SEMIANNUAL REPORT
=================
NICHOLAS II, INC.
700 North
Water Street
Milwaukee,
Wisconsin 53202
September 30, 1996
<PAGE>
November 27, 1996
Dear Fellow Shareholders:
Nicholas II, Inc. ended it's fiscal year, September 30, 1996, with a net
asset value per share of $33.34, a return of 21.35% and $760 million in total
net assets. This performance compares favorably to the benchmark Russell
2000 which returned 13.13% for the same period.
Performance of the Fund is shown below for the time periods ended
September 30, 1996:
<TABLE>
<CAPTION>
Average Annual Total Return*
---------------------------------------
1/1/96-9/30/96 1 Year 3 Years 5 Years 10 Years
-------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Nicholas II (Distributions Reinvested).......... +16.05% +21.35% +16.14% +13.57% +13.23%
NASDAQ OTC Composite (Excludes Income).......... +16.61% +17.57% +17.17% +18.42% +13.34%
Standard & Poor's 500 (Income Reinvested)....... +13.49% +20.32% +17.44% +15.21% +14.97%
Russell 2000 (Includes Income).................. +10.73% +13.13% +12.74% +15.76% +11.91%
Ending value of $10,000 invested in Nicholas II
(Distributions Reinvested).................... $11,605 $12,135 $15,667 $18,891 $34,653
</TABLE>
*Total returns are historical and include change in share price and
reinvestment of dividend and capital gain distributions. Past performance is
no guarantee of future results. Principal value and return will fluctuate so
an investment, when redeemed, may be worth more or less than original cost.
The Fund's performance for the year was driven by long-term holdings such
as Keane and Expeditors International, along with financial holdings which
benefited from declining interest rates. The Fund's large healthcare exposure
did not help much due to investor nervousness over the election and potential
government regulation. This sector should benefit from a more certain
regulatory environment and continued strong fundamentals.
As I write this letter, major market indices seem to reach all-time highs
daily. This year's market has been characterized by outperformance of large
capitalization companies over small. This can be seen by the performance of
the S&P 500 or NASDAQ over the Russell 2000 for the calendar year through
September 30, 1996. What is astonishing this year, is the narrowness of the
rally. For example, if you take Microsoft ($89.9 billion market
capitalization) and Intel ($100.0 market capitalization) out of the NASDAQ
index, the approximate return drops from 16% to 12% for the nine months ended
September 30, 1996. This large capitalization rally continues to be fueled by
a steadily growing economy, with little inflationary pressure and improving
productivity.
The long-term bull market since 1990, along with good price performance by
the Nicholas II portfolio companies has caused the Fund's price/earnings ratio
to reach historical high levels. This has caused us to examine closely the
risk level of the Fund. We are comfortable with the business risk in the
portfolio and believe in being fully invested. Our quality companies will
most likely maintain a fair value. I like to fall back on what Warren Buffett
once said, "You limit your downside risk by holding high quality businesses
run by high quality managements." If we lower the quality of the companies we
hold, we may increase the business risk therefore increasing downside risk.
The long-running bull market has also brought with it a proliferation of
new mutual funds and financial advisors. We see ads in newspapers for mutual
funds with 70% to 90% returns in boldface letters. Then we read the fine
print to find out the fund is only six months old and has less than
$10,000,000 in total assets. We also are amazed at how many funds claim to be
#1 because of some obscure category they are in. In my opinion, these ads are
irresponsible and can encourage shareholders to have a "gamblers" mentality
when it comes to investing. A true "investors" fund has a turnover ratio of
less than 40%, and a total expense ratio of less than 1.25%, including any
12b-1 expenses. Nicholas II's turnover averages less than 20%, has a total
expense ratio of only .62% (one of the lowest in the industry) and no 12b-1
expense. We believe in giving the performance to the shareholders, not the
middlemen.
As you can probably sense, our age old saying applies now more than ever,
"We remain short-term cautious, yet long-term bullish." I am excited about the
long-term prospects of the companies in the portfolio along with the ability
of our staff to find, research and understand quality companies with good
long-term growth prospects. We also want to thank you, our shareholders, whom
I believe are well educated when it comes to the pure investment process.
