<PAGE>
THE STRONG
SPECIAL FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
[PIE CHART OF ASSET DIVERSIFICATION EMPHASIZING STOCKS]
[STRONG FUNDS LOGO]
STRONG FUNDS
<PAGE>
THE STRONG
SPECIAL FUND II
SEMI-ANNUAL REPORT o JUNE 30, 1997
TABLE OF CONTENTS
INVESTMENT REVIEW
The Strong Special Fund II ...........................................2
FINANCIAL INFORMATION
Schedule of Investments in Securities ................................4
Statement of Assets and Liabilities ..................................6
Statement of Operations ..............................................7
Statement of Changes in Net Assets ...................................8
Notes to Financial Statements ........................................9
FINANCIAL HIGHLIGHTS .....................................................11
<PAGE>
THE STRONG SPECIAL FUND II
THIS FUND IS POSITIONED TO DO WELL WHEN SOFTNESS HITS THE MARKET'S CURRENT
LEADERS, AND CONTINUE TO KEEP PACE IN A HEALTHY MARKET ENVIRONMENT.
The Strong Special Fund II seeks capital growth. The Fund invests at least 80%
of its net assets in equity securities, emphasizing small companies that the
Fund's Advisor believes are under-researched and attractively valued.
==========================================
ASSET ALLOCATION
Based on net assets as of 6-30-97
Stocks 91.5%
Short-Term Investments 8.5%
==========================================
For the six months ended June 30, the market was very strong, but it was also
narrow, with the bulk of the S&P 500's returns coming from 10 to 12 of its
largest stocks. Most of the market posted modest returns, and even losses.
Nonetheless, we were able to deliver a return of 10.88% for the six months,
compared with the S&P 500's 20.61% return and the S&P MidCap 400's 12.99%.*(1)
=======================================
TOP FIVE SECTORS
As of 6-30-97
Sector % of Net Assets
- ---------------------------------------
Technology 22.1%
.......................................
Financial 13.3%
.......................................
Energy 12.0%
.......................................
Basic Material 7.7%
.......................................
Consumer Cyclical 6.9%
.......................................
Please see the Schedule of Investments
in Securities for a complete listing of
the Fund's portfolio.
=======================================
AN UNUSUAL MARKET
The market has been an aberration, in that it's been driven by just a few
stocks. Momentum has played a much larger role in many stocks' performance than
their underlying fundamentals. Investors in this narrow group of stocks could be
paying more than what the companies are worth--and that's different from what we
try to do with the Special Fund II.
Our private value approach to investing means that we look at stocks as if we
were considering buying the entire company--and then compare the price we'd be
willing to pay with the current stock price. The current market, marked by high
demand for equity securities in general, makes it harder to find underfollowed,
undervalued stocks as you move up the market-capitalization ladder. That
presents a challenge for the Special Fund II, which focuses on mid-cap stocks as
well as smaller companies.
SPECIFIC AREAS OF FOCUS HAVE WORKED WELL
Although the momentum for larger companies
predominated for most of the past six months, there has been some broadening out
in the market recently. For example, small-cap stocks experienced some strength
in May. Much of the small-cap market had been so beaten down that it enjoyed a
rebound. The portfolio benefited from this rally because few of our smaller
stocks had been battered--so their increases in the May upturn weren't offset by
an earlier decline.
Our significant overweighting in media stocks has begun to pay off. Our picks in
this sector did well in May and June, on the heels of Microsoft's announcement
that it would invest $1 billion in cable television operations. The position
we've built up in foreign stocks has also performed well.
We have built a long record of success based on a discipline of looking for
opportunities in underfollowed sectors and buying stocks cheaply. This has been
a good strategy over the long term, but of late it has presented opportunity
costs as the market's attention has fled toward the largest, best-known
companies. We're not going to change a proven strategy because of a narrowly
focused market, however. As the correction in late March and early April showed,
markets can change quickly. This Fund is positioned to do well when softness
hits the market's current leaders, and to continue to keep pace in a healthy
market environment.
================================================================================
FIVE LARGEST STOCK HOLDINGS
As of 6-30-97
% of Net
Security Industry Assets
- --------------------------------------------------------------------------------
Comcast Corporation Media-Radio/TV 1.9%
Class A
................................................................................
Cabot Corporation Chemical-Specialty 1.6%
................................................................................
Sybron International Healthcare-Medical Supply 1.5%
Corporation
................................................................................
