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: 09/30/2005
Date of reporting period: 03/31/2005
Item 1. Report to Stockholders.
May 2005
Report to Fellow Shareholders:
The stock market started the year as it ended 2004 with an upward bias; however, toward the later part of the quarter investors began to be concerned with inflation, rising interest rates from the Fed and high oil prices. For the quarter, stocks ended lower, especially smaller capitalization stocks and those with economic sensitivity (cyclicals). During the quarter the Fund's Class I declined 2.96% compared to a fall of 1.67% for the Russell Midcap Growth Index and a 2.15% decrease in the S&P 500.
Returns for Nicholas II, Inc. Class I and selected indices are provided in the chart below for the periods ended March 31, 2005.
| | Average Annual Total Return |
| 6 Month | 1 Year | 3 Year | 5 Year | 10 Year | 15 Year |
| Nicholas II, Inc. – Class I | 6.03% | 4.08% | 5.73% | 2.07% | 8.87% | 9.76% |
| Russell Midcap Growth Index | 12.04% | 8.31% | 6.19% | (7.30)% | 9.91% | 11.14% |
| Morningstar Mid-Cap Growth Category | 9.60% | 5.20% | 3.31% | (6.78)% | 9.29% | 10.17% |
| Standard & Poor’s 500 Index | 6.88% | 6.69% | 2.74% | (3.16)% | 10.79% | 10.99% |
| Ending value of $10,000 invested in Nicholas II, Inc. – Class I (Distributions Reinvested) | $10,603 | $10,408 | $11,819 | $11,078 | $23,398 | $40,442 |
Past performance is no guarantee of future results. Assumes reinvestment of all dividends and distributions. Investment returns and principal value will fluctuate, so that you may have a gain or a 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.html.
Class N of the Fund commenced operations on March 1, 2005; therefore, there is no annualized return information available for this Class. The annual returns shown for Class I would be substantially similar to Class N because both classes of shares are invested in the same portfolio of securities. Annual returns will differ only to the extent that the classes do not have the same expenses. Specifically, the performance shown for Class I does not reflect the 0.25% 12b-1 fee or 0.10% shareholder servicing fee that is charged to Class N.
Performance of the Fund for the one-year period was driven by strong performance from energy and material stocks, while technology was a drag on performance. However, our underweight in this area helped our relative performance. Strong moves in commodity stocks such as steel and chemicals as well as home builders, hurt our relative performance due to our underweighting in these areas. The industrial sector was also a good performer as the economy continued to expand. During the year we took profits in the energy and material sectors and relocated to less economically cyclical areas such as healthcare and the depressed areas of technology. Currently the portfolios largest areas of concentration are in consumer discretionary, health care and information technology, all over 20%.
Current market conditions reflect concerns of slower economic growth caused by rising interest rates and oil prices exerting pressure on the consumer. Corporate strength, however, remains good and has allowed companies to increase dividends and buy back stock. Valuations also have come down allowing selective purchases at better prices. All in all, we believe stock selection will be the key going forward and owning solid well managed companies with growth opportunities will be the place to be invested.
Thank you for your continued interest in our Fund.
Sincerely,
David O. Nicholas
Portfolio Manager
-----------------------------------------------------------------------------------------------------------------------
Financial Highlights Class I
For a share outstanding throughout each period
-----------------------------------------------------------------------------------------------------------------------
Six Months Year ended September 30,
ended 03/31/2005 --------------------------------------------------------
(unaudited) 2004 2003 2002 2001 2000
----------- ------ ------ ------ ------ ------
NET ASSET VALUE, BEGINNING OF PERIOD .... $21.88 $18.97 $15.34 $17.54 $36.58 $31.83
INCOME (LOSS) FROM INVESTMENT OPERATIONS
Net investment income (loss)........... -- (.01) (.01) (.02) (.01) .01
Net gain (loss) on securities
(realized and unrealized)............. 1.33 2.92 3.64 (1.60) (5.91) 5.22
------ ------ ------ ------ ------ ------
Total from investment operations.... 1.33 2.91 3.63 (1.62) (5.92) 5.23
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
From net investment income............. -- -- -- -- -- (.01)
From net capital gain.................. (.91) (.00)(1) -- (.58) (13.12) (.47)
------ ------ ------ ------ ------ ------
Total distributions................. (.91) (.00)(1) -- (.58) (13.12) (.48)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD........... $22.30 $21.88 $18.97 $15.34 $17.54 $36.58
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN............................. 6.03%(2) 15.35% 23.66% (9.99)% (20.89)% 16.49%
SUPPLEMENTAL DATA:
Net assets, end of period (millions)..... $532.4 $515.5 $472.5 $408.5 $512.0 $775.4
Ratio of expenses to average net assets.. .70%(3) .63% .65% .65% .62% .62%
Ratio of net investment income (loss)
to average net assets.................. (.01)%(3) (.04)% (.06)% (.12)% (.03)% .02%
Portfolio turnover rate.................. 22.12%(3) 15.35% 26.10% 47.37% 49.92% 65.46%
(1) The amount rounds to $0.00, actual amount is $0.00154.
