<PAGE> 1
ANNUAL REPORT
THE STRONG
SPECIAL FUND II
[PHOTO OF TWO ANONYMOUS MEN]
[STRONG LOGO]
DECEMBER 31,1994
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT REVIEW
The Strong Special 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
In pursuit of capital appreciation, the Strong Special Fund II currently focuses
on the stocks of mid-sized companies that are under-researched by Wall Street
analysts and undervalued by the market.
RISING RATES PRESSURE
STOCK PRICES IN 1994
Stronger-than-expected economic growth, and the potential for higher inflation,
prompted the Federal Reserve to raise the federal funds rate six times during
1994, creating a challenging environment for stock investors. While higher rates
tended to depress stock prices during the first half of the year, strong
corporate earnings helped support prices. Large company stocks were able to
battle back to their initial values by year-end; stocks of mid-sized and smaller
companies trailed the broader market averages. Mid-sized companies, as measured
by the S&P MidCap 400 Index, finished the year down 3.58%.
Despite these difficult conditions for mid-sized company stocks, the Strong
Special Fund II achieved a positive total return of 3.60% for the year.
A DISCIPLINED
INVESTMENT APPROACH
We believe our ability to turn in a positive performance in an unfavorable
environment primarily reflects our demanding investment approach. Going into the
year, we adopted a defensive stance, positioning the Fund with a fairly high
cash position-about 7% of net assets at the start of the year, and at times over
10%. As an additional investment strategy during the first two quarters, we
emphasized cyclical companies, which tend to benefit most from a faster-growing
economy. We also sought to use the early-1994 correction as an opportunity to
replace marginal holdings with solid, quality companies whose prices had become
more attractive.
As the market leveled off during the second half of the year, earnings became
all-important, and we concentrated on stocks with prospects for good earnings
growth. Purchases included Sun Microsystems, LSI Logic and Rite Aid. Eastman
Chemical and Sante Fe Pacific Corporation were among the stocks we sold because
they had hit our price targets.
Throughout the year, we stayed focused on avoiding downside risk, as opposed to
stretching for upside potential. As always, we subjected the portfolio to
continuous, stringent evaluation on a stock-by-stock basis. We looked at
relative value and earnings potential. We emphasized stocks that were less
expensive than the market average, because they tend to be less sensitive to
rising rates.
ASSET ALLOCATION
(based on net assets as of 12/31/94)
<TABLE>
<S> <C>
Common Stocks 85.8%
Cash Equivalents 13.8%
Convertible Corporate Bonds 0.4%
</TABLE>
The Fund's allocation does not reflect a long position of S&P 500 Stock Index
futures representing 3.3% of net assets, which is intended to increase the
Fund's allocation to stocks and decrease the allocation to cash. Please see the
Schedule of Investments in Securities for a complete listing of the Fund's
portfolio.
FIVE LARGEST HOLDINGS
(based on net assets as of 12/31/94)
<TABLE>
<CAPTION>
% of Net
Company Description Assets
- ------------------------------------------------------
<S> <C> <C>
Autodesk, Inc. Computers 1.5%
& Software
- ------------------------------------------------------
Raychem Corporation Electrical & 1.4%
Electronics
- ------------------------------------------------------
Tyco International, Ltd. Conglomerates 1.4%
- ------------------------------------------------------
Marshall Industries Electrical & 1.3%
Electronics
- ------------------------------------------------------
The Times Mirror Publishing 1.3%
Company Class A
- ------------------------------------------------------
</TABLE>
Please see the Schedule of Investments in Securities for a complete listing of
the Fund's portfolio.
2
<PAGE> 4
A MORE FAVORABLE
ENVIRONMENT POSSIBLE IN 1995
Throughout 1994, the equity markets were in a transition period, at times
worried about higher interest rates, at other times encouraged by stronger
corporate earnings brought about by the improving economy. It now appears that
we may see interest rates peak as soon as mid-1995. Should the Federal Reserve's
actions successfully curtail inflation without drastically slowing economic
growth, the market may then be able to focus more fully on the improving
earnings picture, especially for growth companies. If so, the corrections that
occurred in 1994 may help set the stage for a better 1995.
