<PAGE> 1
ANNUAL REPORT
THE STRONG
DISCOVERY FUND II
[PHOTO OF TWO ANONYMOUS PEOPLE]
[STRONG LOGO]
DECEMBER 31,1994
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT REVIEW
The Strong Discovery Fund II....................................... 2
FINANCIAL INFORMATION
Historical Investment Returns...................................... 4
Historical Record.................................................. 4
Summary of Investments............................................. 4
Schedule of Investments in Securities.............................. 5
Statement of Operations............................................ 8
Statement of Assets and Liabilities................................ 8
Statement of Changes in Net Assets................................. 9
Notes to Financial Statements...................................... 9
FINANCIAL HIGHLIGHTS..................................................... 12
REPORT OF INDEPENDENT ACCOUNTANTS........................................ 12
</TABLE>
<PAGE> 3
1994 was a year of transition for the Strong Discovery Fund II, as the economy
adapted to the Federal Reserve's interest rate increases and prepared for a new
era of opportunity made possible by last year's Congressional election.
The Discovery Fund II declined 5.39% in 1994, in significant part because of the
U.S. stock market correction from higher interest rates and the falling dollar.
But a longer-term view of our performance shows that since its inception on May
8, 1992, the Fund has earned an average annual rate of return of 9.02% for its
investors, which is well above the 6.78% return for the S&P 500 during the same
time period.*
Today, our portfolio management team believes that the U.S. and world economies,
financial markets and investment opportunities are well on their way to
becoming the most attractive they have been in two decades. Technology,
productivity and quality of business fabric are leading the way. Though we do
recognize that the U.S. economy is still growing too rapidly, we are confident
that the Federal Reserve's policies will eventually take hold.
In fact, we believe that during 1995, the economy will slow to sustainable
levels, and that interest rates will decline. In response, stocks in general-and
growth stocks in particular-could generate attractive returns this year.
During 1994, the Fund's portfolio was well diversified in growth stocks, and
buttressed by blue chip growth companies such as Home Depot, IBM, Intel,
Motorola, Walt Disney and Xerox. These companies have been generating earnings
growth rates well above the S&P, lending a measure of relative stability and
liquidity to the portfolio.
Blended with these large blue chip growth stocks were a number of smaller,
rapidly growing firms such as Danka Business Systems (office equipment
services), Exide (batteries), Harley-Davidson, Mercury Finance (car loans) and
Office Depot. Moreover, a majority of the portfolio's investments provide
products and services that are consumed on a daily basis. We like the
predictability of companies like these...most are good examples of the razor vs.
blade theory of disposability and repeat purchase.
[PHOTO OF TWO ANONYMOUS CHILDREN]
2
<PAGE> 4
During the year, we reduced our direct exposure to foreign securities
significantly, and on December 31, 1994, only 2.5% of the Fund's assets were
invested overseas. However, when foreign markets return to attractive
valuations, we will again selectively invest in foreign stocks.
In conclusion, we continue to remain fully committed to investing for growth.
LOOKING AHEAD...
We believe the recent Congressional election will result in the Fed being
encouraged to protect the dollar and battle inflation. As the Fed makes progress
on this front, thus slowing the economy, foreign investors could increase their
holdings of U.S. liquid investments. This combination could result in higher
valuations for U.S. equities, making growth stocks potentially excellent
investment vehicles in the next market cycle.
Thank you for your investment in the Strong Discovery Fund II. We will do our
best to earn your continued confidence.
Sincerely,
/s/ RICHARD S. STRONG
Richard S. Strong
Portfolio Manager
[PHOTO OF RICHARD S. STRONG]
ASSET ALLOCATION
(based on net assets as of 12/31/94)
<TABLE>
<S> <C>
Common & Preferred Stocks
including Convertibles 82%
Cash Equivalents 18%
</TABLE>
Please see the Schedule of Investments in Securities for a complete listing of
the Fund's portfolio.
