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, Secretary 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: 09/30/2006
Date of reporting period: 09/30/2006
Item 1. Report to Stockholders.
November 2006
Report to Fellow Shareholders:
Corporate earnings continue on record pace so far in 2006. This has driven record market performance with the Dow Jones Industrial Average surpassing the 12,000 mark. Oil and gas prices have declined from highs reached in mid-summer and the Federal Reserve has paused in raising rates for the time being. All this has driven stable stock market returns in 2006 as the bull market that started in late 2002 continues unabated.
Returns for Nicholas II, Inc. Class I and Class N and selected indices are provided in the chart below for the periods ended September 30, 2006.
| Average Annual Total Return |
| 1 Year | 3 Year | 5 Year | 10 Year | 15 Year |
| Nicholas II, Inc. – Class I | 7.85% | 11.60% | 9.12% | 6,85% | 9.04% |
| Nicholas II, Inc. – Class N (linked to Class I) | 7.49% | 11.40% | 9.00% | 6.79% | 9.00% |
| Russell Midcap Growth Index | 7.03% | 14.53% | 12.01% | 8.20% | 10.48% |
| Morningstar Mid-Cap Growth Category | 5.23% | 12.41% | 8.84% | 7.46% | 9.76% |
| Standard & Poor's 500 Index | 10.79% | 12.30% | 6.97% | 8.59% | 10.76% |
| Ending value of $10,000 invested in Nicholas II, Inc. - Class I | $10,785 | $13,900 | $15,471 | $19,392 | $36,633 |
| Ending value of $10,000 invested in Nicholas II, Inc. - Class N (linked to Class I) | $10,749 | $13,824 | $15,387 | $19,287 | $36,434 |
Performance data quoted represents past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month-end, may be obtained by visiting www.nicholasfunds.com/returns.html.
The Fund is net of expenses, the market indices are gross of fees. The ending values above illustrate the performance of a hypothetical $10,000 investment made in the Fund over the timeframes listed. Assumes reinvestment of dividends and capital gains, but does not reflect the effect of any applicable sales charge or redemption fees. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. These figures do not imply any future performance.
Class N commenced operations on February 28, 2005, and therefore the average annual total returns presented for the periods shown include the performance of the original class of shares, Class I, prior to February 28, 2005. Annual returns will differ only to the extent that the classes do not have the same expenses. Specifically, the performance shown for the Class I shares does not reflect the 0.25% 12b-1 fee or 0.10% servicing fee that is charged to Class N shares.
The almost four-year bull market, which has been unprecedented in length without a 15% correction, has been driven by the industrial, energy and material sectors. These sectors have outperformed due to strong demand from emerging countries such as China and India. Liquidity initiated by the Federal Reserve has also fueled the great economic expansion.
Nicholas II’s return for the year ending September 30, 2006 was driven by strong relative performance in consumer discretionary, industrial and materials sectors. With the pullback in energy stocks in the third quarter of 2006, the energy sector posted negative returns; however, Nicholas II's underweighting helped relative performance. Long-term holdings such as Kohl's, Harley-Davidson, Affiliated Managers Group, Manpower and Expeditors International had strong years. The Fund also had some clunkers such as Kinetic Concepts, ChoicePoint, Maxim Integrated Products and Plantronics. Some of these positions have been sold and others have been added to.
Looking forward, we have been surprised by the continued strength in corporate earnings and the markets. Corporate earnings should eventually slow; however, valuations remain reasonable. The economy seems headed for a mid-cycle slowdown. We remain cautious short-term and opportunistic long-term.
We continue to employ our investment philosophy of finding and holding what we believe are quality companies priced right for the long-term.
Thank you for your continued support.
Sincerely,
David O. Nicholas
Portfolio Manager
The Fund may invest in smaller companies, which involve additional risks such as limited liquidity and greater volatility.
Please refer to the schedule of investments in the report for complete fund holdings information. Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.
The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Dow Jones Industrial Average is an unmanaged index of common stocks comprised of major industrial companies and assumes reinvestment of dividends. One cannot invest directly in an index. Each Morningstar Category average represents a universe of Funds with similar investment objectives.
Must be preceded or accompanied by a prospectus.