McKesson Corporation Healthcare-Medical Supply 1.5%
................................................................................
Noble Affiliates, Inc. Oil-North American 1.5%
Exploration and Production
................................................................................
Please see the Schedule of Investments in Securities for a complete listing of
the Fund's portfolio.
================================================================================
2
<PAGE>
OUTLOOK
Currently, the market is enjoying the best of all worlds. The domestic economy
is strong, inflation is low, and favorable conditions reign in most foreign
markets. With such a positive environment, if the market were ever to be at a
high, it would be now. Investors really shouldn't focus on whether the market is
too high; rather, they should think about whether the world will remain as solid
as it has been recently.
Our strategy should serve investors especially well if we experience more
challenging markets in the coming months. The portfolio has been assembled with
a strong eye toward valuations, and it focuses on quiet or ignored sectors of
the market. A market downturn would likely punish momentum-driven stocks, while
we would expect stocks out of the limelight to fare better.
We're renewing our focus on high-quality companies. At times, this may mean
paying somewhat more for a stock than we might have been willing to in the past.
This is not a shift in strategy. It's a refinement that is designed to help the
Fund prosper in the current environment. When few stocks are cheap on an
absolute basis, it's necessary to look for companies at reasonable valuations
with strong management teams and competitive positions.
Going forward, this Fund will be called Strong Opportunity Fund II. This change
reflects our intention for this Fund to closely track the Strong Opportunity
Fund.
Thank you for your investment in the Strong Special Fund II. We look forward to
helping you pursue your important financial goals.
Sincerely,
/s/Richart Trent Weiss
Richard T. Weiss
/s/Marina Carlson
Marina Carlson
Portfolio Managers
================================================================================
GROWTH OF AN ASSUMED $10,000 INVESTMENT
From 5-8-92 to 6-30-97
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
6-97 24,831 24,303 21,649
This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Growth Funds Index.
Results include the reinvestment of all dividends and capital gains
distributions. Performance is historical and does not represent future results.
Investment returns and principal value vary, and you may have a gain or loss
when you sell shares. To equalize time periods, the indexes' performance was
prorated for the month of May 1992.
================================================================================
====================================
AVERAGE ANNUAL
TOTAL RETURNS(1)
As of 6-30-97
1-year 22.14%
3-year 19.19%
5-year 21.24%
Since Inception 19.33%
(on 5-8-92)
====================================
* The S&P 500 is an unmanaged index generally representative of the U.S.
stock market, without regard to company size. The S&P MidCap 400 Stock
Index is an unmanaged index generally representative of the 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 Average annual total return and total return measure change in the value of
an investment in the Fund, assuming reinvestment of all dividends and
capital gains. Average annual total return reflects annualized change,
while total return reflects aggregate change. 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 June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
COMMON STOCKS 91.4%
AIRLINE 0.2%
Air New Zealand, Ltd. Class B 450,000 $ 1,376,595
Korean Airline Company, Ltd. (b) 19,000 358,126
------------
1,734,721
BANK - MONEY CENTER 3.2%
BankAmerica Corporation 143,600 9,271,175
Deutsche Bank AG 22,500 1,313,897
Fuji Bank, Ltd. 68,000 1,020,326
Grupo Financiero Banamex Accival SA de CV (b) 413,000 1,085,746
Toronto - Dominion Bank Ontario 344,000 10,253,223
------------
22,944,367
BANK - REGIONAL 1.0%
Mercantile Bancorporation, Inc. 117,300 7,125,975
BANK - SUPER REGIONAL 4.0%
Barnett Banks, Inc. 197,400 10,363,500
First Union Corporation 99,900 9,240,750