GROWTH OF AN
ASSUMED $10,000 INVESTMENT
from 5/8/92 to 12/31/94
Growth of an assumed $10,000 investment
from 5/8/92 to 12/31/94
<TABLE>
<CAPTION>
The Strong Discovery Fund II
<S> <C>
5/92 10000
6/92 9591
12/92 10887
6/93 11392
12/93 13285
6/94 11885
12/94 12569
<CAPTION>
S&P 500 Stock Index
<S> <C>
5/92 10000
6/92 9857
12/92 10680
6/93 11201
12/93 11756
6/94 11358
12/94 11912
</TABLE>
This graph, prepared 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, an unmanaged index generally representative
of the U.S. stock market. Results include the reinvestment of all dividends and
capital gains. Source for the index data is Micropal. 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. Please see the
Historical Investment Returns section for more information on the Fund's
performance record.
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS*
through 12/31/94
<S> <C>
Since inception on 5/8/92 9.02%
1-year -5.39%
</TABLE>
*The Fund's returns include the effects of deducting the Fund's expenses, but do
not include charges and expenses attributable to any particular insurance
product. Excluding such fees and expenses from the Fund's return quotations has
the effect of increasing the performance quoted.
3
<PAGE> 5
HISTORICAL INVESTMENT RETURNS(1)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
1992 + 8.9%(2)
1993 +22.0%
1994 - 5.4%
Since Inception +25.7%
Average Annual Total Return
-- One-Year Period Ended December 31, 1994 - 5.4%
-- Inception Date to December 31, 1994(2) + 9.0%
</TABLE>
(1) All performance is historical and does not represent future results.
Investment returns and principal value will vary, and you may have a gain or
loss when you sell shares. Returns assume reinvestment of all dividend and
capital gains distributions. The returns do not include the fees and charges
imposed under certain variable annuity insurance contracts, which will
reduce the total return to contract owners. Therefore, these performance
figures may be of limited use.
(2) Inception date is May 8, 1992.
HISTORICAL RECORD
- --------------------------------------------------------------------------------
The following table illustrates an assumed $10,000 investment in Strong
Discovery Fund II on May 8, 1992, the date of the initial public offering, with
income dividends and capital gains distributions reinvested in additional
shares.
<TABLE>
<CAPTION>
NET ASSET CAPITAL GAINS INCOME GROWTH OF
VALUE PER DISTRIBUTIONS DIVIDENDS AN INITIAL $10,000
SHARE PER SHARE PER SHARE INVESTMENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May 8, 1992 $10.00 $ -- $ -- $10,000
December 31, 1992 10.15 .63 .04 10,887
December 31, 1993 11.54 .70 .05 13,285
December 31, 1994 10.07 .33 .53 12,569
</TABLE>
SUMMARY OF INVESTMENTS
- --------------------------------------------------------------------------------
December 31, 1994
<TABLE>
<S> <C> <C>
Common and Preferred Stocks including Convertibles $ 98,103,376 82%
Cash Equivalents and Other Assets and Liabilities, Net 20,823,941 18
------------ ---
Net Assets $118,927,317 100%
============ ===
</TABLE>
4
<PAGE> 6
SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS 81.2%*
UNITED STATES 69.0%*
AIRCRAFT & AEROSPACE 0.6%*
3,400 Boeing Company $ 158,950
4,100 McDonnell Douglas Corporation 582,200
----------
741,150
AUTOMOTIVE RELATED 2.2%*
26,300 Exide Corporation 1,479,375
18,800 General Motors Corporation 794,300
28,400 Thompson PBE, Inc.+ 372,750
----------
2,646,425
BANKING 1.1%*
11,500 Citicorp 475,813
5,500 Wells Fargo & Company 797,500