Sincerely,
/S/ David O. Nicholas
David O. Nicholas
Portfolio Manager
<PAGE>
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------
QUOTED
SHARES OR MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1 (A))
--------- ------------
COMMON STOCKS - 95.7%
BANKS AND FINANCE - 9.1%
306,023 Associated Banc-Corp $ 12,355,679
223,125 Fifth Third Bancorp 12,969,141
144,800 First Financial Corporation 3,475,200
8,803 First National Bank of Anchorage (The) 13,556,620
413,287 Litchfield Financial Corporation + 5,786,018
527,900 Marshall & Ilsley Corporation 15,902,988
195,000 MBNA Corporation 6,776,250
------------
70,821,896
------------
BUSINESS SERVICES - 17.2%
330,000 Alco Standard Corporation 16,458,750
420,000 Checkfree Corporation * 8,400,000
200,000 Danka Business Systems PLC 7,950,000
75,000 Envoy Corporation * 2,906,250
642,500 Fiserv, Inc. * 24,575,625
419,062 G&K Services, Inc. - Class A 12,257,563
1,018,675 Keane, Inc. * + 48,896,400
449,500 Micro Warehouse, Inc. * 11,574,625
173,900 Programming and Systems, Inc. *
(Note 1 (a)) 0
------------
133,019,213
------------
CONSUMER PRODUCTS AND SERVICES - 3.6%
146,900 Central Parking Corporation 4,774,250
313,850 Newell Co. 9,415,500
126,000 ThermoTrex Corporation * 4,662,000
175,600 Valspar Corporation (The) 8,648,300
------------
27,500,050
------------
FOOD AND BEVERAGE - 2.9%
250,000 Outback Steakhouse, Inc. * 6,031,250
459,000 Tootsie Roll Industries, Inc. 16,237,125
------------
22,268,375
------------
HEALTH CARE PRODUCTS - 10.2%
108,000 Amgen Inc. * 6,817,500
322,029 Block Drug Company, Inc. - Class A 14,451,051
315,900 DENTSPLY International Inc. 14,057,550
591,200 Elan Corporation, plc * 17,662,100
376,000 Forest Laboratories, Inc. * 13,583,000
227,500 Sofamor/Danek Group, Inc. * 7,024,063
130,000 Thermo Cardiosystems Inc. * 4,761,250
47,250 Trex Medical Corporation * 927,281
------------
79,283,795
------------
HEALTH CARE SERVICES - 21.7%
141,585 American HomePatient, Inc. * 3,150,266
119,853 Cardinal Health, Inc. 9,902,854
581,000 Emeritus Corporation * + 9,150,750
458,750 Health Care and Retirement Corporation * 10,780,625
1,459,993 Health Management
Associates, Inc. Class A * 36,317,326
555,600 Healthsource, Inc. * 8,195,100
145,000 Oxford Health Plans, Inc. * 7,213,750
173,500 PacifiCare Health Systems, Inc. * 15,007,750
466,600 Patterson Dental Company * 12,481,550
153,750 PhyCor, Inc. * 5,852,186
522,500 Quorum Health Group, Inc. * 12,931,875
425,646 Vencor, Inc. * 13,727,083
713,955 VIVRA Incorporated * 23,292,782
------------
168,003,897
------------
INDUSTRIAL PRODUCTS AND SERVICES - 0.4%
169,000 Watts Industries, Inc. - Class A 3,316,625
------------
INSURANCE - 6.9%
110,000 Foremost Corporation of America 6,050,000
187,500 MGIC Investment Corporation 12,632,813
619,200 Mutual Risk Management Ltd. 17,956,800
445,000 Protective Life Corporation 16,798,750
------------
53,438,363
------------
MEDIA, COMMUNICATIONS AND ENTERTAINMENT - 7.0%
460,000 American Mobile Satellite Corporation * 6,670,000
