UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-03851
Nicholas II, Inc.
(Exact name of registrant as specified in charter)
700 North Water Street, Milwaukee, Wisconsin 53202
(Address of principal executive offices) (Zip code)
Jeffrey T. May, Senior Vice President and Treasurer
700 North Water Street
Milwaukee, Wisconsin 53202
(Name and address of agent for service)
Registrant's telephone number, including area code: 414-272-4650
Date of fiscal year end: 09/30/2004
Date of reporting period: 09/30/2004
Item 1. Report to Stockholders.
November 2004
Report to Fellow Shareholders:
So far in 2004 the equity markets have managed to bore us with very little direction. Individual stocks however have been another story, with large ups and downs. As of September 30, 2004, the S&P 500 Index was up 1.51% year-to-date while the NASDAQ market lost 5.32%. This compares to Nicholas II’s return of 2.53%. There is a lid on the market due to concerns about oil prices, Iraq, and the strength of the economy. As these issues clear, the market should have a more distinct direction. We can only guess what direction that is. We are cautiously optimistic.
In reviewing Nicholas II, Inc.'s fiscal year ended September 30, 2004, the Fund produced a gain of 15.35% surpassing the S&P 500’s gain of 13.86% and the NASDAQ's gain of 6.15%. Returns for Nicholas II, Inc. and selected indices are provided in the chart below for the periods ended September 30, 2004.
| Average Annual Total Return |
| |
| 1 Year | 3 Year | 5 Year | 10 Year | 15 Year |
| Nicholas II, Inc. | 15.35% | 8.69% | 3.42% | 9.10% | 8.90% |
| Russell Midcap Growth Index | 13.68% | 10.09% | 0.63% | 9.64% | 10.08% |
| Morningstar Mid-Cap Growth Category | 11.06% | 5.42% | 0.49% | 8.70% | 9.04% |
| Standard & Poor’s 500 Index | 13.86% | 4.04% | (1.31)% | 11.08% | 10.43% |
Ending value of $10,000 invested in Nicholas II, Inc.
(Distributions Reinvested) | $11,535 | $12,839 | $11,832 | $23,900 | $35,924 |
Assumes reinvestment of all dividends and distributions. Past performance is no guarantee of future results. Investment returns, principal value and yield will fluctuate, so that you may have a gain or loss when you sell your shares. Performance data current to the most recent month-end, which may be higher or lower than that cited, is available at www.nicholasfunds.com/returns.htm
Nicholas II’s fiscal year performance was driven by strong returns in industrial, energy and financial stocks while media and technology stocks hurt the Funds performance. During the year we lightened up on the industrial sector due to what we think is a maturing recovery and moved some assets into healthcare and quality growth stocks. We continue to believe the time is right to own high quality mid- to small-cap growth companies as our economy moves in to a more mature stage of recovery.
The line graph which follows compares the initial account value and subsequent account values at the end of each of the most recently completed ten fiscal years of the Fund, to the same investment over the same period in two peer group indices. The graph assumes a $10,000 investment in the Fund and the indices at the beginning of the first fiscal year. The peer group in the graph includes the Russell Midcap Index and the Russell Midcap Growth Index. The Fund believes the Russell Midcap Index and the Russell Midcap Growth Index are representative of the performance of small- and medium-capitalization growth companies in which the Fund primarily invests.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
NICHOLAS II, INC., RUSSELL MIDCAP INDEX AND RUSSELL MIDCAP GROWTH INDEX
| Nicholas II, Inc. | % Total Return | Russell Midcap
Index | % Total Return | Russell Midcap Growth Index | % Total Return |
| 09/30/94 | 10,000 | | 10,000 | | 10,000 | |
| 09/30/95 | 12,239 | 22.39% | 12,706 | 27.06% | 12,967 | 29.67% |
| 09/30/96 | 14,852 | 21.35% | 14,740 | 16.01% | 15,088 | 16.36% |
| 09/30/97 | 20,041 | 34.94% | 19,908 | 35.06% | 19,561 | 29.64% |
| 09/30/98 | 19,708 | (1.66)% | 18,715 | (5.99)% | 17,727 | (9.37)% |
| 09/30/99 | 20,201 | 2.50% | 22,352 | 19.43% | 24,324 | 37.21% |
| 09/30/00 | 23,532 | 16.49% | 29,424 | 31.64% | 39,010 | 60.38% |
| 09/30/01 | 18,616 | (20.89)% | 22,843 | (22.37)% | 18,812 | (51.78)% |
| 09/30/02 | 16,756 | (9.99)% | 20,791 | (8.98)% | 15,898 | (15.49)% |
| 09/30/03 | 20,721 | 23.66% | 27,575 | 32.63% | 22,080 | 38.89% |
| 09/30/04 | 23,902 | 15.35% | 33,242 | 20.55% | 25,101 | 13.68% |
The Fund's average annual total returns for the one, five and ten year periods ended on the last day of the most recent fiscal year are as follows:
| One Year Ended September 30, 2004 | Five Years Ended September 30, 2004 | Ten Years Ended September 30, 2004 |
| | | |
| Average Annual Total Return | 15.35% | 3.42% | 9.10% |
Past performance is not predictive of future performance, and the above graph and table do not reflect deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.
As I mentioned earlier there has been large volatility among individual stocks. We continue to look for opportunities to add quality companies with good management and strong growth opportunities while trimming or selling companies that have become overvalued or have lost their way.
Thank you for your continued support.
