund's attractive valuation and earnings-growth profile also compare
well with the Russell 2500.
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DIVERGENT
PERFORMANCE
ACCELERATED
IN 1998.
-------------------------------
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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.
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 December 31, 1998. The earnings growth projection for the S&P 500 has
been based on a consensus of earnings estimates from six Wall Street
investment firms as shown by Bloomberg dated December 31, 1998.
2
<PAGE>
P/E RATIO ESTIMATED
FUND (1998 EARNINGS) EARNINGS GROWTH(2)
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Strong Discovery Fund II 20.7x 21.6%
S&P 500 Index 26.2x 5.0%
Russell 2500 Index 24.2x 19.9%
Our investment approach is not based on chasing market euphoria or fads. Rather,
we look for well-managed companies that are in good businesses and offer
superior growth potential--and can be invested in at attractive prices. We also
focus on companies with products that are used and replaced every day, such as
razor blades and batteries. By investing in companies with consumable
characteristics, we attempt to insulate the portfolio from the impact of
economic slowdowns.
At the present time, we believe the portfolio is well positioned relative to
these attributes. Over our respective careers, it has been our experience that
stock prices eventually track earnings growth. Although there is occasionally a
lapse in this relationship, it is our plan to stay the course with confidence in
our time-tested approach.
Successful investing requires confidence and patience. Yours is appreciated.
Thank you for your investment in the Strong Discovery Fund II.
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 12-31-98
THE STRONG Lipper Capital
DISCOVERY S & P 500 Appreciation Russell
FUND II Stock Index* Funds Index* 2500(R) Index*
4-92 10,000 10,000 10,000 10,000
12-92 10,886 10,680 11,024 11,239
12-93 13,284 11,756 12,760 12,603
12-94 12,569 11,911 12,446 12,442
12-95 17,000 16,387 16,379 16,616
12-96 17,138 20,150 18,829 19,120
12-97 19,090 26,873 22,588 21,941
12-98 20,476 34,553 27,103 22,621
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
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Capital
Appreciation Funds Index. Results include the reinvestment of all dividends and
capital gains distributions. Performance is historical and does not represent
future results. Investment returns and principal value vary, and you may have a
gain or loss when you sell shares. To equalize time periods, the indexes'
performance was prorated for the month of May 1992.
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* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market. The Russell 2500(R) Index is an unmanaged index generally
representative of the U.S. stock market for small cap stocks. The Lipper
Capital Appreciation Funds Index is an equally-weighted performance index
of the largest qualifying funds in this Lipper category. Source of the S&P
500 and Russell index data is Standard & Poor's Micropal. Source of the
Lipper index data is Lipper, Inc.
YOUR FUND'S
APPROACH
THE STRONG DISCOVERY FUND II SEEKS TO PROVIDE INVESTORS WITH CAPITAL GROWTH, A
GOAL WE PURSUE BY INVESTING PRIMARILY IN SMALLER- AND MEDIUM-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 A COMPUTER DATABASE OR HISTORICAL
FINANCIAL STATEMENTS.
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MARKET
HIGHLIGHTS
o Large company stocks continue to perform well. The vast majority of stocks,
however, have not kept pace. In 1998, the average New York Stock Exchange
stock declined 2.9% and the average NASDAQ stock rose just 0.3%.
o By many measures, the U.S. stock market's third-quarter correction exceeded
both the 1990 bear market and the 1987 crash. Following the Fed's autumn
interest-rate cuts, the market rallied and finished the year with strong
momentum.