The Nicholas Funds are distributed by Quasar Distributors, LLC. (11/06)
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
NICHOLAS II, INC. CLASS I, RUSSELL MIDCAP INDEX AND RUSSELL MIDCAP GROWTH INDEX
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's Class I, to the same investment over the same period in two peer group indices. The graph assumes a $10,000 investment in the Fund's Class I 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 Adviser 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.
| Nicholas II, Inc. Class I | % Total Return | Russell Midcap
Index | % Total Return | Russell Midcap
Growth
Index | % Total Return |
| 09/30/96 | $10,000 | | $10,000 | | $10,000 | |
| 09/30/97 | 13,494 | 34.94% | 13,506 | 35.06% | 12,964 | 29.64% |
| 09/30/98 | 13,270 | (1.66)% | 12,697 | (5.99)% | 11,749 | (9.37)% |
| 09/30/99 | 13,602 | 2.50% | 15,164 | 19.43% | 16,121 | 37.21% |
| 09/30/00 | 15,844 | 16.49% | 19,962 | 31.64% | 25,854 | 60.38% |
| 09/30/01 | 12,534 | (20.89)% | 15,497 | (22.37)% | 12,468 | (51.78)% |
| 09/30/02 | 11,282 | (9.99)% | 14,105 | (8.98)% | 10,536 | (15.49)% |
| 09/30/03 | 13,951 | 23.66% | 18,707 | 32.63% | 14,634 | 38.89% |
| 09/30/04 | 16,093 | 15.35% | 22,552 | 20.55% | 16,636 | 13.68% |
| 09/30/05 | 17,982 | 11.74% | 28,212 | 25.10% | 20,540 | 23.47% |
| 09/30/06 | 19,392 | 7.85% | 30,912 | 9.57% | 21,984 | 7.03% |
The Fund's Class I average annual total returns for the one, three, five and ten year periods ended on the last day of the most recent fiscal year are as follows:
| One Year Ended September 30, 2006 | Three Years Ended September 30, 2006 | Five Years Ended September 30, 2006 | Ten Years Ended September 30, 2006 |
| Average Annual Total Return | 7.85% | 11.60% | 9.12% | 6.85% |
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.
Financial Highlights Class I (NCTWX)
For a share outstanding throughout each period
- -------------------------------------------------------------------------
Year ended September 30,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $23.50 $21.88 $18.97 $15.34 $17.54
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income
(loss) .................. .04(1) .01 (.01) (.01) (.02)
Net gain (loss) on
securities (realized and
unrealized) ............. 1.73(1) 2.52 2.92 3.64 (1.60)
------ ------ ------ ------ ------
Total from investment
operations ........... 1.77 2.53 2.91 3.63 (1.62)
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
From net investment
income .................. (.01) --- --- --- ---
From net capital gain .... (2.15) (.91) (.00)(2) --- (.58)
------ ------ ------ ------ ------
Total distributions ... (2.16) (.91) (.00)(2) --- (.58)
------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD .................. $23.11 $23.50 $21.88 $18.97 $15.34
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN ................ 7.85% 11.74% 15.35% 23.66% (9.99)%
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) .......... $536.8 $546.0 $515.5 $472.5 $408.5
Ratio of expenses to
average net assets ......... .67% .70% .63% .65% .65%
Ratio of net investment
income (loss) to average
net assets ................. .19% .02% (.04)% (.06)% (.12)%
Portfolio turnover rate ..... 16.90% 20.80% 15.35% 26.10% 47.37%
(1) Computed based on average shares outstanding.
(2) Rounds to $.00, the actual amount is $.00154.
The accompanying notes to financial statements are an integral part of these
highlights.
Financial Highlights Class N (NNTWX)
For a share outstanding throughout each period
- -----------------------------------------------------------------------------------
Year Period from
Ended 02/28/2005 (1)
09/30/2006 to 09/30/2005
---------- -------------
NET ASSET VALUE,
BEGINNING OF PERIOD .......... $23.45 $22.59
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment loss ........ (.03)(2) (.02)
Net gain on securities
(realized and unrealized).. 1.71(2) .88
------ ------
Total from investment
operations ............. 1.68 .86
------ ------
LESS DISTRIBUTIONS
From net capital gain ...... (2.13) --
------ ------
NET ASSET VALUE, END
OF PERIOD .................... $23.00 $23.45
------ ------
------ ------TOTAL RETURN .................. 7.49% 3.81%(3)
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) ............ $0.8 $0.5
Ratio of expenses to
average net assets ........... 1.02% 1.06%(4)
Ratio of net investment
loss to average net assets .... (.16)% (.24)%(4)
Portfolio turnover rate ....... 16.90% 20.80%(4)
(1) Commencement of operations.
(2) Computed based on average shares outstanding.
(3) Not annualized.
(4) Annualized.
The accompanying notes to financial statements are an integral part of these
highlights.
