November 20, 1998
Dear Fellow Shareholders:
1998 has turned out to be a very tumultuous year for stocks around the
world. Asian and other international markets have been under siege most of the
year due to financial and economic woes. The international crisis has also
affected our markets and especially small-cap stocks. The chart below shows
market drops and recoveries from July 1998 through October 1998.
<TABLE>
<CAPTION>
Percentage Decrease Percentage Increase
from Index High from Index Low
------------------- -------------------
<S> <C> <C>
Dow Jones
Industrial Average 19.26% 13.97%
S&P 500 Index
(Large Company Index) 19.19% 15.06%
Russell 2000 Index
(Small Company Index) 33.08% 21.88%
</TABLE>
This type of volatility is extreme when compared to market history, not
only due to its severity, but also the short duration in which it occurred. The
recovery has been as impressive as the fall. It is reminiscent of the 1987
market crash when stocks fell precipitously in one day and recovered shortly
thereafter. Bear markets seem to last only days or months not years which was
the past trend. As highlighted in the above table, the volatility of small-cap
stocks as tracked by the Russell 2000 Index versus large-cap stocks speaks to
the increased risks associated with investments in smaller companies.
Returns for Nicholas II and comparable indexes can be seen in the chart
below for the periods ended September 30, 1998.
<TABLE>
<CAPTION>
Average Annual Total Return*
----------------------------------------
9 Months 1 Year 3 Years 5 Years 10 Years
-------------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
Nicholas II
(Distributions Reinvested). (5.85)% (1.66)% 17.21% 15.76% 13.51%
Mid-Cap Funds**
(Distributions Reinvested).. (9.17)% (11.95)% 9.34% 10.86% 13.70%
S&P 400 Mid-Cap Index
(Dividends Reinvested)...... (7.06)% (6.29)% 14.11% 13.67% 16.67%
Russell 2000 Index
(Dividends Reinvested)...... (16.21)% (19.02)% 6.86% 9.10% 11.15%
Consumer Price Index.......... 1.05% 1.43% 2.21% 2.43% 3.18%
Ending value of $10,000
invested in Nicholas II
(Distributions Reinvested).. $ 9,415 $ 9,834 $16,103 $20,791 $35,511
</TABLE>
Nicholas II mainly invests in small to mid-sized companies.
Therefore, comparisons are most effective when made to similar indices.
Nicholas II's returns for both the short and long term periods have been
excellent when compared to these similar indices. In fact, according to Lipper
Analytical Services Nicholas II finished in the top 11%, 4%, 10% and top half
of performance for the 1, 3, 5 and 10 year periods ended September 30, 1998,
respectively for mid-cap funds. The Fund's performance year-to-date has been
driven by stocks in the health care products area, specialty retail and
business service sectors. Areas that hurt the Fund's performance include:
healthcare services, where medicare reimbursement is a concern; financials, due
to concerns over the international financial crisis; and companies which are
perceived to be cyclical due to recessionary fears. Also, companies with
exposure to international markets have been hit by the depression overseas.
During the depths of the market in August and September, we were able to
buy some great companies at favorable prices. Some of these companies we
already owned and some were new to the Fund. As investment managers we
sometimes welcome these severe corrections which create buying opportunities
for the long-term.
We are still amazed however by the performance and valuation differentials
between large and small companies. Year-to-date as of October 31, 1998 the
Russell 2000 is 27.42 percentage points behind the S&P 500 index even after the
S&P 500 outperformed the Russell 2000 in 1997 by 10.99 percentage points. This
performance differential has caused large company valuations to be
significantly higher relative to small companies. Therefore, we feel the place
to be and where the values reside is in small and mid sized-companies.
As always, we appreciate your continued support, especially considering
the emotional rollercoaster ride the market has taken during 1998.
Sincerely,
/S/ David O. Nicholas
---------------------
David O. Nicholas
Portfolio Manager
*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.
**Based on Lipper Investment objective performance summary for all mid-cap
funds followed by Lipper Analytical Services, Inc. Based on total returns,
Lipper ranked Nicholas II 31 out of 298, 7 out of 178, 9 out of 99, and
19 out of 39 mid-cap funds for the 1, 3, 5 and 10 year periods ended
September 30, 1998, respectively.