o The U.S. economy has proven resilient while many economies have experienced
recession and even depression. This global economic climate has driven many
international investors to the perceived safety of America's largest
companies.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES DECEMBER 31, 1998
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================================================================================
STRONG DISCOVERY FUND II
================================================================================
Shares or
Principal Value
Amount (Note 2)
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COMMON STOCKS 89.5%
Bank - Money Center 1.2%
Citigroup, Inc. 46,462 $ 2,299,869
Brokerage & Investment Management 2.0%
Kansas City Southern Industries, Inc. 46,200 2,272,462
Waddell & Reed Financial, Inc. Class A 66,850 1,583,509
-----------
3,855,971
Commercial Service 12.7%
Clark/Bardes Holdings, Inc. (b) 200 3,375
Coinmach Laundry Corporation (b) 303,250 3,942,250
Consolidated Graphics, Inc. (b) 40,550 2,739,659
Corrections Corporation America (b) 234,550 4,133,943
H & R Block, Inc. 23,625 1,063,125
ITT Educational Services, Inc. (b) 82,900 2,818,600
Lamar Advertising Company (b) 16,650 620,212
Modis Professional Services, Inc. (b) 182,901 2,652,064
Outdoor Systems, Inc. (b) 90,280 2,708,400
Pittston Company Brinks Group 46,900 1,494,938
The ServiceMaster Company 62,025 1,368,427
Sykes Enterprises, Inc. (b) 23,300 710,650
Valassis Communications, Inc. (b) 10,900 562,713
-----------
24,818,356
Computer - Mainframe 1.4%
International Business Machines Corporation 15,300 2,826,675
Computer - Peripheral Equipment 2.2%
Lexmark International Group, Inc. Class A (b) 26,250 2,638,125
Security Dynamics Technologies, Inc. (b) 22,500 517,500
Storage Technology Corporation (b) 32,600 1,159,338
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4,314,963
Computer Service 1.4%
Pierce Leahy Corporation (b) 110,550 2,819,025
Computer Software 0.5%
HBO & Company 37,600 1,078,650
Consumer - Miscellaneous 2.2%
Equity Corporation International (b) 165,925 4,407,383
Electric Power 0.2%
Montana Power Company 7,600 429,875
Electronic Products - Miscellaneous 1.8%
Rayovac Corporation (b) 128,675 3,434,014
Electronics - Semiconductor/Component 0.9%
Micron Technology, Inc. (b) 36,450 1,843,003
Food 0.7%
Lancaster Colony Corporation 16,900 542,912
Merkert American Corporation (b) 59,900 905,988
-----------
1,448,900
Healthcare - Drug/Diversified 1.1%
Halsey Drug Company, Inc. (b) 235,800 324,225
Jones Medical Industries, Inc. 30,475 1,112,337
Warner-Lambert Company 9,050 680,447
-----------
2,117,009
Healthcare - Instrumentation 1.0%
Datascope Corporation (b) 30,100 692,300
Medtronic, Inc. 15,900 1,180,575
-----------
1,872,875
Healthcare - Medical Supply 6.7%
McKesson Corporation 23,000 1,818,438
PSS World Medical, Inc. (b) 48,100 1,106,300
Henry Schein, Inc. (b) 86,818 3,885,106
Steris Corporation (b) 42,650 1,212,859
Sybron International Corporation (b) 185,000 5,029,688
-----------
13,052,391
Healthcare - Patient Care 0.6%
Compdent Corporation (b) 115,900 1,202,462
Healthcare - Product 0.7%
Cytyc Corporation (b) 53,575 1,379,556
Household Appliances & Furnishings 0.8%
Newell Companies, Inc. 39,800 1,641,750
Insurance - Life 0.4%
Protective Life Corporation 9,742 387,853
The MONY Group, Inc. (b) 14,600 457,163
-----------
845,016
Insurance - Property & Casualty 1.7%
American Bankers Insurance Group, Inc. 68,250 3,301,594
Leisure Product 2.7%
Action Performance Companies, Inc. (b) 64,475 2,280,803
Harley-Davidson, Inc. 22,550 1,068,306
SCP Pool Corporation (b) 128,237 1,939,585
-----------
5,288,694
Leisure Service 2.0%
Bally Total Fitness Holding Corporation (b) 87,150 2,167,856
International Game Technology 68,925 1,675,739
-----------
3,843,595
Machine Tool 1.1%
Applied Power, Inc. 55,675 2,101,731
Media - Publishing 0.6%
School Specialty, Inc. (b) 52,100 1,113,638
Media - Radio/TV 6.3%
Chancellor Media Corporation (b) 81,050 3,880,269
Clear Channel Communications, Inc. (b) 44,806 2,441,927
Infinity Broadcasting Corporation (b) 32,300 884,213
Tele-Communications, Inc. TCI Group Series A (b) 40,300 2,229,094
Viacom International, Inc. (b) 39,975 2,958,150