Sincerely,
David O. Nicholas
Portfolio Manager
Financial Highlights
For a share outstanding throughout each period
- -----------------------------------------------------------------------------------------------------------------------
Year Ended September 30,
----------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $18.97 $15.34 $17.54 $36.58 $31.83 $34.78 $40.65 $33.34 $30.07 $26.71
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income
(loss) .................. (.01) (.01) (.02) (.01) .01 .01 .13 .08 .10 .24
Net gain (loss) on
securities (realized and
unrealized) ............. 2.92 3.64 (1.60) (5.91) 5.22 1.18 (.69) 10.47 5.84 5.22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations ........... 2.91 3.63 (1.62) (5.92) 5.23 1.19 (.56) 10.55 5.94 5.46
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
From net investment
income .................. -- -- -- -- (.01) (.13) (.08) (.08) (.18) (.21)
From net capital gain .... (.00)* -- (.58) (13.12) (.47) (4.01) (5.23) (3.16) (2.49) (1.89)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions ... (.00)* -- (.58) (13.12) (.48) (4.14) (5.31) (3.24) (2.67) (2.10)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD .................. $21.88 $18.97 $15.34 $17.54 $36.58 $31.83 $34.78 $40.65 $33.34 $30.07
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN ................ 15.35% 23.66% (9.99)% (20.89)% 16.49% 2.50% (1.66)% 34.94% 21.35% 22.39%
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) .......... $515.5 $472.5 $408.5 $512.0 $775.4 $874.1 $960.0 $994.4 $774.8 $682.2
Ratio of expenses to
average net assets ......... .63% .65% .65% .62% .62% .61% .59% .61% .62% .66%
Ratio of net investment
income (loss) to average
net assets ................. (.04)% (.06)% (.12)% (.03)% .02% .03% .33% .23% .29% .68%
Portfolio turnover rate ..... 15.35% 26.10% 47.37% 49.92% 65.46% 21.03% 20.47% 30.21% 24.47% 19.63%
* The amount rounds to $.00, the actual amount is $.00154.
The accompanying notes to financial statements are an integral part of these highlights.
-------------------------------------------------------------------------------
Top Ten Portfolio Holdings
September 30, 2004 (unaudited)
- -------------------------------------------------------------------------------
Percentage
Name of Net Assets
---- -------------
International Speedway Corporation -- Class A ............. 2.20%
Renal Care Group, Inc. .................................... 2.12%
Fiserv, Inc. .............................................. 2.07%
Marshall & Ilsley Corporation ............................. 1.95%
Willis Group Holdings Limited ............................. 1.94%
ChoicePoint Inc. .......................................... 1.87%
Kohl's Corporation ........................................ 1.80%
Expeditors International of Washington, Inc. .............. 1.70%
CDW Corporation ........................................... 1.69%
O'Reilly Automotive, Inc. ................................. 1.65%
------
Total of top ten .......................................... 18.99%
------
-------------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
September 30, 2004
- -------------------------------------------------------------------------------
PIE CHART PLOT POINTS
Consumer Discretionary .................................... 22.26%
Consumer Staples .......................................... 2.09%
Energy .................................................... 5.66%
Financials ................................................ 14.70%
Health Care ............................................... 23.07%
Industrials ............................................... 9.20%
Information Technology .................................... 19.60%
Materials ................................................. 1.45%
Short-Term Investments .................................... 1.97%
-------------------------------------------------------------------------------
Fund Expenses
- -------------------------------------------------------------------------------
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs and (2) ongoing costs, including management fees and other operating
expenses. The following table is intended to help you understand your ongoing
costs (in dollars) of investing in the Fund and to compare these costs with
those of other mutual funds.
The example is based on an investment of $1,000 made at the beginning of the
report period and held for the entire report period.
The first line of the table provides information about the actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is
not the Fund's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in the Fund with other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder
reports of other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as wire
fees. Therefore, the second line of the table is useful in comparing ongoing
costs only, and will not help you determine the relative total costs of owning
different funds. In addition, if these transactional costs were included, your
costs would have been higher.
Beginning Ending Expenses
Account Account Paid During
Value Value Period*
04/01/2004 09/30/2004
--------------------------------------------------------------
Actual $1,000 $ 982 $3.12
Hypothetical 1,000 1,044 3.22 * Expenses are equal to the Fund's annualized expense ratio 0.63%,
multiplied by the average account value over the period, multiplied by
number of days in most recent fiscal half-year, then divided by 366.
Schedule of Investments
September 30, 2004
- -------------------------------------------------------------------------------
COMMON STOCKS -- 97.93%
Consumer Discretionary -
Auto & Components -- 1.39%
120,600 Harley-Davidson, Inc. ................................ $ 7,168,464
------------
Consumer Discretionary -
Hotels Restaurants & Leisure -- 6.26%
142,500 Applebee's International, Inc. ....................... 3,602,400
226,926 International Speedway Corporation -- Class A ........ 11,323,607
100,000 Outback Steakhouse, Inc. ............................. 4,153,000
165,000 Panera Bread Company * ............................... 6,194,100
65,000 Starbucks Corporation * .............................. 2,954,900
120,000 Wendy's International, Inc. .......................... 4,032,000
------------
32,260,007
------------
Consumer Discretionary -
Media -- 6.46%
265,265 Clear Channel Communications, Inc. ................... 8,268,310
475,407 DIRECTV Group, Inc. (The) * .......................... 8,362,409
100,000 EchoStar Communications Corporation * ................ 3,112,000
170,000 Lamar Advertising Company * .......................... 7,073,700
603,918 Liberty Media Corporation -- Class A * ............... 5,266,165
36,374 Liberty Media International, Inc. -- Class A * ....... 1,213,509
------------
33,296,093
------------
Consumer Discretionary -
Retail -- 8.13%
150,000 Family Dollar Stores, Inc. ........................... 4,065,000
320,000 IAC/InterActiveCorp * ................................ 7,046,400