Financial Highlights
(For a share outstanding throughout the year)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR........................... $40.65 $33.34 $30.07 $26.71 $26.94 $24.53 $23.87 $17.39 $21.76 $18.58
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income........... .13 .08 .10 .24 .21 .21 .23 .26 .36 .29
Net gains (losses) on
securities (realized and
unrealized).................... (.69) 10.47 5.84 5.22 1.23 3.24 1.07 6.70 (3.75) 3.31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.................. (.56) 10.55 5.94 5.46 1.44 3.45 1.30 6.96 (3.39) 3.60
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends (from net
investment income)............. ( .08) (.08) (.18) (.21) (.20) (.24) (.24) (.34) (.31) (.34)
Distributions (from capital
gains)......................... (5.23) (3.16) (2.49) (1.89) (1.47) (.80) (.40) (.14) (.67) (.08)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (5.31) (3.24) (2.67) (2.10) (1.67) (1.04) (.64) (.48) (.98) (.42)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF YEAR........................... $34.78 $40.65 $33.34 $30.07 $26.71 $26.94 $24.53 $23.87 $17.39 $21.76
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN....................... (1.66%) 34.94% 21.35% 22.39% 5.49% 14.19% 5.59% 40.91% (16.14%) 19.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (millions)................... $960.0 $994.4 $774.8 $682.2 $624.7 $715.8 $646.5 $490.9 $336.5 $422.2
Ratio of expenses to average
net assets........................ .59% .61% .62% .66% .67% .67% .66% .70% .71% .74%
Ratio of net investment income
to average net assets............. .33% .23% .29% .68% .72% .79% 1.01% 1.24% 1.78% 1.43%
Portfolio turnover rate............ 20.47% 30.21% 24.47% 19.63% 17.38% 27.32% 11.47% 12.46% 18.78% 8.22%
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
- ------------------------------------------------------------------------------
Top Ten Equity Holdings
September 30, 1998 (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage of
Net Assets
----------------
<S> <C>
Health Management Associates, Inc. - Class A .............. 4.96%
Fiserv, Inc ............................................... 4.62%
Mutual Risk Management Ltd. ............................... 4.56%
Tootsie Roll Industries,Inc ............................... 3.58%
Patterson Dental Company .................................. 3.41%
Protective Life Corporation ............................... 3.34%
Elan Corporation plc....................................... 2.75%
Marshall & Ilsley Corporation ............................. 2.63%
General Motors Corporation - Class H ...................... 2.52%
Qwest Communications International Inc. ................... 2.49%
------
Total of top ten holdings ................................. 34.86%
------
------
</TABLE>
Schedule of Investments
September 30, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares or Quoted
Principal Market
Amount Value
--------- ------------
(Note 1 (a))
<S> <C> <C>
COMMON STOCKS - 95.24%
Banks and Finance - 9.03%
653,483 Associated Banc-Corp 20,543,872
367,030 Fifth Third Bancorp 21,104,225
17,706 First National Bank
of Anchorage (The) 19,830,720
527,900 Marshall & Ilsley Corporation 25,207,225
-------------
86,686,042
-------------
Business Services - 10.70%
540,000 Checkfree Holdings Corporation * 5,332,500
240,000 ENVOY Corporation * 5,250,000
963,750 Fiserv, Inc. * 44,392,735
466,062 G&K Services, Inc. - Class A 21,846,656
780,000 Select Appointments (Holdings)
Public Limited Company 13,552,500
1,121,600 Thermo Instrument Systems Inc.* 12,337,600
-------------
102,711,991
-------------
Consumer Products and Services - 3.74%
313,850 Newell Co. 14,456,716
690,500 Thermedics Inc. * 5,178,750
453,700 ThermoTrex Corporation * 5,784,675
351,200 Valspar Corporation (The) 10,514,050
-------------
35,934,191
-------------
Food and Beverage - 3.58%
973,906 Tootsie Roll Industries, Inc. 34,330,186
-------------
Health Care Products - 11.20%
340,000 BioChem Pharma Inc. * 6,247,500
325,000 Biogen, Inc. * 21,389,063
822,200 DENTSPLY International Inc. 18,396,725