(2) Not annualized.
(3) Annualized.
The accompanying notes to financial statements are an integral part of these highlights.
Financial Highlights Class N
For a share outstanding throughout each period
-----------------------------------------------------------------------------------------------------------------------
Period from
02/28/2005 (1)
to 03/31/2005
(unaudited)
-----------------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $22.59
INCOME FROM
INVESTMENT OPERATIONS
Net investment income ....... --
Net loss on
securities (realized and
unrealized) ............. (.30)
------
Total from investment
operations ........... (.30)
------
LESS DISTRIBUTIONS
From net investment
income .................. --
From net capital gain .... --
------
Total distributions ... --
------
NET ASSET VALUE, END
OF PERIOD .................. $22.29
------
------
TOTAL RETURN ................ (1.33)%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period (thousands) ......... $45.9
Ratio of expenses to
average net assets ......... 1.19%(3)
Ratio of net investment
loss to average
net assets ................. N/A(4)
Portfolio turnover rate ..... 22.12%(3)
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
(4) The ratio of net investment income to average net assets is not shown
due to the short period of existence.
The accompanying notes to financial statements are an integral part of these highlights.
-----------------------------------------------------------------------------------------------------------------------
Top Ten Portfolio Holdings
March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
Percentage
Name of Net Assets
---- -------------
Fiserv, Inc. .............................................. 2.29%
Marshall & Ilsley Corporation ............................. 1.96%
International Speedway Corporation - Class A .............. 1.96%
O'Reilly Automotive, Inc. ................................. 1.95%
Willis Group Holdings Limited ............................. 1.92%
Renal Care Group, Inc. .................................... 1.91%
ARAMARK Corporation ....................................... 1.73%
Kohl's Corporation ........................................ 1.72%
Bemis Company, Inc. ....................................... 1.64%
IMS Health Incorporated ................................... 1.60%
------
Total of top ten .......................................... 18.68%
------
------
-------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
BAR CHART PLOT POINTS
Consumer Discretionary .................................... 23.31%
Information Technology .................................... 22.20%
Health Care ............................................... 20.77%
Financials ................................................ 14.06%
Industrials ............................................... 6.89%
Energy .................................................... 4.56%
Short-Term Investments .................................... 4.14%
Consumer Staples .......................................... 2.43%
Materials ................................................. 1.64%
-------------------------------------------------------------------------------
Fund Expenses
For the six month period ended March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
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
period and held for the entire period.
The first line of the table below for each share class of the Fund 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
ratios for each class of the Fund 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.
Class I
Beginning Ending Expenses
Account Account Paid During
Value Value Period*
09/30/04 03/31/05 09/30/04 - 03/31/05
------------------------------------------------------------------
Actual $1,000.00 $1,060.30 $3.60
Hypothetical 1,000.00 1,043.00 3.57
(5% return before expenses)
* Expenses are equal to the Class I six-month annualized expense ratio
of 0.70%, multiplied by the average account value over the period,
multiplied by 182 days then divided by 365 to reflect the one-half year
period.
