<PAGE> 1
THE STRONG SPECIAL FUND II
ANNUAL REPORT - DECEMBER 31, 1995
[PHOTO OF FAMILY] [GRAPHIC OF CHART]
DESIGNED TO SEEK CAPITAL GROWTH
BY INVESTING PRIMARILY IN
MEDIUM-SIZED COMPANIES
[STRONG LOGO]
STRONG FUNDS
<PAGE> 2
THE STRONG SPECIAL FUND II
ANNUAL REPORT - DECEMBER 31, 1995
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Special Fund II..............................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities...................................4
Statement of Operations.................................................7
Statement of Assets and Liabilities.....................................8
Statement of Changes in Net Assets......................................8
Notes to Financial Statements...........................................9
FINANCIAL HIGHLIGHTS........................................................11
REPORT OF INDEPENDENT ACCOUNTANTS...........................................12
<PAGE> 3
THE STRONG SPECIAL FUND II
- -----------------------------------------------------------------------------
In pursuit of capital growth, the Stong Special Fund II invests at least 70% of
its total assets in equity securities. It currently emphasizes medium-sized
companies that the Fund's advisor believes are under-researched and
attractively valued.
NEAR-PERFECT ENVIRONMENT FOR STOCKS
Low interest rates, combined with moderate inflation and healthy corporate
earnings provided a near-perfect environment for U.S. common stocks in 1995,
and contributed to the stock market rally that ran practically unabated through
year-end. Technology and financial stocks led this momentum-driven market,
aided by large inflows into equity mutual funds.
Large companies which, measured by the S&P 500, were up 37.58% through
year-end, saw the biggest gains as investors favored traditional large-cap
stocks through much of the year. Though mid-cap stocks slightly lagged larger
counterparts, they also posted significant gains, as reflected by the S&P
MidCap 400's 30.94% total return for the same period.(1)
The Fund had good exposure to some of the best performing sectors this
year--especially publishing, broadcasting, and technology--and had a total
return of 25.82% for the year.
A DISCIPLINED APPROACH TO INVESTING
Our investing style remained consistent through the year--we do not believe in
chasing market momentum. Rather, we continue to evaluate existing and
prospective holdings by analyzing their "private value." That simply means we
evaluate companies as if we were private buyers determining how much we would
be willing to pay to own the entire company. In doing so, we have a
disciplined way to view the company's inherent value and impartially evaluate
potential winners and losers.
We look at underfollowed stocks--those with low institutional ownership and low
analyst coverage--because we believe they tend to be undervalued by the market.
We take a close look at unpopular, or "quiet," sectors because we think that,
in a market increasingly dominated by institutions, unpopular sectors can yield
superior returns for those willing to look beyond this year's favorites.
The Fund's top performers this year include Paging Network, Inc., a provider of
paging services in the U.S., and Sun Microsystems, Inc., a computer hardware
manufacturer.
This year, a number of companies in the Fund received takeover bids at
a price very close to our private market value. In the publishing and
broadcasting sector alone, we own two companies that received takeover bids.
Both companies, Capital Cities/ABC, Inc. and CBS, Inc., obtained bids within
several dollars of our private market valuations. The Capital Cities/ABC
takeover is awaiting a vote by shareholders in January, and the CBS takeover is
complete.
ASSET ALLOCATION
as of 12-31-95
[PIE CHART]
Common Stocks 85.4%
Convertible Corporate Bonds 0.4%
Short-Term Investments 14.2%
This allocation is presented as a percentage of net assets. Please see the
Schedule of Investments in Securities for a complete listing of the Fund's
portfolio
PUBLISHING BROADCASTING TECHNOLOGY
2
<PAGE> 4
FIVE LARGEST STOCK HOLDINGS
as of 12-31-95
Paging Network, Inc. Telecommunication 1.5%
Service
Tenet Healthcare Corp. Healthcare-Patient Care 1.4%
Whitman Corporation Diversified Operations 1.4%
The E.W. Scripps Co. Media-Publishing 1.4%
BJ Services Co. Oil Well Equipment 1.4%
& Service
CYCLE MAY REWARD MID-CAP STOCKS
We believe the stage now may be set for a
longer-term cycle during which mid-cap
stocks have the potential to outperform large-
cap issues. Given this year's rally in large
caps, we find mid-cap issues very attractive,
based on their relative value and expected
earnings growth.
