THE STRONG
SPECIAL FUND II
ANNUAL REPORT o DECEMBER 31, 1996
[PICTURE OF PIE CHART]
[PHOTO OF FAMILY] [PICTURE OF BAR GRAPH]
DESIGNED TO SEEK CAPITAL GROWTH
BY INVESTING PRIMARILY IN
MEDIUM-SIZED COMPANIES
[STRONG LOGO]
STRONG FUNDS
<PAGE>
THE STRONG
SPECIAL FUND II
ANNUAL REPORT o DECEMBER 31, 1996
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Special Fund II ...........................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities ................................4
Statement of Operations ..............................................6
Statement of Assets and Liabilities ..................................7
Statement of Changes in Net Assets ...................................7
Notes to Financial Statements ........................................8
FINANCIAL HIGHLIGHTS .....................................................10
REPORT OF INDEPENDENT ACCOUNTANTS ........................................11
<PAGE>
THE STRONG SPECIAL FUND II
FOR THE YEAR, THE MARKET PROVED TO BE STRONGER THAN WE EXPECTED.
In pursuit of capital growth, the Strong Special Fund II invests at least 70% of
its net assets in equity securities. It currently emphasizes medium-size
companies that the Fund's Advisor believes are under-researched and attractively
valued.
ASSET ALLOCATION
Based on net assets as of 12-31-96
[PIE CHART]
Stocks 91.0%
Short-Term Investments 9.0%
TOP FIVE SECTORS
Based on net assets as of 12-31-96
SECTOR % OF NET ASSETS
- ------------------------------------------------
Technology 22.0%
................................................
Consumer Cyclical 12.0%
................................................
Financial 11.8%
................................................
Energy 11.3%
................................................
Basic Material 8.5%
................................................
Please see the Schedule of Investments in Securities
for a complete listing of the Fund's portfolio.
STOCKS CLIMBED, BUT NOT SMOOTHLY
For the year, the market proved to be stronger than we expected. The broad-based
S&P 500 Index returned 22.96% for the year. There were plenty of peaks and
valleys on the way to that number, though. Small- and mid-size stocks were
powerful in the first several months of the year, then suffered around the
middle of the year. They regained some of their footing, but ultimately
large-capitalization stocks beat them for the year. Thus, the S&P MidCap 400
Stock Index's 19.20% gain trailed the broader S&P 500 Stock Index.*
Our return for the year was 18.15%. That's a robust figure, but it is a little
below the return of our benchmark, the S&P MidCap 400. This slight difference is
not entirely surprising. The market has been focused on earnings, with little
regard to valuation, to which we pay close attention. Therefore, high-priced,
momentum-driven stocks continued to move up as long as they delivered a certain
level of earnings.
We positioned the Fund somewhat defensively around the beginning of the second
quarter. This kept the Fund from fully realizing the gains that many
higher-priced growth stocks posted early in that quarter. It also protected the
portfolio from the sharp declines that hit small- and medium-size stocks in the
summer. The market rallied strongly in the second half of the year, but as time
progressed the focus increasingly fell on momentum stocks-stocks that, for
various reasons, attract intense investor interest.
MANY FACTORS CONTRIBUTED TO HEALTHY RETURNS
The Fund benefited from more than our defensive stance at mid-year. Late in the
summer we began to identify many solid opportunities, particularly in two
sectors. After an early summer downturn, technology began to recover, and rising
natural-resource prices helped to strengthen energy stocks.
We've also been able to take profits in some areas. For example, toward the end
of the year we slowly reduced our sizable position in retail. We had purchased
these stocks based on our perception that the market was unduly pessimistic
about their prospects. Our more optimistic view seems to have won out-and as the
stocks have gone up, we have selectively sold them off.
APPLYING OUR DISCIPLINE IN TODAY'S MARKET
Both market forces and our stock-selection criteria have made certain parts of
our portfolio especially attractive going into 1997. Our media stocks, for
example, appear to have bottomed out early in 1996's fourth quarter. They were a
drag on returns for most of the year, but now seem set for improved performance.
FIVE LARGEST STOCK HOLDINGS
Based on net assets as of 12-31-96
% OF NET
SECURITY INDUSTRY ASSETS
- --------------------------------------------------------------------------------
Comcast Corporation Media-Radio/TV 1.7%
Class A
................................................................................