366,200 Elan Corporation, plc * 26,389,288
262,000 Forest Laboratories, Inc. * 9,006,250
237,500 Sofamor Danek Group, Inc. * 21,137,500
12,900 Thermo Cardiosystems Inc. * 206,400
375,150 Trex Medical Corporation * 4,783,162
-------------
107,555,888
-------------
Health Care Services - 15.01%
184,779 Cardinal Health, Inc. 19,078,432
621,000 Emeritus Corporation * + 6,714,563
752,750 HCR Manor Care, Inc. * 22,064,984
2,562,183 Health Management Associates,
Inc. - Class A * 46,759,840
884,400 Patterson Dental Company * 32,722,800
1,033,750 Quorum Health Group, Inc. * 16,798,436
-------------
144,139,055
-------------
Industrial Products and Services - 7.59%
565,000 Fastenal Company 14,125,000
939,750 General Cable Corporation 17,385,375
760,000 Republic Services, Inc. * 14,820,000
570,000 Superior Services, Inc. * 16,066,875
547,300 Sybron International
Corporation * 10,467,113
-------------
72,864,363
-------------
Insurance - 9.13%
446,100 Liberty Financial
Companies, Inc. 11,765,887
1,238,400 Mutual Risk Management Ltd. 43,808,400
890,000 Protective Life Corporation 32,040,000
-------------
87,614,287
-------------
Media, Communications
and Entertainment - 11.36%
1,338,400 Artesyn Technologies, Inc. * 23,087,400
658,100 General Motors
Corporation - Class H * 24,226,306
325,000 International Speedway
Corporation - Class A 9,729,688
477,500 PanAmSat Corporation * 19,607,344
222,000 Penske Motorsports, Inc. * 4,828,500
763,795 Qwest Communications
International Inc. * 23,916,331
187,500 USA Networks, Inc. * 3,644,531
-------------
109,040,100
-------------
Real Estate - 2.65%
871,000 Corrections Corporation
of America * 11,812,937
431,120 Meditrust Corp. Paired ctf. 7,355,985
531,346 Ventas, Inc. * 6,309,734
-------------
25,478,656
-------------
Retail Trade - 7.84%
735,000 AutoZone, Inc. * 18,099,375
389,948 CVS Corporation 17,084,597
237,800 Kohl's Corporation * 9,274,200
1,106,000 OfficeMax, Inc. * 10,852,625
550,000 O'Reilly Automotive, Inc. * 19,937,500
-------------
75,248,297
-------------
Transportation - 3.41%
508,000 Expeditors International of
Washington, Inc. 14,097,000
1,128,892 Heartland Express, Inc. * 18,626,718
-------------
32,723,718
-------------
TOTAL COMMON STOCKS
(cost $574,016,847) 914,326,774
-------------
CONVERTIBLE BONDS - 0.75%
$7,000,000 Emeritus Corporation, +
6.25%, due January 1, 2006 5,162,500
2,500,000 ThermoTrex Corporation,
3.25%, due November 1, 2007 2,034,375
------------
TOTAL CONVERTIBLE BONDS
(cost $8,480,500) 7,196,875
-------------
SHORT-TERM INVESTMENTS - 3.34%
Commercial Paper - 2.94%
4,500,000 Cox Enterprises, Inc.,
5.68%, due October 2, 1998 4,499,290
2,000,000 Quad/Graphics, Inc.,
5.70%, due October 9, 1998 1,997,467
3,645,000 Schreiber Foods, Inc.,
5.65%, due October 14, 1998 3,637,563
3,600,000 Marriott International, Inc.,
5.72%, due October 15, 1998 3,591,992
7,300,000 Boston Scientific Corporation,
5.73%, due October 23, 1998 7,274,438
2,300,000 Schreiber Foods, Inc.,
5.70%, due October 27, 1998 2,290,532
5,000,000 PanAmSat Corporation,
5.69%, due November 9, 1998 4,969,179
-------------
28,260,461
-------------
Variable Rate Demand Notes - 0.40%
649,887 General Mills, Inc.,
4.95%, due October 1, 1998 649,887
463,000 Pitney Bowes Credit Corporation,
4.95%, due October 1, 1998 463,000
418,530 Sara Lee Corporation,
4.94%, due October 1, 1998 418,530
1,295,817 Warner-Lambert Company,
4.96%, due October 1, 1998 1,295,817
962,194 Wisconsin Electric Power Company
4.96%, due October 1, 1998 962,194
-------------
3,789,428
-------------
TOTAL SHORT-TERM INVESTMENTS
(cost $31,912,130) 32,049,889
-------------
TOTAL INVESTMENTS
(cost $614,409,477) 953,573,538
-------------
CASH AND RECEIVABLES,
NET OF LIABILITIES - 0.67% 6,456,387
-------------
TOTAL NET ASSETS (Basis of
percentages disclosed above) $960,029,925
------------
------------
</TABLE>
+ This company is affiliated with the Fund; that is, the Fund
holds 5% or more of its outstanding voting securities. Such
companies are defined in Section 2(a)(3) of the Investment
Company Act of 1940. (Note 5)
* Nondividend paying security.