We are, however, somewhat cautious going
into the new year, and are not totally con-
vinced that the much talked about "soft
landing" has occurred. Even with the Fed's
bias toward easing credit, the economy is slug-
gish, and it remains unclear whether this slow-
down will evolve into a recession. The market
has already basically discounted for slow growth
but, if growth is slower than anticipated, the
stock market could react negatively.
Looking ahead, we will continue to place
emphasis on underfollowed, growing firms
selling at significant discounts from their
private market values. This attention to disci-
pline and value should help to protect the
Fund from sharp declines if the market turns
down -- while providing the potential for
upside appreciation in the meantime.
Thank you for your continued confidence.
/s/ Richard Trent Weiss
Richard T. Weiss
Portfolio Manager
/s/ Marina Carlson
Marina T. Carlson
Portfolio Manager
[Photo of Richard T. Weiss & Marina T. Carlson]
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<TABLE>
<CAPTION>
Growth of an assumed $10,000 Investment
from 5-8-92 to 12-31-95
The Strong Special Fund II S&P Midcap 400 Stock Index S&P 500 Stock Index Average Annual Total Returns
through 12-31-95
- -------------------------- -------------------------- ------------------- ----------------------------
<S> <C> <C> <C>
5-92 10,000 5-92 10,000 5-92 10,000 1-year 25.82%
6-92 9,480 6-92 9,705 6-92 9,857 3-year 17.72%
12-92 11,617 12-92 11,267 12-92 10,680 Since inception 19.16%
6-93 13,149 6-93 11,907 6-93 11,201 (on 5-8-92)
12-93 14,541 12-93 12,839 12-93 11,756
6-94 14,664 6-94 11,901 6-94 11,358
12-94 15,064 12-94 12,378 12-94 11,912
6-95 17,041 6-95 14,559 6-95 14,319
12-95 18,953 12-95 16,209 12-95 16,388
---------
---------
---------
---------
---------
</TABLE>
This graph, provided 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 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 shares.
- --------------------------------------------------------------------------------
(1) Source of index data: Micropal
(2) 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. Excluding such fees and expenses from the Fund's return
quotations has the effect of increasing the performance quoted.
3
<PAGE> 5
SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 85.4%
AIRLINE 2.1%
AMR Corporation (b) 72,500 $ 5,383
Air New Zealand, Ltd. Class B 623,000 2,115
Federal Express Corporation (b) 26,000 1,921
--------
9,419
AUTOMOBILE 0.0%
Mitsubishi Motors Corporation 24,000 195
BANK - MONEY CENTER 1.0%
HSBC Holdings PLC ADR 20,800 3,147
Mitsubishi Bank, Ltd. Japan 17,000 400
Mitsubishi Trust & Banking Corporation 22,000 366
Mitsui Trust & Banking Company, Ltd. 13,000 142
Sakura Bank, Ltd. 27,000 342
--------
4,397
BANK - REGIONAL 2.2%
Old Kent Financial Corporation 119,505 4,915
U.S. Bancorp 154,350 5,190
--------
10,105
BANK - SUPER REGIONAL 1.1%
Barnett Banks, Inc. 85,500 5,045
BEVERAGE - SOFT DRINK 0.2%
Coca-Cola Amatil, Ltd. 122,000 972
BROKERAGE & INVESTMENT MANAGEMENT 0.2%
Nomura Securities Company, Ltd. 49,000 1,067
CHEMICAL 1.2%
Rohm & Haas Company 86,900 5,594
CLOSED-END FUND 0.2%
The Central European Growth Fund PLC 250,000 152
Five Arrows Chile Investment Trust, Ltd.(b) 52,000 140
Jardine Fleming Mutual Fund 490,000 160
