<PAGE>
===============================================================================
THE STRONG
OPPORTUNITY FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1998
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Opportunity 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
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 * Milwaukee, Wisconsin 53201
Strong Funds are offered by prospectus only. 8302H98
<PAGE>
==============================
THE STRONG OPPORTUNITY FUND II
==============================
THE GAP IN PERFORMANCE BETWEEN LARGE STOCKS AND SMALL STOCKS THAT HAS BEEN
NOTABLE IN RECENT YEARS GREW TO NEAR-HISTORIC PROPORTIONS.
The Strong Opportunity Fund II seeks capital growth by investing at least 70% of
its assets in equity securities. The Fund has an emphasis on medium-size
companies that the Fund's advisor believes are under-researched and attractively
valued.
==================================
ASSET ALLOCATION
==================================
Based on net assets as of 6-30-98
[PIE CHART]
Stocks 85.5%
Short-Term Investments 13.7%
Bonds 0.8%
The Fund's asset allocation does
not reflect any futures or options
positions held by the Fund.
==================================
ASIA-THE SECOND WAVE
In the first quarter, investors downplayed the economic crisis in Southeast
Asia as a mere bump in the road resulting in strong performance for both
large-cap and small-cap stocks. Interestingly, as investors gained more
confidence in the world economies and subsequently the U.S. stock market, large
stock liquidity seemed to play a lesser role. Investors were attracted to the
fundamental valuation of small companies as well as large companies.
============================================
TOP FIVE SECTORS
============================================
As of 6-30-98
SECTOR % OF NET ASSETS
- --------------------------------------------
Technology 19.9%
............................................
Financial 14.4%
............................................
Consumer Cyclical 13.7%
............................................
Energy 10.5%
............................................
Retail 8.3%
............................................
Please see the Schedule of Investments in
Securities for a complete listing of the
Fund's portfolio.
============================================
The second quarter of 1998 mirrored the fourth quarter of 1997. The Asian crisis
reared its head with the original six Southeast Asian markets making new lows
while the world focus shifted to a more ominous factor, the potential of severe
financial distress in Japan. Concern with the overall Asian outlook began to
impact the U.S. market in late April and was followed up by tangible negative
effects on actual corporate earnings as a number of companies pre-announced bad
earnings in June. The overall impact on the U.S. markets was mixed. Investors
rotated out of most stocks into a narrow band of large cap growth stocks
represented in the S&P 500. The result was a 4.66% decline in the Russell
2000(reg.tm) and a 3.30% increase in the S&P 500.(*)
A NARROW MARKET
In response to these heightened fears, investors rotated out of most stocks,
heading for the perceived stability of the largest companies in the S&P 500. As
a result, the gap in performance between large stocks and small stocks that has
been notable in recent years grew to near-historic proportions, reaching 9
percentage points in the second quarter. For the six months ended June 30, 1998,
the S&P 500 Stock Index returned 17.71%, while the Fund's benchmark, the S&P
MidCap 400 Stock Index, went up a more subtle 8.64%. Despite this yawning gap,
the Fund was able to register a return of 13.42% for the period, bettering its
benchmark by a healthy margin.(1)*
The market's gains were even more narrowly concentrated than the S&P 500; just
10 stocks accounted for more than half the index's returns.
CONTINUING OUR FOCUS ON RESEARCH
Rather than chase this current trend, we believe our strength lies in a
commitment to our private value approach to stock selection. We evaluate a
company as though we were considering buying the entire firm, and compare the
price we'd be willing to pay with the stock price. If the cost of the company's
stock reflects a lower price than this private value, we will consider adding it
to the portfolio.
To be successful with our investment approach, we apply an intensive research
process, of which direct company visits are vital. During the first half of the
year, the Fund identified a number of areas where private value was not being
reflected in companies' stock prices.
In particular, the Fund continued to benefit from outperformance by many of its
holdings in media--a sector we overweighted in the portfolio. Cable and cellular
stocks benefited from further consolidation in those industries. Among our
==============================================================
FIVE LARGEST STOCK HOLDINGS
==============================================================
As of 6-30-98
% OF NET
SECURITY INDUSTRY ASSETS
- --------------------------------------------------------------
Tele-Communications, Inc. Media-Radio/TV 3.5%
..............................................................
MediaOne Group, Inc. Telecommunication Service 1.9%
..............................................................
Cox Communications, Inc. Media-Radio/TV 1.7%
..............................................................