Top Ten Equity Portfolio Holdings
September 30, 2006 (unaudited)
- ------------------------------------------------------------------------------- Percentage
Name of Net Assets
---- -------------
Fiserv, Inc. .............................................. 2.68%
Willis Group Holdings Limited ............................. 2.17%
Marshall & Ilsley Corporation ............................. 2.06%
O'Reilly Automotive, Inc. ................................. 1.98%
Manpower Inc. ............................................. 1.88%
CDW Corporation ........................................... 1.84%
Respironics, Inc. ......................................... 1.83%
Eaton Vance Corp. ......................................... 1.83%
Cintas Corporation ........................................ 1.80%
Bemis Company, Inc. ....................................... 1.78%
------
Total of top ten .......................................... 19.85%
------
------
-------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
September 30, 2006 (unaudited)
- -------------------------------------------------------------------------------
BAR CHART PLOT POINTS
Information Technology .................................... 21.11%
Consumer Discrectionary ................................... 18.45%
Health Care ............................................... 18.35%
Financials ................................................ 14.32%
Industrials ............................................... 9.31%
Short-Term Investments .................................... 6.18%
Energy .................................................... 5.59%
Materials ................................................. 3.80%
Consumer Staples .......................................... 2.89%
-------------------------------------------------------------------------------
Fund Expenses
For the six month period ended September 30, 2006 (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*
03/31/06 09/30/06 04/01/06 - 09/30/06
------------------------------------------------------------------
Actual $1,000.00 $975.90 $3.30
Hypothetical 1,000.00 $1,021.66 3.38
(5% return before expenses) * Expenses are equal to the Fund's Class I six-month annualized expense
ratio of 0.67%, multiplied by the average account value over the
period, multiplied by 182 then divided by 365 to reflect the one-half
year period.
Class N
Beginning Ending Expenses
Account Account Paid During
Value Value Period**
03/31/06 09/30/06 04/01/06 - 09/30/06
------------------------------------------------------------------
Actual $1,000.00 $974.20 $5.02
Hypothetical 1,000.00 $1,019.91 5.14
(5% return before expenses) ** Expenses are equal to the Class N six-month annualized expense ratio
of 1.02%, multiplied by the average account value over the period,
multiplied by 182 then divided by 365 to reflect the one-half year
period.
Schedule of Investments
September 30, 2006
- -------------------------------------------------------------------------------
Shares or
Principal
Amount Value
- ----------- -----------
COMMON STOCKS -- 93.11%
Consumer Discretionary -
Auto & Components -- 1.50%
35,000 Gentex Corporation $ 497,350
120,600 Harley-Davidson, Inc. 7,567,650
------------
8,065,000
------------
Consumer Discretionary - Hotels,
Restaurants & Leisure -- 2.71%
102,500 Applebee's International, Inc. 2,204,775
150,000 International Game Technology 6,225,000
180,000 Starbucks Corporation * 6,129,000
------------
14,558,775
------------
Consumer Discretionary -
Media -- 5.09%
125,265 Clear Channel Communications, Inc. 3,613,895
100,407 DIRECTV Group, Inc. (The) * 1,976,010
140,000 EchoStar Communications
Corporation * 4,583,600
150,000 Lamar Advertising Company * 8,011,500
60,278 Liberty Global, Inc. -- Series A * 1,551,556
304,935 Liberty Global, Inc. -- Series C * 7,641,671
------------
27,378,232
------------
Consumer Discretionary -
Retail -- 8.21%
225,672 IAC/InterActiveCorp * 6,490,327
85,000 J.C. Penney Company, Inc. 5,813,150
122,100 Kohl's Corporation * 7,926,732
275,979 Liberty Media Holding Corporation
Interactive Common -- Series A * 5,624,452
320,000 O'Reilly Automotive, Inc. * 10,627,200
275,000 PETsMART, Inc. 7,631,250
------------
44,113,111
------------
Consumer Discretionary -
Services -- 0.80%