NITC Fu-Yuan Fund 449,000 169
Yuan Ta Duo Yuan Fund 476,000 176
--------
797
COMMERCIAL SERVICE 1.7%
Reuters Holdings PLC ADR 89,000 4,906
Rollins Truck Leasing Corporation 255,000 2,837
--------
7,743
COMPUTER - PERIPHERAL EQUIPMENT 1.3%
Seagate Technology, Inc. (b) 121,400 5,767
COMPUTER - PERSONAL & WORKSTATION 1.2%
Sun Microsystems, Inc. (b) 120,400 5,493
COMPUTER SOFTWARE 1.3%
Adobe Systems, Inc. 59,200 3,670
Microsoft Corporation (b) 24,700 2,167
--------
5,837
COMPUTER SYSTEMS 1.1%
Policy Management Systems Corporation (b) 108,200 5,153
CONGLOMERATE 0.6%
Guinness Peat Group PLC 365,000 191
Keppel Corporation, Ltd. 80,000 713
Lonrho PLC 690,000 1,882
--------
2,786
DIVERSIFIED OPERATIONS 5.0%
Corning, Inc. 173,000 $ 5,536
Teledyne, Inc. 236,500 6,060
Tyco International, Ltd. 131,700 4,692
Whitman Corporation 277,500 6,452
--------
22,740
ELECTRIC POWER 1.3%
NIPSCO Industries, Inc. 148,400 5,676
ELECTRONIC PARTS DISTRIBUTION 1.1%
Marshall Industries (b) 153,000 4,915
ELECTRONIC PRODUCTS - MISCELLANEOUS 1.6%
AVX Corporation 42,400 1,124
Hubbell, Inc. Class B 72,400 4,760
Sony Corporation 24,000 1,437
--------
7,321
ELECTRONICS - SEMICONDUCTOR/COMPONENT 3.7%
Dallas Semiconductor Corporation 205,400 4,262
LSI Logic Corporation (b) 85,000 2,784
National Semiconductor Corporation (b) 267,000 5,941
SGS-Thomson Microelectronics ADR (b) 88,000 3,542
--------
16,529
ENGINEERING & CONSTRUCTION 0.1%
Ishikawajima Harima Heavy Industries
Company, Ltd. 44,000 185
Ohmoto Gumi Company, Ltd. 14,000 345
Walker Corporation 340,000 114
--------
644
FINANCE - MISCELLANEOUS 0.2%
Lend Lease Corporation, Ltd. 60,500 876
FOOD 3.5%
CPC International, Inc. 74,500 5,112
Hershey Foods Corporation 84,900 5,519
Nestle SA Sponsored ADR 96,500 5,351
--------
15,982
HEALTHCARE - DRUG/DIVERSIFIED 4.0%
Mallinckrodt Group, Inc. 164,000 5,965
Pharmacia & Upjohn, Inc. (b) 153,100 5,933
Rhone Poulenc Rorer, Inc. 112,900 6,012
--------
17,910
HEALTHCARE - INSTRUMENTATION 1.2%
United States Surgical Corporation 243,000 5,194
HEALTHCARE - MEDICAL SUPPLY 2.5%
McKesson Corporation 106,600 5,397
Sybron International Corporation (b) 242,200 5,752
--------
11,149
HEALTHCARE - PATIENT CARE 2.0%
Columbia/HCA Healthcare Corporation 50,700 2,573
Tenet Healthcare Corporation (b) 311,600 6,466
--------
9,039
HOUSING RELATED 0.1%
Nichiha 10,000 226
INSURANCE - PROPERTY & CASUALTY 3.3%
ACE, Ltd. ADR 125,200 4,977
American International Group, Inc. 61,000 5,642
Mid Ocean, Ltd. 121,100 4,496
--------
15,115
</TABLE>
4
See notes to financial statements
<PAGE> 6
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<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- -------------------------------------------------------------------------------
<S> <C> <C>
LEISURE PRODUCT 1.2%
Eastman Kodak Company 80,000 $ 5,360
LEISURE SERVICE 0.0%
Sydney Aquarium, Ltd. 106,000 205
MEDIA - PUBLISHING 2.7%
Matichon Public Company, Ltd. 16,000 95
The E.W. Scripps Company 160,400 6,316
U.S. West, Inc. Media Group (b) 315,700 5,998
--------
12,409
MEDIA - RADIO/TV 5.6%
Bell Cablemedia PLC ADR (b) 312,500 5,000
Capital Cities/ABC, Inc. 40,000 4,935
Cox Communications, Inc. Class A (b) 283,900 5,536
Tele-Communications, Inc. Class A (b) 298,700 5,936
Turner Broadcasting System, Inc. Class B 145,600 3,786