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12,393,653
Office Automation 1.2%
Xerox Corporation 19,175 2,262,650
Oil Well Equipment & Service 0.4%
Noble Drilling Corporation (b) 66,600 861,638
Personal & Commercial Lending 3.5%
Associates First Capital Corporation 73,950 3,133,631
Household International, Inc. 92,900 3,681,162
-----------
6,814,793
Pollution Control 3.7%
Republic Services, Inc. Class A (b) 65,100 1,200,281
Superior Services, Inc. (b) 154,150 3,092,634
Waste Management, Inc. 64,635 3,013,607
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7,306,522
4
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STRONG DISCOVERY FUND II (CONTINUED)
================================================================================
Shares or
Principal Value
Amount (Note 2)
- --------------------------------------------------------------------------------
Railroad 1.0%
Burlington Northern Santa Fe Corporation 61,000 $ 2,058,750
Real Estate 1.6%
CCA Prison Realty Trust 29,100 596,550
Sunstone Hotel Investors, Inc. 260,400 2,457,525
----------
3,054,075
Retail - Drug Store 0.3%
Rite Aid Corporation 10,200 505,538
Retail - Food Chain 0.4%
US Foodservice (b) 15,175 743,575
Retail - Restaurant 2.2%
PJ America, Inc. (b) 63,400 1,149,125
Papa John's International, Inc. (b) 40,725 1,796,991
Rainforest Cafe, Inc. (b) 220,000 1,333,750
----------
4,279,866
Retail - Specialty 16.3%
Black Box Corporation (b) 58,500 2,215,687
Central Garden & Pet Company (b) 651,375 9,363,516
Global Imaging Systems, Inc. (b) 101,000 2,449,250
Lowe's Companies, Inc. 15,450 790,847
MSC Industrial Direct Company, Inc. Class A (b) 72,125 1,631,828
Movie Gallery, Inc. (b) 279,475 1,991,259
Office Depot, Inc. (b) 85,000 3,139,688
Pier 1 Imports, Inc. 86,100 834,094
Regis Corporation 41,000 1,640,000
Renters Choice, Inc. (b) 81,925 2,601,119
United Stationers, Inc. (b) 154,200 4,009,200
Wilmar Industries, Inc. (b) 68,800 1,397,500
----------
32,063,988
Savings & Loan 1.0%
Dime Bancorp, Inc. 17,600 465,300
TCF Financial Corporation 65,325 1,580,048
----------
2,045,348
Telecommunication Equipment 1.1%
American Tower Corporation Class A (b) 56,850 1,680,628
Aware, Inc. (b) 18,400 500,250
----------
2,180,878
Telecommunication Service 2.1%
Davel Communications, Inc. (b) 144,925 2,644,881
MCI WorldCom, Inc. (b) 20,000 1,435,000
----------
4,079,881
Tobacco 1.1%
Philip Morris Companies, Inc. 39,925 2,135,988
Transportation Service 0.7%
Hub Group, Inc. Class A (b) 74,475 1,442,953
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TOTAL COMMON STOCKS (Cost $165,851,602) 175,567,091
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PREFERRED STOCKS 0.6%
News Corporation, Ltd. Sponsored ADR 50,900 1,256,594
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TOTAL PREFERRED STOCKS (Cost $1,254,821) 1,256,594
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SHORT-TERM INVESTMENTS (A) 4.4%
COMMERCIAL PAPER 0.5%
Interest Bearing, Due Upon Demand
American Family Financial Services, Inc.,
5.17% $ 100 100
Pitney Bowes Credit Corporation, 5.23% 522,500 522,500
Sara Lee Corporation, 5.23% 303,100 303,100
Wisconsin Corporate Central Credit Union, 5.30% 138,000 138,000
----------
963,700
REPURCHASE AGREEMENT 3.5%
Goldman Sachs Group LP (Dated 12/31/98), 4.55%,
Due 1/04/99 (Repurchase proceeds $6,803,438);
Collateralized by: $5,400,000 United States
Treasury Bonds, 10.00%, Due 5/15/10 (Market
Value $6,941,700) (d) 6,800,000 6,800,000
UNITED STATES GOVERNMENT ISSUES 0.4%
United States Treasury Bills,
Due 3/04/99 thru 4/01/99 (c) 740,000 732,832
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TOTAL SHORT-TERM INVESTMENTS (Cost $8,496,463) 8,496,532
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TOTAL INVESTMENTS IN SECURITIES (Cost $175,602,886) 94.5% 185,320,217
Other Assets and Liabilities, Net 5.5% 10,852,312
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NET ASSETS 100.0% $196,172,529
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FUTURES
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Underlying
Expiration Face Amount Unrealized
Contracts Date at Value Appreciation
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Purchased:
21 Russell 2000 3/99 $ 4,465,125 $123,607
44 S&P 500 3/99 13,700,500 99,548
WRITTEN OPTIONS ACTIVITY
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Contracts Premiums
- --------------------------------------------------------------------------------
Options outstanding at beginning of period -- $ --
Options written during the period 198 504,289
Options closed (198) (504,289)
Options expired -- --
Options exercised -- --
----------------------
Options outstanding at end of period -- $ --
======================
Closed options resulted in a capital gain of $142,345.
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) All or a portion of security pledged to cover margin requirements for
future contracts.
(d) 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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December 31, 1998
Strong Discovery
Fund II
----------------
ASSETS:
Investments in Securities, at Value (Cost of $175,602,886) $185,320,217
Receivable for Securities Sold 12,281,846
Dividends and Interest Receivable 70,746
Other Assets 82,352
------------
Total Assets 197,755,161
LIABILITIES:
Payable for Securities Purchased 1,532,698
Accrued Operating Expenses and Other Liabilities 49,934
------------
Total Liabilities 1,582,632
------------
NET ASSETS $196,172,529
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $167,210,968
Undistributed Net Realized Gain 19,021,075
Net Unrealized Appreciation 9,940,486
------------
Net Assets $196,172,529
============
Capital Shares Outstanding (Unlimited Number Authorized) 15,418,542
NET ASSET VALUE PER SHARE $12.72
======
See Notes to Financial Statements.
6
<PAGE>
STATEMENT OF OPERATIONS
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For the Year Ended December 31, 1998
Strong Discovery
Fund II
----------------
INCOME:
Dividends $ 863,036
Interest 890,019
-----------
Total Income 1,753,055
EXPENSES:
Investment Advisory Fees 1,988,031
Custodian Fees 64,386
Shareholder Servicing Costs 266,920
Other 25,197
-----------
Total Expenses 2,344,534
-----------
NET INVESTMENT LOSS (591,479)
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 25,936,829
Futures Contracts and Options (3,191,483)
-----------
Net Realized Gain 22,745,346
Change in Unrealized Appreciation/Depreciation on:
Investments (8,861,607)
Futures Contracts 223,155
-----------
Net Change in Unrealized Appreciation/Depreciation (8,638,452)
-----------
NET GAIN ON INVESTMENTS 14,106,894
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $13,515,415
===========
See Notes to Financial Statements.
7
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
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<CAPTION>
Strong Discovery Fund II
---------------------------------------
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
OPERATIONS:
Net Investment Loss ($ 591,479) ($ 1,512,488)
Net Realized Gain 22,745,346 18,148,062
Net Change in Unrealized Appreciation/Depreciation (8,638,452) 6,534,581
------------ ------------
Net Increase in Net Assets Resulting from Operations 13,515,415 23,170,155
DISTRIBUTIONS:
From Net Realized Gains (3,179,809) --
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 71,710,705 111,653,915
Proceeds from Reinvestment of Distributions 3,178,862 --
Payment for Shares Redeemed (102,946,444) (150,342,369)
------------ ------------
Net Decrease in Net Assets from Capital Share Transact (28,056,877) (38,688,454)
------------ ------------
TOTAL DECREASE IN NET ASSETS (17,721,271) (15,518,299)
NET ASSETS:
Beginning of Year 213,893,800 229,412,099
------------ ------------
End of Year $196,172,529 $213,893,800
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 5,844,176 9,567,132
Issued in Reinvestment of Distributions 241,739 --
Redeemed (8,445,910) (13,026,043)
------------ ------------
Net Decrease in Shares of the Fund (2,359,995) (3,458,911)
============ ============
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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December 31, 1998
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 December
31, 1998, approximately 96% of the Fund's shares are owned by one insurance
company.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.