65,000 ITT Educational Services, Inc. * 4,309,500
------------ Consumer Staples - Food
& Staple Retail -- 1.42%
238,296 CVS Corporation 7,654,068
------------
Consumer Staples - Food,
Beverage & Tobacco -- 1.44%
215,000 Hormel Foods Corporation 7,735,700
------------ Energy -- 5.55%
25,450 Apache Corporation 1,608,440
120,000 BJ Services Company 3,615,600
50,000 Cameron International Corporation * 2,415,500
55,000 GlobalSantaFe Corporation 2,749,450
154,178 Kinder Morgan Management, LLC * 6,509,375
111,000 Nabors Industries, Ltd. * 3,302,250
20,000 Smith International, Inc. 776,000
175,000 Weatherford International Ltd. * 7,301,000
36,666 XTO Energy, Inc. 1,544,739
------------
29,822,354
------------
Financials - Banks -- 4.53%
215,000 Commerce Bancorp, Inc. 7,892,650
230,000 Marshall & Ilsley Corporation 11,081,400
90,000 MGIC Investment Corporation 5,397,300
------------
24,371,350
------------
Financials - Diversified -- 4.51%
67,500 Affiliated Managers Group, Inc. * 6,757,425
340,000 Eaton Vance Corp. 9,812,400
50,000 Legg Mason, Inc. 5,043,000
40,000 Moody's Corporation 2,615,200
------------
24,228,025
------------
Financials - Insurance -- 5.17%
230,000 Brown & Brown, Inc. 7,028,800
188,800 Nationwide Financial Services, Inc. 9,081,280
307,000 Willis Group Holdings Limited 11,666,000
------------
27,776,080
------------
Health Care - Equipment -- 4.91%
185,000 Biomet, Inc. 5,955,150
10,000 Cooper Companies, Inc. (The) 535,000
170,000 DENTSPLY International Inc. 5,118,700
255,000 Respironics, Inc. * 9,845,550
140,000 St. Jude Medical, Inc. * 4,940,600
------------
26,395,000
------------
Health Care - Pharmaceuticals
& Biotechnology -- 7.35%
42,500 Allergan, Inc. 4,785,925
30,000 Biogen Idec Inc. * 1,340,400
32,000 Biotech HOLDRS Trust 5,911,040
66,960 Fisher Scientific
International Inc. * 5,238,950
106,500 Forest Laboratories, Inc. * 5,389,965
85,000 Invitrogen Corporation * 5,389,850
180,000 Medicis Pharmaceutical
Corporation 5,823,000
165,000 Teva Pharmaceutical
Industries Ltd. 5,624,850
------------
39,503,980
------------
Health Care - Services -- 5.96%
23,252 Cardinal Health, Inc. 1,528,586
162,500 DaVita, Inc. * 9,403,875
260,883 Health Management
Associates, Inc. 5,452,455
245,000 IMS Health Incorporated 6,526,800
12,600 Patterson Companies, Inc. * 423,486
145,000 Universal Health Services,
Inc. -- Class B 8,689,850
------------
32,025,052
------------
Industrials - Capital
Goods -- 3.76%
208,000 Fastenal Company 8,022,560
110,000 IDEX Corporation 4,735,500
20,000 ITT Corporation 1,025,400
70,000 Oshkosh Truck Corporation 3,532,900
50,000 Rockwell Automation, Inc. 2,905,000
------------
20,221,360
------------
Industrials - Commerical
Services & Supplies -- 4.46%
116,604 ChoicePoint Inc. * 4,174,423
237,500 Cintas Corporation 9,697,125
165,000 Manpower Inc. 10,109,550
------------
23,981,098
------------
Industrials - Transportation -- 1.02%
123,000 Expeditors International
of Washington, Inc. 5,483,340
------------
Information Technology -
Hardware & Equipment -- 10.78%
160,000 CDW Corporation 9,868,800
175,000 Harris Corporation 7,785,750
260,000 Jabil Circuit, Inc. 7,428,200
225,000 Molex Incorporated -- Class A 7,404,750
380,000 QLogic Corporation * 7,182,000
215,000 Tektronix, Inc. 6,219,950
392,500 Vishay Intertechnology, Inc. * 5,510,700
183,750 Zebra Technologies
Corporation -- Class A * 6,567,225
------------
57,967,375
------------
Information Technology - Semiconductors &
Equipment -- 3.78%
217,000 Intersil Holding Corporation 5,327,350
200,000 Maxim Integrated Products, Inc. 5,614,000
288,750 Microchip Technology Incorporated 9,361,275
------------
20,302,625
------------
Information Technology -
Software & Services -- 6.39%
145,000 Affiliated Computer Services, Inc. * 7,519,700
322,500 BEA Systems, Inc. * 4,902,000
85,300 Check Point Software
Technologies Ltd. * 1,624,965
305,937 Fiserv, Inc. * 14,406,573
243,500 Hewitt Associates, Inc. * 5,907,310
------------
34,360,548
------------
Materials -- 3.77%
291,400 Bemis Company, Inc. 9,575,404
155,000 Ecolab Inc. 6,637,100
105,000 Florida Rock Industries, Inc. 4,064,550
------------
20,277,054
------------
TOTAL COMMON STOCKS
(cost $317,828,732) 500,529,627
------------
SHORT-TERM INVESTMENTS -- 6.13%
Commercial Paper -- 5.74%
$1,326,000 Fiserv, Inc.