Comcast Corporation Media-Radio/TV 1.7%
..............................................................
Enron Corporation Natural Gas Distribution 1.6%
..............................................................
Please see the Schedule of Investments in Securities for a
complete listing of the Fund's portfolio.
==============================================================
2
<PAGE>
strong-performing stocks in this area were Cable and Wireless,
Tele-Communications, Inc., and MediaOne Group.
LOOKING AHEAD
We are optimistic that the second half of the year should lead to improved
relative performance for many mid-cap companies. Although the economic crisis in
Southeast Asia is far from a positive force, it has helped to bolster the U.S.
dollar. Historically, a stronger dollar has helped small companies' relative
performance by putting pressure on the earnings of large multinational companies
that make much of their profits overseas. In the coming months, we believe
investors will focus on smaller companies, which typically derive more of their
earnings at home.
Two sectors that appear to have been beaten down to unsustainably low relative
valuations are energy and technology. Energy, in particular, has suffered unduly
from lower oil prices. We anticipate a rebound in these stocks in the second
half of the year.
Many technology stocks have also been severely depressed and may more fully than
the rest of the market reflect the negative impact of Asia on profits.
Consequently, we think the downside for these stocks may be lower than for the
market as a whole and are starting to increase our underweighted position.
Thank you for your investment in the Strong Opportunity Fund II. We appreciate
your confidence in our investment approach.
[PHOTO OF RICHARD TRENT WEISS AND MARINA CARLSON]
Sincerely,
/s/ Richard Trent Weiss
Richard T. Weiss
/s/ Marina Carlson
Marina Carlson
Portfolio Co-managers
===============================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
===============================================================================
From 5-8-92 to 6-30-98
[GRAPH]
THE STRONG
OPPORTUNITY S&P 500 Lipper Growth
FUND II Stock Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 11,617 10,680 10,922
12-93 14,541 11,756 12,230
12-94 15,064 11,912 12,038
12-95 18,953 16,388 15,969
12-96 22,393 20,151 18,768
12-97 28,093 26,874 24,030
6-98 31,862 31,633 27,772
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Growth Funds
Index. Results include the reinvestment of all dividends and capital gains
distributions. Performance is historical and does not represent future results.
Investment returns and principal value vary, and you may have a gain or loss
when you sell shares. To equalize time periods, the indexes' performance was
prorated for the month of May 1992.
=================================
AVERAGE ANNUAL
TOTAL RETURNS(1)
=================================
As of 6-30-98
1-YEAR 28.32%
3-YEAR 23.20%
5-YEAR 19.36%
SINCE INCEPTION 20.74%
(on 5-8-92)
=================================
- -------------------------------------------------------------------------------
* The S&P 500 is an unmanaged index generally representative of the U.S. stock
market, without regard to company size. The S&P MidCap 400 Stock Index is an
unmanaged index generally representative of the U.S. market for medium cap
stocks. The Lipper Growth Funds Index is an equally-weighted performance
index of the largest qualifying funds in this Lipper category. The Russell
2000(reg.tm) Index is an unmanaged index generally representative of the U.S.