While we understand that periods of market turbulence can be unsettling, we
encourage shareholders to maintain a long-term perspective. There are many
positives for mid-cap stocks. These stocks were laggards through most of the
1980s, and are now relatively attractive based on their value and their expected
growth rates. Therefore, we believe we are now in the midst of a long-term
trend, during which mid-cap stocks should outperform large-cap issues.
Thank you for your continued confidence,
/s/ Richard T. Weiss
Richard T. Weiss
Portfolio Manager
/s/ Marina T. Carlson
Marina T. Carlson
Portfolio Manager
[PHOTO OF RICHARD T. WEISS & MARINA T. CARLSON]
GROWTH OF AN
ASSUMED $10,000 INVESTMENT
from 5/8/92 to 12/31/94
<TABLE>
<CAPTION>
Growth of an assumed $10,000 investment
from 5/8/92 to 12/31/94
The Strong Special Fund II
<S> <C>
5/92 10000
6/92 9480
12/92 11617
6/93 13149
12/93 14541
6/94 14664
12/94 15064
<CAPTION>
S&P MidCap 400 Stock Index
<S> <C>
5/92 10000
6/92 9705
12/92 11267
6/93 11907
12/93 12839
6/94 11901
12/94 12378
<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 similar investments in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Standard & Poor's MidCap
400 Stock Index ("S&P 400"). Results include the reinvestment of all dividends
and capital gains. The S&P 500 is an unmanaged index generally representative of
the U.S. stock market. The S&P 400 is an unmanaged index generally
representative of the market for the stocks of mid-sized U.S. companies. 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 Fund shares. Please see the Historical Investment
Returns section for more information on the Fund's performance record.
AVERAGE ANNUAL
TOTAL RETURNS*
through 12/31/94
<TABLE>
<S> <C>
Since inception on 5/8/92 16.74%
1-year 3.60%
</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
<TABLE>
HISTORICAL INVESTMENT RETURNS(1)
- --------------------------------------------------------------------------------
<S> <C>
1992 + 16.2%(2)
1993 + 25.2%
1994 + 3.6%
Since Inception + 50.6%
Average Annual Total Return
-- One-Year Period Ended
December 31, 1994 + 3.6%
-- Inception Date to
December 31, 1994(2) + 16.7%
</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 Special
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 11.33 .24 .02 11,617
December 31, 1993 14.12 -- .06 14,541
December 31, 1994 14.23 .30 .11 15,064
</TABLE>
<TABLE>
SUMMARY OF INVESTMENTS*
- --------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1994
Common Stocks $257,819,009 86%
Convertible Corporate Bonds 1,133,825 --
Cash Equivalents and Other Assets and Liabilities, Net 41,479,831 14
------------ ---
Net Assets $300,432,665 100%
============ ===
</TABLE>
*The Fund's asset allocation does not reflect a long position of S&P 500 Stock
Index futures representing 3.3% of net assets, which is intended to increase
the Fund's allocation to stocks and decrease the allocation to cash. (See Note
2(D) in the Notes to Financial Statements.)