----------
1,273,313
BROADCASTING 1.5%*
18,800 Broadcasting Partners, Inc.+ 289,050
8,500 CBS, Inc. 470,688
4,800 Century Communications Corporation Class A+ 36,000
900 Citicasters, Inc.+ 22,275
1,915 Infinity Broadcasting Corporation+ 60,322
35,200 SFX Broadcasting, Inc.+ 651,200
13,400 Young Broadcasting, Inc.+ 237,850
----------
1,767,385
BUSINESS SERVICES 1.2%*
8,100 Alco Standard Corporation 508,275
23,700 Career Horizons Corporation+ 385,125
25,700 Corporate Express, Inc.+ 501,150
1,200 Manpower, Inc. 33,750
----------
1,428,300
CELLULAR TELEPHONES 0.3%*
13,200 AirTouch Communications, Inc.+ 384,450
COMMUNICATIONS, LODGING & ENTERTAINMENT 2.8%*
21,900 Carmike Cinemas, Inc.+ 503,700
54,900 Comcast Corporation Class A 861,244
3,500 The Walt Disney Company 161,437
10,200 Host Marriott Corporation+ 98,175
18,000 Promus Companies, Inc.+ 558,000
24,450 Regal Cinemas, Inc.+ 623,475
13,400 Viacom International, Inc.+ 544,375
----------
3,350,406
COMPUTERS & SOFTWARE 8.2%*
19,100 Aspen Technology, Inc.+ 374,838
4,000 CDW Computer Centers, Inc.+ 136,500
20,900 Cisco Systems, Inc.+ 734,112
9,500 Computer Associates International, Inc. 460,750
50,100 Compuware Corporation+ 1,803,600
109,300 EMC Communications Corporation+ 2,363,612
5,900 IMRS, Inc.+ 233,050
36,000 Informix Corporation+ 1,156,500
8,200 International Business Machines Corporation 602,700
34,100 Mentor Graphics Corporation+ 520,025
3,400 Microsoft Corporation+ 207,825
9,900 MicroTouch Systems, Inc.+ 445,500
5,500 Oracle Systems Corporation+ 242,688
5,600 Sun Microsystems, Inc.+ 198,800
6,800 Synopsys, Inc.+ 297,500
----------
9,778,000
CONGLOMERATES 0.2%*
26,125 Jason, Inc. (Acquired 1/21/94; Cost $229,900)(r)+ 189,668
Consumer Related Products 4.7%*
14,100 CUC International, Inc.+ 472,350
4,000 Eastman Kodak Company 191,000
128,000 Fingerhut Companies, Inc. 1,984,000
43,400 Harley-Davidson, Inc. 1,215,200
22,000 Herbalife International, Inc. 371,250
4,000 IHOP Corporation+ 109,000
2,500 Mattel, Inc. 62,813
2,600 The Rival Company 45,500
41,400 Service Corporation International 1,148,850
----------
5,599,963
ELECTRICAL & ELECTRONICS 2.3%*
8,800 Intel Corporation 562,100
27,700 International Rectifier Corporation+ 671,725
11,100 Mattson Technology, Inc.+ 213,675
11,400 Methode Electronics, Inc. Class A 193,800
28,800 National Semiconductor Corporation+ 561,600
29,800 Powell Industries, Inc.+ 167,625
9,600 Sensormatic Electronics Corporation 345,600
----------
2,716,125
ENERGY RELATED 0.4%*
11,015 Anadarko Petroleum Corporation 424,078
FINANCIAL SERVICES 1.5%*
9,265 American Express Company 273,318
3,600 First Financial Management Corporation 221,850
7,100 First USA, Inc. 233,412
72,100 Mercury Finance Company 937,300
9,000 SafeCard Services, Inc. 169,875
----------
1,835,755
FOOD, BEVERAGE & TOBACCO 2.3%*
36,200 American Family Restaurants, Inc.+ 131,225
17,900 Boston Chicken, Inc.+ 311,012
21,300 Brinker International, Inc.+ 386,063
26,900 Canandaigua Wine Company, Inc.+ 1,022,200
24,600 DF & R Restaurants, Inc. 365,925
17,500 Quality Dining, Inc.+ 216,562
8,700 Starbucks Corporation+ 239,250
9,900 Stokely USA, Inc.+ 56,925
----------
2,729,162
FOREST & PAPER PRODUCTS 1.0%*
11,400 Minerals Technologies, Inc. 333,450
11,700 Scott Paper Company 808,763
3,600 Specialty Paperboard, Inc.+ 40,500
----------
1,182,713
INSURANCE & INSURANCE RELATED 0.6%*
13,300 TIG Holdings, Inc. 249,375
15,400 Vesta Insurance Group, Inc. 438,900
----------
688,275
</TABLE>
See notes to financial statements.
