November 19, 1999
Report to Fellow Shareholders:
Nicholas II ended its fiscal year September 1999 with a 12-month
total return of 2.50% compared to the S&P 500 return of 27.79% and the
Russell 2000 return of 19.07%. Driving most of the indices returns were
spectacular performance from large-cap growth stocks, especially technology,
and smaller cap speculations such as initial public offerings ("IPO's") of
internet companies.
The narrowness of the market and the differential in valuations
continue to astonish us. For example, the NASDAQ 100, an index of the
largest 100 companies on the NASDAQ, (mostly technology) returned 79.10% for
the year ended September 1999 and had an average price to earnings ratio
("P/E") of approximately 75x. This compares to the S&P 500 which returned
27.79% with a P/E ratio of 36x. This divergence of performance can also be
seen in small-caps with the Russell 2000 growth component returning 32.63%
for the year ending September 1999 versus 5.84% for the value component.
Returns for Nicholas II and selected indices are provided in the
chart below for the periods ended September 30, 1999.
<TABLE>
<CAPTION>
Average Annual Total Return*
----------------------------------------------------
1 Year 3 Years 5 Years 10 Years 15 Years
------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Nicholas II
(Distributions Reinvested).. 2.50% 10.80% 15.10% 11.75% 13.97%
Russell 2000 Index
(Dividends Reinvested)...... 19.07% 8.70% 12.38% 10.93% 11.74%
Standard & Poors 500 Index
(Dividends Reinvested)...... 27.79% 25.08% 25.02% 16.81% 17.97%
Consumer Price Index.......... 2.63% 2.09% 2.36% 3.00% 3.20%
Ending value of $10,000
invested in Nicholas II
(Distributions Reinvested).. $10,250 $13,602 $20,201 $30,363 $71,067
</TABLE>
The chart shows the meager performance of small company stocks
relative to large when comparing the 3, 5 and 10 year records of the Russell
2000 versus the S&P 500. This performance disparity has also caused relative
valuations to differ materially with small companies selling at much lower
valuations than large companies (excluding internet related companies).
Nicholas II's weighted median market cap of approximately $2 billion puts it
much closer to the Russell 2000 weighted median market cap of $760 million
than the S&P 500 which has a weighted median market cap of approximately $70
billion.
Nicholas II's performance for the year was driven by its exposure to
the media and entertainment industry with strong performance from radio stock
Clear Channel Communication, cable network company, USA Network and raceway
company, International Speedway Corporation. Further, performance by
technology companies such as ADC Telecommunications, Hughes Electronics and
Qwest Communications helped the Funds' performance.
The Funds' exposure to healthcare and financial stocks in general
hurt the Funds' annual performance with the exception of biotech company
Biogen, Inc. which was a strong performer. Fears of rising inflation,
government reimbursement cuts and heavy tax loss selling continued to depress
these sectors. The bright spot, however, is that since the end of September
these fears are abating allowing some of these stocks and the fund to recover.
In fact from September 30 to November 19, the Fund is up 11.03%.
Finally, Nicholas II's dearth of the most speculative end of the
market, which has had spectacular short-term performance, has impacted its
performance relative to indices and other funds during fiscal 1999. Periods
such as these when stocks are being driven by psychological greed pushing
their valuation beyond any reasonable or rational level puts us at a
disadvantage due to our disciplined approach to investing. We are cognizant
of the money making opportunities these speculations provide, however, we are
also aware of the downside risk these stocks retain. Sometimes we wish we
were more naive, however, our experience has proven that over the long-term
reality will win out. Take the biotech craze of the early 80's, or the
restaurant craze of the early 90's. Does anyone remember Boston Chicken?
A company whose stock rose dramatically as a speculative IPO, now in
bankruptcy. Currently, the hare has jumped out in front, however, there will
be a time when the hare falters and the tortoise catches up. Slow and steady
wins the race.
We will continue to stick to our long-term discipline and forego
short-term profit for long-term sustainability. We appreciate your continued
support in this time of relative underperformance. We are confident that our
investment approach will return to favor as it has after other speculative
markets.
Sincerely,
David O. Nicholas
* 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.