Class N
Beginning Ending Expenses
Account Account Paid During
Value Value Period**
02/28/05 03/31/05 02/28/05 - 03/31/05
------------------------------------------------------------------
Actual $1,000.00 $ 986.70 $1.00
Hypothetical 1,000.00 1,038.10 1.03
(5% return before expenses)
** Expenses are equal to the Class N one-month annualized expense ratio
of 1.19%, multiplied by the average account value over the period,
multiplied by 31 days then divided by 365 to reflect the one-month
period.
Schedule of Investments
March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
Shares or
Principal
Amount Value
---------- ------------
COMMON STOCKS - 96.10%
Consumer Discretionary -
Auto & Components -- 1.91%
100,000 Gentex Corporation $ 3,190,000
120,600 Harley-Davidson, Inc. 6,965,856
------------
10,155,856
------------
Consumer Discretionary -
Hotels, Restaurants & Leisure -- 5.62%
162,500 Applebee's International, Inc. 4,478,500
130,000 International Game Technology 3,465,800
191,926 International Speedway
Corporation - Class A 10,411,986
90,000 Panera Bread Company * 5,087,700
35,000 Starbucks Corporation * 1,808,100
120,000 Wendy's International, Inc. 4,684,800
------------
29,936,886
------------
Consumer Discretionary -
Media -- 6.16%
200,265 Clear Channel Communications, Inc. 6,903,135
275,407 DIRECTV Group, Inc. (The) * 3,971,369
175,000 EchoStar Communications
Corporation * 5,118,750
150,000 Lamar Advertising Company * 6,043,500
603,918 Liberty Media
Corporation - Class A * 6,262,630
36,374 Liberty Media
International, Inc. - Class A * 1,590,999
105,000 Univision Communications Inc. * 2,907,450
------------
32,797,833
------------
Consumer Discretionary -
Retail -- 9.68%
170,000 Family Dollar Stores, Inc. 5,161,200
250,000 IAC/InterActiveCorp * 5,567,500
120,000 J.C. Penney Company, Inc. 6,230,400
177,100 Kohl's Corporation * 9,143,673
210,000 O'Reilly Automotive, Inc. * 10,401,300
80,000 PETCO Animal Supplies, Inc. * 2,944,800
140,000 PETsMART, Inc. 4,025,000
110,000 Target Corporation 5,502,200
70,000 Williams-Sonoma, Inc. * 2,572,500
------------
51,548,573
------------
Consumer Staples -
Food, Beverage & Tobacco -- 1.26%
215,000 Hormel Foods Corporation 6,688,650
------------
Consumer Staples -
Food & Staple Retail -- 1.18%
119,148 CVS Corporation 6,269,568
------------
Energy -- 4.57%
52,950 Apache Corporation 3,242,128
80,000 BJ Services Company 4,150,400
110,000 GlobalSantaFe Corporation 4,074,400
138,978 Kinder Morgan Management, LLC * 5,641,116
63,000 Nabors Industries, Ltd. * 3,725,820
106,666 XTO Energy, Inc. 3,502,911
------------
24,336,775
------------
Financials - Banks -- 5.12%
190,000 Commerce Bancorp, Inc. 6,169,300
90,545 Fifth Third Bancorp 3,891,624
110,000 MGIC Investment Corporation 6,783,700
250,000 Marshall & Ilsley Corporation 10,437,500
------------
27,282,124
------------
Financials - Diversified -- 3.72%
67,500 Affiliated Managers Group, Inc. * 4,187,025
340,000 Eaton Vance Corp. 7,969,600
77,500 Legg Mason, Inc. 6,055,850
20,000 Moody's Corporation 1,617,200
------------
19,829,675
------------
Financials - Insurance -- 5.25%
65,000 Arthur J. Gallagher & Co. 1,872,000
95,000 Brown & Brown, Inc. 4,378,550
188,800 Nationwide Financial Services, Inc. 6,777,920
30,000 PartnerRe Ltd. 1,938,000
70,000 Protective Life Corporation 2,751,000
277,000 Willis Group Holdings Limited 10,212,990
------------
27,930,460
------------