120,000 J.C. Penney Company, Inc. ............................ 4,233,600
192,100 Kohl's Corporation * ................................. 9,257,299
222,000 O'Reilly Automotive, Inc. * .......................... 8,500,380
145,000 Target Corporation ................................... 6,561,250
60,000 Williams-Sonoma, Inc. * .............................. 2,253,000
------------
41,916,929
------------
Consumer Staples -
Food, Beverage & Tobacco -- 1.12%
215,000 Hormel Foods Corporation ............................. 5,757,700
------------
Consumer Staples -
Food & Staple Retail -- 0.97%
119,148 CVS Corporation ...................................... 5,019,705
------------
Energy -- 5.66%
122,950 Apache Corporation ................................... 6,161,024
80,000 BJ Services Company .................................. 4,192,800
110,000 GlobalSantaFe Corporation ............................ 3,371,500
163,128 Kinder Morgan Management, LLC * ...................... 6,773,091
63,000 Nabors Industries, Ltd. * ............................ 2,983,050
175,000 XTO Energy, Inc. ..................................... 5,684,000
------------
29,165,465
------------
Financials - Banks -- 5.26%
95,000 Commerce Bancorp, Inc. ............................... 5,244,000
90,545 Fifth Third Bancorp .................................. 4,456,625
110,000 MGIC Investment Corporation .......................... 7,320,500
250,000 Marshall & Ilsley Corporation ........................ 10,075,000
------------
27,096,125
------------
Financials - Diversified -- 3.79%
67,500 Affiliated Managers Group, Inc. * .................... 3,613,950
170,000 Eaton Vance Corp. .................................... 6,866,300
142,500 Legg Mason, Inc. ..................................... 7,590,975
20,000 Moody's Corporation .................................. 1,465,000
------------
19,536,225
------------
Financials - Insurance -- 5.63%
155,000 Arthur J. Gallagher & Co. ............................ 5,135,150
39,000 Everest Re Group, Ltd. ............................... 2,898,870
188,800 Nationwide Financial Services, Inc. .................. 6,628,768
30,000 PartnerRe Ltd. ....................................... 1,640,700
70,000 Protective Life Corporation .......................... 2,751,700
267,000 Willis Group Holdings Limited ........................ 9,985,800
------------
29,040,988
------------
Health Care - Equipment -- 8.11%
155,000 Biomet, Inc. ......................................... 7,266,400
180,000 Boston Scientific Corporation * ...................... 7,151,400
85,000 DENTSPLY International Inc. .......................... 4,414,900
106,960 Fisher Scientific International Inc. * ............... 6,238,977
85,500 Guidant Corporation .................................. 5,646,420
115,000 Kinetic Concepts, Inc. * ............................. 6,043,250
95,000 Respironics, Inc. * .................................. 5,076,800
------------
41,838,147
------------
Health Care - Pharmaceuticals
& Biotechnology -- 6.52%
65,000 Allergan, Inc. ....................................... 4,715,750
39,750 Biogen Idec Inc. * ................................... 2,431,507
36,000 Biotech HOLDRS Trust * ............................... 5,202,000
121,500 Forest Laboratories, Inc. * .......................... 5,465,070
180,000 Medicis Pharmaceutical Corporation -- Class A ........ 7,027,200
220,326 Shire Pharmaceuticals Group PLC ...................... 6,312,340
95,000 Teva Pharmaceutical Industries Ltd. .................. 2,465,250
------------
33,619,117
------------
Health Care - Services -- 8.41%
23,252 Cardinal Health, Inc. ................................ 1,017,740
182,500 DaVita, Inc. * ....................................... 5,684,875
60,000 First Health Group Corp. * ........................... 965,400
240,883 Health Management Associates, Inc. ................... 4,921,240
350,000 IMS Health Incorporated .............................. 8,372,000
13,800 Patterson Companies, Inc. * .......................... 1,056,528
203,500 Priority Healthcare Corporation * .................... 4,100,525
338,750 Renal Care Group, Inc. * ............................. 10,917,913
145,000 Universal Health Services, Inc. -- Class B ........... 6,307,500
------------
43,343,721
------------
Industrials - Capital Goods -- 1.36%
121,500 Fastenal Company ..................................... 6,998,400
------------
Industrials - Commercial Services
& Supplies --6.13%
351,000 ARAMARK Corporation .................................. 8,473,140
226,604 ChoicePoint Inc. * ................................... 9,664,661
182,500 Cintas Corporation ................................... 7,672,300
130,000 Manpower Inc. ........................................ 5,783,700
------------
31,593,801
------------
Industrials - Transportation -- 1.70%
170,000 Expeditors International of Washington, Inc. ......... 8,789,000
------------
Information Technology -
Communication Equipment -- 1.85%
135,000 Harris Corporation ................................... 7,416,900
230,000 Tellabs, Inc. * ...................................... 2,113,700
------------
9,530,600
------------
Information Technology -
Hardware & Equipment -- 7.01%
150,000 CDW Corporation ...................................... 8,704,500
155,000 Molex Incorporated -- Class A ........................ 4,078,050
51,400 Plantronics, Inc. .................................... 2,222,536
195,000 QLogic Corporation * ................................. 5,773,950
95,000 Tech Data Corporation * .............................. 3,662,250
392,500 Vishay Intertechnology, Inc. * ....................... 5,063,250
108,750 Zebra Technologies Corporation -- Class A * .......... 6,634,838
------------
36,139,374
------------
Information Technology -
Semiconductors & Equipment -- 2.46%
282,000 Intersil Holding Corporation -- Class A .............. 4,492,260
100,000 LSI Logic Corporation * .............................. 431,000
288,750 Microchip Technology Incorporated .................... 7,750,050
------------
12,673,310
------------
Information Technology -
Software & Services -- 8.26%
145,000 Affiliated Computer Services, Inc. * ................. 8,072,150
322,500 BEA Systems, Inc. * .................................. 2,228,475
85,300 Check Point Software Technologies Ltd. * ............. 1,447,541
305,937 Fiserv, Inc. * ....................................... 10,664,964
233,500 Hewitt Associates, Inc. * ............................ 6,178,410
230,000 Jabil Circuit, Inc. * ................................ 5,290,000
220,000 Keane, Inc. * ........................................ 3,379,200
225,000 SunGard Data Systems Inc. * .......................... 5,348,250
------------
42,608,990
------------
Materials -- 1.45%
281,400 Bemis Company, Inc. .................................. 7,479,612
------------
TOTAL COMMON STOCKS
(cost $349,308,762) ............................... 504,871,773
------------
SHORT-TERM INVESTMENTS -- 1.96%
Commercial Paper -- 1.60%
$1,000,000 Prudential Financial, Inc.
