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 811-00216
Nicholas High Income Fund, 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: 12/31/2006
Date of reporting period: 06/30/2006
Item 1. Report to Stockholders.
August 2006
Report to Fellow Shareholders:
The Nicholas High Income Fund returned 2.69% for the first half of 2006, which was ahead of the Morningstar High Yield Bond category return of 2.46%, but modestly behind the bond market indices. For the year ending June 30, 2006, the Fund produced a good relative return of 5.04%, net of fees, compared to the Merrill Lynch U.S. High Yield Master II Index gross return of 4.70%. The high yield bond market has produced more modest returns over the period as a result of historically high valuations and caution stemming from the Federal Reserve raising interest rates. As we noted a year ago, the average spread on the high yield market was near its all-time tights (high valuation) at the end of 2004, which left little room for improvement in 2006; therefore, greater prudence is to maintain principal value. The high yield corporate bond market faces similar challenges to those presented in 2005 including rising energy costs, the Federal Reserve tightening credit, a distressed auto sector and an aging credit cycle. We remain cautious for the reasons above, and are on track for the returns we anticipated for 2006.
The Fund's long-term strategy has been to identify value opportunities in out-of-favor or under followed securities of financially sound companies. There tend to be significant opportunities over time in the securities of companies that are temporarily out-of-favor due to specific company issues or in industries that are out-of-favor. Often times we find companies that are in a period of transition where market sentiment is overly harsh or negative resulting in undervalued securities. A cheap price does not guarantee a good investment; therefore, we must be able to identify a catalyst we believe will allow the investments to return to favor and higher valuations. We believe that by identifying securities trading below their fair values due to non-fundamental short-term issues, emotion or misunderstanding, they have potential to be great long-term investments. The challenge is often determining the price at which the security offers the best value. Our philosophy of investing for the long-term often leads us to be in early, but we allow ourselves latitude to increase position size when we deem it appropriate.
The Fund's performance in 2006 reflects both the positive and negative volatility in our deeper value investments. The Fund's positions in GMAC and Ford Motor Credit Company, which were initiated in 2005, have rebounded as the management of each company has pursued restructuring plans to cut costs and provide greater flexibility in the future. During the past year, a number of investors suspected these companies, as well as most of the auto industry in the U.S., were at great risk of failure. It was our opinion that the pessimism was too extreme, and that the finance companies of General Motors and Ford Motor Company would survive. The Fund has benefited from this strategy.
We remain cautious for the balance of 2006 because of the challenges facing the high yield corporate bond markets. The Federal Reserve appears intent on repeating history by raising rates until they sufficiently suffocate economic growth. Fed Funds stand at 5.25% as of June 30, and investors see a high probability of another 0.25% increase by year-end. The economy slowed dramatically in the second quarter of 2006. The annualized GDP went from 5.6% in the first quarter to 2.5% by June 30. While the slower growth may lead to lower interest rates, the decline in economic activity may produce some unwelcome surprises in company earnings in future months. We believe the greatest risk is to consumer spending, which we believe will soften due to higher borrowing costs, an increasing tax burden, modest wage growth and what appears to be a slowing housing market.
Our strategy for the balance of 2006 will be to continue to upgrade the portfolio holdings and increase allocations in fundamentally strong companies positioned to weather a more uncertain economic landscape. Our objective for the Fund is to generate an attractive distribution yield for our shareholders and attractive total returns with less volatility. We believe that absolute, positive returns along with attractive income returns will be a greater focus for investors in the years ahead.
Returns for Nicholas High Income Fund, Inc. and selected indices are provided in the chart below for the periods ended June 30, 2006. The Fund and Morningstar performance data is net of fees, while the Merrill Lynch Index is gross of fees.
| | | Average Annual Total Return |
| | 6 Month | 1 Year | 3 Year | 5 Year | 10 Year |
| Nicholas High Income Fund, Inc. - Class I | 2.69% | 5.04% | 7.39% | 5.37% | 4.02% |
| Merrill Lynch U.S. High Yield Master II Index | 3.07% | 4.70% | 8.46% | 8.32% | 6.58% |
| Morningstar High Yield Bond Funds Category | 2.46% | 4.76% | 7.83% | 7.44% | 5.25% |
| Ending value of $10,000 invested in Nicholas High Income Fund, Inc. - Class I | $10,269 | $10,504 | $12,384 | $12,988 | $14,826 |
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 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 of the Fund commenced operations on February 28, 2005. The annual returns shown for the Class I shares for this Fund would be substantially similar to the 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 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.
Thank you for your continued investment in the Nicholas High Income Fund.
Sincerely,
Lawrence J. Pavelec
Senior Vice President
Portfolio Manager
Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investment by the Fund in lower-rated and non-rated securities presents a greater risk of loss to principal and interest than higher-rated securities.