--------
25,193
METALS & MINING 1.4%
Freeport-McMoRan Copper & Gold, Inc. Class A 195,000 5,460
Posgold, Ltd. 273,800 545
Tambang Timah PT GDR (b) 6,000 71
Tambang Timah PT GDR (Acquired 10/6/95;
Cost $102) (b) (c) 8,000 95
--------
6,171
OIL - NORTH AMERICAN EXPLORATION &
PRODUCTION 4.1%
Barrett Resources Corporation 98,000 2,879
Devon Energy Corporation 231,600 5,906
Enron Oil & Gas Company 258,000 6,192
H S Resources, Inc. 271,400 3,494
--------
18,471
OIL - NORTH AMERICAN INTEGRATED 1.2%
Phillips Petroleum Company 160,300 5,470
OIL WELL EQUIPMENT & SERVICE 3.2%
BJ Services Company (b) 214,000 6,206
Offshore Logistics, Inc. (b) 208,300 2,630
Petroleum Geo-Services A/S ADR (b) 226,000 5,650
--------
14,486
PAPER & FOREST PRODUCTS 0.4%
Fletcher Challenge, Ltd. Forestry Division 1,057,438 1,505
Fletcher Challenge, Ltd. Ordinary Division 151,000 348
--------
1,853
PRECIOUS METAL/GEM/STONE 2.7%
De Beers Consolidated Mines, Ltd. ADR 181,000 5,475
Newmont Mining Company 121,500 5,498
Western Deep Levels, Ltd. ADR 32,700 1,071
--------
12,044
REAL ESTATE 0.4%
Amoy Properties, Ltd. 1,280,000 1,275
Diamond City Company 8,000 61
TOC Company, Ltd. 31,000 309
--------
1,645
RETAIL - DEPARTMENT STORE 1.0%
May Department Stores Company 111,000 4,690
RETAIL - DISCOUNT & VARIETY 1.2%
Toys 'R' Us, Inc. (b) 254,500 5,535
RETAIL - FOOD CHAIN 3.7%
Albertson's, Inc. 158,500 $ 5,210
American Stores Company 163,500 4,374
FamilyMart 7,000 316
The Kroger Company (b) 158,100 5,929
The Stop & Shop Companies, Inc. (b) 40,000 925
--------
16,754
RETAIL - MAJOR CHAIN 1.1%
Dayton Hudson Corporation 63,700 4,778
RETAIL - SPECIALTY 2.5%
The Limited, Inc. 328,000 5,699
Ross Stores, Inc. 294,000 5,623
--------
11,322
SAVINGS & LOAN 0.5%
Washington Federal Savings & Loan Association 87,300 2,237
SHIPPING 0.5%
Anangel American Shipholdings, Ltd. ADR 211,200 2,349
Cosco Investments, Ltd. 88,000 123
--------
2,472
SHOE & APPAREL MANUFACTURING 1.1%
Inner Mongolia Erdos Cashmere 'B' (b) 192,000 72
Simint SPA (b) 43,000 47
Warnaco Group, Inc. Class A 191,000 4,775
--------
4,894
STEEL 0.0%
Chubu Steel Plate Company, Ltd. (b) 17,000 98
Sahavirya Steel Industries PCL (Fgn Reg)(b) 38,000 50
--------
148
TELECOMMUNICATION SERVICE 4.0%
AirTouch Communications (b) 204,800 5,786
Hong Kong Telecommunications, Ltd. 38,100 676
MCI Communications Corporation 188,600 4,927
Paging Network, Inc. (b) 270,400 6,591
--------
17,980
TELEPHONE 1.9%
Telefonos de Mexico S.A. ADR Series L 116,000 3,698
Telephone & Data Systems, Inc. 125,700 4,965
--------
8,663
--------
TOTAL COMMON STOCKS (Cost $319,811) 386,466
CONVERTIBLE NOTES 0.4%
LSI Logic Corporation Convertible Subordinated
Notes, 5.50%, Due 3/15/01 (Acquired 3/16/94,
11/01/94; Cost $748) (c) (Amortized Cost $704) $ 665 1,834
CASH EQUIVALENTS (a) 13.1%
COMMERCIAL PAPER 12.9%
DISCOUNTED 12.5%
CNA Financial Corporation
Due 1/04/96 18,900 18,894
Cole Taylor Finance Company
Due 1/05/96 8,500 8,496
Fleet Mortgage Group, Inc.
Due 1/25/96 3,450 3,437
General Signal Corporation
Due 1/23/96 (Acquired 12/04/95; Cost $6,279) (c) 6,300 6,279
Due 1/29/96 (Acquired 12/04/95; Cost $11,947) (c) 12,000 11,947
Potomac Capital Investment Corporation
Due 1/16/96 7,700 7,681
--------
56,734
</TABLE>
5
See notes to financial statements.