5
<PAGE> 7
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
MANUFACTURING 0.5%*
2,200 Applied Power, Inc. $ 55,825
17,200 AptarGroup, Inc. 494,500
-----------
550,325
MEDICAL SERVICES 5.7%*
5,600 Medaphis Corporation+ 260,400
184,300 National Medical Enterprises, Inc.+ 2,603,238
130,250 Ornda Healthcorp+ 1,628,125
62,500 Value Health, Inc.+ 2,328,125
-----------
6,819,888
MEDICAL SUPPLIES 1.5%*
14,800 McKesson Corporation 482,850
13,400 Omnicare, Inc. 587,925
28,400 Patterson Dental Company+ 589,300
5,350 Sybron International Corporation+ 184,575
-----------
1,844,650
METALS & MINING 5.7%*
26,900 American Barricks Resources Corporation 598,525
17,200 Cyprus Amax Minerals Company 449,350
12,201 Newmont Mining Company 439,243
409,801 Santa Fe Pacific Gold Corporation+ 5,276,188
-----------
6,763,306
OFFICE EQUIPMENT 0.7%*
8,800 Xerox Corporation 871,200
OIL FIELD SERVICES & EQUIPMENT 0.4%*
39,050 Energy Service Company, Inc.+ 478,362
PETROLEUM 1.8%*
21,500 Box Energy Corporation Class B+ 231,125
18,300 Cross Timber Oil Company 274,500
31,800 Enron Corporation 969,900
58,000 Flores & Rucks, Inc.+ 609,000
-----------
2,084,525
PHARMACEUTICALS 0.3%*
7,400 R.P. Scherer Corporation+ 335,775
PUBLISHING 1.1%*
40,425 The Times Mirror Company Class A 1,268,334
RAILROADS 1.1%*
4,100 Burlington Northern, Inc. 197,312
43,300 Santa Fe Pacific Corporation 757,750
7,900 Wisconsin Central Transportation Corporation+ 325,875
-----------
1,280,937
REAL ESTATE 6.1%*
43,500 Associated Estates Realty Corporation 913,500
20,100 Duke Realty Investments, Inc. 567,825
53,200 Equity Inns, Inc.+ 585,200
35,100 General Growth Properties, Inc. 794,137
16,400 JDN Realty Corporation 328,000
30,600 Merry Land & Investment Company, Inc. 669,375
15,800 Mid-America Apartment Communities, Inc. 422,650
64,300 RFS Hotel Investors, Inc. 940,387
42,700 ROC Communities, Inc. 896,700
12,000 Storage USA, Inc. 330,000
33,800 Weeks Corporation 739,375
3,700 Wellsford Residential Property Trust 77,700
-----------
7,264,849
RETAIL 7.6%*
2,600 Barnes & Noble, Inc.+ 81,250
26,700 Best Products Company, Inc.+ 173,550
21,200 Damark International, Inc. Class A+ 174,900
4,000 Dollar General Corporation 120,000
12,200 Eckerd Corporation+ 364,475
97,100 Federated Department Stores, Inc.+ 1,869,175
14,300 The Home Depot, Inc. 657,800
43,750 Just For Feet, Inc.+ 749,218
35,100 Micro Warehouse, Inc.+ 1,228,500
66,300 Movie Gallery, Inc.+ 1,723,800
65,800 Office Depot, Inc.+ 1,579,200
11,400 OfficeMax, Inc.+ 302,100
-----------
9,023,968
STEEL 1.1%*
23,800 Nucor Corporation 1,320,900
TELECOMMUNICATIONS 2.4%*
45,200 Motorola, Inc. 2,615,950
4,700 Pronet, Inc.+ 68,150
9,900 U.S. Long Distance Corporation+ 118,800
-----------
2,802,900
TIRES & RUBBER 0.2%*
3,900 Bandag, Inc. 235,950
TRANSPORTATION 0.8%*
5,200 Knight Transportation, Inc.+ 74,100
7,000 Landstar Systems, Inc.+ 229,250
11,700 MS Carriers, Inc.+ 254,475
10,200 MTL, Inc.+ 114,750