The accompanying notes to financial statements
are an integral part of this schedule.
Statement of Assets and Liabilities
September 30, 1998
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
ASSETS:
Investments in securities at market value (Note 1 (a)) --
Nonaffiliated issuers (cost $599,549,730)-
see accompanying schedule of investments.............. $941,696,475
Affiliated issuers (cost $14,859,747)-
see accompanying schedule of investments (Note 5)..... 11,877,063
--------------
Total investments............................... 953,573,538
--------------
Receivables --
Investment securities sold........................... 10,420,566
Dividends and interest............................... 321,334
--------------
Total Receivables............................... 10,741,900
--------------
Total assets.................................... 964,315,438
--------------
LIABILITIES:
Payables --
Investment securities purchased...................... 3,651,536
Management fee (Note 2).............................. 417,341
Other payables and accrued expenses.................. 216,636
--------------
Total liabilities............................... 4,285,513
--------------
Total net assets................................ $960,029,925
--------------
--------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding..................... $517,359,511
Net unrealized appreciation on investments (Note 3).... 339,026,302
Accumulated undistributed net realized
gains on investments.................................. 100,475,226
Accumulated undistributed net investment income........ 3,168,886
--------------
$960,029,925
--------------
--------------
NET ASSET VALUE PER SHARE ($.01 par value, 200,000,000 shares
authorized) offering price and redemption price
($960,029,925 ./. 27,606,085 shares outstanding)....... $34.78
------
------
The accompanying notes to financial statements
are an integral part of this statement.
Statement of Operations
For the Year Ended September 30, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
INCOME:
Dividends --
Nonaffiliated issuers....................... $ 7,593,916
Affiliated issuers (Note 5)................. 24,797
Interest --
Nonaffiliated issuers....................... 1,844,215
Affiliated issuers (Note 5)................. 437,523
------------
9,900,451
------------
EXPENSES:
Management fee (Note 2)...................... 5,548,861
Transfer agent fees.......................... 506,353
Registration fees............................ 72,712
Custodian fees............................... 54,180
Postage and mailing fees..................... 45,844
Legal fees................................... 40,624
Printing fees................................ 32,777
Audit and tax consulting fees................ 20,825
Telephone fees............................... 19,642
Directors' fees.............................. 13,500
Insurance fees............................... 8,264
Other operating expenses..................... 1,771
------------
6,365,353
------------
Net investment income........ 3,535,098
------------
NET REALIZED GAINS ON INVESTMENTS (Note 1 (b))
Nonaffiliated issuers 96,263,122
Affiliated issuers (Note 5) 4,214,421
------------
100,477,543
------------
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (122,367,451)
------------
Net gains (loss) on investments.... (21,889,908)
------------
Net increase (decrease) in net assets
resulting from operations.. $(18,354,810)
------------
------------
The accompanying notes to financial statements
are an integral part of this statement.