<PAGE> 7
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- -----------------------------------------------------------------------------------
<S> <C> <C>
INTEREST BEARING, DUE UPON DEMAND 0.4%
American Family Financial, 5.49% $ 70 $ 70
General Mills, Inc., 5.58% 518 518
Pitney Bowes Credit Corporation, 5.49% 3 3
Sara Lee Corporation, 5.47% 918 918
Wisconsin Electric Power Company, 5.53% 124 124
--------
1,633
--------
Total Commercial Paper 58,367
UNITED STATES GOVERNMENT ISSUES 0.2%
United States Treasury Bills, Due 2/29/96 860 853
--------
Total Cash Equivalents (Cost $59,220) 59,220
TOTAL INVESTMENTS IN SECURITIES --------
(Cost $379,735) 98.9% 447,520
Other Assets and Liabilities, Net 1.1% 4,853
--------
NET ASSETS 100.0% $452,373
========
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
- -------------------------------------------
VALUE UREALIZED
SETTLEMENT IN USD APPRECIATION
DATE (In Thousands) (In Thousands)
- -------------------------------------------------------------------------------------
Sold:
570,078,000 JPY 5/7/96 $5,517 $236
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- -------------------------------------------------------------------------------------
United States 83.9%
United Kingdom 2.7%
Bermuda 2.1%
Hong Kong 1.4%
Japan 1.2%
Norway 1.2%
South Africa 1.2%
Switzerland 1.2%
New Zealand 1.0%
France 0.8%
Mexico 0.8%
Australia 0.6%
Luxembourg 0.5%
Singapore 0.2%
Taiwan 0.1%
Other Assets and Liabilities, Net 1.1%
------
Total 100.0%
======
</TABLE>
LEGEND
- ------
(a) Cash equivalents includes any security which has a maturity of less
than one year.
(b) Non-income producing security.
(c) Restricted security.
All principal amounts and costs are stated in thousands.
Percentages are stated as a percent of net assets.
CURRENCY ABBREVIATION
- ---------------------
JPY Japanese Yen
6
See notes to financial statements.
<PAGE> 8
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
For the Year Ended December 31, 1995 (In Thousands)
INCOME:
Dividends $ 4,767
Interest 2,607
-------
Total Income 7,374
EXPENSES:
Investment Advisory Fees 3,755
Custodian Fees 122
Shareholder Servicing Costs 505
Reports to Shareholders 25
Federal and State Registration Fees 51
Other 51
--------
Total Expenses 4,509
--------
NET INVESTMENT INCOME 2,865
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 19,204
Futures Contracts, Options and Forward Foreign Currency Contracts 453
Foreign Currencies (2)
Change in Unrealized Appreciation/Depreciation on:
Investments 63,614
Futures Contracts, Options and Forward Foreign Currency Contracts 254
-------
NET GAIN 83,523
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $86,388
=======
</TABLE>
See notes to financial statements.
7
<PAGE> 9
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
December 31, 1995
(In Thousands, Except Per Share Amounts)
ASSETS:
Investments in Securities, at Value (Cost of $379,735) $ 447,520
Receivable from Brokers for Securities and
Forward Foreign Currency Contracts Sold 6,101
Dividends and Interest Receivable 364
Other Assets 319
----------
Total Assets 454,304
LIABILITIES:
Payable to Brokers for Securities Purchased 996
Accrued Operating Expenses and Other Liabilities 935
----------
Total Liabilities 1,931
----------
NET ASSETS $ 452,373
==========
Capital Shares
Authorized 10,000,000
Outstanding 26,554
NET ASSET VALUE PER SHARE $ 17.04
==========
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1995 and 1994 (In Thousands)
1995 1994
--------- ---------
OPERATIONS:
Net Investment Income $ 2,865 $ 1,912
Net Realized Gain 19,655 12,782
Change in Unrealized Appreciation/Depreciation 63,868 (10,293)
-------- ----------
Increase in Net Assets Resulting from Operations 86,388 4,401
CAPITAL SHARE TRANSACTIONS 82,495 151,981
DISTRIBUTIONS:
From Net Investment Income (2,874) (1,900)
In Excess of Net Investment Income (848) --
From Net Realized Gains (13,221) (5,255)
--------- ---------
TOTAL INCREASE IN NET ASSETS 151,940 149,227
NET ASSETS:
Beginning of Year 300,433 151,206
------- -------
End of Year $452,373 $300,433
======== ========
</TABLE>
8
See notes to financial statements.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1995
1. ORGANIZATION
The Strong Special Fund II, Inc. is a diversified, open-end management
investment company registered 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 - Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean between 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 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. Aggregate cost and fair value
of these restricted securities held at December 31, 1995 were (in
thousands) $19,076 and $20,155, respectively, representing 4.5% of
the net assets of the Fund.