market for small cap stocks. Source of the S&P index data and Russell 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 85.2%
AIRLINE 0.1%
Air New Zealand, Ltd. Class B 1,053,000 $ 1,129,962
AUTO & TRUCK PARTS 1.6%
The Goodyear Tire & Rubber Company 73,100 4,710,381
Magna International, Inc. Class A 158,000 10,842,750
-----------
15,553,131
BANK - MONEY CENTER 4.3%
Banca di Roma (b) 540,000 1,089,399
BankAmerica Corporation 145,000 12,533,437
Banque Nationale de Paris 6,000 489,028
Chase Manhattan Corporation 180,000 13,590,000
Nordbanken Holding AB 170,000 1,244,136
Toronto-Dominion Bank 265,000 12,044,634
UBS AG - Registered Shares (b) 1,750 649,342
-----------
41,639,976
BANK - SUPER REGIONAL 1.8%
Mellon Bank Corporation 85,000 5,918,125
Norwest Corporation 310,000 11,586,250
-----------
17,504,375
CHEMICAL - SPECIALTY 2.4%
Praxair, Inc. 244,000 11,422,250
Solutia, Inc. 415,000 11,905,313
-----------
23,327,563
COMPUTER - PERIPHERAL EQUIPMENT 3.0%
American Power Conversion Corporation (b) 430,000 12,900,000
Quantum Corporation (b) 525,000 10,893,750
Seagate Technology, Inc. (b) 233,000 5,548,313
-----------
29,342,063
COMPUTER - PERSONAL & WORKSTATION 2.7%
Hewlett-Packard Company 178,000 10,657,750
Sun Microsystems, Inc. (b) 345,000 14,985,938
-----------
25,643,688
COMPUTER SOFTWARE 0.6%
Sybase, Inc. (b) 790,000 5,505,313
DIVERSIFIED OPERATIONS 1.5%
Whitman Corporation 633,000 14,519,438
ELECTRIC POWER 1.6%
NIPSCO Industries, Inc. 538,000 15,064,000
ELECTRONIC PARTS DISTRIBUTION 1.3%
Arrow Electronics, Inc. (b) 380,000 8,265,000
Marshall Industries (b) 162,900 4,439,025
-----------
12,704,025
ELECTRONIC PRODUCTS - MISCELLANEOUS 2.4%
AVX Corporation 570,000 9,155,625
General Motors Corporation Class H 302,000 14,231,750
-----------
23,387,375
ELECTRONICS - SEMICONDUCTOR/COMPONENT 3.9%
KLA-Tencor Corporation (b) 440,000 12,182,500
Solectron Corporation (b) 298,000 12,534,625
Texas Instruments, Inc. 221,000 12,887,063
-----------
37,604,188
FOOD 4.5%
ConAgra, Inc. 445,000 14,100,937
Nestle SA Sponsored ADR 127,000 13,589,000
Unilever NV 195,000 15,392,812
-----------
43,082,749
HEALTHCARE - MEDICAL SUPPLY 1.1%
Sybron International Corporation (b) 412,000 10,403,000
HEALTHCARE - PATIENT CARE 2.5%
Tenet Healthcare Corporation (b) 388,100 12,128,125
United Healthcare Corporation (b) 185,000 11,747,500
-----------
23,875,625
HOUSEHOLD APPLIANCES & FURNISHINGS 0.9%
Rubbermaid, Inc. 271,600 9,013,725
HOUSING RELATED 1.2%
U.S. Industries, Inc. 485,000 12,003,750
INSURANCE - DIVERSIFIED 1.3%
CIGNA Corporation 189,000 13,041,000
INSURANCE - MULTI-LINE 0.1%
Skandia Forsakrings AB 75,000 1,069,619
INSURANCE - PROPERTY & CASUALTY 4.1%
ACE, Ltd. 330,000 12,870,000
American International Group, Inc. 90,000 13,140,000
Hartford Financial Services Group, Inc. 110,000 12,581,250
Scor 15,000 949,100
-----------
39,540,350
MEDIA - PUBLISHING 1.2%
The E.W. Scripps Company Class A 220,100 12,064,231
MEDIA - RADIO/TV 8.6%
Cable & Wireless Communications PLC (b) 284,000 2,874,053
Cable & Wireless Communications PLC
Sponsored ADR (b) 264,000 13,200,000
Comcast Corporation Class A 405,000 16,440,469
Cox Communications, Inc. Class A (b) 347,300 16,822,344
Tele-Communications, Inc. Liberty Media Group
Series A (b) 462,000 17,931,375
Tele-Communications, Inc. TCI Group Series A (b) 415,000 15,951,562
-----------
83,219,803
NATURAL GAS DISTRIBUTION 2.9%
Columbia Gas Systems, Inc. 213,000 11,848,125
Enron Corporation 292,000 15,786,250
-----------
27,634,375
OIL - NORTH AMERICAN EXPLORATION & PRODUCTION 5.0%
Barrett Resources Corporation (b) 297,000 11,118,937
Devon Energy Corporation 292,500 10,219,218
Noble Affiliates, Inc. 290,000 11,020,000
Ocean Energy, Inc. (b) 322,700 6,312,819
Union Pacific Resources Group, Inc. 530,000 9,308,125
-----------
47,979,099
OIL - NORTH AMERICAN INTEGRATED 1.1%
USX-Marathon Group 319,000 10,945,688
OIL WELL EQUIPMENT & SERVICE 4.4%
BJ Services Company (b) 400,500 11,639,531
Cooper Cameron Corporation (b) 211,200 10,771,200