105,000 British Sky Broadcasting Group plc 5,775,000
335,000 General Motors Corporation - Class H 19,346,250
175,000 Penske Motorsports, Inc. * 6,146,875
310,000 PanAmSat Corporation * 8,622,030
335,000 United States Satellite Broadcasting
Company, Inc. - Class A * 7,788,750
------------
54,348,905
------------
RETAIL TRADE - 13.0%
628,500 Arbor Drugs, Inc. 13,669,875
320,000 AutoZone, Inc. * 9,280,000
335,000 Circuit City Stores, Inc. 12,101,875
562,500 Consolidated Stores Corporation * 22,500,000
521,500 Heilig-Meyers Company 8,148,437
471,400 Kohl's Corporation * 16,970,400
526,000 OfficeMax, Inc. * 7,364,000
<PAGE>
QUOTED
SHARES OR MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1 (A))
--------- ------------
RETAIL TRADE - 13.O% (CONTINUED)
310,000 O'Reilly Automotive, Inc. * $ 10,695,000
------------
100,729,587
------------
TRANSPORTATION - 3.7%
494,000 Expeditors International of
Washington, Inc. 17,413,500
392,595 Heartland Express, Inc. * 11,090,809
------------
28,504,309
------------
TOTAL COMMON STOCKS
(cost $402,794,950) 741,235,015
------------
CONVERTIBLE BOND - 041%
$1,000,000 Emeritus Corporation,
6.25%, due January 1, 2006
(cost $1,000,000)+ 970,000
------------
SHORT-TERM INVESTMENTS - 4.1%
COMMERCIAL PAPER - 3.2%
2,000,000 Harnischfeger Industries, Inc.,
5.50%, due October 2, 1996 1,999,694
2,000,000 Quad/Graphics, Inc.,
5.50%, due October 4, 1996 1,999,083
2,000,000 Harnischfeger Industries, Inc.,
5.50%, due October 7, 1996 1,998,167
2,500,000 Quad/Graphics, Inc.,
5.55%, due October 9, 1996 2,496,917
2,075,000 Fiserv, Inc.,
5.55%, due October 16, 1996 2,070,201
2,075,000 Fiserv, Inc.,
5.55%, due October 18, 1996 2,069,562
2,750,000 Mosinee Paper Corporation,
5.55%, due October 21, 1996 2,741,521
2,000,000 Harnischfeger Industries, Inc.,
5.55%, due October 23, 1996 1,993,217
2,000,000 Quad/Graphics, Inc.,
5.55%, due October 25, 1996 1,992,600
2,000,000 Schreiber Foods, Inc.,
5.60%, due October 28, 1996 1,991,600
1,500,000 Columbia/HCA Healthcare Corporation,
5.52%, due November 4, 1996 1,492,180
2,000,000 Fiserv, Inc.,
5.50%, due November 6, 1996 1,989,000
------------
24,833,742
------------
VARIABLE DEMAND NOTES - 0.9%
384,600 General Mills, Inc.,
5.19%, due October 1, 1996 384,600
2,738,935 Johnson Controls, Inc.,
5.22%, due October 1, 1996 2,738,935
488,900 Pitney Bowes Credit Corporation,
5.19%, due October 1, 1996 488,900
1,611,630 Sara Lee Corporation,
5.17%, due October 1, 1996 1,611,630
2,213,500 Warner-Lambert Company,
5.17%, due October 1, 1996 2,213,500
------------
7,437,565
------------
TOTAL SHORT-TERM
INVESTMENTS
(cost $32,199,550) 32,271,307
------------
TOTAL INVESTMENTS 774,476,322
------------
CASH AND RECEIVABLES, NET
OF LIABILITIES - 0.1% 278,913
------------
TOTAL NET ASSETS (Basis of
percentages disclosed above) $774,755,235
============
* Nondividend paying security
+ This company is affiliated with the Fund as defined in Section 2(a)(2)-(3)
of the Investment Company Act of 1940, in that the Fund holds 5% or more of
its outstanding voting securities.