Mellon Bank Corporation 205,500 9,273,188
------------
28,877,438
BEVERAGE - SOFT DRINK 0.2%
Coca-Cola Amatil, Ltd. 40,000 518,683
Pepsi-Gemex SA de CV GDR (b) 45,600 570,000
------------
1,088,683
CHEMICAL - SPECIALTY 1.6%
Cabot Corporation 393,200 11,157,050
COMPUTER - PERIPHERAL EQUIPMENT 2.3%
American Power Conversion Corporation (b) 450,000 8,550,000
Seagate Technology, Inc. (b) 235,000 8,269,063
------------
16,819,063
COMPUTER - PERSONAL & WORKSTATION 0.9%
Sun Microsystems, Inc. (b) 174,000 6,476,063
COMPUTER SOFTWARE 3.4%
Cabletron Systems, Inc. (b) 286,500 8,111,531
Cadence Design Systems, Inc. (b) 202,800 6,793,800
Sybase, Inc. (b) 640,000 9,520,000
------------
24,425,331
CONGLOMERATE 0.1%
Guinness Peat Group PLC 485,815 300,534
DIVERSIFIED OPERATIONS 1.5%
Desc SA de CV Sponsored ADR (b) 25,600 745,600
Whitman Corporation 409,000 10,352,813
------------
11,098,413
ELECTRIC POWER 3.0%
Centrais Electricas Brasileiras SA Sponsored
ADR 16,000 474,000
Energy Group PLC 579,000 6,176,495
Energy Group PLC Sponsored ADR 105,300 4,462,088
NIPSCO Industries, Inc. 246,300 10,175,269
------------
21,287,852
ELECTRONIC PARTS DISTRIBUTION 2.1%
Arrow Electronics, Inc. (b) 155,000 8,234,375
Marshall Industries (b) 189,200 7,047,700
------------
15,282,075
ELECTRONIC PRODUCTS - MISCELLANEOUS 2.7%
AVX Corporation 360,000 9,720,000
Hubbell, Inc. Class B 219,100 9,640,400
------------
19,360,400
ELECTRONICS - SEMICONDUCTOR/COMPONENT 3.6%
KLA-Tencor Corporation (b) 178,000 8,677,500
SGS-Thomson Microelectronics (b) 110,000 8,800,000
Texas Instruments, Inc. 100,000 8,406,250
------------
25,883,750
ENGINEERING & CONSTRUCTION 0.0%
Walker Corporation 165,000 136,833
FINANCE - MISCELLANEOUS 0.1%
Hong Leong Finance, Ltd. (Fgn Reg) 104,000 295,376
Japan Associated Finance 5,000 392,567
------------
687,943
FOOD 5.2%
CPC International, Inc. 99,700 9,203,556
General Mills, Inc. 134,000 8,726,750
Nestle SA Sponsored ADR 145,800 9,750,375
Unilever NV 45,100 9,831,800
------------
37,512,481
HEALTHCARE - DRUG/DIVERSIFIED 2.5%
Bristol-Myers Squibb Company 49,700 4,025,700
Merck & Company, Inc. 44,000 4,554,000
Pharmacia & Upjohn, Inc. 275,000 9,556,250
------------
18,135,950
HEALTHCARE - MEDICAL SUPPLY 3.0%
McKesson Corporation 137,800 10,679,500
Sybron International Corporation (b) 268,800 10,718,400
------------
21,397,900
HEALTHCARE - PATIENT CARE 1.2%
Tenet Healthcare Corporation (b) 303,200 8,963,350
HOUSEHOLD APPLIANCES & FURNISHINGS 0.7%
Philips Electronics NV ADR 68,700 4,937,813
INSURANCE - DIVERSIFIED 0.5%
American General Corporation 76,000 3,629,000
INSURANCE - PROPERTY & CASUALTY 2.7%
ACE, Ltd. 133,100 9,832,763
American International Group, Inc. 62,600 9,350,875
------------
19,183,638
MACHINERY - MISCELLANEOUS 1.3%
Ingersoll-Rand Company 154,000 9,509,500
MEDIA - PUBLISHING 1.1%
The E.W. Scripps Company Class A 193,800 8,066,925
MEDIA - RADIO/TV 5.1%
Comcast Corporation Class A 650,000 13,893,750
Cox Communications, Inc. Class A (b) 387,701 9,304,824
Grupo Televisa S.A. GDS (b) 20,700 628,762
Tele Communications, Inc. Class A (b) 673,500 10,018,312
Tele Communications, Inc. Liberty Media Group
Series A (b) 110,900 2,633,875
------------
36,479,523
METAL PRODUCTS & FABRICATION 0.1%
Leader Universal Holdings BHD 317,000 570,198
METALS & MINING 1.3%
Freeport-McMoRan Copper & Gold, Inc. Class A 311,400 9,108,450
NATURAL GAS DISTRIBUTION 1.4%
Columbia Gas Systems, Inc. 148,800 9,709,200
OIL - NORTH AMERICAN EXPLORATION
& PRODUCTION 7.1%
Barrett Resources Corporation (b) 285,000 8,532,188
Devon Energy Corporation 257,700 9,470,475
H S Resources, Inc. (b) 276,800 3,909,800
Noble Affiliates, Inc. 272,400 10,538,475
Union Pacific Resources Group, Inc. 382,000 9,502,250
United Meridian Corporation (b) 310,000 9,300,000
------- ------------
51,253,188
OIL - NORTH AMERICAN INTEGRATED 1.3%
USX-Marathon Group 330,300 9,537,413
OIL WELL EQUIPMENT & SERVICE 3.6%
BJ Services Company (b) 142,900 7,663,013
Baker Hughes, Inc. 232,000 8,975,500
Transocean Offshore, Inc. 125,000 9,078,125
------------
25,716,638
See notes to financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
SHARES OR
PRINCIPAL VALUE
AMOUNT (NOTE 2)
- --------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS 2.6%