Health Care - Equipment -- 7.08%
120,000 Biomet, Inc. 4,356,000
200,000 Boston Scientific Corporation * 5,858,000
85,000 DENTSPLY International Inc. 4,624,850
106,960 Fisher Scientific International Inc. * 6,088,163
105,000 Kinetic Concepts, Inc. * 6,263,250
115,000 Respironics, Inc. * 6,701,050
105,000 St. Jude Medical, Inc. * 3,780,000
------------
37,671,313
------------
Health Care - Pharmaceuticals
& Biotechnology -- 5.74%
65,000 Allergan, Inc. 4,515,550
30,000 Biogen Idec Inc. * 1,035,300
38,000 Biotech HOLDRS Trust * 5,350,020
141,500 Forest Laboratories, Inc. * 5,228,425
210,000 Medicis Pharmaceutical
Corporation - Class A 6,295,800
97,826 Shire Pharmaceuticals Group PLC 3,353,475
155,000 Teva Pharmaceutical Industries Ltd. 4,805,000
------------
30,583,570
------------
Health Care - Services -- 8.01%
23,252 Cardinal Health, Inc. 1,297,462
162,500 DaVita, Inc. * 6,800,625
260,883 Health Management Associates, Inc. 6,829,917
350,000 IMS Health Incorporated 8,536,500
27,600 Patterson Companies, Inc. * 1,378,620
268,750 Renal Care Group, Inc. * 10,196,375
145,000 Universal Health
Services, Inc. - Class B 7,598,000
------------
42,637,499
------------
Industrials - Capital Goods -- 1.26%
121,500 Fastenal Company 6,720,165
------------
Industrials - Commercial Services
& Supplies -- 4.94%
351,000 ARAMARK Corporation 9,224,280
96,604 ChoicePoint Inc. * 3,874,786
182,500 Cintas Corporation 7,539,075
130,000 Manpower Inc. 5,657,600
------------
26,295,741
------------
Industrials - Transportation -- 0.70%
70,000 Expeditors International
of Washington, Inc. 3,748,500
------------
Information Technology -
Communication Equipment -- 1.42%
180,000 Harris Corporation 5,877,000
230,000 Tellabs, Inc. * 1,679,000
------------
7,556,000
------------
Information Technology -
Hardware & Equipment -- 8.58%
210,000 Avaya Inc. * 2,452,800
150,000 CDW Corporation 8,502,000
215,000 Molex Incorporated - Class A 5,074,000
91,400 Plantronics, Inc. 3,480,512
165,000 QLogic Corporation * 6,682,500
95,000 Tech Data Corporation * 3,520,700
155,000 Tektronix, Inc. 3,802,150
392,500 Vishay Intertechnology, Inc. * 4,878,775
153,750 Zebra Technologies
Corporation - Class A * 7,301,588
------------
45,695,025
------------
Information Technology -
Semiconductors & Equipment -- 3.07%
332,000 Intersil Holding
Corporation - Class A 5,750,240
75,000 Maxim Integrated Products, Inc. 3,065,250
288,750 Microchip Technology Incorporated 7,510,387
------------
16,325,877
------------
Information Technology -
Software & Services -- 9.19%
145,000 Affiliated Computer Services, Inc. * 7,719,800
80,000 Ask Jeeves, Inc. * 2,246,400
322,500 BEA Systems, Inc. * 2,570,325
85,300 Check Point Software
Technologies Ltd. * 1,854,422
305,937 Fiserv, Inc. * 12,176,293
233,500 Hewitt Associates, Inc. * 6,211,100
230,000 Jabil Circuit, Inc. * 6,559,600
220,000 Keane, Inc. * 2,866,600
195,000 SunGard Data Systems Inc. * 6,727,500
------------
48,932,040
------------
Materials -- 1.64%
281,400 Bemis Company, Inc. 8,757,168
------------
TOTAL COMMON STOCKS
(cost $346,358,404) 511,699,298
------------
SHORT-TERM INVESTMENTS -- 4.15%
Commercial Paper - 3.98%
$1,750,000 John Deere Capital Corporation
04/01/05, 2.63% 1,750,000
1,500,000 Kraft Foods Inc.
04/06/05, 2.68% 1,499,442
1,000,000 General Electric Capital Corporation
04/08/05, 2.65% 999,485
2,000,000 Kraft Foods Inc.
04/12/05, 2.79% 1,998,295
1,000,000 Fiserv, Inc.