EVI Weatherford, Inc. (b) 293,900 10,911,038
R&B Falcon Corporation (b) 414,000 9,366,750
-----------
42,688,519
PERSONAL & COMMERCIAL LENDING 1.5%
Household International, Inc. 285,000 14,178,750
PRECIOUS METAL/GEM/STONE 0.9%
Barrick Gold Corporation 445,200 8,542,275
4
<PAGE>
- -------------------------------------------------------------------------------
Shares or
Principal Value
Amount (Note 2)
- -------------------------------------------------------------------------------
REAL ESTATE 1.3%
Ayala Land, Inc. 1,083,600 $ 313,330
Post Properties, Inc. 155,000 5,967,500
Security Capital Pacific Trust 240,000 5,400,000
Shortland Properties, Ltd. 1,041,000 350,775
------------
12,031,605
RETAIL - DEPARTMENT STORE 2.6%
Federated Department Stores, Inc. (b) 248,000 13,345,500
May Department Stores Company 171,600 11,239,800
------------
24,585,300
RETAIL - FOOD CHAIN 1.2%
The Kroger Company (b) 278,000 11,919,250
RETAIL - MAJOR CHAIN 3.0%
Kmart Corporation (b) 685,000 13,186,250
Sears Canada, Inc. 191,000 3,559,693
Toys 'R' Us, Inc. (b) 505,000 11,899,063
------------
28,645,006
RETAIL - SPECIALTY 1.5%
Cortefiel SA 20,000 436,653
Office Depot, Inc. (b) 460,000 14,518,750
------------
14,955,403
TELECOMMUNICATION EQUIPMENT 0.0%
Harmonic Lightwaves, Inc. (b) 9,900 152,213
TELECOMMUNICATION SERVICE 6.0%
AirTouch Communications, Inc. (b) 245,000 14,317,187
MediaOne Group, Inc. (b) 420,000 18,453,750
Omnipoint Corporation (b) 560,000 12,845,000
Paging Network, Inc. (b) 877,000 12,278,000
------------
57,893,937
TELEPHONE 1.1%
Telephone & Data Systems, Inc. 266,600 10,497,375
- ------------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $635,053,440) 822,887,744
- ------------------------------------------------------------------------------
PREFERRED STOCKS 0.3%
Henkel KGaA-Vorzug 22,000 2,171,893
Telecom Italia Spa 135,000 655,595
- ------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (COST $1,781,317) 2,827,488
- ------------------------------------------------------------------------------
CORPORATE BONDS 0.8%
Niagara Mohawk Power Corporation Senior
Notes, Series B, 7.00%, Due 10/01/00 $ 7,600,000 7,638,000
- ------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (COST $7,586,396) 7,638,000
- ------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (a) 13.6%
COMMERCIAL PAPER 0.1%
INTEREST BEARING, DUE UPON DEMAND
General Mills, Inc., 5.26% 252,800 252,800
Johnson Controls, Inc., 5.26% 892,000 892,000
Warner Lambert Company, 5.25% 100 100
------------
1,144,900
REPURCHASE AGREEMENTS 13.5%
ABN-AMRO Chicago Corporation (Dated 6/30/98),
5.75%, Due 7/01/98 (Repurchase proceeds
$126,520,205); Collateralized by: $300,067,000
United States Treasury Strips, Zero %, Due
2/15/05 - 5/15/19 (Market Value $129,222,254)(c) 126,500,000 126,500,000
Cantor Fitzgerald & Company, Inc. (Dated 6/30/98),
5.68%, Due 7/01/98 (Repurchase proceeds
$3,800,600); Collateralized by: $3,819,000 United
States Treasury Bonds, 5.375%, Due 2/15/01
(Market Value $3,876,285) (c) 3,800,000 3,800,000
------------
130,300,000
- ------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $131,444,900) 131,444,900
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES (COST $775,866,053) 99.9% 964,798,132
Other Assets and Liabilities, Net 0.1% 1,409,044
- ------------------------------------------------------------------------------
NET ASSETS 100.0% $966,207,176
==============================================================================
WRITTEN OPTIONS ACTIVITY
- -------------------------------------------------------------------------------
Contracts Premiums
- -------------------------------------------------------------------------------
Options outstanding at beginning of period -- $ --
Options written during the period 3,175 1,586,975
Options closed (700) (427,552)
Options expired -- --
Options exercised -- --
----- ----------
Options outstanding at end of period 2,475 $1,159,423
===== ==========
Closed options resulted in a capital gain of $191,779.