10/01/04, 1.78% ...................................... 1,000,000
1,500,000 LaSalle Bank Corporation
10/05/04, 1.80% ...................................... 1,499,700
2,500,000 John Deere Capital Corporation
10/07/04, 1.73% ...................................... 2,499,279
1,250,000 Fiserv, Inc.
10/13/04, 1.75% ...................................... 1,249,271
1,000,000 Coca-Cola Enterprises Inc.
10/19/04, 1.76% ...................................... 999,120
1,000,000 Fiserv, Inc.
10/22/04, 1.90% ...................................... 998,892
------------
8,246,262
------------
Variable Rate Demand Note -- 0.36%
1,874,992 U.S. Bank N.A.
10/01/04, 1.59% ..................................... 1,874,992
------------
TOTAL SHORT-TERM
INVESTMENTS
(cost $10,121,254) ................................ 10,121,254
------------
TOTAL INVESTMENTS
(cost $359,430,016) -- 99.89% ..................... 514,993,027
------------
OTHER ASSETS,
NET OF LIABILITIES -- 0.11% .......................... 554,502
------------
TOTAL NET ASSETS
(Basis of percentages
disclosed above) -- 100% ......................... $515,547,529
------------
------------* Non-income producing security.
The accompanying notes to financial statements are an integral part of this
schedule.
Statement of Assets and Liabilities
September 30, 2004
- -------------------------------------------------------------------------------ASSETS
Investments in securities at value (cost $359,430,016) .... $514,993,027
------------
Receivables -
Investment securities sold ........................... 784,128
Dividend and interest ................................ 267,108
Other ................................................ 5,096
------------
Total receivables ............................... 1,056,332
------------
Total assets .................................... 516,049,359
------------LIABILITIES
Payables -
Management fee ...................................... 225,110
Investment securities purchased...................... 154,155
Other payables and accrued expense ................... 122,565
------------
Total liabilities ............................... 501,830
------------
Total net assets ................................ $515,547,529
------------
------------NET ASSETS CONSIST OF
Paid in capital ........................................... $338,614,059
Net unrealized appreciation on investments ................ 155,563,011
Accumulated undistributed
net realized gain on investments ......................... 21,370,459
------------
Total net assets ................................ $515,547,529
------------
------------NET ASSET VALUE PER SHARE ($.01 par value,
200,000,000 shares authorized),
offering price and redemption price
($515,547,529 / 23,557,726 shares outstanding) .............. $21.88
------
------
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the year ended September 30, 2004
- -------------------------------------------------------------------------------INCOME
Dividend .................................................. $ 2,818,633
Interest .................................................. 258,939
-----------
Total income ......................................... 3,077,572
-----------EXPENSES
Management fee ............................................ 2,787,277
Transfer agent fees ....................................... 271,118
Postage and mailing ....................................... 77,342
Registration fees ......................................... 30,559
Legal fees ................................................ 26,315
Custodian fees ............................................ 26,122
Printing .................................................. 24,656
Audit and tax fees ........................................ 22,000
Insurance ................................................. 14,113
Accounting system and pricing service fees ................ 10,495
Directors' fees ........................................... 10,000
Other operating expenses .................................. 6,888
-----------
Total expenses ....................................... 3,306,885
-----------
Net investment loss .................................. (229,313)
-----------NET REALIZED GAIN ON INVESTMENTS .............................. 23,481,527
-----------CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS .......... 48,606,700
-----------
Net realized and unrealized gain on investments ........... 72,088,227
-----------
Net increase in net assets resulting from operations ...... $71,858,914
-----------
-----------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, 2004 and 2003
- -------------------------------------------------------------------------------
2004 2003
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment loss .................... $ (229,313) $ (245,378)
Net realized gain
on investments ........................ 23,481,527 4,317,258
Change in net unrealized
appreciation on investments ........... 48,606,700 88,156,556
------------ -------------
Net increase in net assets
resulting from operations ........ 71,858,914 92,228,436
------------ -------------DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments .. (37,694) --
------------ -------------CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued
(957,859 and 5,517,256
shares, respectively) ................. 20,638,630 90,154,057
Reinvestment of distributions
(1,694 and 0 shares, respectively) .... 35,767 --
Cost of shares redeemed
(2,304,377 and 7,239,686
shares, respectively) ................. (49,403,055) (118,417,042)
------------ -------------
Decrease in net assets
derived from capital share
transactions ..................... (28,728,658) (28,262,985)
------------ -------------
Total increase in net assets ...... 43,092,562 63,965,451
------------ -------------NET ASSETS
Beginning of period .................... 472,454,967 408,489,516
------------ -------------
End of period .......................... $515,547,529 $472,454,967
------------ -------------
------------ -------------
The accompanying notes to financial statements are an integral part of these
statements.
Notes to Financial Statements
September 30, 2004
- ------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies --
Nicholas II, Inc. (the "Fund") is organized as a Maryland corporation and
is registered as an open-end, diversified management investment company
under the Investment Company Act of 1940, as amended. The primary
objective of the Fund is long-term growth. The following is a summary of
the significant accounting policies of the Fund: (a) Equity securities traded on a stock exchange will ordinarily be valued
on the basis of the last sale price on the date of valuation on the
securities principal exchange, or in the abscence of any sale on that
day, the closing bid price. For valuating securities traded on the
NASDAQ market, the Fund uses the NASDAQ Official Closing Price. Debt
securities, excluding short-term investments, are valued at their
current evaluated bid price as determined by an independent pricing
service, which generates evaluations on the basis of dealer quotes for
normal, institutional-sized trading units, issuer analysis, bond
market activity and various other factors. Securities for which
market quotations may not be readily available are valued at their
fair value as determined in good faith by procedures adopted by the
Board of Directors. Variable rate demand notes are valued at cost,
which approximates market value. U.S. Treasury Bills and commercial
paper are stated at amortized cost, which approximates market value.