The accompanying notes to financial statements are an integral part of
this schedule.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities at market value (Note 1 (a)) --
Nonaffiliated issuers (cost $414,332,717)-see accompanying schedule of investments........ $710,643,154
Affiliated issuers (cost $21,661,783)-see accompanying schedule of investments (Note 5)... 63,833,168
------------
Total investments................................................................. 774,476,322
------------
Cash...................................................................................... 94,014
------------
Receivables --
Investment securities sold.............................................................. 1,188,118
Dividends and interest.................................................................. 460,557
------------
Total receivables................................................................. 1,648,675
------------
Total assets...................................................................... 776,219,011
------------
LIABILITIES:
Payables --
Investment securities purchased......................................................... 1,019,138
Management fee (Note 2)................................................................. 303,761
Other payables and accrued expenses..................................................... 140,877
------------
Total liabilities................................................................. 1,463,776
------------
Total net assets.................................................................. $774,755,235
============
NET ASSETS CONSIST OF:
Fund shares issued and outstanding......................................................... $369,186,422
Net unrealized appreciation on investments (Note 3)........................................ 338,410,065
Accumulated undistributed net realized gains on investments................................ 65,720,712
Accumulated undistributed net investment income............................................ 1,438,036
------------
$774,755,235
============
NET ASSET VALUE PER SHARE ($.01 par value, 200,000,000 shares authorized)
offering price and redemption price ($774,755,235 ./. 23,235,296 shares
outstanding)............................................................................... $33.34
======
</TABLE>
The accompanying notes to financial statements are an integral part of
this statement.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C>
INCOME:
Dividends --
Nonaffiliated issuers................................................................... $ 5,158,996
Affiliated issuers (Note 5)............................................................. 13,230
Interest................................................................................ 1,436,690
Other................................................................................... 26,444
-----------
6,635,360
-----------
EXPENSES:
Management fee (Note 2)................................................................... 3,830,524
Transfer agent fees....................................................................... 440,741
Postage................................................................................... 60,844
Custodian fees............................................................................ 51,415
Printing.................................................................................. 30,112
Registration fees......................................................................... 29,274
Legal fees................................................................................ 24,841
Audit and tax consulting fees............................................................. 23,775
Telephone................................................................................. 14,302
Directors' fees........................................................................... 9,000
Insurance................................................................................. 4,956
Other operating expenses.................................................................. 3,260
-----------
4,523,044
-----------
Net investment income..................................................... 2,112,316
-----------
NET REALIZED GAINS ON INVESTMENTS (Note 1 (b)):
Nonaffiliated issuers .................................................................... 73,968,832
Affiliated issuers (Note 5)............................................................... -
-----------
73,968,832
-----------
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS....................................... 62,431,510
------------
Net gains on investments.. ............................................................... 136,400,342
------------
Net increase in net assets resulting from operations...................................... $138,512,658
============
</TABLE>
The accompanying notes to financial statements are an integral part of
this statement.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................. $ 2,112,316 $ 4,279,862
Net realized gains on investments (Note 1 (b))......................... 73,968,832 53,181,461
Net increase in unrealized appreciation on investments................. 62,431,510 71,740,215
------------ ------------
Net increase in net assets resulting from operations........... 138,512,658 129,201,538
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.1750 and $0.2056 per share, respectively)........................ (3,881,013) (4,696,388)