WRITTEN OPTIONS DETAIL
- -------------------------------------------------------------------------------
Value
Contracts (Note 2)
- -------------------------------------------------------------------------------
AirTouch Communications, Inc. (Strike Price is $50.00.
Expiration date is 10/16/98. Premium Received $439,143.) 750 ($750,000)
Comcast Corporation Class A (Strike Price is $32.50.
Expiration date is 10/16/98. Premium Received $162,149.) 425 (467,500)
Mellon Bank Corporation (Strike Price is $70.00.
Expiration date is 9/18/98. Premium Received $427,298.) 850 (451,562)
Tele-Communications, Inc. Class A (Strike Price is $35.00.
Expiration date is 10/16/98. Premium Received $130,833.) 450 (227,813)
LEGEND
- -------------------------------------------------------------------------------
(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(H) 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
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $775,866,053) $964,798,132
Receivable for Securities Sold 5,772,714
Dividends and Interest Receivable 567,625
Other Assets 57,335
------------
Total Assets 971,195,806
LIABILITIES:
Payable for Securities Purchased 2,951,166
Written Options, at Value (Premiums Received of $1,159,423) 1,896,875
Accrued Operating Expenses and Other Liabilities 140,589
------------
Total Liabilities 4,988,630
------------
NET ASSETS $966,207,176
============
NET ASSETS CONSIST OF:
Capital Stock (par value and paid-in capital) $711,481,728
Undistributed Net Investment Income 593,181
Undistributed Net Realized Gain 65,937,748
Net Unrealized Appreciation 188,194,519
------------
Net Assets $966,207,176
============
Capital Shares Outstanding (Unlimited Number Authorized) 44,447,520
NET ASSET VALUE PER SHARE $21.74
======
6
See notes to financial statements.
<PAGE>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the Six Months Ended June 30, 1998 (Unaudited)
INCOME:
Dividends - Unaffiliated Issuers $ 3,076,845
Dividends - Affiliated Issuers 359,349
Interest 2,442,216
------------
Total Income 5,878,410
EXPENSES:
Investment Advisory Fees 4,509,509
Custodian Fees 36,665
Shareholder Servicing Costs 711,608
Other 27,446
------------
Total Expenses 5,285,228
------------
NET INVESTMENT INCOME 593,182
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 67,657,494
Futures Contracts and Options 188,893
Foreign Currencies (2,808)
------------
Net Realized Gain 67,843,579
Change in Unrealized Appreciation/Depreciation on:
Investments 43,952,008
Futures Contracts and Options (737,452)
Foreign Currencies 142,005
------------
Net Change in Unrealized Appreciation/Depreciation 43,356,561
------------
NET GAIN 111,200,140
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $111,793,322
============
7
See notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DEC. 31, 1997
---------------- -------------
(UNAUDITED)
OPERATIONS:
Net Investment Income $ 593,182 $ 2,571,030
Net Realized Gain 67,843,579 110,951,151
Net Change in Unrealized Appreciation/
Depreciation 43,356,561 49,558,727
------------ ------------
Net Increase in Net Assets Resulting from
Operations 111,793,322 163,080,908
DISTRIBUTIONS:
From Net Investment Income (303,495) (2,571,030)
In Excess of Net Investment Income -- (162,663)
From Net Realized Gains (111,831,141) (60,859,506)
------------ ------------
Total Distributions (112,134,636) (63,593,199)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 117,944,966 210,554,869
Proceeds from Reinvestment of Distributions 112,120,187 63,573,723
Payment for Shares Redeemed (98,725,385) (170,348,393)
------------ ------------
Increase in Net Assets from Capital Share
Transactions 131,339,768 103,780,199
------------ ------------
TOTAL INCREASE IN NET ASSETS 130,998,454 203,267,908
NET ASSETS:
Beginning of Period 835,208,722 631,940,814
------------ ------------
End of Period $966,207,176 $835,208,722
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 5,322,800 10,580,657
Issued in Reinvestment of Distributions 5,124,323 3,633,086
Redeemed (4,480,103) (8,576,774)
--------- ----------
Net Increase in Shares of the Fund 5,967,020 5,636,969
========= ==========
8
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
1. ORGANIZATION
The Strong Opportunity Fund II, Inc. (formerly Strong Special Fund II, Inc.)
is a diversified, 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 97% of the Fund's shares were 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 current value.