10/02/06, 5.33% 1,326,000
1,133,000 General Mills, Inc.
10/03/06, 5.30% 1,132,833
700,000 General Mills, Inc.
10/03/06, 5.31% 699,897
1,300,000 Prudential Financial, Inc.
10/04/06, 5.26% 1,299,620
1,000,000 John Deere Capital Corporation
10/05/06, 5.30% 999,558
400,000 Fiserv, Inc.
10/06/06, 5.33% 399,763
1,865,000 Time Warner Inc.
10/10/06, 5.34% 1,862,787
1,000,000 Time Warner Inc.
10/11/06, 5.35% 998,662
1,000,000 American General Finance Corporation
10/12/06, 5.24% 998,544
1,000,000 Marshall & Ilsley Corporation
10/13/06, 5.25% 998,396
750,000 General Mills, Inc.
10/16/06, 5.30% 748,454
750,000 Walt Disney Company (The)
10/17/06, 5.30% 748,344
1,300,000 Fiserv, Inc.
10/18/06, 5.34% 1,296,915
400,000 Walt Disney Company (The)
10/18/06, 5.30% 399,058
1,100,000 CVS Corporation
10/19/06, 5.31% 1,097,242
1,050,000 CVS Corporation
10/20/06, 5.31% 1,047,212
755,000 General Mills, Inc.
10/20/06, 5.31% 752,995
700,000 John Deere Capital Corporation
10/23/06, 5.31% 697,832
775,000 Fortune Brands, Inc.
10/24/06, 5.37% 772,457
1,575,000 AT&T Inc.
10/25/06, 5.26% 1,569,707
1,000,000 CVS Corporation
10/25/06, 5.32% 996,601
505,000 Fiserv, Inc.
10/26/06, 5.31% 503,212
1,175,000 Morgan Stanley
10/27/06, 5.25% 1,170,716
1,925,000 Fiserv, Inc.
10/31/06, 5.33% 1,916,735
1,000,000 John Deere Capital Corporation
11/01/06, 5.30% 995,583
605,000 CVS Corporation
11/16/06, 5.33% 601,865
400,000 Fortune Brands, Inc.
11/07/06, 5.35% 397,860
1,000,000 Time Warner Cable, Inc.
11/15/06, 5.34% 993,473
1,500,000 John Deere Capital Corporation
11/20/06, 5.29% 1,489,200
2,000,000 Barclays U.S. Funding LLC
11/29/06, 5.24% 1,983,116
------------
30,894,637
------------
Variable Rate Security -- 0.39%
2,087,547 Wisconsin Corporate Central
Credit Union (1)
10/02/06, 4.99% 2,087,547
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $32,982,184) 32,982,184
------------
TOTAL INVESTMENTS
(cost $350,810,916) -- 99.24% 533,511,811
------------
OTHER ASSETS, NET OF LIABILITIES -- 0.76% 4,067,700
------------
TOTAL NET ASSETS
(basis of percentages disclosed above) -- 100% $537,579,511
------------
------------* Non-income producing security.
(1) Subject to a demand feature as defined by the Securities and Exchange
Commission.
The accompanying notes to financial statements are an integral part of this
schedule.