<PAGE>
[CAPTION]
<TABLE>
Financial Highlights
(For a share outstanding throughout each period)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR.......................... $34.78 $40.65 $33.34 $30.07 $26.71 $26.94 $24.53 $23.87 $17.39 $21.76
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.......... .01 .13 .08 .10 .24 .21 .21 .23 .26 .36
Net gains (losses) on
securities (realized and
unrealized)................... $1.18 (.69) 10.47 5.84 5.22 1.23 3.24 1.07 6.70 (3.75)
----- ---- ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................. $1.19 (.56) 10.55 5.94 5.46 1.44 3.45 1.30 6.96 (3.39)
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income..... (.13) ( .08) (.08) (.18) (.21) (.20) (.24) (.24) (.34) (.31)
From capital gains............. (4.01) (5.23) (3.16) (2.49) (1.89) (1.47) (.80) (.40) (.14) (.67)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (4.14) (5.31) (3.24) (2.67) (2.10) (1.67) (1.04) (.64) (.48) (.98)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF YEAR........................... $31.83 $34.78 $40.65 $33.34 $30.07 $26.71 $26.94 $24.53 $23.87 $17.39
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN....................... 2.50% (1.66)% 34.94% 21.35% 22.39% 5.49% 14.19% 5.59% 40.91% (16.14)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (millions)................... $874.1 $960.0 $994.4 $774.8 $682.2 $624.7 $715.8 $646.5 $490.9 $336.5
Ratio of expenses to average
net assets........................ .61% .59% .61% .62% .66% .67% .67% .66% .70% .71%
Ratio of net investment income
to average net assets............. .03% .33% .23% .29% .68% .72% .79% 1.01% 1.24% 1.78%
Portfolio turnover rate............ 21.03% 20.47% 30.21% 24.47% 19.63% 17.38% 27.32% 11.47% 12.46% 18.78%
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Top Ten Portfolio Holdings
September 30, 1999 (unaudited)
- ------------------------------------------------------------------------------
Percentage of
Net Assets
-------------
<S> <C>
Fiserv, Inc. .............................................. 5.37%
General Motors Corporation - Class H. ..................... 4.87%
Tootsie Roll Industries, Inc. ............................. 3.77%
Marshall & Ilsley Corporation ............................. 3.45%
Protective Life Corporation ............................... 2.95%
International Speedway Corporation - Class A. ............. 2.93%
Patterson Dental Company .................................. 2.87%
Artesyn Technologies, Inc. ................................ 2.77%
Sybron International Corporation .......................... 2.71%
Associated Banc-Corp. ..................................... 2.71%
------
Total of top ten holdings........................... 34.40%
------
------
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
September 30, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares or Quoted
Principal Market
Amount Value
--------- ------------
(Note 1 (a))
<S> <C> <C>
COMMON STOCKS - 87.87%
Banks and Finance - 11.87%
653,483 Associated Banc-Corp $ 23,647,916
367,030 Fifth Third Bancorp 22,331,500
17,706 First National Bank
of Anchorage (The) 18,077,826
527,900 Marshall & Ilsley Corporation 30,123,294
435,000 National Commerce Bancorporation 9,556,428
-------------
103,736,964
-------------
Business Services - 10.45%
1,445,625 Fiserv, Inc. * 46,982,813
466,062 G&K Services, Inc. - Class A 18,875,511
378,800 Keane, Inc. * 8,641,375
315,000 Paychex, Inc. 10,749,375
569,500 Thermo Instrument Systems Inc. * 6,086,531
-------------
91,335,605
-------------
Consumer Products
and Services - 2.34%
313,850 Newell Rubbermaid Inc. 8,964,341
351,200 Valspar Corporation (The) 11,479,850
-------------
20,444,191
-------------
Food and Beverage - 5.49%
1,003,123 Tootsie Roll Industries, Inc. 32,977,669
100,000 Tricon Global Restaurants, Inc. * 4,093,750
605,000 U.S. Foodservice * 10,890,000
-------------
47,961,419
-------------
Health Care Products - 7.76%
340,000 BioChem Pharma Inc. * 8,138,750
220,000 Biogen, Inc. * 17,338,750
435,000 Biomet, Inc. 11,445,937
272,400 Elan Corporation PLC * 9,142,425
262,000 Forest Laboratories, Inc. * 11,036,750
351,166 Watson Pharmaceuticals, Inc. * 10,732,511
-------------
67,835,123
-------------