Cox Communications, Inc. Media-Radio/TV 1.6%
Class A
................................................................................
Unilever NV Food 1.5%
................................................................................
Seagate Technology Inc. Computer- 1.5%
Peripheral Equipment
................................................................................
CPC International, Inc. Food 1.4%
................................................................................
Please see the Schedule of Investments in Securities for a complete listing of
the Fund's portfolio.
2
<PAGE>
Although we don't see quite as many opportunities now as we did at points in
1996, we are pleased with the prospects in some of the portfolio's main sectors.
Technology is a good example. We have identified companies in some less
traditional areas in this sector. Should another correction hit technology,
these are the types of stocks that may be insulated from the damage.
As we seek out the best opportunities in the year ahead, we will place renewed
emphasis on selecting high-quality companies for the portfolio-those companies
with superior management teams and a competitive advantage within their
industry. In a market full of lofty valuations, we feel it presents too much
risk not to go with the best-quality companies.
Looking for high-quality management is consistent with our private-value
approach to investing. We evaluate companies as if we were contemplating
purchasing the entire firm, and determining the price we would be willing to pay
(its private-market value). When a stock price does not reflect the strength of
this private value- usually because not many analysts are paying attention to
the stock- we will consider adding it to the portfolio.
OTHER POTENTIAL AREAS OF EMPHASIS
Over the next six months, we may add to our foreign holdings. One reason to
venture abroad is that prices in the U.S. market are somewhat high. At the same
time, we are finding more suitable companies overseas.
We will be working to lower the Fund's median market capitalization. This figure
has moved up a little recently, partly because of appreciation of the stocks in
the portfolio and partly because of the nature of the opportunities we have
found. By heightening our focus on smaller and mid-size firms, we plan to bring
Fund's market cap down from its year-end level of $3.85 billion. We intend to
keep the Fund in line with its historic character.
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 AND MARINA T. CARLSON]
- --------------------------------------------------------------------------------
AVERAGE ANNUAL
TOTAL RETURNS(1)
As of 12-31-96
1-YEAR 18.15%
3-YEAR 15.48%
SINCE INCEPTION 18.94%
(on 5-8-92)
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 12-31-96
[GRAPH]
THE STRONG S&P 500 Lipper Growth
SPECIAL FUND II Stock Index* Funds Index*
4-92 10,000 10,000 10,000
12-92 11,617 10,680 10,922
12-93 14,541 11,756 12,230
12-94 15,064 11,912 12,038
12-95 18,953 16,388 15,969
12-96 22,393 20,151 18,760
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Growth Funds Index.
Results include the reinvestment of all dividends and capital gains
distributions. Performance is historical and does not represent future results.
Investment returns and principal value vary, and you may have a gain or loss
when you sell shares. To equalize time periods, the indexes' performance was
prorated for the month of May 1992.
- --------------------------------------------------------------------------------
* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market, without regard to company size. The S&P MidCap 400 Stock
Index is an unmanaged index generally representative of the market for the
stocks of mid-sized U.S. companies. The Lipper Growth Funds Index is an
equally-weighted performance index of the largest funds in this Lipper
category. Source of the S&P index data is Micropal. Source of the Lipper
index data is Lipper Analytical Services, Inc.
1 The Fund's returns include the effect of deducting the Fund's expenses, but
do not include charges and expenses attributable to any particular
insurance product. Including such insurance fees and expenses from the
Fund's return quotations has the effect of decreasing the performance
quoted.