04/13/05, 2.90% 999,033
1,000,000 John Deere Capital Corporation
04/15/05, 2.74% 998,934
1,750,000 SBC Communications Inc.
04/18/05, 2.70% 1,747,769
1,500,000 Kraft Foods Inc.
04/20/05, 2.76% 1,497,815
2,500,000 Prudential Financial, Inc.
04/22/05, 2.75% 2,495,989
1,000,000 General Electric Capital Corporation
04/26/05, 2.74% 998,097
1,000,000 Fiserv, Inc.
05/02/05, 3.00% 997,417
2,250,000 SBC Communications Inc.
05/04/05, 2.80% 2,244,225
1,000,000 Walt Disney Company (The)
05/09/05, 2.88% 996,960
2,000,000 Walt Disney Company (The)
05/09/05, 2.90% 1,993,878
------------
21,217,339
------------
Variable Rate Demand Note -- 0.17%
890,705 U.S. Bank N.A.
04/01/05, 2.70% 890,705
------------
TOTAL SHORT-TERM
INVESTMENTS
(cost $22,108,044) 22,108,044
------------
TOTAL INVESTMENTS
(cost $368,466,448) -- 100.25% 533,807,342
------------
LIABILITIES, NET OF
OTHER ASSETS -- (0.25)% (1,345,156)
------------
TOTAL NET ASSETS
(basis of percentages
disclosed above) -- 100% $532,462,186
------------
------------
* Non-income producing security.
The accompanying notes to financial statements are an integral part of this
schedule.
Statement of Assets and Liabilities
March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
ASSETS
Investments in securities at value (cost $368,466,448) .... $533,807,342
-----------
Receivables -
Investment securities sold ........................... 2,151,079
Dividend and interest ................................ 275,302
Capital stock subscription ........................... 3,680
------------
Total receivables ............................... 2,430,061
------------
Other ..................................................... 9,669
------------
Total assets .................................... 536,247,072
------------
LIABILITIES
Payables -
Investment securities purchased ...................... 3,461,024
Due to adviser -
Management fee .................................. 242,910
Accounting and administrative fee ............... 22,805
Other payables and accrued expense ................... 58,147
------------
Total liabilities ............................... 3,784,886
------------
Total net assets ................................ $532,462,186
------------
------------
NET ASSETS CONSIST OF
Paid in capital ........................................... $345,835,396
Net unrealized appreciation on investments ................ 165,340,894
Accumulated undistributed
net realized gain on investments ......................... 21,305,542
Accumulated net investment loss ........................... (19,646)
------------
Total net assets ................................ $532,462,186
------------
------------
Class I:
Net assets .................................................... $532,416,243
Shares outstanding ............................................ 23,870,356
NET ASSET VALUE PER SHARE ($.01 par value,
125,000,000 shares authorized),
offering price and redemption price .......................... $22.30
------
------
Class N:
Net assets .................................................... $45,943
Shares outstanding ............................................ 2,061
NET ASSET VALUE PER SHARE ($.01 par value,
75,000,000 shares authorized),
offering price and redemption price .......................... $22.29
------
------
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the six months ended March 31, 2005 (unaudited)
-------------------------------------------------------------------------------
INCOME
Dividend .................................................. $ 1,656,292
Interest .................................................. 197,220
-----------
Total income ......................................... 1,853,512
-----------
EXPENSES
Management fee ............................................ 1,424,985
Transfer agent fees ....................................... 142,742
Accounting and administrative fees ........................ 111,893
Postage and mailing ....................................... 41,160
Legal fees ................................................ 36,556
Printing .................................................. 27,116
Registration fees ......................................... 22,222
Custodian fees ............................................ 13,354
Audit and tax fees ........................................ 11,500
Directors' fees ........................................... 10,000
Insurance ................................................. 9,325
Accounting system and pricing service fees................. 4,934
Other operating expenses .................................. 17,371
-----------
Total expenses ....................................... 1,873,158
-----------
Net investment loss .................................. (19,646)
-----------
NET REALIZED GAIN ON INVESTMENTS .............................. 21,306,716
-----------
CHANGE IN NET UNREALIZED APPRECIATION ON INVESTMENTS .......... 9,777,883
-----------
Net realized and unrealized gain on investments ........... 31,084,599
-----------
Net increase in net assets resulting from operations ...... $31,064,953