4
<PAGE> 6
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1994
- --------------------------------------------------------------------------------
SHARES OR VALUE
PRINCIPAL AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS 85.8%*
UNITED STATES 72.1%*
BANKING 4.3%*
84,500 Barnett Banks, Inc. $ 3,242,687
105,000 Old Kent Financial Corporation 3,176,250
171,400 Washington Federal Savings and Loan Association 2,978,075
128,000 West One Bancorp 3,392,000
-----------
12,789,012
BROADCASTING 2.3%*
45,600 Capital Cities/ABC, Inc. 3,887,400
190,100 Turner Broadcasting System, Inc. Class B 3,112,887
-----------
7,000,287
CELLULAR TELEPHONES 1.2%*
119,500 AirTouch Communications, Inc.+ 3,480,437
CHEMICALS 1.1%*
341,000 Ethyl Corporation 3,282,125
COMMUNICATIONS, LODGING & ENTERTAINMENT 3.2%*
132,200 Club Med, Inc. 3,073,650
103,100 The E.W. Scripps Company 3,118,775
160,000 Tele-Communications, Inc. Class A+ 3,480,000
-----------
9,672,425
COMPUTERS & SOFTWARE 5.6%*
111,000 Autodesk, Inc. 4,398,375
36,000 BMC Software, Inc.+ 2,047,500
79,000 Compaq Computer Corporation+ 3,120,500
16,800 Legent Corporation+ 483,000
55,800 Microsoft Corporation+ 3,410,775
98,400 Sun Microsystems, Inc.+ 3,493,200
-----------
16,953,350
CONGLOMERATES 1.4%*
86,000 Tyco International, Ltd. 4,085,000
CONSTRUCTION 0.6%*
93,500 USG Corporation+ 1,823,250
CONSUMER RELATED PRODUCTS 2.3%*
205,600 Warnaco Group, Inc. Class A+ 3,546,600
198,900 Whitman Corporation 3,431,025
-----------
6,977,625
ELECTRIC & GAS UTILITIES 1.2%*
125,500 NIPSCO Industries, Inc. 3,733,625
ELECTRICAL & ELECTRONICS 5.1%*
225,500 Dallas Semiconductor Corporation+ 3,748,937
63,500 Hubbell, Inc. Class B 3,381,375
150,000 Marshall Industries+ 4,012,500
115,500 Raychem Corporation 4,114,688
-----------
15,257,500
ENERGY RELATED 8.7%*
107,500 Ashland Oil, Inc. 3,708,750
216,300 BJ Services Company+ 3,650,062
174,000 Devon Energy Corporation 3,175,500
141,400 Dual Drilling Company+ 1,201,900
160,900 H S Resources, Inc.+ 2,835,862
45,000 Mobil Corporation 3,791,250
190,400 Offshore Logistics, Inc.+ 2,475,200
95,100 Phillips Petroleum Company 3,114,525
111,800 Seagull Energy Corporation+ 2,138,175
-----------
26,091,224
FOOD, BEVERAGE & TOBACCO 2.2%*
62,300 CPC International, Inc. 3,317,475
70,000 Hershey Foods Corporation 3,386,250
-----------
6,703,725
INSURANCE & INSURANCE RELATED 1.9%*
39,100 American International Group, Inc. 3,831,800
54,100 Torchmark Corporation 1,886,737
-----------
5,718,537
MEDICAL SERVICES 1.3%*
268,700 National Medical Enterprises, Inc.+ 3,795,387
MEDICAL SUPPLIES 2.1%*
98,500 McKesson Corporation 3,213,563
91,000 Sybron International Corporation+ 3,139,500
-----------
6,353,063
METALS & MINING 3.0%*
165,600 Freeport-McMoRan Copper & Gold, Inc. Class A 3,519,000
106,900 Newmont Mining Corporation 3,848,400
122,401 Santa Fe Pacific Gold Corporation+ 1,575,913
-----------
8,943,313
PHARMACEUTICALS 2.3%*
53,500 Eli Lilly and Company 3,510,937
115,700 Mallinckrodt Group, Inc. 3,456,538
-----------
6,967,475
PUBLISHING 1.3%*
126,700 The Times Mirror Company Class A 3,975,213
REAL ESTATE 0.7%*
93,500 ROC Communities, Inc. 1,963,500
RETAIL 10.3%*
143,800 American Stores Company 3,864,625
49,000 Dayton Hudson Corporation 3,466,750
183,200 Federated Department Stores, Inc.+ 3,526,600
162,400 The Kroger Company+ 3,917,900
107,600 May Department Stores Company 3,631,500