Investment transactions are recorded no later than the first business
day after the trade date. (b) Net realized gain (loss) on portfolio securities was computed on the
basis of specific identification. (c) Dividend income is recorded on the ex-dividend date, and interest
income is recognized on an accrual basis. Non-cash dividends, if any,
are recorded at value on date of distribution. Dividends and
distributions paid to shareholders are recorded on the ex-dividend
date. (d) 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 net investment
income and net realized capital gains on sales of investments to its
shareholders and otherwise comply with the provisions of Subchapter M
of the Internal Revenue Code applicable to regulated investment
companies. As of September 30, 2004, the Fund has no capital loss carryforward.
For the year ended September 30, 2004, the Fund realized no
post-October losses for tax purposes. For the year ended September 30, 2004, the Fund had no tax deferral of
wash loss sales. (e) Distributions from net investment income are generally declared and
paid annually. Distributions of net realized capital gain, if any,
are declared and paid at least annually. The amount of distributions from net investment income and net
realized capital gain are determined in accordance with federal income
tax regulations, which may differ from accounting principles generally
accepted in the United States. To the extent these book and tax
differences are permanent in nature, such amounts are reclassified
among paid in capital, accumulated undistributed net realized gain
(loss) on investments and accumulated undistributed net investment
income. Accordingly, at September 30, 2004, reclassifications were
recorded to increase accumulated undistributed net investment income
by $229,313, and decrease paid in capital by $229,313. This adjustment
is attributable to the reclass of the net operating loss. The tax character of distributions paid during the years ended
September 30 were as follows: 09/30/2004 09/30/2003
------------ ------------
Distributions paid from:
Long-term capital gain ..... $ 37,694 $ --
------------ ------------
------------ ------------ For the year ended September 30, 2004, there were no dividends paid
from ordinary income; therefore, corporate shareholders are not able
to take the dividends received deduction and no distributions will be
eligible for the qualified dividend rate of 15%. As of September 30, 2004, investment cost for federal tax purposes was
$359,430,016 and the tax basis components of net assets were as
follows: Unrealized appreciation ....................... $172,936,951
Unrealized depreciation ....................... (17,373,940)
------------
Net unrealized appreciation ................... 155,563,011
------------
Undistributed ordinary income ................. ---
Accumulated undistributed net realized
capital gain ................................. 21,370,459
Paid in capital ............................... 338,614,059
------------
Net assets .................................... $515,547,529
------------
------------ There were no differences between the book-basis and tax-basis
components of net assets.
The Fund hereby designates approximately $37,694 as a capital gain
dividend for the purposes of the dividends paid deduction. (f) The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could
differ from estimates.(2) Related Parties --
(a) 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) (the "Adviser") to serve
as investment adviser and manager. Under the terms of the agreement, a
monthly fee is paid to the Adviser based on an annualized fee of .75% of
the average net asset value up to and including $50 million, .60% of the
average net asset value over $50 million up to and including $100 million
and .50% of the average net asset value in excess of $100 million. Also,
the Adviser may be reimbursed for clerical and administrative services
rendered by its personnel. No amounts were paid by the Fund for clerical
and administrative services during the year ended September 30, 2004. (b) Independent Counsel --
A director of the Adviser is affiliated with the law firm that provides
services to the Fund. The Fund incurred legal expenses of $24,896 for the
year ended September 30, 2004.
(3) Investment Transactions --
For the year ended September 30, 2004, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $76,899,110 and $89,039,079, respectively.Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------------------------------
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"), including the schedule of investments, as of
September 30, 2004, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years then
ended, and the financial highlights for each of the three years in the period
then ended. 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. The financial highlights for each of the seven years in the period
ended September 30, 2001 were audited by other auditors whose report dated
October 18, 2001, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits 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 and
financial highlights. Our procedures included confirmation of securities owned
as of September 30, 2004, by correspondence with the custodian and brokers or
by other appropriate auditing procedures where replies from brokers were not
received. 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., at September 30, 2004, and the results of its operations for
the year then ended and the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLPChicago, Illinois,
November 17, 2004
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 ***
----------- -------------- ------------- -------------- --------------
October 17, 1983 * ..... $10.00 $ -- $ -- -- $10,000
September 30, 1984 ..... 11.66 -- -- 12.6 times 11,660
September 30, 1985 ..... 14.39 0.0930 0.1860 11.7 14,742
September 30, 1986 ..... 16.90 0.1630 0.0610 15.0 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 4.0049 29.0 82,864
September 30, 2000 ..... 36.58 0.0100 0.4701 35.1 96,527
September 30, 2001 ..... 17.54 -- 13.1200 23.4 76,361
September 30, 2002 ..... 15.34 -- 0.5766 22.2 68,730
September 30, 2003 ..... 18.97 -- -- 22.9 84,994
September 30, 2004 ..... 21.88 -- 0.0015(a) 22.9 98,040 * Date of Initial Public Offering.
** Based on latest 12 months accomplished earnings.
*** Assuming reinvestment of all distributions.
(a) Paid $0.00154 on December 26, 2003 to shareholders of record on December 24, 2003.
Range in quarter end price/earnings ratios
High Low
- ------------------------ ------------------------
September 30, 2000 35.1 September 30, 1985 11.7
INFORMATION ON PROXY VOTING
- -------------------------------------------------------------------------------
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available, without
charge, upon request by calling 800-227-5987 (toll-free) or 414-272-6133. It
also appears in the Fund's Statement of Additional Information, which can be
found on the SEC's website, www.sec.gov. A record of how the Fund voted its
proxies for the period from July 1, 2003 to June 30, 2004 is also available on
the Fund's website, www.nicholasfunds.com, and the SEC's website, www.sec.gov.