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
Statements of Changes in Net Assets
For the six months ended March 31, 2005 (unaudited) and the year ended
September 30, 2004
-------------------------------------------------------------------------------
2005 2004
------------- -------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment loss .................... $ (19,646) $ (229,313)
Net realized gain
on investments ........................ 21,306,716 23,481,527
Change in net unrealized
appreciation on investments ........... 9,777,883 48,606,700
------------ ------------
Net increase in net assets
resulting from operations ........ 31,064,953 71,858,914
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net realized gain on investments .. (21,371,633) (37,694)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued - Class I
(535,647 and 957,859
shares, respectively) ................. 12,111,189 20,638,630
Reinvestment of distributions - Class I
(896,311 and 1,694
shares, respectively) ................. 20,319,383 35,767
Cost of shares redeemed - Class I
(1,119,328 and 2,304,377
shares, respectively) ................. (25,255,069) (49,403,055)
Proceeds from shares issued - Class N
(2,061 and 0
shares, respectively) ................. 45,834 ---
------------ ------------
Increase (decrease) in net assets
derived from capital share
transactions ..................... 7,221,337 (28,728,658)
------------ ------------
Total increase in net assets ...... 16,914,657 43,092,562
------------ ------------
NET ASSETS
Beginning of period .................... 515,547,529 472,454,967
------------ ------------
End of period (including accumulated
net investment loss
of $(19,646) and $0,
respectively) ......................... $532,462,186 $515,547,529
------------ ------------
------------ ------------
The accompanying notes to financial statements are an integral part of these
statements.
Notes to Financial Statements
March 31, 2005 (unaudited)
------------------------------------------------------------------------------
(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. Effective March 1, 2005, the
Fund issued a new class of shares, Class N and renamed the existing class
as Class I. Class N shares are subject to an annual 0.25% 12b-1 fee and an
annual 0.10% shareholder servicing fee, as described in such Class'
prospectus. 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 if in the absence of any sale on
that day, the closing bid price. For securities principally 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. Generally, discounts and premiums on long-term securities
purchases, if any, are amortized over the lives of the respective
securities using the effective yield method.
Investment income, net capital gains (losses) and all expenses
incurred by the Fund are allocated based on the relative net assets of
each class, except for service fees and certain other fees and
expenses related to one class of shares.
(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.
(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 U.S. generally accepted
accounting principles. 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. At
March 31, 2005 no reclassifications were recorded.
The tax character of distributions paid during the six months ended
March 31, 2005 and the year ended September 30, 2004 were as follows:
03/31/2005 09/30/2004
------------ ------------
Distributions paid from:
Long-term capital gain ..... $21,371,633 $37,694
----------- -----------
----------- -----------
As of March 31, 2005, investment cost for federal tax purposes was
$368,466,448 and the tax basis components of net assets were as
follows:
Unrealized appreciation ....................... $177,158,074
Unrealized depreciation ....................... (11,817,180)
------------
Net unrealized appreciation ................... 165,340,894
------------
Undistributed ordinary loss ................... (19,646)
Undistributed accumulated net realized
capital gain ................................. 21,305,542
Paid in capital ............................... 345,835,396
------------
Net assets .................................... $532,462,186
------------
------------
There were no differences between the book-basis and tax-basis
components of net assets.
As of March 31, 2005, the Fund has no capital loss carryforward.
For the period ended March 31, 2005, the Fund realized no post-October
losses for tax purposes.
As of March 31, 2005, the Fund had no tax deferral of wash loss sales.
(f) The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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 paid
for accounting and administrative services rendered by its personnel.
The Fund incurred expenses of $111,893 for accounting and
administrative services during the period ended March 31, 2005.
(b) Independent Counsel --
A director of the Adviser is affiliated with the law firm that
provides services to the Fund. The Fund incurred expenses of $32,628
for the period ended March 31, 2005 for legal services rendered by the
law firm.