Statement of Assets and Liabilities
September 30, 2006
- -------------------------------------------------------------------------------ASSETS
Investments in securities at value (cost $350,810,916) .... $533,511,811
------------ Receivables -
Investment securities sold ........................... 5,202,595
Dividend and interest ................................ 268,252
------------
Total receivables ............................... 5,470,847
------------
Other ..................................................... 40,795
------------
Total assets .................................... 539,023,453
------------LIABILITIES
Payables -
Investment securities purchased ...................... 1,030,362
Due to adviser -
Management fee .................................. 241,420
Accounting and administrative fee ............... 250
12b-1 and servicing fee .............................. 2,778
Other payables and accrued expense ................... 169,132
------------
Total liabilities ............................... 1,443,942
------------
Total net assets ................................ $537,579,511
------------
------------NET ASSETS CONSIST OF
Paid in capital ........................................... $330,513,269
Net unrealized appreciation on investments ................ 182,700,895
Accumulated undistributed
net realized gain on investments ......................... 23,376,227
Accumulated undistributed net investment income ........... 989,120
------------
Total net assets ................................ $537,579,511
------------
------------Class I:
Net assets .................................................... $536,754,275
Shares outstanding ............................................ 23,223,422
NET ASSET VALUE PER SHARE ($.01 par value,
125,000,000 shares authorized),
offering price and redemption price .......................... $23.11
------
------
Class N:
Net assets .................................................... $825,236
Shares outstanding ............................................ 35,881
NET ASSET VALUE PER SHARE ($.01 par value,
75,000,000 shares authorized),
offering price and redemption price .......................... $23.00
------
------
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the year ended September 30, 2006
- -------------------------------------------------------------------------------INCOME
Dividend .................................................. $ 3,754,114
Interest .................................................. 986,387
-----------
Total income ......................................... 4,740,501
-----------EXPENSES
Management fee ............................................ 2,908,786
Transfer agent fees ....................................... 267,113
Accounting and administrative fees ........................ 251,021
Postage and mailing ....................................... 48,518
Registration fees ......................................... 43,379
Audit and tax fees ........................................ 31,000
Custodian fees ............................................ 27,544
Printing .................................................. 22,555
Insurance ................................................. 22,460
Directors' fees ........................................... 19,162
Legal fees ................................................ 16,261
Accounting system and pricing service fees ................ 10,064
12b-1 fees -- Class N ..................................... 1,669
Servicing fees -- Class N ................................. 668
Other operating expenses .................................. 8,522
-----------
Total expenses ....................................... 3,678,722
-----------
Net investment income ................................ 1,061,779
-----------NET REALIZED GAIN ON INVESTMENTS .............................. 26,341,021
-----------CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION
ON INVESTMENTS ............................................... 14,345,179
-----------
Net realized and unrealized gain on investments ........... 40,686,200
-----------
Net increase in net assets resulting from operations ...... $41,747,979
-----------
-----------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, 2006 and 2005
- -------------------------------------------------------------------------------
2006 2005
------------- -------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income .................. $ 1,061,779 $ 117,774
Net realized gain
on investments ........................ 26,341,021 46,352,470
Change in net unrealized
appreciation/depreciation
on investments ........................ 14,345,179 12,792,705
------------ ------------
Net increase in net assets
resulting from operations ........ 41,747,979 59,262,949
------------ ------------DISTRIBUTIONS TO SHAREHOLDERS
From net investment income - Class I ... (190,433) ---
From net realized gain
on investments - Class I .............. (49,264,764) (21,371,633)
From net realized gain
on investments - Class N .............. (51,326) ---
------------ ------------
Total distributions ............... (49,506,523) (21,371,633)
------------ ------------CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued - Class I
(914,130 and 1,020,903
shares, respectively) ................. 21,177,504 23,214,695
Reinvestment of distributions - Class I
(2,103,345 and 896,311
shares, respectively) ................. 46,904,596 20,319,383
Cost of shares redeemed - Class I
(3,026,065 and 2,242,928
shares, respectively) ................. (69,530,517) (51,001,342)
Proceeds from shares issued - Class N
(14,557 and 22,502
shares, respectively) ................. 330,404 513,270
Reinvestment of distributions - Class N
(2,303 shares in fiscal year 2006) .... 51,237 ---
Cost of shares redeemed - Class N
(3,481 shares in fiscal year 2006)..... (80,020) ---
------------ ------------
Decrease in net assets
derived from capital share
transactions ..................... (1,146,796) (6,953,994)
------------ ------------
Total increase (decrease) in
net assets (8,905,340) 30,937,322
------------ ------------NET ASSETS
Beginning of period .................... 546,484,851 515,547,529
------------ ------------
End of period (including accumulated undistributed
net investment income
of $989,120 and $117,774,
respectively) ......................... $537,579,511 $546,484,851
------------ ------------
------------ ------------
The accompanying notes to financial statements are an integral part of these
statements.