The Fund may own certain investment securities which are restricted as to
resale. These securities are valued after giving due consideration to
pertinent factors, including recent private sales, market conditions and
the issuer's financial performance. The Fund generally bears the costs,
if any, associated with the disposition of restricted securities. The
Fund held no restricted securities at June 30, 1998.
(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. Premiums received by
the Fund upon writing put or call options are recorded as an asset with a
corresponding liability which is subsequently adjusted to the current
market value of the option. When an option expires, is exercised, or is
closed, the Fund realizes a gain or loss, and the liability is
eliminated. The Fund continues to bear the risk of adverse movements in
the price of the underlying asset during the period of the option,
although any potential loss during the period would be reduced by the
amount of the option premium received.
(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities initially expressed in foreign currencies are converted
to U.S. dollars based upon current exchange rates. Purchases and sales of
foreign investment securities and income are converted to U.S. dollars
based upon currency exchange rates prevailing on the respective dates of
such transactions. The effect of changes in foreign exchange rates on
realized and unrealized security gains or losses is reflected as a
component of such gains or losses.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
June 30, 1998 (Unaudited)
(G) Forward Foreign Currency Exchange Contracts -- Forward foreign currency
exchange contracts are valued at the forward rate and are marked-to-
market daily. The change in market value is recorded as an unrealized
gain or loss. When the contract is closed, the Fund records an exchange
gain or loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(H) 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 the value
of the collateral transferred under each repurchase agreement to ensure
the value of the collateral exceeds the amount owed to the Fund under
each repurchase agreement by at least 2%.
(I) 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.
(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 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.
(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 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, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees for
the six months then ended were $110,050, $71 and $4,803, respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six months
ended June 30, 1998 were $378,746,266 and $401,455,007, respectively.
5. INCOME TAX INFORMATION
At June 30, 1998, the cost of investments in securities for federal income
tax purposes was $776,474,015. Net unrealized appreciation of securities was
$188,324,117, consisting of gross unrealized appreciation and depreciation of
$228,503,983 and $40,179,866, respectively.
10
<PAGE>
- -------------------------------------------------------------------------------
6. INVESTMENTS IN AFFILIATES
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer, or another Strong Fund. A
summary of transactions in the securities of these issuers during the period
ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
DIVIDEND
BALANCE OF GROSS GROSS SALES BALANCE OF VALUE INCOME
SHARES HELD PURCHASES AND SHARES HELD JUNE 30, JAN. 1 - JUNE 30,
JAN. 1, 1998 AND ADDITIONS REDUCTIONS JUNE 30, 1998 1998 1998
------------ ------------- ----------- ------------- -------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Strong Institutional Money Fund 20,000,000 -- (20,000,000) -- -- $354,734
Strong Step 1 Money Fund -- 1,000,000 (1,000,000) -- -- 4,615
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------------------------------------------------------
SELECTED PER-SHARE DATA(a)
-------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
-------------------------------------- -----------------------------------------------
<CAPTION>
Net Asset Net Realized Total In Excess Net Asset
Value, Net and Unrealized from From Net of Net From Net Value,
Beginning Investment Gains on Investment Investment Investment Realized Total End of
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) $21.70 $0.01 $2.92 $2.93 ($0.01) -- ($2.88) ($2.89) $21.74
Dec. 31, 1997 19.24 0.07 4.35 4.42 (0.07) ($0.01) (1.88) (1.96) 21.70
Dec. 31, 1996 17.04 0.13 2.87 3.00 (0.13) -- (0.67) (0.80) 19.24
Dec. 31, 1995 14.23 0.12 3.42 3.54 (0.12) (0.03) (0.58) (0.73) 17.04
Dec. 31, 1994 14.12 0.11 0.41 0.52 (0.11) -- (0.30) (0.41) 14.23
Dec. 31, 1993 11.33 0.06 2.79 2.85 (0.06) -- -- (0.06) 14.12
</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) +13.4% $966 1.2%* 0.1%* 46.1% $0.0590
Dec. 31, 1997 +25.5% 835 1.1% 0.4% 101.1% 0.0522
Dec. 31, 1996 +18.2% 632 1.2% 0.7% 89.8% 0.0505
Dec. 31, 1995 +25.8% 452 1.2% 0.8% 91.1%
Dec. 31, 1994 +3.6% 300 1.1% 0.9% 74.8%
Dec. 31, 1993 +25.2% 151 1.1% 0.5% 103.1%
* 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.
11
</TABLE>
<PAGE>
NOTES
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12