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 Merrill Lynch High Yield Master II Index is an unmanaged portfolio constructed to mirror the public high yield debt market. This index includes US dollar publicly issued corporate bonds and includes PIKS (payment-in-kind notes) and deferred interest bonds that are not yet accruing a coupon. Bonds rated in default, or that are not rated are excluded from the index. You cannot invest directly in an index. Each Morningstar Category average represents a universe of Funds with similar invest objectives.
Must be preceded or accompanied by a prospectus.
The Nicholas Funds are distributed by Quasar Distributors, LLC. (08/06)
Financial Highlights Class I (NCINX)
For a share outstanding throughout each period
-------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, 2006 ------------------------------------------
(unaudited) 2005 2004 2003 2002 2001
------------- ------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $2.10 $2.23 $2.19 $1.93 $2.36 $2.40
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income..... .08 .16 .16 .17 .19 .24
Net gain (loss) on
securities (realized and
unrealized) ............. (.02) (.13) .04 .26 (.42) (.04)
----- ----- ----- ----- ----- -----
Total from investment
operations ........... .06 .03 .20 .43 (.23) .20
----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS
From net investment
income .................. (.04) (.16) (.16) (.17) (.20) (.24)
----- ----- ----- ----- ----- -----
NET ASSET VALUE, END
OF PERIOD .................. $2.12 $2.10 $2.23 $2.19 $1.93 $2.36
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
TOTAL RETURN ................ 2.69%(1) 1.38% 9.65% 22.75% (10.13)% 8.76%
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) .......... $97.3 $101.9 $114.6 $120.4 $101.4 $118.7
Ratio of expenses to
average net assets ......... .72%(2) .69% .64% .60% .58% .61%
Ratio of net investment
income to average
net assets ................. 6.93%(2) 7.06% 7.16% 7.94% 8.77% 9.56%
Portfolio turnover rate ..... 46.12%(2) 59.29% 64.17% 104.40% 57.19% 69.84%
(1) Not annualized.
(2) Annualized.
The accompanying notes to financial statements are an integral part of these highlights.
Financial Highlights Class N (NNHIX)
For a share outstanding throughout each period
---------------------------------------------------------------------
Six Months
Ended Period from
June 30, 2006 02/28/2005 (1)
(unaudited) to 12/31/2005
------------- -------------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $2.08 $2.24
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income .... .07 .15
Net loss on
securities (realized and
unrealized) ............. (.02) (.16)
----- -----
Total from investment
operations ........... .05 (.01)
----- -----
LESS DISTRIBUTIONS
From net investment
income .................. (.04) (.15)
----- -----
NET ASSET VALUE, END
OF PERIOD .................. $2.09 $2.08
----- -----
----- -----
TOTAL RETURN ................ 2.20%(2) (0.53)%(2)
SUPPLEMENTAL DATA:
Net assets, end of
period (thousands) ......... $118.8 $52.2
Ratio of expenses to
average net assets ......... 1.09%(3) 1.04%(3)
Ratio of net investment
income to average
net assets ................. 6.65%(3) 6.85%(3)
Portfolio turnover rate ..... 46.12%(3) 59.29%
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
The accompanying notes to financial statements are an integral part of these highlights.
-----------------------------------------------------------------------------------------
Top Ten Portfolio Issuers
June 30, 2006 (unaudited)
-------------------------------------------------------------------------------
Percentage
Name of Net Assets
---- -------------
General Motors Acceptance Corporation ..................... 3.48%
DaVita, Inc. .............................................. 2.96%
Ford Motor Credit Company ................................. 2.85%
MGM MIRAGE ................................................ 2.50%
EchoStar DBS Corporation .................................. 2.46%
Constellation Brands, Inc. ................................ 2.37%
DRS Technologies, Inc. .................................... 2.22%
Solo Cup Company .......................................... 2.22%
Sequa Corporation ......................................... 2.17%
SunGard Data Systems Inc. ................................. 2.13%
------
Total of top ten .......................................... 25.36%
------
------
-------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
June 30, 2006 (unaudited)
-------------------------------------------------------------------------------
BAR CHART PLOT POINTS
Consumer Discretionary .................................... 22.22%
Industrials ............................................... 18.51%
Health Care ............................................... 14.70%
Consumer Staples .......................................... 11.36%
Energy .................................................... 8.52%
Information Technology..................................... 7.65%
Financials ................................................ 4.94%
Short-Term Investments .................................... 4.13%
Utilities ................................................. 3.23%
Materials ................................................. 3.19%
Telecommunication Services ................................ 1.55%
-------------------------------------------------------------------------------
Fund Expenses
For the six month period ended June 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*
12/31/05 06/30/06 01/01/06 - 06/30/06
------------------------------------------------------------------
Actual $1,000.00 $1,026.90 $3.62
Hypothetical 1,000.00 1,021.43 3.61
(5% return before expenses)
* Expenses are equal to the Class I six-month annualized expense ratio
of 0.72%, multiplied by the average account value over the period,
multiplied by 181 then divided by 365 to reflect the one-half year
period.