Notes to Financial Statements
September 30, 2006
- ------------------------------------------------------------------------------
(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 February 28, 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 a 0.25% 12b-1 fee and a 0.10%
servicing fee, as described in its prospectus. Income, expenses (other
than expenses attributable to a specific class), and realized and
unrealized gains and losses are allocated daily to each class of shares
based upon the relative net asset value of outstanding shares. Expenses
attributable to a particular class of shares, such as 12b-1 fees and
servicing fees, are allocated directly to that class. 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 for financial statement purposes are recorded
on 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 security
purchases, if any, are amortized over the lives of the respective
securities using the effective yield method. (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. 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. (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
September 30, 2006, no reclassifications were recorded. The tax character of distributions paid during the years ended
September 30 were as follows: 09/30/2006 09/30/2005
---------- ----------
Distributions paid from:
Ordinary income ............ $ 493,290 $ ---
Long-term capital gain ..... 49,013,233 21,371,633
----------- -----------
Total distributions paid ... $49,506,523 $21,371,633
----------- -----------
----------- ----------- As of September 30, 2006, investment cost for federal tax purposes was
$350,810,916 and the tax basis components of net assets were as
follows: Unrealized appreciation ....................... $191,412,018
Unrealized depreciation ....................... (8,711,123)
------------
Net unrealized appreciation ................... 182,700,895
------------
Undistributed ordinary income ................. 989,120
Undistributed accumulated net realized capital
gain ......................................... 23,376,227
Paid in capital ............................... 330,513,269
------------
Net assets .................................... $537,579,511
------------
------------ There were no differences between the book-basis and tax-basis
components of net assets. As of September 30, 2006, the Fund has no capital loss carryforward,
realized no post-October losses for tax purposes, and 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 $251,021 for accounting and
administrative services during the year ended September 30, 2006. (b) Independent Counsel --
A director of the Adviser is affiliated with a law firm that provides
services to the Fund. The Fund incurred expenses of $11,761 for the
year ended September 30, 2006 for legal services rendered by this law
firm.(3) Investment Transactions --
For the year ended September 30, 2006, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $89,017,528 and $141,737,896, respectively.(4) Future Adoption of New Accounting Standards --
On July 13, 2006, the Financial Accounting Standards Board (FASB) released
FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
(FIN 48). FIN 48 provides guidance for how uncertain tax positions should
be recognized, measured, presented and disclosed in the financial
statements. FIN 48 requires the evaluation of tax positions taken or
expected to be taken in the course of preparing the fund's tax returns to
determine whether the tax positions are "more-likely-than-not" of being
sustained by the applicable tax authority. Tax positions not deemed to meet
the more-likely-than-not threshold would be recorded as a tax benefit or
expense in the current year. Adoption of FIN 48 is required for fiscal
years beginning after December 15, 2006 and is to be applied to all open
tax years as of the effective date. At this time, management is evaluating
the implications of FIN 48 and its impact in the financial statements has
not yet been determined. In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement on Financial Accounting Standards No. 157, "Fair Value
Measurements" (FAS 157). This standard clarifies the definition of fair
value for financial reporting, establishes a framework for measuring fair
value and requires additional disclosures about the use of fair value
measurements. FAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. As of September 30, 2006, the Fund does not believe
the adoption of FAS 157 will impact the amounts reported in the financial
statements, however, additional disclosures will be required about the
inputs used to develop the measurements of fair value and the effect of
certain of the measurements reported in the statement of operations for a
fiscal period.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, 2006, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Fund's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of September 30, 2006, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Nicholas II, Inc., as of September 30, 2006, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois,
November 3, 2006
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 (2) Investment (3)
----------- -------------- ------------- -------------- --------------
Class I
October 17, 1983 (1) ... $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
September 30, 2005 ..... 23.50 -- 0.9146 23.3 109,547
September 30, 2006 ..... 23.11 0.0083 (a) 2.1472 (a) 22.4 118,142
Class N
February 28, 2005 (1) .. 22.59 -- -- 23.1 10,000
September 30, 2005 ..... 23.45 -- -- 23.3 10,381
September 30, 2006 ..... 23.00 -- 2.1340 (a) 22.4 11,158
(1) Date of Initial Public Offering.
(2) Based on latest 12 months accomplished earnings.
(3) Assuming reinvestment of all distributions.
(a) Paid December 28, 2005 to shareholders of record on December 27, 2005.
Range in quarter end price/earnings ratios
High Low
- ------------------------ ------------------------
September 30, 2000 35.1 September 30, 1985 11.7
Tax Information
September 30, 2006 (unaudited)
- ------------------------------------------------------------------------------
The Fund designates 100% of its ordinary income distribution for the year ended September 30, 2006
as qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003.For the year ended September 30, 2006, 100% of the dividends paid from net ordinary income qualify
for the dividends received deduction available to corporate shareholders.
The Fund hereby designates approximately $49,013,233 as a capital gain dividend for the year ended
September 30, 2006.
Approval of Investment Advisory Contract
(unaudited)
- -------------------------------------------------------------------------------
A discussion of the Approval by the Board of Directors of the Fund's Investment Advisory Contract
can be found in the Fund's Semiannual Report dated March 31, 2006.
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
800-544-6547 (toll-free) or 414-276-0535. 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 most recent twelve-month period ended June 30, also is 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.