Distributions from net realized gains on investment transactions
($2.4979 and $1.8944 per share, respectively)........................ (55,403,755) (43,254,533)
------------ ------------
Total distributions............................................ (59,284,768) (47,950,921)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (1,894,643 and 1,264,903)
shares, respectively)................................................ 60,059,790 33,523,121
Net asset value of shares issued in distributions from
net investment income and net realized gains
(1,967,328 and 1,867,730 shares, respectively)....................... 55,675,398 45,012,292
Cost of shares redeemed (3,315,408 and 3,835,468 shares, respectively). (102,441,820) (102,224,623)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions.................................... 13,293,368 (23,689,210)
------------ ------------
Total increase in net assets................................... 92,521,258 57,561,407
------------ ------------
NET ASSETS, at the beginning of the year (including undistributed net
investment income of $3,206,733 and $3,623,259, respectively).......... 682,233,977 624,672,570
------------ -----------
NET ASSETS, at the end of the year (including undistributed net
investment income of $1,438,036 and $3,206,733, respectively).......... $774,755,235 $682,233,977
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE YEAR)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR............................ $30.07 $26.71 $26.94 $24.53 $23.87 $17.39 $21.76 $18.58 $21.01 $16.90
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income............ .10 .24 .21 .21 .23 .26 .36 .29 .36 .24
Net gains or (losses) on
securities (realized and
unrealized)..................... 5.84 5.22 1.23 3.24 1.07 6.70 (3.75) 3.31 (1.15) 4.80
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................... 5.94 5.46 1.44 3.45 1.30 6.96 (3.39) 3.60 (.79) 5.04
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net
investment income).............. (.18) (.21) (.20) (.24) (.24) (.34) (.31) (.34) (.34) (.42)
Distributions (from capital
gains).......................... (2.49) (1.89) (1.47) (.80) (.40) (.14) (.67) (.08) (1.30) (.51)
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (2.67) (2.10) (1.67) (1.04) (.64) (.48) (.98) (.42) (1.64) (.93)
------ ----- ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF YEAR............................ $33.34 $30.07 $26.71 $26.94 $24.53 $23.87 $17.39 $21.76 $18.58 $21.01
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN........................ 21.35% 22.39% 5.49% 14.19% 5.59% 40.91% (16.14%) 19.88% (1.48%) 31.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (millions).................... $774.8 $682.2 $624.7 $715.8 $646.5 $490.9 $336.5 $422.2 $380.2 $432.3
Ratio of expenses to average
net assets......................... .62% .66% .67% .67% .66% .70% .71% .74% .77% .74%
Ratio of net investment income
to average net assets.............. .29% .68% .72% .79% 1.01% 1.24% 1.78% 1.43% 1.97% 1.37%
Portfolio turnover rate............. 24.47% 19.63% 17.38% 27.32% 11.47% 12.46% 18.78% 8.22% 18.42% 25.66%
Average commission rate paid by the
Fund on portfolio investment
transactions*...................... $0.046 $0.048 -- -- -- -- -- -- -- --
</TABLE>
*Disclosure of this rate is required by the Securities and Exchange Commission
on a prospective basis beginning with the Fund's 1996 fiscal year end. The
Fund has chosen to disclose this rate beginning in fiscal 1995.
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
Nicholas II, Inc. (the "Fund") is an open-end, diversified management
investment company registered under the Investment Company Act of 1940,
as amended. The primary objective of the Fund is capital appreciation in
which income is a secondary consideration. To achieve its objective, the
Fund invests in a diversified list of common stocks having growth
potential. The following is a summary of the significant accounting
policies of the Fund.
(a) Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the
issue is traded, or if no sale is reported, the latest bid price.
Variable demand notes are valued at cost which approximates market
value. U.S. Treasury Bills and commercial paper are stated at market
value with the resultant difference between market value and original
purchase price being recorded as interest income. Investment
transactions are recorded no later than the first business day after
the trade date. Cost amounts, as reported on the statement of assets
and liabilities, are the same for Federal income tax purposes.
Programming and Sytems, Inc., (the "Company"), common stock was
delisted by NASDAQ after the Securities and Exchange Commission
suspended trading. The Board of Directors of the Fund have deemed the
shares worthless until additional information, including audited
financial statements, is released by the Company. Currently the
Company is attempting to resolve this issue.
(b) Net realized gains and losses on common stocks and bonds were computed
on the basis of specific certificates.
(c) Provision has not been made for Federal income taxes or excise taxes
since the Fund has elected to be taxed as a "regulated investment
company" and intends to distribute substantially all taxable income
to its shareholders and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies.
(d) Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Non-cash dividends, if any, are recorded at fair
market value on date of distribution.