3
<PAGE>
SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1996
- --------------------------------------------------------------------------------
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- --------------------------------------------------------------------------------
COMMON STOCKS 91.0%
AEROSPACE & DEFENSE 1.2%
Litton Industries, Inc. (b) 155,000 $ 7,382
AIRLINE 0.2%
Air New Zealand, Ltd. Class B 401,045 1,087
BANK - MONEY CENTER 2.4%
Bayerische Hypotheken- und Wechsel-Bank AG 110,000 3,323
Deutsche Bank AG 40,000 1,869
Hong Leong Finance, Ltd. (Fgn Reg) 130,000 452
Toronto-Dominion Bank Ontario 336,000 8,690
United Overseas Bank, Ltd. 62,000 691
-------
15,025
BANK - REGIONAL 2.2%
Mercantile Bancorporation, Inc. 142,500 7,321
Old Kent Financial Corporation 136,085 6,498
-------
13,819
BANK - SUPER REGIONAL 2.7%
Barnett Banks, Inc. 217,000 8,924
First Union Corporation 107,000 7,918
-------
16,842
BEVERAGE - SOFT DRINK 0.1%
Coca-Cola Amatil, Ltd. 38,600 412
BROKERAGE & INVESTMENT MANAGEMENT 2.1%
Equity Residential Properties Trust 80,000 3,300
Kimco Realty Corporation 148,200 5,168
New Germany Fund, Inc. 50,000 669
Security Capital Pacific Trust 173,800 3,976
-------
13,113
CHEMICAL 1.2%
IMC Global, Inc. 187,900 7,352
CHEMICAL - SPECIALTY 1.2%
Cabot Corporation 301,600 7,578
CLOSED-END FUND 0.1%
The Central European Growth Fund PLC 392,000 416
Jardine Fleming Fund 416,000 170
-------
586
COMMERCIAL SERVICE 1.1%
Reuters Holdings PLC ADR 88,000 6,732
COMPUTER - PERIPHERAL EQUIPMENT 1.5%
Seagate Technology, Inc. (b) 232,000 9,164
COMPUTER SOFTWARE 3.6%
Cabletron Systems, Inc. (b) 210,000 6,982
Silicon Graphics, Inc. (b) 342,000 8,721
Sybase, Inc. (b) 440,000 7,343
-------
23,046
COMPUTER SYSTEMS 0.7%
Policy Management Systems Corporation (b) 100,000 4,613
CONGLOMERATE 0.2%
Guinness Peat Group PLC 441,650 256
Hutchison Whampoa, Ltd. ADR 18,000 702
Lonrho PLC 259,000 552
-------
1,510
DIVERSIFIED OPERATIONS 1.2%
Whitman Corporation 337,400 7,718
ELECTRIC POWER 1.4%
NIPSCO Industries, Inc. 214,700 8,507
ELECTRICAL EQUIPMENT 1.2%
Keystone International, Inc. 390,000 7,849
ELECTRONIC PARTS DISTRIBUTION 2.1%
Arrow Electronics, Inc. (b) 152,000 8,132
Marshall Industries (b) 165,000 5,053
-------
13,185
ELECTRONIC PRODUCTS - MISCELLANEOUS 2.3%
AVX Corporation 358,600 7,710
Hubbell, Inc. Class B 163,000 7,050
-------
14,760
ELECTRONICS - SEMICONDUCTOR/
COMPONENT 6.3%
Analog Devices, Inc. (b) 232,000 7,859
Intel Corporation 63,000 8,249
KLA Instruments Corporation (b) 224,300 7,963
SGS-Thomson Microelectronics (b) 125,000 8,750
Texas Instruments, Inc. 114,000 7,267
-------
40,088
ENERGY - ALTERNATE SOURCE 1.2%
Calpine Corporation (b) 380,000 7,600
ENGINEERING & CONSTRUCTION 0.1%
Italian-Thai Development PCL (Fgn Reg) 43,000 275
Siam Cement PCL (Fgn Reg) 8,000 251
Walker Corporation 340,000 235
-------
761
FINANCE - MISCELLANEOUS 0.0%
Finance One PCL (Fgn Reg) 100,000 203
FOOD 4.2%
CPC International, Inc. 115,400 8,944
Nestle SA Sponsored ADR 158,000 8,433
Unilever NV 53,500 9,376
-------
26,753
HEALTHCARE - DRUG/DIVERSIFIED 1.1%
Zeneca Group PLC 250,000 7,051
HEALTHCARE - INSTRUMENTATION 1.2%
Sofamor/Danek Group, Inc. (b) 245,000 7,473
HEALTHCARE - MEDICAL SUPPLY 2.6%
McKesson Corporation 141,500 7,924
Sybron International Corporation (b) 255,000 8,415
-------
16,339
HEALTHCARE - PATIENT CARE 1.1%
Tenet Healthcare Corporation 306,800 6,711
HOUSEHOLD APPLIANCES & FURNISHINGS 0.3%
Philips Electronics NV ADR 54,000 2,160
HOUSING RELATED 1.4%
Owens Corning 201,400 8,585
INSURANCE - PROPERTY & CASUALTY 2.4%
ACE, Ltd. 129,500 7,786