Class N
Beginning Ending Expenses
Account Account Paid During
Value Value Period**
12/31/05 06/30/06 01/01/06 - 06/30/06
------------------------------------------------------------------
Actual $1,000.00 $1,022.00 $5.46
Hypothetical 1,000.00 1,019.59 5.46
(5% return before expenses)
** Expenses are equal to the Class N six-month annualized expense ratio
of 1.09%, multiplied by the average account value over the period,
multiplied by 181 then divided by 365 to reflect the one-half year
period.
Schedule of Investments
June 30, 2006 (unaudited)
---------------------------------------------------------------------------
Shares or
Principal
Amount Value
---------- -----------
NON-CONVERTIBLE BONDS -- 94.91%
Consumer Discretionary -
Auto & Components - 6.23%
$ 750,000 American Axle & Manufacturing, Inc.
5.25%, 02/11/14 $ 622,500
500,000 ArvinMeritor, Inc.
8.125%, 09/15/15 462,500
1,500,000 Dura Operating Corp.
8.625%, 04/15/12 1,275,000
3,000,000 Ford Motor Credit Company
5.625%, 10/01/08 2,775,192
1,000,000 Goodyear Tire & Rubber Company (The)
7.857%, 08/15/11 927,500
-----------
6,062,692
-----------
Consumer Discretionary -
Consumer Durables & Apparel -- 0.99%
1,000,000 Eastman Kodak Company
7.25%, 11/15/13 963,083
-----------
Consumer Discretionary -
Consumer Services -- 2.20%
1,500,000 United Rentals (North America), Inc.
7.75%, 11/15/13 1,425,000
750,000 Vail Resorts, Inc.
6.75%, 02/15/14 712,500
-----------
2,137,500
-----------
Consumer Discretionary - Hotels,
Restaurants & Leisure -- 4.91%
500,000 Herbst Gaming, Inc.
7.00%, 11/15/14 475,000
2,500,000 MGM MIRAGE
6.00%, 10/01/09 2,431,250
2,000,000 Station Casinos, Inc.
6.00%, 04/01/12 1,872,500
-----------
4,778,750
-----------
Consumer Discretionary - Media -- 6.15%
1,250,000 DIRECTV Holdings LLC
144A restricted, 6.375%, 06/15/15 1,153,125
2,500,000 EchoStar DBS Corporation
6.375%, 10/01/11 2,393,750
1,750,000 Emmis Operating Company
6.875%, 05/15/12 1,715,000
750,000 Reader's Digest Association, Inc. (The)
144A restricted, 6.50%, 03/01/11 723,750
-----------
5,985,625
-----------
Consumer Discretionary - Retail -- 1.53%
1,500,000 Rent-A-Center, Inc.
7.50%, 05/01/10 1,492,500
-----------
Consumer Staples - Food,
Beverage & Tobacco -- 4.89%
2,250,000 Constellation Brands, Inc.
8.125%, 01/15/12 2,311,875
1,500,000 Pinnacle Foods Group Inc.
8.25%, 12/01/13 1,473,750
1,000,000 Reynolds American Inc.
144A restricted, 7.25%, 06/01/13 977,500
-----------
4,763,125
-----------
Consumer Staples - Food
& Staple Retail -- 2.52%
500,000 Denny's Holdings, Inc.
10.00%, 10/01/12 497,500
1,000,000 Pilgrim's Pride Corporation
9.625%, 09/15/11 1,040,000
1,000,000 Restaurant Company (The)
10.00%, 10/01/13 915,000
-----------
2,452,500
-----------
Consumer Staples - Household
& Personal Products -- 3.84%
2,500,000 Solo Cup Company
8.50%, 02/15/14 2,162,500
750,000 Spectrum Brands, Inc.
7.375%, 02/01/15 609,375
1,000,000 Visant Holding Corporation
144A restricted, 8.75%, 12/01/13 965,000
-----------
3,736,875
-----------
Energy -- 8.43%
2,000,000 Denbury Resources Inc.
7.50%, 04/01/13 2,000,000
1,500,000 Forest Oil Corporation
7.75%, 05/01/14 1,503,750
750,000 Grant Prideco, Inc.
6.125%, 08/15/15 699,375
500,000 Harvest Operations Corp.
7.875%, 10/15/11 475,000
500,000 Hornbeck Offshore Services, Inc.