(e) 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 revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
(2) INVESTMENT ADVISER AND MANAGEMENT AGREEMENT --
The Fund has an agreement with Nicholas Company, Inc. (with whom certain
officers and directors of the Fund are affiliated) to serve as investment
adviser and manager. Under the terms of the agreement, a monthly fee is
paid to the investment adviser based on 1/16th of 1% (.75 of 1% on an
annual basis) of the average net asset value up to and including $50
million and 1/20th of 1% (.6 of 1% on an annual basis) of the average net
asset value over $50 million up to and including $100 million and 1/24th of
1% (.5 of 1% on an annual basis) of the average net asset value in excess
of $100 million. Also, the investment adviser may be reimbursed for
clerical and administrative services rendered by its personnel. This
advisory agreement is subject to an annual review by the Directors of the
Fund.
(3) NET UNREALIZED APPRECIATION --
Aggregate gross unrealized appreciation (depreciation) as of September 30,
1996, based on investment cost for Federal tax purposes is as follows:
Aggregate gross unrealized appreciation on investments.. $351,241,396
Aggregate gross unrealized depreciation on investments.. (12,831,331)
-----------
Net unrealized appreciation ....................... $338,410,065
============
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
(4) INVESTMENT TRANSACTIONS --
For the year ended September 30, 1996, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $173,441,963 and $223,550,994, respectively.
(5) TRANSACTIONS WITH AFFILIATES --
Following is an analysis of fiscal 1996 transactions with "affiliated
companies" as defined by the Investment Company Act of 1940:
<TABLE>
<CAPTION>
AMOUNT OF
DIVIDENDS
SHARE ACTIVITY CREDITED
----------------------------------------- TO INCOME
BALANCE BALANCE IN FISCAL
SECURITY NAME 9/30/95 PURCHASES SALES 9/30/96 1996
------------- ------- --------- ----- ------- ---------
<S> <C> <C> <C> <C> <C>
Emeritus Corporation................ -- 581,000 -- 581,000 $ --
Keane, Inc.......................... 963,675 55,000 -- 1,018,675 --
Litchfield Financial Corporation (a) 347,287 66,000 -- 413,287 13,230
$ 13,230
</TABLE>
(a) The share activity has been adjusted to reflect a stock split/dividend.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
HISTORICAL RECORD (UNAUDITED)
NET INVESTMENT DOLLAR GROWTH OF
NET INCOME CAPITAL GAIN WEIGHTED AN INITIAL
ASSET VALUE DISTRIBUTIONS DISTRIBUTIONS PRICE/EARNINGS $10,000
PER SHARE PER SHARE PER SHARE RATIO** INVESTMENT***
----------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
October 17, 1983*............ $10.00 $ -- $ -- -- $ 10,000
September 30, 1987........... 21.01 .420 .513 20.9 times 23,108
September 30, 1988........... 18.58 .338 1.303 15.0 22,766
September 30, 1989........... 21.76 .335 .080 17.1 27,291
September 30, 1990........... 17.39 .3124 .6686 14.8 22,888
September 30, 1991........... 23.87 .3422 .1434 17.8 32,250
September 30, 1992........... 24.53 .2447 .4042 17.3 34,052
September 30, 1993........... 26.94 .2350 .8000 18.1 38,885
September 30, 1994........... 26.71 .2000 1.4700 18.5 41,020
September 30, 1995........... 30.07 .2056(a) 1.8944(a) 20.8 50,205
September 30, 1996........... 33.34 .1750(b) 2.4979(b) 28.9 60,922
*Date of Initial Public Offering (a) Paid December 31, 1994 to shareholders of
**Based on latest 12 months accomplished earnings record December 27, 1994.
***Assuming reinvestment of all distributions
(b) Paid December 31, 1995 to shareholders of
Range in quarter end price/earnings ratios record December 26, 1995.