American International Group, Inc. 70,000 7,578
-------
15,364
LEISURE PRODUCT 1.1%
Eastman Kodak Company 89,000 7,142
MEDIA - PUBLISHING 1.0%
The E.W. Scripps Company Ohio Class A 178,300 6,240
MEDIA - RADIO/TV 6.9%
Bell Cablemedia PLC ADR (b) 361,700 5,606
Comcast Corporation Class A 615,011 10,955
Cox Communications, Inc. Class A (b) 425,900 9,849
TCI Satellite Entertainment, Inc. (b) 56,000 553
Tele Communications, Inc. Class A (b) 585,000 7,642
Tele Communications, Inc. Liberty Media
Group Series A (b) 310,000 8,854
-------
43,459
See notes to financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- --------------------------------------------------------------------------------
METALS & MINING 1.2%
Freeport-McMoRan Copper & Gold, Inc. Class A 257,700 $ 7,248
Minsur SA 110,496 383
--------
7,631
OIL - NORTH AMERICAN EXPLORATION
& PRODUCTION 7.8%
Barrett Resources Corporation (b) 180,600 7,698
Burlington Resources, Inc. 144,000 7,254
Devon Energy Corporation 255,400 8,875
Enron Oil & Gas Company 292,000 7,373
H S Resources, Inc. (b) 277,000 4,571
Union Pacific Resources Group, Inc. 292,000 8,541
United Meridian Corporation (b) 99,500 5,149
--------
49,461
OIL WELL EQUIPMENT & SERVICE 2.3%
Baker Hughes, Inc. 200,000 6,900
BJ Services Company (b) 150,000 7,650
--------
14,550
PAPER & FOREST PRODUCTS 2.8%
Fletcher Challenge, Ltd. Forestry Division 566,000 947
The Mead Corporation 140,000 8,137
Willamette Industries, Inc. 126,000 8,773
--------
17,857
PRECIOUS METAL/GEM/STONE 2.0%
De Beers Consolidated Mines, Ltd. ADR 240,000 6,780
Newmont Mining Company 125,300 5,607
--------
12,387
RAILROAD 0.8%
Canadian National Railway Company 141,200 5,366
REAL ESTATE 0.0%
Land & House PCL (Fgn Reg) 28,800 210
RETAIL - DEPARTMENT STORE 0.9%
May Department Stores Company 127,300 5,951
RETAIL - FOOD CHAIN 2.0%
Albertson's, Inc. 154,400 5,501
The Kroger Company (b) 150,200 6,984
--------
12,485
RETAIL - MAJOR CHAIN 1.2%
Sears Canada, Inc. 211,500 1,574
Toys 'R' Us, Inc. (b) 204,000 6,120
--------
7,694
RETAIL - RESTAURANT 0.7%
Brinker International, Inc. (b) 290,000 4,640
RETAIL - SPECIALTY 1.6%
The Limited, Inc. 305,600 5,615
OfficeMax, Inc. (b) 432,000 4,590
--------
10,205
SHIPPING 0.1%
Anangel American Shipholdings, Ltd. ADR 51,100 409
SHOE & APPAREL MANUFACTURING 1.3%
Warnaco Group, Inc. Class A 285,000 8,443
STEEL 0.1%
Companhia Vale do Rio Doce Sponsored ADR 30,000 582
TELECOMMUNICATION SERVICE 5.4%
AirTouch Communications, Inc. (b) 305,000 7,701
MCI Communications Corporation 168,000 5,491
Mobilemedia Corporation (b) 267,800 117
Omnipoint Corporation (b) 275,000 5,294
Paging Network, Inc. (b) 450,500 6,870
U.S. West, Inc. Media Group (b) 457,000 8,454
--------
33,927
TELEPHONE 1.2%
Telephone & Data Systems, Inc. 205,000 7,431
--------
TOTAL COMMON STOCKS (COST $480,155) 575,438
SHORT-TERM INVESTMENTS (a) 9.1%
COMMERCIAL PAPER
DISCOUNTED 8.9%
ConAgra, Inc., Due 1/08/97 $20,400 20,380
Financial Federal Corporation, Due 1/06/97 5,000 4,997
Pennsylvania Power & Light Company, Due 1/06/97 1,700 1,699
RJR Nabisco, Inc., Due 1/02/97 5,900 5,900
Tupperware Corporation, Due 1/02/97 8,000 8,000
U.S. West Capital Funding, Inc.:
Due 1/09/97 (Cost $3,784; Acquired 12/13/96) (c) 3,800 3,796
Due 1/10/97 (Cost $11,248; Acquired 12/12/96) (c) 11,300 11,285
--------
56,057
INTEREST BEARING, DUE UPON DEMAND 0.2%
American Family Financial Services, Inc., 5.51% 29 29
Johnson Controls, Inc., 5.53% 913 913
Warner Lambert Company, 5.48% 297 297
Wisconsin Electric Power Company, 5.55% 61 61
--------
1,300
--------
TOTAL SHORT-TERM INVESTMENTS