Statements of Changes in Net Assets
For the Years Ended September 30, 1998 and 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
1998 1997
------------ ------------
<S> <C> <C>
OPERATIONS:
Net investment income.................................................. $ 3,535,098 $ 1,971,980
Net realized gains on investments...................................... 100,477,543 134,967,832
Net increase (decrease) in unrealized appreciation on investments...... (122,367,451) 122,983,697
------------ ------------
Net increase (decrease) in net assets resulting from operations (18,354,810) 259,923,509
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.0810 and $0.0779 per share, respectively)........................ (1,981,807) (1,794,421)
Distributions from net realized gains on investment transactions
($5.2282 and $3.1621 per share, respectively)........................ (127,849,595) (72,841,242)
------------ ------------
Total distributions............................................ (129,831,402) (74,635,663)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (4,358,514 and 1,483,510
shares, respectively)................................................ 173,967,874 51,370,208
Net asset value of shares issued in distributions from
net investment income and net realized gains
(3,389,898 and 2,289,431 shares, respectively)...................... 120,442,883 69,507,135
Cost of shares redeemed (4,605,308 and 2,545,256 shares, respectively). (180,575,245) (86,539,799)
------------ ------------
Increase in net assets derived from
capital share transactions.................................... 113,835,512 34,337,544
------------ ------------
Total increase (decrease) in net assets....................... (34,350,700) 219,625,390
------------ ------------
NET ASSETS, at the beginning of the year (including undistributed net
investment income of $1,615,595 and $1,438,036, respectively).......... 994,380,625 774,755,235
------------ ------------
NET ASSETS, at the end of the year (including undistributed net
investment income of $3,168,886 and $1,615,595, respectively).......... $960,029,925 $994,380,625
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
Notes to Financial Statements
September 30, 1998
- ---------------------------------------------------------------------
(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 equity security 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. Most debt
securities, excluding short-term investments, are valued at
current evaluated bid price. Variable rate 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 generally recorded no later than the first business day after
the trade date. Cost amounts, as reported on the schedule of
investments and the statement of assets and liabilities, are the
same for Federal income tax purposes.
(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 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, 1/20th of 1% (.60 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% (.50 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, 1998, based on investment cost for Federal tax
purposes is as follows:
Aggregate gross unrealized appreciation on investments....$428,991,488
Aggregate gross unrealized depreciation on investments.... (89,965,186)
------------
Net unrealized appreciation .........................$339,026,302
------------
------------
(4) Investment Transactions --
For the year ended September 30, 1998, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $210,812,739 and $239,569,323, respectively.
Notes to Financial Statements (Continued)
September 30, 1998
- -------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
(5) Transactions with Affiliates --
Following is an analysis of fiscal 1998 transactions with "affiliated
companies" as defined by the Investment Company Act of 1940:
<TABLE>
<CAPTION>
Amount of
Share Activity Amount of Capital Gain
-------------------------------------------- Dividends Realized
Credited on Sale
to Income of Shares
Balance Balance in Fiscal in Fiscal
Security Name 9/30/97 Purchases Sales 9/30/98 1998 1998
------------- ------- --------- ----- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Emeritus Corporation (a)............ 621,000 --- -- 621,000 $ -- $ ---
Litchfield Financail Corporation (b) 413,287 --- 413,287 -- 24,797 4,214,421
--------- ------------
24,797 4,214,421
--------- -------------
</TABLE>
(a) In addition to the common stock, the Fund holds 7,000,000 principal
(par) value of an Emeritus Corporation convertible debenture at fiscal
year end. For fiscal 1998, the Fund earned $437,523 in interest on
this bond.
(b) As of September 30, 1998 the Fund is no longer affiliated with this
company.
- ------------------------------------------------------------------------------
Historical Record (Unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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, 1986........... 16.90 0.1630 0.0610 15.0 times 17,581