Health Care Services - 7.63%
257,168 Cardinal Health, Inc. 14,015,656
2,677,183 Health Management Associates,
Inc. - Class A * 19,744,224
458,750 Manor Care, Inc. * 7,884,766
506,400 Patterson Dental Company * 25,098,450
-------------
66,743,096
-------------
Industrial Products
and Services - 6.39%
449,500 Fastenal Company 21,182,688
914,750 General Cable Corporation 10,977,000
881,300 Sybron International
Corporation * 23,684,937
-------------
55,844,625
-------------
Insurance - 4.69%
1,238,400 Mutual Risk Management Ltd. 15,170,400
890,000 Protective Life Corporation 25,810,000
-------------
40,980,400
-------------
Media and Entertainment - 6.80%
15,000 Citadel Communications Corporation* 511,875
172,865 Clear Channel Communications, Inc.* 13,807,592
486,926 International Speedway
Corporation - Class A 25,594,048
74,300 Univision Communications Inc. * 6,046,162
347,500 USA Networks, Inc. * 13,465,625
-------------
59,425,302
-------------
Retail Trade - 6.91%
735,000 AutoZone, Inc. * 20,625,937
319,948 CVS Corporation 13,057,878
157,800 Kohl's Corporation * 10,434,525
342,500 O'Reilly Automotive, Inc. * 16,322,283
-------------
60,440,623
-------------
Technology and Communications - 12.89%
302,500 ADC Telecommunications, Inc. * 12,686,094
1,278,400 Artesyn Technologies, Inc. * 24,249,714
743,100 General Motors
Corporation - Class H * 42,542,475
505,000 PanAmSat Corporation * 18,243,125
507,590 Qwest Communications
International Inc. * 15,005,629
-------------
112,727,037
-------------
Transportation - 4.65%
716,000 Expeditors International
of Washington, Inc. 22,979,161
1,250,892 Heartland Express, Inc. * 17,668,849
-------------
40,648,010
-------------
TOTAL COMMON STOCKS
(cost $416,400,956) 768,122,395
-------------
CONVERTIBLE BOND - 0.41%
Health Care Services - 0.41%
$6,000,000 Emeritus Corporation
6.25%, due January 1, 2006
(cost $4,980,500) 3,600,000
-------------
SHORT-TERM INVESTMENTS - 10.02%
Commercial Paper - 9.17%
1,000,000 Universal Foods Corporation
5.50%, due October 1, 1999 1,000,000
6,000,000 Quad/Graphics, Inc.
5.45%, due October 4, 1999 5,997,275
4,500,000 Marriott International, Inc.
5.45%, due October 5, 1999 4,497,275
4,200,000 Manpower Inc.
5.50%, due October 7, 1999 4,196,150
6,000,000 Marriott International, Inc.
5.45%, due October 8, 1999 5,993,642
3,000,000 A.O. Smith Corporation
5.50%, due October 13, 1999 2,994,500
6,000,000 Raytheon Company
5.45%, due October 13, 1999 5,989,100
2,000,000 Weyco Group, Inc.
5.50%, due October 14, 1999 1,996,028
3,500,000 Banta Corporation
5.50%, due October 15, 1999 3,492,514
4,687,000 Cox Enterprises, Inc.
5.52%, due October 19, 1999 4,674,064
1,700,000 Universal Foods Corporation
5.50%, due October 19, 1999 1,695,325
2,500,000 Banta Corporation
5.50%, due October 21, 1999 2,492,361
2,000,000 Marcus Corporation
5.50%, due October 22, 1999 1,993,583
2,000,000 WICOR Industries, Inc.
5.50%, due October 22, 1999 1,993,583
5,000,000 Raytheon Company
5.46%, due October 25, 1999 4,981,800
3,500,000 Briggs & Stratton Corporation
5.50%, due October 27, 1999 3,486,097
3,250,000 Briggs & Stratton Corporation
5.50%, due October 27, 1999 3,237,090
2,500,000 Banta Corporation
5.50%, due October 29, 1999 2,489,306
2,500,000 Briggs & Stratton Corporation
5.50%, due November 1, 1999 2,488,160
2,000,000 Marcus Corporation
5.50%, due November 2, 1999 1,990,222
1,500,000 Marcus Corporation
5.55%, due November 4, 1999 1,492,137
2,000,000 Banta Corporation
5.55%, due November 8, 1999 1,988,283
7,500,000 Cox Enterprises, Inc.
5.57%, due November 9, 1999 7,454,744
1,500,000 Manpower Inc.
5.55%, due November 10, 1999 1,490,750
-------------
80,103,989
-------------
Variable Rate Demand Notes - 0.85%
6,122,338 Firstar Bank U.S.A., N.A.
5.05%, due October 1, 1999 6,122,338
1,331,404 General Mills, Inc.
4.99%, due October 1, 1999 1,331,404
-------------
7,453,742
-------------
TOTAL SHORT-TERM
INVESTMENTS
(cost $87,328,572) 87,557,731
-------------
TOTAL INVESTMENTS
(cost $508,710,028) 859,280,126
-------------
CASH AND RECEIVABLES,
NET OF LIABILITIES - 1.70% 14,865,163
-------------
TOTAL NET ASSETS (Basis of
percentages disclosed above) $874,145,289
-------------
-------------
</TABLE>
* Nondividend paying security.