QUARTERLY PORTFOLIO SCHEDULE
- ------------------------------------------------------------------------------
The Fund will file its complete schedule of investments with the SEC for the
first and third quarters of each fiscal year on Form N-Q beginning December 31,
2004. The Fund's Form N-Q's will be available on the SEC's website at
www.sec.gov and may be reviewed and copied at the SEC's Public Reference Room
in Washington, D.C. Information on the operation of the Public Reference Room
may be obtained by calling 1-800-SEC-0330.
DIRECTORS AND OFFICERS OF THE FUND (unaudited)
- -----------------------------------------------------------------------------------------------------------------------
The following table sets forth the pertinent information about the Fund's directors and officers as of October 31,
2004. Unless otherwise listed, the business address of each director and officer is 700 North Water Street, Milwaukee,
WI 53202.
Number of
Term of Portfolios in Other
Office and Fund Complex Directorships
Positions Held Length of Principal Occupations Overseen Held
Name, Age and Address With Fund Time Served During Past 5 Years by Director by Director
- -----------------------------------------------------------------------------------------------------------------------INTERESTED DIRECTOR
David O. Nicholas, 43 (1), (3) President, (2), (4) President, Chief Investment 4 None
Director and Officer and Director, Nicholas
Portfolio Company, Inc., the Adviser to
Manager to the Fund. He has been
Co-Portfolio Manager of Nicholas
Fund, Inc.; and also Nicholas Income
Fund, Inc. and Nicholas Equity Income
Fund, Inc. since April 2001 and
July 2001, respectively. He also is
the Portfolio Manager of Nicholas II,
Inc. and Nicholas Limited Edition, Inc.DISINTERESTED DIRECTORS
Robert H. Bock, 72 Director (2), 21 years Private Investor, Consultant, 5 None
Dean Emeritus of Business
Strategy and Ethics, University of
Wisconsin School of Business,
1997 to present.Timothy P. Reiland, 48 Director (2), 2 years Private Investor, Consultant, 6 None
Chairman and Chief Financial
Officer, Musicnotes, Inc.,
October 2001 to present.
Investment Analyst from 1987
to October 2001, Tucker Anthony
Incorporated, a brokerage firm.
He is a Chartered Financial
Analyst.Jay H. Robertson, 53 Director (2), (4) Private Investor, April 2000 7 None
to present. Chairman of the
Board of Robertson-Ryan and
Associates, Inc., an insurance
brokerage firm from 1993 to
March 2000.OFFICERS
David L. Johnson, 62 (3) Executive Annual, Executive Vice President,
Vice President 21 years Nicholas Company, Inc., the
Adviser to the Fund.Albert O. Nicholas, 73 (3) Executive Annual, Chief Executive Officer and
Vice President 21 years Chairman of the Board, Nicholas
Company, Inc., the Adviser to
to the Fund. He has been
Co-Portfolio Manager of Nicholas
Fund, Inc.; and Nicholas Equity
Income Fund, Inc. since
July 2001. He formerly was
the sole Portfolio Manager
of these funds, since the
time the Adviser managed them.
He was a Director of the Fund
until October 29, 2004.Thomas J. Saeger, 60 Executive Annual, Executive Vice President and
Vice President 21 years Assistant Secretary, Nicholas
Company, Inc., the Adviser to
the Fund.Jeffrey T. May, 48 Senior Vice Annual, Senior Vice President, Treasurer
President, 12 years and Chief Compliance Officer, Nicholas
Secretary, Company, Inc., the Adviser to the
Treasurer Fund. He has been Portfolio Manager
and Chief of Nicholas Money Market Fund, Inc.
Compliance
OfficerLynn S. Nicholas, 48 (3) Senior Vice Annual, Senior Vice President, Nicholas
President 18 years Company, Inc. the Adviser to the
Fund. Mark J. Giese, 33 Vice President Annual, Vice President, Nicholas Company,
7 years Inc., the Adviser to the Fund. He has
been the Portfolio Manager of Nicholas
Liberty Fund since December 2001.Candace L. Lesak, 47 Vice President Annual, Employee, Nicholas Company, Inc.,
18 years the Adviser to the Fund.
____________________(1) David O. Nicholas is the only director of the Fund who is an "interested person" of the Fund,
as that term is defined in the 1940 Act.
(2) Until duly elected or re-elected at a subsequent annual meeting of the Fund.
(3) David O. Nicholas and Lynn S. Nicholas are the son and daughter, respectively, of Albert O.
Nicholas. David L. Johnson is the brother-in-law of Albert O. Nicholas.
(4) Elected October 29, 2004. The Fund's Statement of Additional Information includes additional information about Fund
directors and is available, without charge, upon request, by calling 800-227-5987 (toll-free)
or 414-272-6133.
Nicholas II, Inc. Privacy Policy
- -------------------------------------------------------------------------------
Nicholas II, Inc. respects each shareholders' right to privacy. We are
committed to safeguarding the information that you provide us to maintain and
execute transactions on your behalf. We collect the following non-public personal information about you:
* Information we receive from you on applications or other forms, whether
we receive the form in writing or electronically. This includes, but is not
limited to, your name, address, phone number, tax identification number, date
of birth, beneficiary information and investment selection.
* Information about your transactions with us and account history with
us. This includes, but is not limited to, your account number, balances and
cost basis information. This also includes transaction requests made through
our transfer agent.
* Other general information that we may obtain about you such as
demographic information.
WE DO NOT SELL ANY NON-PUBLIC PERSONAL INFORMATION
ABOUT CURRENT OR FORMER SHAREHOLDERS.
INFORMATION SHARED WITH OUR TRANSFER AGENT,
A THIRD PARTY COMPANY, ALSO IS NOT SOLD. We may share, only as permitted by law, non-public personal information
about you with third party companies. Listed below are some examples of third
parties to whom we may disclose non-public personal information. While these
examples do not cover every circumstance permitted by law, we hope they help
you understand how your information may be shared.