Fletcher Challenge, Ltd. Forestry Division 671,000 976,152
The Mead Corporation 145,000 9,026,250
Willamette Industries, Inc. 124,000 8,680,000
------------
18,682,402
PRECIOUS METAL/GEM/STONE 2.0%
De Beers Consolidated Mines, Ltd. ADR 241,300 8,913,019
Newmont Mining Company 143,400 5,592,600
------------
14,505,619
RAILROAD 2.2%
Burlington Northern Santa Fe Corporation 97,900 8,798,763
Canadian National Railway Company 161,200 7,052,500
------------
15,851,263
REAL ESTATE 1.3%
Equity Residential Properties Trust 102,000 4,845,000
Security Capital Pacific Trust 186,700 4,270,762
------------
9,115,762
RETAIL - DEPARTMENT STORE 2.4%
Federated Department Stores, Inc. (b) 262,400 9,118,400
May Department Stores Company 173,600 8,202,600
------------
17,321,000
RETAIL - FOOD CHAIN 0.9%
Albertson's, Inc. 176,300 6,434,950
RETAIL - MAJOR CHAIN 1.7%
Sears Canada, Inc. 191,000 2,559,394
Toys `R' Us, Inc. (b) 272,000 9,520,000
------------
12,079,394
RETAIL - RESTAURANT 1.2%
Brinker International, Inc. (b) 612,300 8,725,275
SAVINGS & LOAN 0.5%
Charter One Financial, Inc. 69,500 3,744,312
STEEL 0.3%
British Steel PLC 725,600 1,799,240
TELECOMMUNICATION EQUIPMENT 0.5%
DSC Communications Corporation (b) 159,200 3,542,200
TELECOMMUNICATION SERVICE 6.5%
AirTouch Communications, Inc. (b) 381,100 10,432,612
Cable & Wireless Communications PLC (b) 210,000 1,135,816
Cable & Wireless Communications PLC ADR (b) 291,656 7,838,255
Nippon Telegraph & Telephone Corporation 1,440 1,381,837
Omnipoint Corporation (b) 474,500 7,888,562
Paging Network, Inc. (b) 800,000 7,025,000
Telecommunicacoes Brasileiras SA Sponsored ADR 10,300 1,563,025
U.S. West, Inc. Media Group (b) 472,000 9,558,000
------------
46,823,107
TELEPHONE 1.3%
Telephone & Data Systems, Inc. 248,200 9,431,600
------------
TOTAL COMMON STOCKS (COST $540,608,122) 656,453,782
PREFERRED STOCKS 0.1%
Henkel KGaA-Vorzug (COST $705,698) 13,000 737,536
SHORT-TERM INVESTMENTS (a) 8.2%
COMMERCIAL PAPER 0.1%
INTEREST BEARING, DUE UPON DEMAND
American Family Financial Services,
Inc., 5.29% $ 225,800 225,800
Johnson Controls, Inc., 5.31% 487,900 487,900
Warner Lambert Company, 5.26% 100 100
Wisconsin Electric Power Company, 5.33% 53,000 53,000
------------
766,800
MONEY MARKET 2.8%
Strong Institutional Money Fund 20,000,000 20,000,000
REPURCHASE AGREEMENT 5.3%
Goldman, Sachs & Company (Dated 6/30/97),
5.75%, Due 7/01/97 (Repurchase proceeds
$38,206,101); Collateralized by:
$38,200,000 United States Treasury Bonds,
8.50%, Due 2/15/20 (Market value
$38,983,125) (c) $38,200,000 38,200,000
------------
TOTAL SHORT-TERM INVESTMENTS
(COST $58,966,800) 58,966,800
------------
TOTAL INVESTMENTS IN SECURITIES
(COST $600,280,620) 99.7% 716,158,118
Other Assets and Liabilities, Net 0.3% 1,989,828
------------
NET ASSETS 100.0% $718,147,946
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- --------------------------------------------------------------------------------
United States ........................................ 84.7%
United Kingdom ....................................... 3.0
Canada ............................................... 2.8
Netherlands .......................................... 2.0
Bermuda .............................................. 1.4
Switzerland .......................................... 1.3
France ............................................... 1.2
South Africa ......................................... 1.2
Japan ................................................ 0.4
Mexico ............................................... 0.4
New Zealand .......................................... 0.4
Brazil ............................................... 0.3
Germany .............................................. 0.3
Australia ............................................ 0.1
Malaysia ............................................. 0.1
South Korea .......................................... 0.1
Other Assets and Liabilities, Net .................... 0.3
-----
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) The Fund may engage in repurchase agreements where the underlying
collateral consists of U.S. Government securities which are maintained in a
segregated account with a custodian. The market value of the collateral
must exceed the principal amount by at least two percent on a daily basis.