13,200 TNT Freightways Corporation 338,250
-----------
1,010,825
WASTE CONTROL 0.1%*
5,400 Continental Waste Industries, Inc.+ 53,325
OTHER 1.0%*
64,800 Consolidated Graphics, Inc.+ 729,000
2,200 Corrpro Companies, Inc.+ 33,275
23,000 Equity Corporation International+ 304,750
11,900 John Q. Hammons Hotels, Inc.+ 166,600
-----------
1,233,625
-----------
Total United States 81,978,812
FOREIGN 12.2%*
BRAZIL 3.2%*
PETROLEUM 0.1%*
500,000 Petroleo Brasileiro S.A. 63,233
STEEL 0.1%*
4,000 Usinas Siderurgicas de Minas Gerais S.A. ADR
(USD) (Acquired 9/20/94-12/28/94;
Cost $54,050)(r)+ 54,500
TELECOMMUNICATIONS 1.9%*
52,100 Telecommunicacoes Brasileiras S.A. ADR (USD) 2,331,475
OTHER 1.1%*
35,100 Companhia Energetica de Minas Gerais ADR
(USD)+ 851,175
9,800 Companhia Vale do Rio Doce ADR (USD) 471,625
-----------
1,322,800
-----------
3,772,008
</TABLE>
See notes to financial statements.
6
<PAGE> 8
SCHEDULE OF INVESTMENTS IN SECURITIES (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
CANADA 1.1%*
CONSUMER RELATED PRODUCTS 0.8%*
34,800 The Loewen Group, Inc. (USD) $ 922,200
METALS & MINING 0.3%*
17,450 Placer Dome, Inc. (USD) 379,538
------------
1,301,738
HONG KONG 5.9%*
AIRCRAFT & AEROSPACE 0.2%*
82,700 Hong Kong Aircraft Engineering Company, Ltd. 275,774
BANKING 1.7%*
18,500 HSBC Holdings PLC ADR (USD) 1,996,564
CONGLOMERATES 1.5%*
367,000 Citic Pacific, Ltd. 884,652
66,000 Guangdong Investment, Ltd. 32,629
23,000 Swire Pacific, Ltd. `A' 143,286
125,000 Swire Pacific, Ltd. ADR (USD) 778,712
------------
1,839,279
ELECTRIC & GAS UTILITIES 0.8%*
390,000 Consolidated Electric Power Asia, Ltd. 856,921
1,900 Consolidated Electric Power Asia, Ltd. ADS
(USD) (Acquired 1/14/94; Cost $28,738)(r) 42,038
------------
898,959
FINANCIAL SERVICES 0.1%*
16,000 Guoco Group, Ltd. 68,450
REAL ESTATE 0.4%*
58,000 Cheung Kong (Holdings), Ltd. 236,138
62,000 New World Development Company, Ltd. 165,478
21,800 Sun Hung Kai Properties, Ltd. 130,174
------------
531,790
OTHER 1.2%*
28,000 Hutchison Whampoa, Ltd. ADR (USD) 566,365
129,300 Jardine Matheson Holdings, Ltd. ADR (USD) 923,318
------------
1,489,683
------------
7,100,499
THAILAND 0.1%*
BANKING
10,000 Bangkok Bank Public Company, Ltd. (Fgn Reg) 106,794
UNITED KINGDOM 1.9%*
BUSINESS SERVICES
107,400 Danka Business Systems PLC ADR (USD) 2,322,525
------------
Total Foreign 14,603,564
------------
Total Common Stocks (Cost $99,144,600) 96,582,376
PREFERRED STOCK 0.1%*
FOREIGN
FINLAND
800 Nokia Corporation Preferred ADR (USD)+
(Cost $59,036) 60,000
CONVERTIBLE PREFERRED STOCK 1.2%*
243,500 RJR Nabisco Holdings Corporation Series C
Depository Shares Representing 1/10
Series C Conversion Preferred Stock
(Cost $1,582,750) 1,461,000
CASH EQUIVALENTS 14.6%*
COMMERCIAL PAPER 14.6%*
DISCOUNTED 12.8%*
$5,000,000 Anadarko Petroleum Corporation
Due 1/06/95 4,997,354
2,000,000 Pennsylvania Power & Light Energy Trust
Due 1/04/95 1,999,664
1,200,000 Pet, Inc.