(COST $57,357) 57,357
--------
TOTAL INVESTMENTS IN SECURITIES
(COST $537,512) 100.1% 632,795
Other Assets and Liabilities, Net (0.1%) (854)
--------
NET ASSETS 100.0% $631,941
========
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------------------------------------------------
United States .........................................85.5%
United Kingdom .........................................3.2
Canada .................................................2.5
Netherlands ............................................1.8
France .................................................1.4
Switzerland ............................................1.3
Bermuda ................................................1.2
South Africa ...........................................1.1
Germany ................................................0.9
New Zealand ............................................0.4
Singapore ..............................................0.2
Australia ..............................................0.1
Brazil .................................................0.1
Hong Kong ..............................................0.1
Luxembourg .............................................0.1
Peru ...................................................0.1
Thailand ...............................................0.1
Other Assets and Liabilities, Net .....................(0.1)
------
Total 100.0%
======
LEGEND
- ------
(a) Short-term investments include 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.
See notes to financial statements.
5
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1996 (In Thousands)
INCOME:
Dividends $ 6,900
Interest 3,689
-------
Total Income 10,589
EXPENSES:
Investment Advisory Fees 5,515
Custodian Fees 127
Shareholder Servicing Costs 648
Other 172
-------
Total Expenses 6,462
-------
NET INVESTMENT INCOME 4,127
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 63,805
Futures Contracts and Forward Foreign Currency Contracts (2,248)
Foreign Currencies 1
Change in Unrealized Appreciation/Depreciation on:
Investments 27,498
Forward Foreign Currency Contracts (236)
Foreign Currencies (4)
-------
NET GAIN 88,816
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $92,943
=======
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1996
(In Thousands, Except Per Share Amounts)
ASSETS:
Investments in Securities, at Value (Cost of $537,512) $632,795
Receivable from Brokers for Securities Sold 529
Dividends and Interest Receivable 628
Other Assets 724
--------
Total Assets 634,676
LIABILITIES:
Payable to Brokers for Securities Purchased 2,076
Accrued Operating Expenses and Other Liabilities 659
--------
Total Liabilities 2,735
--------
NET ASSETS $631,941
========
Capital Shares Outstanding (Unlimited Number Authorized) 32,844
NET ASSET VALUE PER SHARE $19.24
======
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------
(In Thousands)
<CAPTION>
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
OPERATIONS:
<S> <C> <C>
Net Investment Income $ 4,127 $ 2,865
Net Realized Gain 61,558 19,655
Change in Unrealized Appreciation/Depreciation 27,258 63,868
-------- --------
Increase in Net Assets Resulting from Operations 92,943 86,388
CAPITAL SHARE TRANSACTIONS 110,102 82,495
DISTRIBUTIONS:
From Net Investment Income (4,127) (2,874)
In Excess of Net Investment Income (28) (848)
From Net Realized Gains (19,322) (13,221)
-------- --------
TOTAL INCREASE IN NET ASSETS 179,568 151,940
NET ASSETS:
Beginning of Period 452,373 300,433
-------- --------
End of Period $631,941 $452,373
======== ========
See notes to financial statements.