High Low
9/30/96 28.9 9/30/85 11.7
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of Nicholas II, Inc.:
We have audited the accompanying statement of assets and liabilities of
NICHOLAS II, INC. (the "Fund", a Maryland corporation), including the
schedule of investments, as of September 30, 1996, 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 presented. 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 September 30, 1996, by correspondence with the custodian and
brokers. As to securities purchased but not received, we requested
confirmation from brokers and, when replies were not received, we carried out
other alternative auditing procedures. 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
Nicholas II, Inc. as of September 30, 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 the periods
presented in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
November 8, 1996.
<PAGE>
CAN YOU AFFORD NOT TO INVEST IN AN IRA?
The maximum yearly IRA contribution is the less of $2,000 or 100% of your
compensation. Every year that you contribute this amount you may also deduct
it from your Federal income taxes, unless you (or your spouse) are an eligible
participant in an employer-sponsored retirement plan and your adjusted gross
income exceeds certain limits as defined by the Internal Revenue Code. This
deduction can lead to substantial savings, especially when you look at the
relationship between higher tax brackets and the net cost of investing. The
table below illustrates a schedule of tax brackets, resulting tax savings, and
the net cost of investing $2,000 in an IRA, assuming full deductibility of your
contributions.
TABLE I
FEDERAL TAX FEDERAL TAX NET COST OF INVESTING
BRACKETS SAVINGS $2,000 IN AN IRA
----------- ----------- ---------------------
15% $300 $1,700
28% 560 1,440
31% 620 1,380
36% 720 1,280
39.6% 792 1,208
Even if you are an eligible participant in an employer-sponsored retirement
plan, you may still make a non-deductible IRA contribution (subject to the
$2,000/100% of compensation limit). Another tax advantage to investing in an
IRA is that any amounts received from dividends, interest, etc., accumulate tax
deferred, whether or not your contribution is fully deductible. Taxes will
have to be paid when you receive distributions.
Finally, Table II shows the various amounts accumulated in a IRA under
different annual rates of return, based on a $2,000 annual year end
contribution. These figures are purely hypothetical since investment returns
are rarely constant year to year. Yet, one can get a good idea that investing
in an IRA plan provides a good nest egg for retirement.
TABLE II
Amounts accumulated in an IRA
ANNUAL RATES OF RETURN
------------------------------------------------
AFTER 8% 10% 12% 15%
----- -------- -------- --------- ----------
10 years $ 28,973 $ 31,874 $ 35,096 $ 40,606
20 years 91,524 114,550 144,104 204,880
30 years 226,566 328,980 482,660 869,480
40 years 518,113 885,180 1,534,180 3,558,000
- ------------------------------------------------------------------------------
Top Ten Equity Holdings
September 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------
Percentage of
Total Net Assets
Keane, Inc. 6.31%
Health Management Associates, Inc. Cl A 4.69%
Fiserv, Inc. 3.17%
VIVRA Incorporated 3.01%
Consolidated Stores Corporation 2.90%
General Motors Corporation - Class H 2.50%
Mutual Risk Management Ltd. 2.32%
Elan Corporation, plc 2.28%
Expeditors International of Washington, Inc. 2.25%
Kohl's Corporation 2.19%
<PAGE>
OFFICERS AND DIRECTORS
ALBERT O. NICHOLAS
President and Director
ROBERT H. BOCK
Director
MELVIN L. SCHULTZ
Director
RICHARD SEAMAN
Director
DAVID L. JOHNSON
Executive Vice President
THOMAS J. SAEGER
Executive Vice President and Secretary
DAVID O. NICHOLAS
Senior Vice President
LYNN S. NICHOLAS
Senior Vice President
CANDACE L. LESAK
Vice President
JEFFREY T. MAY
Vice President and Treasurer
JOHN O'HARE II
Vice President
KATHLEEN A. EVANS
Assistant Vice President
CUSTODIAN AND TRANSFER AGENT
FIRSTAR TRUST COMPANY
Milwaukee
(414) 276-0535
Member of 100% NO-LOAD tm MUTUAL FUND
COUNCIL
This report is submitted for the information of shareholders
of the Fund. It is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective prospectus.