Due 1/03/95 1,200,000
1,600,000 Sundstrand Corporation
Due 1/03/95 1,600,000
5,400,000 Tyson Foods, Inc.
Due 1/05/95 5,398,149
------------
15,195,167
INTEREST BEARING, DUE UPON DEMAND 1.8%*
50,100 BarclaysAmericanCorp., 5.80% 50,100
355,100 Eli Lilly & Company, 5.55% 355,100
165,700 General Mills, Inc., 5.73% 165,700
1,229,800 Pitney Bowes Credit Corporation, 5.73% 1,229,800
338,400 Sara Lee Corporation, 5.71% 338,400
74,100 Wisconsin Electric Power Company, 5.77% 74,100
------------
2,213,200
------------
Total Cash Equivalents (Cost $17,408,367) 17,408,367
------------
TOTAL INVESTMENTS IN SECURITIES
(COST $118,194,753) 97.1%* 115,511,743
Other Assets and Liabilities, Net 2.9%* 3,415,574
------------
NET ASSETS 100.0%* $118,927,317
============
</TABLE>
* Percentages are calculated as a percentage of net assets.
(USD) U.S. dollar-denominated.
(r) Restricted Security.
+ Non-income producing.
See notes to financial statements.
7
<PAGE> 9
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1994
<TABLE>
<S> <C>
INCOME:
Dividends $1,595,910
Interest 561,098
----------
Total Income 2,157,008
EXPENSES:
Investment Advisory Fees 925,829
Custodian Fees 112,907
Other 71,086
----------
Total Expenses 1,109,822
----------
NET INVESTMENT INCOME 1,047,186
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 3,440,152
Futures Contracts (696,167)
Foreign Currencies (1,878)
Change in Unrealized Appreciation/Depreciation on Investments (8,202,698)
----------
NET LOSS (5,460,591)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ($4,413,405)
==========
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1994
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $118,194,753) $ 115,511,743
Receivable from Brokers for Securities Sold 4,910,883
Dividends and Interest Receivable 877,189
Other 17,458
---------------
Total Assets 121,317,273
LIABILITIES:
Payable to Brokers for Securities Purchased 2,252,922
Accrued Operating Expenses and Other Liabilities 137,034
---------------
Total Liabilities 2,389,956
---------------
NET ASSETS $ 118,927,317
===============
Capital Shares
Authorized 10,000,000,000
Outstanding 11,814,393
NET ASSET VALUE PER SHARE $ 10.07
===============
</TABLE>
See notes to financial statements.
8
<PAGE> 10
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
For the Years Ended December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
OPERATIONS:
Net Investment Income $ 1,047,186 $ 212,631
Net Realized Gain 2,742,107 6,696,782
Change in Unrealized Appreciation/Depreciation (8,202,698) 3,383,609
------------ -----------
Increase (Decrease) in Net Assets Resulting from Operations (4,413,405) 10,293,022
CAPITAL SHARE TRANSACTIONS 60,217,692 38,197,143
DISTRIBUTIONS:
From Net Investment Income (1,047,186) (215,344)
In Excess of Net Investment Income (4,473,221) (3,075,395)
From Net Realized Gains (3,294,825) --
------------ -----------
TOTAL INCREASE IN NET ASSETS 46,989,055 45,199,426
NET ASSETS:
Beginning of Year 71,938,262 26,738,836
------------ -----------
End of Year $118,927,317 $71,938,262
============ ===========
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1994
1. ORGANIZATION
The Strong Discovery Fund II, Inc. is a diversified, open-end management
investment company registered with the Securities and Exchange Commission
under the Investment Company Act of 1940.