(3) Investment Transactions --
For the period ended March 31, 2005, the cost of purchases and the proceeds
from sales of investment securities, other than short-term obligations,
aggregated $57,432,818 and $81,689,892, respectively.
Historical Record
(unaudited)
--------------------------------------------------------------------------------------------------
CLASS I
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 22.9 98,040
March 31, 2005 ......... 22.30 -- 0.9146(a) 23.5 $103,952
* Date of Initial Public Offering.
** Based on latest 12 months accomplished earnings.
*** Assuming reinvestment of all distributions.
(a) Paid $0.9146 on December 27, 2004 to shareholders of record on December 23, 2004.
Range in quarter end price/earnings ratios
High Low
------------------------ ------------------------
September 30, 2000 35.1 September 30, 1985 11.7
Approval of Investment Advisory Contract
(unaudited)
-------------------------------------------------------------------------------
In October 2004, the Board of Directors of the Fund renewed the one-year
term of the Investment Advisory Agreement by and between the Fund and the
Adviser through October 2005. In connection with renewal of the Investment
Advisory Agreement, no changes to the amount or manner of calculation of the
management fee or the terms of the agreement were proposed by the Adviser or
adopted by the Board. For the fiscal year ended September 30, 2004, the
management fee was 0.53% and the Fund's total expense ratio (including the
management fee) was 0.63%. In renewing the Investment Advisory Agreement, the
Board carefully considered the following factors on an absolute basis and
relative to the Fund's peer group: (i) the Fund's expense ratio, which was the
lowest compared to the overall peer group; (ii) the Fund's performance on a
short-term and long-term basis; (iii) the Fund's management fee; (iv) the
overall performance of the market as measured by a number of different indices;
and (v) the range and quality of the services offered by the Adviser. The peer
group fund data included primarily mid-cap growth funds representing a
combination of investment styles (mainly blend and growth) generally similar in
asset size. In reviewing the Fund's performance relative to peer group data,
the Board noted that the Fund's investment style was growth at a reasonable
price, and therefore, the Board focused in particular on funds with core/blend
and growth investment styles. The Board noted that they were pleased with the
performance of the Fund, and in particular noted that performance on both an
absolute and relative basis had shown improvement as the Fund outperformed the
Russell Midcap Growth Index and the Morningstar Mid-Cap Growth Category, both
Fund benchmarks, for the one-year period ended September 30, 2004. In terms of
the peer group data used for performance comparisons, the Fund was ranked 4th,
2nd, 3rd, 2nd and 2nd out of 10 funds for the one-, three-, five-, ten- and
fifteen- year periods ending September 30, 2004. The Board also stated that
they were pleased with management's efforts to control Fund expenses, and
recognized that the management fees were a significant factor in maintaining a
low expense ratio. The Board did not consider in this review the profitability
of the Adviser as the management fees and other expenses of the Fund were low
compared to the category average and the peer group, therefore benefiting the
shareholders.
Information on Proxy Voting
(unaudited)
-------------------------------------------------------------------------------
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
(unaudited)
------------------------------------------------------------------------------
The Fund files its complete schedule of investments with the SEC for the first
and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q's are
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.
Nicholas Funds Services Offered
(unaudited)
-------------------------------------------------------------------------------
* 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 Funds
(1-800-544-6547).
Directors and Officers
DAVID O. NICHOLAS, President and Director
ROBERT H. BOCK, Director
TIMOTHY P. REILAND, Director
JAY H. ROBERTSON, Director
ALBERT O. NICHOLAS, Executive Vice President
DAVID L. JOHNSON, 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
LAWRENCE J. PAVELEC, Senior Vice President
MARK J. GIESE, Vice President
CANDACE L. LESAK, Vice President
Investment Adviser
NICHOLAS COMPANY, INC.
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
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.
SEMIANNUAL REPORT
NICHOLAS II, INC.
700 North Water Street
Milwaukee, WI 53202
www.nicholasfunds.com
March 31, 2005
Item 2. Code of Ethics.
Applicable only to annual reports.
Item 3. Audit Committee Financial Expert.
Applicable only to annual reports.
Item 4. Principal Accountant Fees and Services.
Applicable only to annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
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: 05/26/2005
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: 05/26/2005
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: 05/26/2005