Directors and Officers of the Fund
(unaudited)
The following table sets forth the pertinent information about the Fund's directors and officers as of September
30, 2006. 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 and Age With Fund Time Served During Past 5 Years by Director by Director
- -----------------------------------------------------------------------------------------------------------------------INTERESTED DIRECTOR
David O. Nicholas, 45 (1), (3) President, (2), 2 years Chief Investment Officer 4 None
Director and and Director, Nicholas
Portfolio Company, Inc., the Adviser
Manager to the Fund. He is Co-Portfolio
Manager of Nicholas Fund, Inc.,
Nicholas High Income Fund, Inc.
and Nicholas Equity Income
Fund, Inc. He also is the
Portfolio Manager of Nicholas II,
Inc. and Nicholas Limited Edition, Inc.DISINTERESTED DIRECTORS
Robert H. Bock, 74 Director (2), 23 years Private Investor, Consultant, 6 None
Dean Emeritus of Business
Strategy and Ethics, University of
Wisconsin School of Business,
1997 to present.Timothy P. Reiland, 50 Director (2), 4 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, 54 Director (2), 2 years 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
Albert O. Nicholas, 75 (3) Executive Annual, Chief Executive Officer and
Vice President 23 years Chairman of the Board, Nicholas
Company, Inc., the Adviser to
the Fund. He is Co-Portfolio
Manager of Nicholas Fund, Inc.
and Nicholas Equity Income
Fund, Inc. He formerly was
the sole Portfolio Manager
of these funds since each
fund's inception.
He was a Director of the Fund
until October 29, 2004.David L. Johnson, 64 (3) Executive Annual, Executive Vice President,
Vice President 23 years Nicholas Company, Inc., the
Adviser to the Fund.Jeffrey T. May, 50 Senior Vice Annual, Senior Vice President, Treasurer
President, 14 years and Chief Compliance Officer, Nicholas
Secretary, Company, Inc., the Adviser to the
Treasurer Fund. He is Portfolio Manager
and Chief of Nicholas Money Market Fund, Inc.
Compliance
OfficerLynn S. Nicholas, 50 (3) Senior Vice Annual, Senior Vice President, Nicholas
President 20 years Company, Inc. the Adviser to the
Fund. Lawrence J. Pavelec, 47 Senior Vice Annual, Senior Vice President, Nicholas
President 2 years Company, Inc., the Adviser to the
Fund. He has been Co-Portfolio
Manager of Nicholas High Income
Fund, Inc. since April 2003. He was
a portfolio manager for Brandes
Investment Partners from 1999 to
April 2003.Mark J. Giese, 35 Vice President Annual, Vice President, Nicholas Company,
8 years Inc., the Adviser to the Fund. He is
the Portfolio Manager of Nicholas
Liberty Fund.Candace L. Lesak, 49 Vice President Annual, Employee, Nicholas Company, Inc.,
20 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 a brother-in-law of Albert O. Nicholas. The Fund's Statement of Additional Information includes additional information about Fund
directors and is available, without charge, upon request, by calling 800-544-6547 (toll-free)
or 414-276-0535.
-----------------------------------------------------------------------------------------------------------------------
Privacy Policy
(unaudited)
- -------------------------------------------------------------------------------
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 Fund.
Nicholas II - Class I
--------------------
$1,000 initial investment on ....................... 10/17/83* 09/30/96
Number of years investing $100 each month following
the date of initial investment .................... 23 10
Total cash invested ................................ $28,600 $13,000
Total dividend and capital gain distributions
reinvested ........................................ $77,004 $5,911
Total full shares owned at 09/30/06 ................ 4,643 777
Total market value at 09/30/06 ..................... $107,301 $17,971The 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 Funds Services Offered
(unaudited)
- -------------------------------------------------------------------------------
* IRAs
* Traditional * SIMPLE
* Roth * SEP* Coverdell Education Accounts
* Profit Sharing Plan
* 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
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
www.nicholasfunds.com
414-276-0535 or 800-544-6547
Transfer Agent
U.S. BANCORP FUND SERVICES, LLC
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
Distributor
QUASAR DISTRIBUTORS, LLC
Milwaukee, Wisconsin
Custodian
U.S. BANK N.A.
Milwaukee, Wisconsin
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, 2006
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 6, 2006
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 $25,000 in 2006 and $22,600 in 2005.
(b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods 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 were $2,500 in 2006 and $2,000 in 2005. These services were for consents issued for the Fund's registration statements.
(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 $5,000 in 2006 and $4,000 in 2005. 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. The aggregate fees billed for professional services rendered by the Auditor to the Fund's investment adviser were $10,000 in 2005 and $8,400 in 2004. These services were for the audit of the investment adviser for the adviser's fiscal years ended 10/31/2005 and 10/31/2004.
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.
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: 11/29/2006
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: 11/29/2006
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: 11/29/2006