(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 determined
by comparing the identified cost of the security lot sold with the
net sales proceeds.
(D) Futures - Upon entering into a futures contract, the
Fund pledges to the broker cash, U.S. government securities or other
liquid, high-grade debt obligations 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 - 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.
(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.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
December 31, 1995
(H) Additional Investment Risk -- The use of futures
contracts, options, foreign denominated assets and forward foreign
currency exchange contracts for purposes of hedging the Fund's
investment portfolio involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of
assets and liabilities. The predominant risk with futures contracts
is an imperfect correlation between the value of the contracts and
the underlying securities. Foreign denominated assets and forward
foreign currency exchange contracts may involve greater risks than
domestic transactions, including currency, political and economic,
regulatory and market risks.
(I) 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. NET ASSETS
Net assets as of December 31, 1995 were as follows (in thousands):
<TABLE>
<S> <C>
Capital Stock $366,261
Undistributed Net Investment Loss (365)
Undistributed Net Realized Gain 18,456
Net Unrealized Appreciation 68,021
--------
$452,373
========
</TABLE>
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31,
1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares Sold 9,208 $141,211 16,549 $240,047
Dividends Reinvested 1,159 16,936 490 7,151
Shares Redeemed (4,931) (75,652) (6,631) (95,217)
----- -------- ------ --------
5,436 $ 82,495 10,408 $151,981
===== ======== ====== ========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom
certain officers and directors of the Fund are affiliated, provides
investment advisory 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.
The amount payable to the Advisor at December 31, 1995 was (in
thousands) $386 and unaffiliated directors' fees were (in thousands) $8.
6. INVESTMENT TRANSACTIONS
Aggregate purchases and sales of long-term securities for the year ended
December 31, 1995 were (in thousands) $346,870 and $300,300, respectively.
7. INCOME TAX INFORMATION
At December 31, 1995, the investment cost and gross unrealized
appreciation and depreciation on investments for Federal income tax
purposes were as follows (in thousands):
<TABLE>
<S> <C>
Aggregate Investment Cost $380,458
========
Aggregate Unrealized:
Appreciation $ 75,818
Depreciation (8,756)
--------
$ 67,062
</TABLE> ========
For corporate shareholders in the Fund, the percentage of dividend income
distributed for the year ended December 31, 1995, which is designated as
qualifying for the dividends-received deduction is 89.0%.
10
<PAGE> 12
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
The following presents information relating to a share of capital stock of the
Fund, outstanding for the entire period.
<TABLE>
<CAPTION>
1995 1994 1993 1992(a)
---- ---- ----- -------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 14.23 $ 14.12 $ 11.33 $ 10.00
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------
Net Investment Income 0.12 0.11 0.06 0.02
Net Realized and Unrealized Gains on Investments 3.42 0.41 2.79 1.57
------ -------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS 3.54 0.52 2.85 1.59
LESS DISTRIBUTIONS
- ------------------
From Net Investment Income (0.12) (0.11) (0.06) (0.02)
In Excess of Net Investment Income (0.03) - - -
From Net Realized Gains (0.58) (0.30) - (0.24)
------ ------- ------ -------
TOTAL DISTRIBUTIONS (0.73) (0.41) (0.06) (0.26)
------ ------- ------ -------
NET ASSET VALUE, END OF PERIOD $17.04 $ 14.23 $ 14.12 $ 11.33
====== ======== ======= =======
Total Return +25.8% +3.6% +25.2% +16.2%
Net Assets, End of Period (In Thousands) $452,373 $300,433 $151,206 $26,649
Ratio of Expenses to Average Net Assets 1.2% 1.1% 1.1% 1.6%*
Ratio of Net Investment Income to Average Net Assets 0.8% 0.9% 0.5% 0.3%*
Portfolio Turnover Rate 91.1% 74.8% 103.1% 249.5%
</TABLE>
* Calculated on an annualized basis.
(a) Inception date is May 8, 1992.
Total return and portfolio turnover rate are not annualized.
11
<PAGE> 13
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, 1995, and the related statement of operations for the year then
ended, the statements 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, 1995 by correspondence with the custodians 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
Strong Special Fund II, Inc. as of December 31, 1995, 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 8, 1996
12
<PAGE> 14
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