</TABLE>
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1996
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 valuation obtained from a
commercial pricing service, otherwise sale or bid prices are used.
Securities for which market quotations are not readily available, when
held by the Fund, 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, 1996 were (in thousands) $15,032 and
$15,081, respectively, representing 2.4% 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 or other investments equal to the minimum "initial
margin" requirements of the exchange. The Fund also receives from or
pays to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin," and are recorded as unrealized gains or losses.
When the futures contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(E) Options -- 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.
8
<PAGE>
- --------------------------------------------------------------------------------
(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets, forward foreign currency exchange
contracts and other similar instruments 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) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
(J) 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, 1996 were as follows (in thousands):
Capital Stock $476,362
Undistributed Net Investment Income 223
Undistributed Net Realized Gain 60,077
Net Unrealized Appreciation 95,279
--------
$631,941
========
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31, 1996
and 1995 were as follows (in thousands):
1996 1995
---- ----
Shares Dollars Shares Dollars
------ ------- ------ -------
Shares Sold 11,817 $209,746 9,208 $141,211
Dividends Reinvested 1,354 23,469 1,159 16,936
Shares Redeemed (6,881) (123,113) (4,931) (75,652)
----- -------- ----- --------
6,290 $110,102 5,436 $ 82,495
===== ======== ===== ========
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, 1996 and unaffiliated
directors' fees for 1996 were (in thousands) $535 and $9, respectively.
6. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year
ended December 31, 1996 were (in thousands) $530,260 and $434,104,
respectively.
7. INCOME TAX INFORMATION
At December 31, 1996, the investment cost, gross unrealized appreciation
and depreciation on investments for Federal income tax purposes were as
follows (in thousands):
Aggregate Investment Cost $538,294
========
Aggregate Unrealized:
Appreciation $112,221
Depreciation (17,720)
--------
$ 94,501
========
For corporate shareholders in the Fund, the percentage of dividend income
distributed for the year ended December 31, 1996 which is designated as
qualifying for the dividends-received deduction is 22.9%.
9
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
12-31-96 12-31-95 12-31-94 12-31-93 12-31-92(b)
-------- -------- -------- -------- -----------
SELECTED PER-SHARE DATA(a)
- --------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.04 $ 14.23 $ 14.12 $ 11.33 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income 0.13 0.12 0.11 0.06 0.02
Net Realized and Unrealized Gains on Investments 2.87 3.42 0.41 2.79 1.57
-------- -------- -------- -------- --------
Total from Investment Operations 3.00 3.54 0.52 2.85 1.59
LESS DISTRIBUTIONS:
From Net Investment Income (0.13) (0.12) (0.11) (0.06) (0.02)
In Excess of Net Investment Income -- (0.03) -- -- --
From Net Realized Gains (0.67) (0.58) (0.30) -- (0.24)
-------- -------- -------- -------- --------
Total Distributions (0.80) (0.73) (0.41) (0.06) (0.26)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 19.24 $ 17.04 $ 14.23 $ 14.12 $ 11.33
======== ======== ======== ======== ========
TOTAL RETURN +18.2% +25.8% +3.6% +25.2% +16.2%
RATIOS AND SUPPLEMENTAL DATA
- ----------------------------
Net Assets, End of Period (In Thousands) $631,941 $452,373 $300,433 $151,206 $ 26,649
Ratio of Expenses to Average Net Assets 1.2% 1.2% 1.1% 1.1% 1.6%*
Ratio of Net Investment Income to Average Net Assets 0.7% 0.8% 0.9% 0.5% 0.3%*
Portfolio Turnover Rate 89.8% 91.1% 74.8% 103.1% 249.5%
Average Commission Rate Paid(c) $ 0.0505
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the Fund outstanding for the entire period.
(b) Inception date is May 8, 1992. Total return and portfolio turnover rate are not annualized.
(c) Disclosure required, effective for reporting periods beginning after September 1, 1995.
</TABLE>
10
<PAGE>
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, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of 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, 1996 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, 1996, 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 3, 1997
11
<PAGE>
NOTES
- --------------------------------------------------------------------------------
12
<PAGE>
[STRONG LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936
Milwaukee, Wisconsin 53201
http://www.strong-funds.com
Strong Funds are offered by prospectus only.
4623A97