80,600 J.C. Penney Company, Inc. 3,596,775
117,100 Rite Aid Corporation 2,737,213
238,800 Ross Stores, Inc. 2,686,500
134,900 The Stop & Shop Companies, Inc.+ 3,439,950
-----------
30,867,813
</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>
TELECOMMUNICATIONS 4.3%*
22,900 LIN Broadcasting Corporation+ $ 3,057,150
11,050 LIN Television Corporation+ 251,388
148,000 MCI Communications Corporation 2,719,500
101,500 Paging Network, Inc.+ 3,451,000
73,600 Telephone & Data Systems, Inc. 3,394,800
------------
12,873,838
TIRES & RUBBER 1.3%*
115,500 The Goodyear Tire & Rubber Company 3,883,688
TRANSPORTATION 3.3%*
68,400 AMR Corporation+ 3,642,300
67,400 Alexander & Baldwin, Inc. 1,499,650
129,800 J.B. Hunt Transport Services, Inc. 1,979,450
231,700 Rollins Truck Leasing Corporation 2,751,438
------------
9,872,838
WASTE CONTROL 1.1%*
121,700 Browning-Ferris Industries, Inc. 3,453,238
------------
Total United States 216,517,488
FOREIGN 13.7%*
AUSTRALIA 0.9%*
CONSTRUCTION 0.1%*
488,000 Walker Corporation, Ltd. 272,304
FINANCIAL SERVICES 0.3%*
66,500 Lend Lease Corporation, Ltd. 822,538
METALS & MINING 0.5%*
628,500 Normandy Poseidon, Ltd. 915,725
286,000 Poseidon Gold, Ltd. 598,455
------------
1,514,180
------------
2,609,022
BERMUDA 1.0%*
REAL ESTATE
147,200 Partners RE Holdings, Ltd. (USD) 3,054,400
CANADA 1.0%*
ENERGY RELATED
173,300 Talisman Energy, Inc.+ 2,906,058
FRANCE 0.2%*
CONGLOMERATES
3,100 Chargeurs 677,399
HONG KONG 2.2%*
BANKING 0.9%*
24,000 HSBC Holdings PLC ADR (USD) 2,590,138
CONGLOMERATES 0.4%*
158,000 Jardine Matheson Holdings, Ltd. 1,128,280
METALS & MINING 0.4%*
27,400 Western Deep Levels, Ltd. ADR (USD) 1,099,425
REAL ESTATE 0.3%*
522,000 Hongkong Land Holdings, Ltd. 1,018,767
UTILITIES 0.2%*
130,000 China Light & Power Company, Ltd. ADR (USD) 554,478
------------
6,391,088
LUXEMBOURG 0.7%*
TRANSPORTATION
138,000 Anangel American Shipholdings, Ltd. ADR (USD) 2,087,250
MEXICO 0.5%*
AUTOMOTIVE RELATED
214,462 Consorcio G Grupo Dina S.A. de C.V.
Series L ADR (USD) 1,608,465
NEW ZEALAND 1.1%*
FOREST & PAPER PRODUCTS 0.5%*
632,000 Fletcher Challenge, Ltd. Forestry Division 756,141
290,800 Fletcher Challenge, Ltd. Ordinary Division 682,818
------------
1,438,959
TRANSPORTATION 0.6%*
570,000 Air New Zealand, Ltd. Class B 1,786,961
------------
3,225,920
NORWAY 0.2%*
TRANSPORTATION
87,500 Mosvold Shipping AS Class B 582,264
SINGAPORE 0.6%*
BANKING 0.4%*
120,000 The Development Bank of Singapore, Ltd. (Fgn Reg) 1,235,415
TRANSPORTATION 0.2%*
63,000 Singapore Airlines, Ltd. (Fgn Reg) 579,410
------------
1,814,825
SOUTH AFRICA 1.0%*
METALS & MINING
136,600 De Beers Consolidated Mines, Ltd. ADR (USD) 3,193,025
SWITZERLAND 1.1%*
FOOD, BEVERAGE & TOBACCO
70,200 Nestle SA Sponsored ADR (USD) 3,344,616
UNITED KINGDOM 3.2%*
COMMUNICATIONS, LODGING & ENTERTAINMENT 1.2%*
182,300 Bell Cablemedia PLC ADR (USD)+ 3,691,575
CONGLOMERATES 0.7%*
926,000 Lonrho PLC 2,204,176
METALS & MINING 0.3%*
74,700 The RTZ Corporation PLC 967,426
TELECOMMUNICATIONS 1.0%*
67,100 Reuters Holdings PLC ADR (USD) 2,944,012
------------
9,807,189
------------
Total Foreign 41,301,521
------------
Total Common Stocks (Cost $254,036,247) 257,819,009
CONVERTIBLE CORPORATE BONDS 0.4%*
$665,000 LSI Logic Corporation Convertible Subordinated
Notes, 5.50%, Due 3/15/01 (Acquired
3/16/94, 11/1/94; Cost $748,250)(r)
(Amortized Cost $745,618) 1,133,825
</TABLE>
See notes to financial statements.