The accompanying notes to financial statements
are an integral part of this schedule.
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
September 30, 1999
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in securities at market value (cost $508,710,028) (Note 1 (a)).. $859,280,126
--------------
Receivables --
Investment securities sold................................................ 15,599,011
Dividends and interest.................................................... 367,977
--------------
Total receivables.................................................... 15,966,988
--------------
Total assets......................................................... 875,247,114
--------------
LIABILITIES:
Payables --
Investment securities purchased........................................... 517,500
Management fee (Note 2)................................................... 391,770
Other payables and accrued expenses....................................... 192,555
--------------
Total liabilities.................................................... 1,101,825
--------------
Total net assets..................................................... $874,145,289
--------------
--------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding.......................................... $511,594,001
Net unrealized appreciation on investments (Note 3)......................... 350,340,939
Accumulated undistributed net realized gains on investments................. 12,210,349
--------------
$874,145,289
--------------
--------------
NET ASSET VALUE PER SHARE ($.01 par value, 200,000,000 shares
authorized), offering price and redemption price
($874,145,289 / 27,462,951 shares outstanding).............................. $31.83
------
------
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
[CAPTION]
<TABLE>
Statement of Operations
For the Year Ended September 30, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<S>
INCOME: <C>
Interest....................................................... $ 3,526,477
Dividends...................................................... 2,984,220
------------
6,510,697
------------
EXPENSES:
Management fee (Note 2)........................................ 5,305,196
Transfer agent fees............................................ 553,988
Legal fees..................................................... 76,517
Registration fees.............................................. 72,406
Postage and mailing............................................ 70,777
Custodian fees................................................ 50,288
Printing....................................................... 46,131
Audit and tax consulting fees.................................. 27,025
Directors' fees................................................ 15,000
Telephone...................................................... 11,158
Insurance...................................................... 8,463
Other operating expenses....................................... 3,707
------------
6,240,656
------------
Net investment income................................. 270,041
------------
NET REALIZED GAINS (losses) ON INVESTMENTS
Nonaffiliated issuers 24,352,130
Affiliated issuers (Note 5) (1,679,702)
-----------
22,672,428
-----------
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS............ 11,314,637
------------
Net gains on investments.............................. 33,987,065
------------
Net increase in net assets resulting from operations.. $34,257,106
------------
------------
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
[CAPTION]
<TABLE>
Statements of Changes in Net Assets
For the Years Ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1999 1998
------------ -------------
OPERATIONS:
Net investment income.................................................... $ 270,041 $ 3,535,098
Net realized gains on investments........................................ 22,672,428 100,477,543
Net increase (decrease) in unrealized appreciation on investments ....... 11,314,637 (122,367,451)
------------ ------------
Net increase (decrease) in net assets resulting from operations.. 34,257,106 (18,354,810)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.1337 and $0.0810 per share, respectively)........................ (3,694,992) (1,981,807)
Distributions from net realized gains on investment transactions
($4.0049 and $5.2282 per share, respectively)........................ (110,681,240) (127,849,595)
------------ ------------
Total distributions............................................ (114,376,232) (129,831,402)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (4,328,067 and 4,358,514
shares, respectively)................................................. 154,027,842 173,967,874
Net asset value of shares issued in distributions to shareholders
(3,119,952 and 3,389,898 shares, respectively)........................ 107,638,328 120,442,883
Cost of shares redeemed (7,591,153 and 4,605,308 shares, respectively).. (267,431,680) (180,575,245)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions.................................... (5,765,510) 113,835,512
------------ ------------
Total (decrease) in net assets................................. (85,884,636) (34,350,700)
------------ ------------
NET ASSETS, at the beginning of the year (including undistributed net
investment income of $3,168,886 and $1,615,595, respectively)........... 960,029,925 994,380,625
------------ ------------
NET ASSETS, at the end of the year (including undistributed net
investment income of $0 and $3,168,886, respectively)................... $874,145,289 $960,029,925
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
Notes to Financial Statements
September 30, 1999
- --------------------------------------------------------------------------
(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 growth 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 last 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. The character of
distributions made during the year from net investment income or
net realized gain may differ from the characterization for federal
income tax purposes due to differences in the recognition of income,
expense and gain items for financial statement and tax purposes.
Where appropriate, reclassifications between net asset accounts are
made for such differences that are permanent in nature. Accordingly,
at September 30, 1999, reclassifications were recorded to increase
undistributed net investment income by $256,067 and decrease
accumulated undistributed net realized gains on investments by
$256,067.