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 -- Investments in securities for which market
quotations are readily available are valued at fair value as determined
by a pricing service on the basis of the average of the most recent bid
and asked prices in the principal market (closing sales prices if the
principal market is an exchange) in which such securities are normally
traded. Securities for which 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 Directors of the Fund. Debt securities which are purchased within 60
days of their stated maturity are valued at amortized cost, which
approximates current value.
The Fund owns 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. Where future disposition of these
securities requires registration under the Securities Act of 1933, the
Fund has the right to include its securities in such registration,
generally without cost to the Fund. Aggregate cost and fair value of
these restricted securities held at December 31, 1994 were $312,688 and
$286,206, respectively, representing 0.2% of net assets of the Fund.
(B) Federal Income 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
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 tax purposes due to differences in the recognition of income and
expense items for financial statement and tax purposes.
(C) Realized Gains and Losses On Investment Transactions -- The Fund
determines the gain or loss realized on investment transactions by
comparing the identified cost of the security lot sold with the net sales
proceeds.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
December 31, 1994
(D) Futures -- The Fund may enter into futures contracts to provide
protection against adverse movements in the prices of securities in the
portfolio. Upon entering into a futures contract, the Fund pledges to the
broker cash or U.S. government securities equal to the minimum "initial
margin" requirements of the exchange. Additionally, the Fund 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 by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a realized
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.
The use of futures contracts involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of assets
and liabilities. The predominant risk is that the movement in the price
of the futures contract may not correlate perfectly with the movement in
the prices of the assets being hedged. A lack of correlation could render
the portfolio's hedging strategy unsuccessful and could result in a loss
to the portfolio.
(E) Options -- The Fund may engage in options transactions to hedge against
expected declines of its portfolio securities. Premiums received by the
Fund upon writing covered call options are recorded in the Fund's
statement of assets and liabilities 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 a decline in the price of the underlying
security during the period, although any potential loss during the period
would be reduced by the amount of the option premium received.
The Fund may also purchase stock index options and write covered stock
index options. A stock index option is similar to an option on a specific
security, except that delivery of cash rather than the underlying
security is made.
The use of written option contracts involves elements of market risk in
excess of the amount recognized in the statement of assets and
liabilities. The contract value represents the Fund's involvement in
these financial instruments. When required, the Fund will set aside
permissible liquid assets in a segregated account to secure its potential
obligations under its options positions.
(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities denominated in foreign currencies are converted to U.S.
dollars based upon current exchange rates. Purchases and sales of foreign
investment securities and income are converted to U.S. dollars based upon
currency exchange rates prevailing on the respective dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains or losses is reflected as a component of
such gains or losses.
(G) When-Issued Securities -- The Fund may purchase securities on a
when-issued or delayed delivery basis. Although the payment and interest
terms of these securities are established at the time the purchaser
enters into the agreement, these securities may be delivered and paid for
at a future date, generally within 45 days. The Fund records purchases of
when-issued securities and reflects the values of such securities in
determining net asset value in the same manner as other portfolio
securities. The Fund segregates and maintains at all times cash, cash
equivalents, or other high-quality liquid debt securities in an amount at
least equal to the amount of outstanding commitments for when-issued
securities.
(H) Other -- Portfolio transactions are recorded on the trade date. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date. Interest income is recorded on the accrual basis.
3. NET ASSETS
Net assets as of December 31, 1994 were as follows:
<TABLE>
<S> <C>
Capital Stock $123,829,119
Undistributed Net Investment Loss (55)
Undistributed Net Realized Loss (2,218,737)
Net Unrealized Depreciation (2,683,010)
------------
Net Assets $118,927,317
============
</TABLE>
10
<PAGE> 12
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund during 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------ -----------------------
SHARES DOLLARS SHARES DOLLARS
--------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Shares Sold 9,271,840 $101,330,716 6,180,867 $66,083,373
Shares Issued in Reinvestment of Dividends 851,339 8,806,683 312,225 3,283,245
Shares Redeemed (4,541,890) (49,919,707) (2,894,221) (31,169,475)
--------- ------------ --------- -----------
Net Increase 5,581,289 $ 60,217,692 3,598,871 $38,197,143
========= ============ ========= ===========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and a director 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 an 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 contractually established
rates for each open and closed shareholder account. In addition, the Advisor
is compensated for certain other services related to costs incurred for
reports to shareholders.