6
<PAGE> 8
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SHARES OR VALUE
PRINCIPAL AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
CASH EQUIVALENTS 15.7%*
COMMERCIAL PAPER 15.4%*
DISCOUNTED 14.8%*
$14,500,000 Anadarko Petroleum Corporation
Due 1/06/95 $ 14,492,327
8,000,000 Mapco, Inc.
Due 1/18/95 7,980,000
7,000,000 Pet, Inc.
Due 1/05/95 6,997,609
10,000,000 Potomac Capital Investment Corporation
Due 1/03/95 10,000,000
5,000,000 Union Oil Company of California
Due 1/13/95 4,991,611
------------
44,461,547
INTEREST BEARING, DUE UPON DEMAND 0.6%*
100 BarclaysAmericanCorp., 5.80% 100
64,500 General Mills, Inc., 5.73% 64,500
158,100 Pitney Bowes Credit Corporation, 5.73% 158,100
1,094,800 Sara Lee Corporation, 5.71% 1,094,800
317,600 Southwestern Bell Telephone Company, 5.71% 317,600
123,300 Wisconsin Electric Power Company, 5.77% 123,300
------------
1,758,400
------------
Total Commercial Paper 46,219,947
UNITED STATES GOVERNMENT ISSUES 0.3%*
United States Treasury Bills:
65,000 Due 1/26/95 64,815
245,000 Due 2/09/95 243,754
515,000 Due 3/02/95 510,520
170,000 Due 3/09/95 168,330
------------
987,419
------------
Total Cash Equivalents (Cost $47,207,269) 47,207,366
------------
TOTAL INVESTMENTS IN SECURITIES
(COST $301,989,134) 101.9%* 306,160,200
Other Assets and Liabilities, Net (1.9%*) (5,727,535)
------------
NET ASSETS 100.0%* $300,432,665
============
</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
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31, 1994
INCOME:
Dividends $ 3,051,066
Interest 1,296,487
------------
Total Income 4,347,553
EXPENSES:
Investment Advisory Fees 2,237,627
Custodian Fees 98,833
Other 98,603
------------
Total Expenses 2,435,063
------------
NET INVESTMENT INCOME 1,912,490
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 12,800,185
Futures Contracts (14,762)
Foreign Currencies (3,320)
Change in Unrealized Appreciation/Depreciation on Investments (10,293,538)
------------
NET GAIN 2,488,565
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,401,055
============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
<S> <C>
December 31, 1994
ASSETS:
Investments in Securities, at Value (Cost $301,989,134) $ 306,160,200
Receivable from Brokers for Securities Sold 566,829
Dividends and Interest Receivable 373,745
---------------
Total Assets 307,100,774
LIABILITIES:
Payable to Brokers for Securities Purchased 6,314,151
Accrued Operating Expenses and Other Liabilities 353,958
---------------
Total Liabilities 6,668,109
---------------
NET ASSETS $ 300,432,665
===============
Capital Shares
Authorized 10,000,000,000
Outstanding 21,116,871
NET ASSET VALUE PER SHARE $ 14.23
===============
</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 $ 1,912,490 $ 397,341
Net Realized Gain 12,782,103 5,108,866
Change in Unrealized Appreciation/Depreciation (10,293,538) 11,845,714
------------- -------------
Increase in Net Assets Resulting from Operations 4,401,055 17,351,921
CAPITAL SHARE TRANSACTIONS 151,980,818 107,607,164
DISTRIBUTIONS:
From Net Investment Income (1,900,181) (402,289)
From Net Realized Gains (5,255,061) --
------------- -------------
TOTAL INCREASE IN NET ASSETS 149,226,631 124,556,796
NET ASSETS:
Beginning of Year 151,206,034 26,649,238
------------- -------------
End of Year $ 300,432,665 $ 151,206,034
============= =============
</TABLE>
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1994
1. ORGANIZATION
The Strong Special 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 $748,250 and
$1,133,825, respectively, representing 0.4% 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 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 futures 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.