Percentages are stated as a percent of net assets.
See notes to financial statements.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
ASSETS:
Investments in Securities, at Value (Cost of $600,280,620) $716,158,118
Receivable from Brokers for Securities Sold 7,278,828
Dividends and Interest Receivable 809,780
Other Assets 907,258
------------
Total Assets 725,153,984
LIABILITIES:
Payable to Brokers for Securities Purchased 6,927,357
Accrued Operating Expenses and Other Liabilities 78,681
------------
Total Liabilities 7,006,038
------------
NET ASSETS $718,147,946
============
NET ASSETS CONSIST OF:
Capital (par value and paid-in surplus) $556,155,730
Undistributed Net Investment Income 78,245
Undistributed Net Realized Gain 46,048,982
Net Unrealized Appreciation 115,864,989
------------
Net Assets $718,147,946
============
Capital Shares Outstanding (Unlimited Number Authorized) 37,405,456
NET ASSET VALUE PER SHARE $19.20
======
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (Unaudited)
INCOME:
Dividends $ 3,981,472
Interest 1,524,638
-----------
Total Income 5,506,110
EXPENSES:
Investment Advisory Fees 3,233,244
Custodian Fees 39,297
Shareholder Servicing Costs 488,957
Other 9,115
-----------
Total Expenses 3,770,613
-----------
NET INVESTMENT INCOME 1,735,497
REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 46,831,367
Foreign Currencies (100)
-----------
Net Realized Gain 46,831,267
Change in Unrealized Appreciation/Depreciation on:
Investments 20,594,471
Foreign Currencies (8,714)
-----------
Net Change in Unrealized Appreciation/Depreciation 20,585,757
-----------
NET GAIN 67,417,024
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $69,152,521
===========
See notes to financial statements.
7
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
---------------- -------------
(UNAUDITED)
OPERATIONS:
<S> <C> <C>
Net Investment Income $ 1,735,497 $ 4,127,461
Net Realized Gain 46,831,267 61,557,894
Change in Unrealized Appreciation/Depreciation 20,585,757 27,258,118
------------ ------------
Increase in Net Assets Resulting from Operations 69,152,521 92,943,473
DISTRIBUTIONS:
From Net Investment Income (1,879,852) (4,127,461)
In Excess of Net Investment Income __ (27,914)
From Net Realized Gains (60,859,506) (19,321,839)
------------ ------------
Total Distributions (62,739,358) (23,477,214)
CAPITAL SHARE TRANSACTIONS:
Proceeds from Shares Sold 110,327,632 209,745,337
Proceeds from Reinvestment of Dividends 62,719,994 23,469,211
Proceeds from Shares Redeemed (93,253,657) (123,112,902)
------------ ------------
Increase in Net Assets from Capital Share Transactions 79,793,969 110,101,646
------------ ------------
TOTAL INCREASE IN NET ASSETS 86,207,132 179,567,905
NET ASSETS:
Beginning of Period 631,940,814 452,372,909
------------ ------------
End of Period $718,147,946 $631,940,814
============ ============
TRANSACTIONS IN SHARES OF THE FUND:
Sold 5,876,700 11,816,834
Issued in Reinvestment of Dividends 3,592,948 1,353,993
Redeemed (4,907,723) (6,881,124)
--------- ---------
Net Increase in Shares of the Fund 4,561,925 6,289,703
========= =========
</TABLE>
See notes to financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
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 last 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.