(A) Security Valuation -- Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean of the latest bid and asked prices where no last
sales price is available. Securities traded over-the-counter are
valued at the mean of the latest bid and asked prices or the last
reported sales price. Debt securities not traded on a principal
securities exchange are valued through valuations obtained from a
commercial pricing service, otherwise last sale or bid prices are
used. Securities for which market quotations are not readily available
are valued at fair value as determined in good faith under
consistently applied procedures established by and under the general
supervision of the Board of Directors. Securities which are purchased
within 60 days of their stated maturity are valued at amortized cost,
which approximates 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 December 31,
1998.
(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 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 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.
Foreign denominated assets and forward currency contracts may involve
greater risks than domestic transactions, including 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.
(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
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
December 31, 1998
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), purchased in a repurchase transaction be maintained in a
segregated account with a custodian in a manner sufficient to enable
the Fund to obtain those securities in the event of a default of the
issuer of the repurchase agreement. On a daily basis, the Advisor
monitors 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 -- Investment security transactions are recorded as of the trade
date. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of premium and discounts.
3. RELATED PARTY TRANSACTIONS
The Advisor, with whom certain officers and directors of the Fund are
affiliated, provides investment advisory 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 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 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, 1998, shareholder
servicing and other expenses paid to the Advisor, and unaffiliated
directors' fees for the year then ended, were $24,017, $352,996 and $3,576,
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 December 31, 1998, there were no borrowings by the Funds
outstanding under the LOC.
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year
ended December 31, 1998 were $350,146,456 and $386,867,545, respectively.
6. INCOME TAX INFORMATION
At December 31, 1998, the cost of investments in securities for federal
income tax purposes was $179,339,231. Net unrealized appreciation of
securities was $5,980,986, consisting of gross unrealized appreciation and
depreciation of $21,806,588 and $15,825,602, respectively.
During the year ended December 31, 1998, the Fund paid a capital gain
distribution (taxable as long-term capital gains at 20%) to shareholders of
$1,680,441 (unaudited).
10
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------
STRONG DISCOVERY FUND II
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
Year Ended
------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA(a) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $12.03 $10.80 $13.44 $10.07 $11.54
Income From Investment Operations
Net Investment Income (Loss) (0.04) (0.09) (0.05) (0.03) 0.10
Net Realized and Unrealized Gains (Losses) on Investments 0.92 1.32 0.04 3.58 (0.71)
---------------------------------------------------------------------------------------------------------
Total from Investment Operations 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 (0.19) -- (1.58) -- (0.33)
---------------------------------------------------------------------------------------------------------
Total Distributions (0.19) -- (2.63) (0.18) (0.86)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.72 $12.03 $10.80 $13.44 $10.07
===========================================================================================================
RATIOS AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------
Total Return +7.3% +11.4% +0.8% +35.3% -5.4%
Net Assets, End of Period (In Millions) $196 $214 $229 $245 $119
Ratio of Expenses to Average Net Assets 1.2% 1.2% 1.2% 1.3% 1.2%
Ratio of Net Investment Income (Loss) to Average Net Assets (0.3%) (0.7%) (0.3%) (0.3%) 1.1%
Portfolio Turnover Rate 194.0% 198.1% 970.0% 542.1% 662.5%
</TABLE>
(a) Information presented relates to a share of capital stock of the Fund
outstanding for the entire period.
See Notes to Financial Statements.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Board of Directors of the Strong Variable Insurance Funds, Inc. and the
Shareholders of the Strong Discovery Fund II
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Strong Discovery Fund II (the
"Fund") (one of the portfolios constituting the Strong Variable Insurance Funds,
Inc.) at December 31, 1998, 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. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 1, 1999
11