Futures contracts open at December 31, 1994 were as follows:
<TABLE>
<CAPTION>
UNREALIZED
COLLATERAL (PAR VALUE) CONTRACTS CONTRACT VALUE EXPIRATION DEPRECIATION
---------------------- ----------------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills: 43 S&P 500 (Long) $9,919,025 Mar. 1995 $18,100
$245,000 Due 2/09/95
515,000 Due 3/02/95
170,000 Due 3/09/95
</TABLE>
(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.
10
<PAGE> 12
- -------------------------------------------------------------------------------
3. NET ASSETS
Net assets as of December 31, 1994 were as follows:
<TABLE>
<S> <C>
Capital Stock $283,766,360
Undistributed Net Investment Income 8,988
Undistributed Net Realized Gain 12,504,351
Net Unrealized Appreciation 4,152,966
------------
Net Assets $300,432,665
============
</TABLE>
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 16,549,320 $240,046,708 11,295,485 $146,286,272
Shares Issued in Reinvestment of Dividends 489,615 7,151,175 30,452 401,722
Shares Redeemed (6,630,857) (95,217,065) (2,969,539) (39,080,830)
---------- ------------ ---------- ------------
Net Increase 10,408,078 $151,980,818 8,356,398 $107,607,164
========== ============ ========== ============
</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>
<CAPTION>
<S> <C>
Payable to Advisor at December 31, 1994 $267,970
Shareholder Recordkeeping Fees Paid to Advisor 4,998
Other Shareholder Servicing Expenses Paid to Advisor 82
Unaffiliated Directors' Fees 3,250
</TABLE>
6. INVESTMENT TRANSACTIONS
Aggregate purchases and sales of long-term securities during 1994 were
$267,082,727 and $146,322,202, respectively.
7. INCOME TAX INFORMATION
At December 31, 1994, based on investment cost for Federal income tax
purposes of $302,496,848, net unrealized appreciation was $3,663,352,
consisting of $21,155,206 in aggregate gross unrealized appreciation and
$17,491,854 in aggregate gross unrealized depreciation.
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>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.12 $ 11.33 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.11 0.06 0.02
Net Realized and Unrealized Gains on Investments 0.41 2.79 1.57
-------- -------- -------
TOTAL FROM INVESTMENT OPERATIONS 0.52 2.85 1.59
LESS DISTRIBUTIONS
From Net Investment Income (0.11) (0.06) (0.02)
From Net Realized Gains (0.30) -- (0.24)
-------- -------- -------
TOTAL DISTRIBUTIONS (0.41) (0.06) (0.26)
-------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 14.23 $ 14.12 $ 11.33
======== ======== =======
Total Return + 3.6% +25.2% +16.2%
Net Assets, End of Period (In Thousands) $300,433 $151,206 $26,649
Ratio of Expenses to Average Net Assets 1.1% 1.1% 1.6%*
Ratio of Net Investment Income to Average Net Assets 0.9% 0.5% 0.3%*
Portfolio Turnover Rate 74.8% 103.1% 383.7%*
</TABLE>
* Calculated on an annualized basis.
** Inception date is May 8, 1992. Total return is not annualized.
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors of the
Strong Special Fund II, Inc.
We have audited the accompanying statement of assets and liabilities of Strong
Special 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 Special 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 Special Fund II.
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