September 30, 1987........... 21.01 0.4200 0.5130 20.9 23,108
September 30, 1988........... 18.58 0.3380 1.3030 15.0 22,766
September 30, 1989........... 21.76 0.3350 0.0800 17.1 27,291
September 30, 1990........... 17.39 0.3124 0.6686 14.8 22,888
September 30, 1991........... 23.87 0.3422 0.1434 17.8 32,250
September 30, 1992........... 24.53 0.2447 0.4042 17.3 34,052
September 30, 1993........... 26.94 0.2350 0.8000 18.1 38,885
September 30, 1994........... 26.71 0.2000 1.4700 18.5 41,020
September 30, 1995........... 30.07 0.2056 1.8944 20.8 50,205
September 30, 1996........... 33.34 0.1750 2.4979 28.9 60,922
September 30, 1997........... 40.65 0.0779 3.1621 31.4 82,206
September 30, 1998........... 34.78 0.0810(a) 5.2282(a) 28.6 80,845
*Date of Initial Public Offering. (a) Paid December 31, 1997 to shareholders of
**Based on latest 12 months accomplished earnings. record December 24, 1997.
***Assuming reinvestment of all distributions.
</TABLE>
Range in quarter end price/earnings ratios
High Low
- ------------------------ -------------------------
3/31/98 32.9 9/30/85 11.7
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, 1998, 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, 1998, 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, 1998, 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,
October 23, 1998
AUTOMATIC INVESTMENT PLAN - AN UPDATE (UNAUDITED)
The Nicholas Family of Funds' Automatic Investment Plan provides a simple
method to dollar cost average into the fund(s) of your choice.
Dollar cost averaging involves making equal systematic investments over an
extended time period. A fixed dollar investment will purchase more shares
when the market is low and fewer shares when the market is high. The
automatic investment plan is an excellent way for you to become a disciplined
investor.
The following table illustrates what dollar cost averaging can achieve.
Please note that past performance is no guarantee of future results. Nicholas
Company recommends dollar cost averaging as a practical investment method. It
should be consistently applied for long periods (5-10 years or more) so that
investments are made through several market cycles. The table will be updated
and appear in future financial reports issued by the Nicholas Family of Funds.
<TABLE>
<CAPTION>
Nicholas II
_____________________
<S> <C> <C>
$1,000 initial investment on................................. 10-17-83* 9-30-88
Number of years investing $100.00 on the last day of each
month following the date of initial investment.......... 15.0 10
Total cash invested.......................................... $19,000 $13,000
Total dividends and capital gains distributions reinvested... $24,604 $ 9,349
Total full shares owned 9/30/98.............................. 1,868 835
Total market value on 9/30/98................................ $64,981 $29,048
</TABLE>
The results above assume purchase on the last day of the month. The Nicholas
Automatic Investment Plan actually invests on the 20th of each month (or on the
alternate date specified by the investor). Total market value includes
reinvestment of all distributions.
* Date of initial public offering.
Dividend Distribution Schedule
<TABLE>
<CAPTION>
NICHOLAS FAMILY OF FUNDS DECEMBER DISTRIBUTION SCHEDULE
-------------------------------------------------------
<S> <C> <C> <C>
FUND RECORD DATE EX-DIVIDEND DATE PAYMENT DATE
- ---- ----------- ---------------- ------------
NICHOLAS II 12/22/98 12/23/98 12/31/98
NICHOLAS FUND 12/28/98 12/29/98 12/31/98
NICHOLAS LIMITED
EDITION 12/29/98 12/30/98 12/31/98
NICHOLAS EQUITY
INCOME 12/29/98 12/30/98 12/31/98
NICHOLAS INCOME 12/29/98 12/30/98 12/31/98
</TABLE>
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
JEFFREY T. MAY
Senior Vice President and Treasurer
CANDACE L. LESAK
Vice President
MARK J. GIESE
Vice President
KATHLEEN A. EVANS
Assistant Vice President
TRACY C. EBERLEIN
Assistant Vice President
Investment Adviser
NICHOLAS COMPANY, INC.
Milwaukee, Wisconsin
414-272-6133 or 800-227-5987
Transfer Agent
FIRSTAR MUTUAL FUND SERVICES, LLC
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
Custodian
FIRSTAR BANK MILWAUKEE, N.A.
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
Counsel
MICHAEL, BEST & FRIEDRICH LLP
Milwaukee, Wisconsin
Auditors
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
- -------------------------------------------------------------------------------
This report is submitted for the information of shareholders
of the Fund. It is not authorized for distribuyion to prospective
investors unless preceded or accompanied by an effective prospectus.
700 North Water Street
Milwaukee, Wisconisn 53202
www.nicholasfunds.com