(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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
June 30, 1997 (Unaudited)
(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. 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 Fund may invest cash reserves in money market funds sponsored and
managed by Strong Capital Management, Inc., subject to certain limitations.
The terms of such transactions are identical to those of non-related
entities except that, to avoid duplicate investment advisory fees, the
Advisor remits to the Fund an amount equal to all fees otherwise due to
them under their investment advisory agreement for the assets invested in
such money market funds.
The amount payable to the Advisor at June 30, 1997, other shareholder
servicing expenses paid to the Advisor, and unaffiliated directors' fees
for the six months ended June 30, 1997 were $8,841, $29 and $4,317,
respectively.
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the six
months ended June 30, 1997 were $374,827,957 and $360,500,403,
respectively.
5. INCOME TAX INFORMATION
At June 30, 1997, the cost of investments in securities for federal income
tax purposes was $601,406,246. Net unrealized appreciation of securities
was $114,751,872, consisting of gross unrealized appreciation and
depreciation of $134,021,486 and $19,269,614, respectively.
10
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SELECTED PER-SHARE DATA(a)
------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------- --------------------------------------------------
Net Realized
Net Asset and Unrealized Total In Excess Net Asset
Value, Net Gains from From Net of Net From Net Value,
Beginning Investment (Losses) on Investment Investment Investment Realized Total End of
of Period Income Investments Operations Income Income Gains Distributions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1997(c) $19.24 $0.05 $1.84 $1.89 ($0.05) -- ($1.88) ($1.93) $19.20
Dec. 31, 1996 17.04 0.13 2.87 3.00 (0.13) -- (0.67) (0.80) 19.24
Dec. 31, 1995 14.23 0.12 3.42 3.54 (0.12) ($0.03) (0.58) (0.73) 17.04
Dec. 31, 1994 14.12 0.11 0.41 0.52 (0.11) -- (0.30) (0.41) 14.23
Dec. 31, 1993 11.33 0.06 2.79 2.85 (0.06) -- -- (0.06) 14.12
Dec. 31, 1992(d) 10.00 0.02 1.57 1.59 (0.02) -- (0.24) (0.26) 11.33
</TABLE>
<TABLE>
<CAPTION>
RATIOS AND SUPPLEMENTAL DATA
----------------------------------------------------------------------
Net Ratio of Net
Assets, Ratio of Investment Average
End of Expenses Income Portfolio Commission
Total Period (In to Average to Average Turnover Rate
Return Millions) Net Assets Net Assets Rate Paid(b)
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997(c) +10.9% $718 1.2%* 0.5%* 60.2% $0.0548
Dec. 31, 1996 +18.2% 632 1.2% 0.7% 89.8% 0.0505
Dec. 31, 1995 +25.8% 452 1.2% 0.8% 91.1%
Dec. 31, 1994 +3.6% 300 1.1% 0.9% 74.8%
Dec. 31, 1993 +25.2% 151 1.1% 0.5% 103.1%
Dec. 31, 1992(d) +16.2% 27 1.6%* 0.3%* 249.5%
</TABLE>
* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the Fund
outstanding for the entire period.
(b) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
(c) For the six months ended June 30, 1997 (Unaudited). Total return and
portfolio turnover rate are not annualized.
(d) Inception date is May 8, 1992. Total return and portfolio turnover rate are
not annualized.
11
<PAGE>
NOTES
- --------------------------------------------------------------------------------
12
<PAGE>
DIRECTORS
Richard S. Strong
John Dragisic
Willie D. Davis
Stanley Kritzik
Marvin E. Nevins
William F. Vogt
OFFICERS
Richard S. Strong, Chairman of the Board
John Dragisic, President
Lawrence A. Totsky, Vice President
Thomas P. Lemke, Vice President
John S. Weitzer, Vice President
Stephen J. Shenkenberg, Vice President and Secretary
John A. Flanagan, Treasurer
INVESTMENT ADVISOR
Strong Capital Management, Inc.
P.O. Box 2936, Milwaukee, Wisconsin 53201
CUSTODIAN
Firstar Trust Company
P.O. Box 701, Milwaukee, Wisconsin 53201
AUDITOR
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>
[STRONG FUNDS LOGO]
STRONG FUNDS DISTRIBUTORS, INC.
P.O. Box 2936 o Milwaukee, Wisconsin 53201 5525G97
Strong Funds are offered by prospectus only.