(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 .75 of 1% on an
annual basis of the average net asset value up to and including $50
million, .60 of 1% on an annual basis of the average net asset value
over $50 million up to and including $100 million and .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, 1999, based on investment cost for federal tax
purposes is as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation on investments.. $383,393,815
Aggregate gross unrealized depreciation on investments.. (33,052,876)
------------
Net unrealized appreciation ....................... $350,340,939
------------
------------
</TABLE>
(4) Investment Transactions --
For the year ended September 30, 1999, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $203,129,069 and $385,057,681, respectively.
Notes to Financial Statements (Continued)
September 30, 1999
- -----------------------------------------------------------------------------
(5) Transactions with Affiliates --
Following is an analysis of fiscal 1999 transactions with "affiliated
companies" as defined by the Investment Company Act of 1940:
[CAPTION]
<TABLE>
Amount of
Capital (Loss)
Share Activity Realized on
------------------------------------------ Sale of Shares
Balance Balance in Fiscal
Security Name 9/30/98 Purchases Sales 9/30/99 1999
------------- ------- --------- ----- ------- --------------
<S> <C> <C> <C> <C> <C>
Emeritus Corporation (a)............ 621,000 --- 621,000 --- $(1,679,702)
</TABLE>
(a) As of September 30, 1999 the Fund is no longer affiliated with this
company.
There were no dividends from affiliated companies credited to income in
the one-year period ended September 30, 1999.
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, 1999, 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, 1999, 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, 1999, 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 26, 1999
[CAPTION]
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
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, 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 5.2282 28.6 80,845
September 30, 1999........... 31.83 0.1337(a) 4.0049(a) 29.0 82,864
</TABLE>
* Date of Initial Public Offering.
** Based on latest 12 months accomplished earnings.
*** Assuming reinvestment of all distributions.
(a) Paid December 31, 1998 to shareholders of record December 22, 1998.
Range in quarter end price/earnings ratios
High Low
- ----------------------- ---------------------------
March 31, 1998 32.9 September 30, 1985 11.7
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.
[CAPTION]
<TABLE>
Nicholas II
_____________________
<S> <C> <C>
$1,000 initial investment on................................. 10/17/83* 9/30/89
Number of years investing $100.00 each
month following the date of initial investment...... .... 16 10
Total cash invested.......................................... $ 20,200 13,000
Total dividends and capital gains distributions reinvested... $ 32,358 10,512
Total full shares owned 9/30/99.............................. 2,127 823
Total market value on 9/30/99................................ $ 67,708 26,202
</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.
[CAPTION]
<TABLE>
- -------------------------------------------------------------------------------
Dividend Distribution Schedule
- -------------------------------------------------------------------------------
NICHOLAS FAMILY OF FUNDS DECEMBER DISTRIBUTION SCHEDULE
-------------------------------------------------------
FUND RECORD DATE EX-DIVIDEND DATE PAYMENT DATE
----------- ---------------- ------------
<S> <C> <C> <C>
NICHOLAS II, INC. 12/22/1999 12/23/1999 12/23/1999
NICHOLAS FUND, INC. 12/21/1999 12/22/1999 12/22/1999
NICHOLAS LIMITED EDITION, INC. 12/29/1999 12/30/1999 12/30/1999
NICHOLAS EQUITY INCOME FUND, INC. 12/28/1999 12/29/1999 12/29/1999
NICHOLAS INCOME FUND, INC. 12/29/1999 12/30/1999 12/30/1999
</TABLE>
NICHOLAS FAMILY OF FUNDS
Services Offered
- ---------------------------------------------------------------------
* IRAs
*Traditional *Simple *Educational
*Roth *SEP
*Self-employed Master Retirement Plan
*Money Purchase *Profit Sharing
*Automatic Investment Plan
*Direct Deposit of Dividend and Capital Gain Distributions
*Systematic Withdrawl Plan with Direct Deposit
*Monthly Automatic Exchange between Funds
*Telephone Redemption
*Telephone Exchange
*24-hour Automated Account Information (800-544-6547)
Please call a shareholder representative for further information on
the above services or with any other questions you may have regarding
the Nicholas Family of Funds. 800-227-5987
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
MARK J. GIESE, Vice President
CANDACE L. LESAK, Vice President
TRACY C. EBERLEIN, Assistant Vice President
KATHLEEN A. EVANS, 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 INSTITUTIONAL CUSTODY SERVICES
Milwaukee, Wisconsin
Auditors
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
Counsel
MICHAEL BEST & FRIEDRICH LLP
Milwaukee, Wisconsin
- -------------------------------------------------------------------------------
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.