We may share non-public personal information about you:
* With companies who work for us to service your accounts or to process
transactions that you may request. This would include, but is not limited to,
our transfer agent to process your transactions, mailing houses to send you
required reports and correspondence regarding the Fund and its Adviser, the
Nicholas Company, Inc., and our dividend disbursing agent to process fund
dividend checks.
* With a party representing you, with your consent, such as your broker
or lawyer.
* When required by law, such as in response to a subpoena or other legal
process.
The Fund and its Adviser maintain policies and procedures to safeguard
your non-public personal information. Access is restricted to employees who
the Adviser determines need the information in order to perform their job
duties. To guard your non-public personal information we maintain physical,
electronic, and procedural safeguards that comply with federal standards.
In the event that you hold shares of the Fund with a financial
intermediary, including, but not limited to, a broker-dealer, bank, or trust
company, the privacy policy of your financial intermediary would govern how
your non-public personal information would be shared with non-affiliated third
parties.
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 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.
Nicholas II
-------------------
$1,000 initial investment on ....................... 10/17/83* 09/30/94
Number of years investing $100 each month following
the date of initial investment .................... 21 10
Total cash invested ................................ $26,200 $13,000
Total dividends and capital gains distributions
reinvested ........................................ $64,323 $ 7,921
Total full shares owned at 09/30/04 ................ 3,972 837
Total market value at 09/30/04 ..................... $86,909 $18,315The 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.
Nicholas Family of Funds
Services Offered
- -------------------------------------------------------------------------------
* IRAs
* Traditional * SIMPLE
* Roth * SEP* Coverdell Education Accounts
* Self-employed Master Retirement Plan
* Profit Sharing * Money Purchase* Automatic Investment Plan
* Direct Deposit of Dividend and Capital Gain Distributions
* Systematic Withdrawal Plan with Direct Deposit
* Monthly Automatic Exchange between Funds
* Telephone Redemption
* Telephone Exchange
* 24-hour Automated Account Information (1-800-544-6547)
* 24-hour Internet Account Access (www.nicholasfunds.com)
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 (1-800-227-5987).
Directors and Officers
DAVID O. NICHOLAS, President and Director
ROBERT H. BOCK, Director
TIMOTHY P. REILAND, Director
JAY H. ROBERTSON, Director
DAVID L. JOHNSON, Executive Vice President
ALBERT O. NICHOLAS, Executive Vice President
THOMAS J. SAEGER, Executive Vice President
JEFFREY T. MAY, Senior Vice President, Secretary,
Treasurer and Chief Compliance Officer
LYNN S. NICHOLAS, Senior Vice President
MARK J. GIESE, Vice President
CANDACE L. LESAK, Vice President
Investment Adviser
NICHOLAS COMPANY, INC.
Milwaukee, Wisconsin
414-272-6133 or 800-227-5987
Transfer Agent
U.S. BANCORP FUND SERVICES, LLC
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
Custodian
U.S. BANK N.A.
Cincinnati, Ohio
Independent Registered Public Accounting Firm
ERNST & YOUNG LLP
Chicago, Illinois
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.
ANNUAL REPORT
NICHOLAS II, INC.
700 North Water Street
Milwaukee, WI 53202
www.nicholasfunds.com
September 30, 2004
Item 2. Code of Ethics.
CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND
SENIOR FINANCIAL OFFICERS
I. Covered Officers/Purpose of the Code
The Nicholas Family of Funds code of ethics (this "Code") for the investment companies within the complex (collectively, "Funds" and each, "Company") applies to the Company's Principal Executive Officer and Principal Financial Officer (the "Covered Officers" each of whom are set forth in Exhibit A) for the purpose of promoting:
* honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;* full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Company; * compliance with applicable laws and governmental rules and regulations;* the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and * accountability for adherence to the Code.
Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.
II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest
Overview. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the Company. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Company.
Certain conflicts of interest arise out of the relationships between Covered Officers and the Company and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Company because of their status as "affiliated persons" of the Company. The Company's and the investment adviser's compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code.
Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Company and the investment adviser of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Company or for the adviser, or for both), be involved in establishing policies and implementing decisions that will have different effects on the adviser and the Company. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Company and the adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Company. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes.
Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Company.
* * *
Each Covered Officer must:
* not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Company whereby the Covered Officer would benefit personally to the detriment of the Company;* not cause the Company to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Company; * not use material non-public knowledge of portfolio transactions made or contemplated for the Company to trade personally or cause others to trade personally in contemplation of the market effect of such transactions;* report, at least annually:
* officer and director positions in corporations, public or private, for profit or not for profit, or in which the Covered Officer or any of his immediate family members holds 5% or more of its outstanding stock;* Positions as a trustee, executor or other fiduciary; * Ownership interest in any broker-dealer or bank; * Transactions between the Covered Officer and any of the Nicholas Family of Funds, the Nicholas Company or any company in which any director of any of the Nicholas Family of Funds is an officer or director. * Situations in which any immediate family member of the Covered Employee is an officer, director or employee of any company in which any officer or director of the Nicholas Company or any of the Nicholas Family of Funds is a director or executive officer.
There are some conflict of interest situations that should always be discussed with the appropriate officer if material. If the matter involves Jeffrey T. May, he should discuss the matter with David O. Nicholas. If the matter involves any other person, that person should discuss the matter with Jeffrey T. May. In each case, the officer with whom such matter is discussed is encouraged to review the matter with counsel to the Company. Examples of these include:
* service as a director on the board of any public company; * the receipt of any non-nominal gifts; * the receipt of any entertainment from any company with which the Company has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; * any ownership interest in, or any consulting or employment relationship with, any of the Company's service providers, other than its investment adviser, principal underwriter, administrator or any affiliated person thereof;* a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Company for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership.
III. Disclosure and Compliance
* Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the Company; * each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others, whether within or outside the Company, including to the Company's directors and auditors, and to governmental regulators and self-regulatory organizations; * each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the Funds and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds files with, or submits to, the SEC and in other public communications made by the Funds; and* it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations.