Certain information regarding these transactions for the year ended December
31, 1994 is as follows:
<TABLE>
<S> <C>
Payable to Advisor at December 31, 1994 $112,041
Shareholder Recordkeeping Fees Paid to Advisor 5,002
Other Shareholder Servicing Expenses Paid to Advisor 122
Unaffiliated Directors' Fees 2,333
</TABLE>
6. INVESTMENT TRANSACTIONS
Aggregate purchases and sales of long-term securities during 1994 were
$559,089,616 and $515,708,181, respectively.
7. INCOME TAX INFORMATION
At December 31, 1994, based on investment cost for Federal income tax
purposes of $118,986,719, net unrealized depreciation was $3,474,976,
consisting of $4,199,810 in aggregate gross unrealized appreciation and
$7,674,786 in aggregate gross unrealized depreciation. At December 31, 1994,
the Fund has capital loss carryovers of $1,418,231 which expire in 2002.
8. FOREIGN INVESTMENTS
Investments in foreign markets can pose more risks than U.S. investments, and
to the extent that the Fund invests in foreign securities, the Fund's share
price is expected to be more volatile than that of a U.S. securities-only
fund. The value of the Fund's foreign securities will fluctuate with changes
in stock market conditions, currency values, interest rates, foreign
government regulations, and economic and political conditions in countries in
which the Fund invests. These risks are generally intensified for investments
in emerging markets.
11
<PAGE> 13
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The following presents information relating to a share of capital stock
outstanding for the entire period.
<TABLE>
<CAPTION>
1994 1993 1992**
-------- ------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.54 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10 0.05 0.04
Net Realized and Unrealized Gains
(Losses) on Investments (0.71) 2.09 0.78
-------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS (0.61) 2.14 0.82
LESS DISTRIBUTIONS
From Net Investment Income (0.10) (0.05) (0.04)
In Excess of Net Investment Income (0.43) (0.70) --
From Net Realized Gains (0.33) -- (0.63)(1)
-------- ------- --------
TOTAL DISTRIBUTIONS (0.86) (0.75) (0.67)
-------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 10.07 $ 11.54 $ 10.15
======== ======= ========
Total Return -5.4% +22.0% +8.9%
Net Assets, End of Period (In Thousands) $118,927 $71,938 $ 26,739
Ratio of Expenses to Average Net Assets 1.2% 1.3% 1.7%*
Ratio of Net Investment Income to Average Net Assets 1.1% 0.5% 0.5%*
Portfolio Turnover Rate 662.5% 976.5% 1,767.9%*
</TABLE>
* Calculated on an annualized basis.
** Inception date is May 8, 1992. Total return is not annualized.
(1) Ordinary income distribution for tax purposes.
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Discovery Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of Strong
Discovery Fund II, Inc., including the schedule of investments in securities, as
of December 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Strong Discovery Fund II, Inc. as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
February 7, 1995
12
<PAGE> 14
DIRECTORS OF THE FUND
Richard S. Strong
Marvin E. Nevins
Willie D. Davis
OFFICERS OF THE FUND
Richard S. Strong
Chairman of the Board
John Dragisic
Vice Chairman
Lawrence A. Totsky
Vice President
Thomas P. Lemke
Vice President
Ann E. Oglanian
Secretary
Thomas M. Zoeller
Treasurer
Investment Advisor
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
Distributor
Strong Funds Distributors, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
Custodian
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
Transfer Agent and Dividend-Disbursing Agent
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
Auditors
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202
Legal Counsel
Godfrey & Kahn, S.C.
780 North Water Street, Milwaukee, Wisconsin 53202
<PAGE> 15
This report must be preceded or accompanied by the prospectus for
the Strong Discovery Fund II.
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