IV. Reporting and Accountability
Each Covered Officer must:
* upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code; * annually thereafter affirm to the Board that he has complied with the requirements of the Code; * not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and * notify the appropriate person promptly if he knows of any violation of this Code. Failure to do so is itself a violation of this Code. Each Covered Officer should notify Jeffrey T. May unless the person violating the Code is Jeffrey T. May, in which case such person should notify David O. Nicholas. In each case, each Covered Officer is encouraged to also contact counsel to the Fund.
Jeffrey T. May is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation; provided that if the situation involves Jeffrey T. May directly, then Mr. David O. Nicholas is responsible for applying the Code to him and he has authority to interpret the Code with respect to such application. Both Jeffrey T. May and David O. Nicholas are encouraged to discuss the matter with counsel to the Fund. However, any approvals or waivers sought by the Principal Executive Officer will be considered by the Independent Directors (the "Committee").
The Company will follow these procedures in investigating and enforcing this Code:
* Jeffrey T. May or David O. Nicholas, with the advice of counsel will take all appropriate action to investigate any potential violations reported to him; * if, after such investigation, the officer making such investigation believes that no violation has occurred, he is not required to take any further action; * any matter that the officer making the investigation believes is a violation will be reported to the independent directors; * if the independent directors concur that a violation has occurred, they will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; * the independent directors will be responsible for granting waivers, as appropriate; and * any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules.
V. Other Policies and Procedures
This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' and their investment adviser's codes of ethics under Rule 17j-1 under the Investment Company Act and the adviser's more detailed policies and procedures are separate requirements applying to the Covered Officers and others, and are not part of this Code.
VI. Amendments
Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Board, including a majority of independent directors.
VII. Confidentiality
All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Board and its counsel, the appropriate Company and the Nicholas Company.
VIII. Internal Use
The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Company, as to any fact, circumstance, or legal conclusion.
Date: November 20, 2003
Affirmed: November 19, 2004
Exhibit A
Persons Covered by this Code of Ethics
| The Nicholas Company | Albert O. Nicholas | Jeffrey T. May |
| Nicholas Fund, Inc. | Albert O. Nicholas | Jeffrey T. May |
| Nicholas II, Inc. | David O. Nicholas | Jeffrey T. May |
| Nicholas Limited Edition, Inc. | David O. Nicholas | Jeffrey T. May |
| Nicholas Income Fund, Inc. | David O. Nicholas | Jeffrey T. May |
| Nicholas Equity Income Fund, Inc. | Albert O. Nicholas | Jeffrey T. May |
| Nicholas Liberty Fund | David O. Nicholas | Jeffrey T. May |
| Nicholas Money Market Fund, Inc. | Albert O. Nicholas | Jeffrey T. May |
Item 3. Audit Committee Financial Expert.
The Fund's Board of Directors has determined that Mr. Timothy P. Reiland, an independent director, qualifies as an audit committee financial expert as that term is defined for purposes of this item.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees billed for each of the last two fiscal years (the "Reporting Periods") for professional services rendered by the Fund's principal accountant (the "Auditor") for the audit of the Fund's annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $XX,XXX in 2004 and $18,790 in 2003.
(b) Audit-Related Fees. There were no fees billed in each of the last two fiscal years for assurance and related services rendered by the Auditor to the Fund that are reasonably related to the performance of the audit of the Fund's financial statements and are not reported under paragraph (a) of this Item 4.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning ("Tax Services") were $XX,XXX in 2004 and $2,710 in 2003. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed in each of the last two fiscal years for Tax Services by the Auditor to the Fund's investment adviser which required pre-approval by the Board of Directors as described in paragraph (e)(1) of this Item 4.
(d) All Other Fees. There were no fees billed in each of the last two fiscal years for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4.
There were no fees billed in each of the last two fiscal years for Non-Audit Services by the Auditor to the Fund's investment adviser which required pre-approval by the Board of Directors as described in paragraph (e)(1) of this Item 4.
(e) Audit Committee Pre-Approval Policies and Procedures. The Fund's Board of Director's has not adopted any pre-approval policies and procedures as described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. The Fund's Board of Directors meets with the Auditors and management to review and pre-approve the Auditor's engagements for audit and non-audit services to the Fund and its Adviser prior to each engagement.
(f) No disclosures are required by this Item 4(f).
(g) There were no non-audit fees billed in each of the last two fiscal years by the Auditor for services rendered to the Fund or the Fund's investment adviser that provides ongoing services.
(h) No disclosures are required by this Item 4(h).
Item 5. Audit Committee of Listed Registrants.
Applicable only for annual reports covering periods ending on or after the earlier of (i) the first annual shareholder meeting after January 15, 2004 or (ii) October 31, 2004.
Item 6. Schedule of Investments.
The schedule of investments in securities of unaffiliated issuers is included as part of the report to shareholders filed under Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Applicable only to annual reports filed by closed-end funds.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers.
Applicable only to closed-end funds.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable to this filing.
Item 11. Controls and Procedures.
The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. There were no significant changes or corrective actions with regard to significant deficiencies or material weaknesses in the Fund's internal controls or in other factors that could significantly affect the Fund's internal controls subsequent to the date of their evaluation.
Item 12. Exhibits.
(a)(1) Code of Ethics -- Any code of ethics, or amendments thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit.
Not applicable to this filing.
(a)(2) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbannes-Oxley Act of 2002, attached hereto as part of EX-99.CERT.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more person.
Applicable only to closed-end funds.
(b) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbannes-Oxley Act of 2002, attached hereto as part of EX-99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Nicholas II, Inc.
By: /s/ David O. Nicholas
Name: David O. Nicholas
Title: Principal Executive Officer
Date: November 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ David O. Nicholas
Name: David O. Nicholas
Title: Principal Executive Officer
Date: November 29, 2004
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: November 29, 2004