6.125%, 12/01/14 463,750
1,000,000 Stone Energy Corporation
8.25%, 12/15/11 1,010,000
500,000 Stone Energy Corporation
6.75%, 12/15/14 501,875
1,500,000 Williams Companies, Inc. (The)
8.125%, 03/15/12 1,556,250
-----------
8,210,000
-----------
Financials - Diversified -- 3.48%
3,500,000 General Motors Acceptance Corporation (1)
7.43%, 12/01/14 3,390,594
-----------
Financials - Insurance -- 0.89%
1,000,000 Fairfax Financial Holdings Limited
7.75%, 04/26/12 870,000
-----------
Financials - Real Estate -- 0.52%
500,000 Corrections Corporation of America
7.50%, 05/01/11 503,750
-----------
Health Care - Equipment -- 0.90%
1,000,000 MSC - Medical Services Company (2)
12.57%, 10/15/11 875,000
-----------
Health Care - Services -- 13.66%
1,250,000 AmeriPath, Inc.
10.50%, 04/01/13 1,310,937
3,000,000 DaVita, Inc.
7.25%, 03/15/15 2,880,000
2,000,000 Fresenius Medical Care Capital Trust IV
7.875%, 06/15/11 2,020,000
750,000 HCA Inc.
6.375%, 01/15/15 694,912
500,000 Inverness Medical Innovations, Inc.
8.75%, 02/15/12 485,000
500,000 Omnicare, Inc.
6.875%, 12/15/15 475,000
1,250,000 Psychiatric Solutions, Inc.
10.625%, 06/15/13 1,362,500
2,000,000 Res-Care, Inc.
7.75%, 10/15/13 1,985,000
1,500,000 Tenet Healthcare Corporation
6.375%, 12/01/11 1,338,750
750,000 Triad Hospitals, Inc.
7.00%, 05/15/12 746,250
-----------
13,298,349
-----------
Industrials - Capital Goods -- 9.09%
1,000,000 Accuride Corporation
8.50%, 02/01/15 960,000
1,500,000 Bombardier Inc.
144A restricted, 6.75%, 05/01/12 1,380,000
2,250,000 DRS Technologies, Inc.
6.875%, 11/01/13 2,165,625
500,000 L-3 Communications Corporation
5.875%, 01/15/15 466,250
750,000 L-3 Communications Corporation
6.375%, 10/15/15 716,250
973,000 Manitowoc Company, Inc. (The)
10.50%, 08/01/12 1,055,705
2,000,000 Sequa Corporation
9.00%, 08/01/09 2,110,000
-----------
8,853,830
-----------
Industrials - Commerical Services
& Supplies -- 9.23%
1,000,000 Alliance Laundry Systems LLC
8.50%, 01/15/13 965,000
2,000,000 Allied Waste North America, Inc.
6.50%, 11/15/10 1,930,000
2,000,000 GEO Group, Inc. (The)
8.25%, 07/15/13 2,000,000
2,250,000 Great Lakes Dredge & Dock Company
7.75%, 12/15/13 2,072,812
2,000,000 Waste Services, Inc.
9.50%, 04/15/14 2,020,000
-----------
8,987,812
-----------
Information Technology -
Hardware & Equipment -- 2.46%
1,500,000 Flextronics International Ltd.
6.25%, 11/15/14 1,404,375
1,000,000 Xerox Corporation
6.875%, 08/15/11 993,750
-----------
2,398,125
-----------
Information Technology -
Software & Services -- 5.11%
1,500,000 Iron Mountain Incorporated
8.625%, 04/01/13 1,500,000
2,000,000 SunGard Data Systems Inc.
144A restricted, 9.125%, 08/15/13 2,075,000
1,500,000 Unisys Corporation
6.875%, 03/15/10 1,400,625
-----------
4,975,625
-----------
Materials -- 3.15%
1,500,000 Lyondell Chemical Company
9.625%, 05/01/07 1,522,500
500,000 Owens-Illinois, Inc.
8.10%, 05/15/07 502,500
974,000 United States Steel LLC
10.75%, 08/01/08 1,047,050
-----------
3,072,050
-----------
Telecommunication Services -- 1.53%
1,000,000 Nextel Communications, Inc.
6.875%, 10/31/13 1,005,862
500,000 Syniverse Technologies Inc.
7.75%, 08/15/13 486,250
-----------
1,492,112
-----------
Utilities -- 3.20%
1,000,000 AES Corporation (The)
144A restricted, 8.75%, 05/15/13 1,070,000
500,000 Nevada Power Company
8.25%, 06/01/11 534,461
1,500,000 Sonat Inc.
7.625%, 07/15/11 1,515,000
-----------
3,119,461
-----------
TOTAL NON-CONVERTIBLE BONDS
(cost $94,594,151) 92,419,358
-----------
SHORT-TERM INVESTMENTS -- 4.09%
Commercial Paper -- 3.39%
300,000 Kraft Foods Inc.
5.31%, 07/03/06 300,000
600,000 Time Warner Cable, Inc.
5.37%, 07/05/06 599,821
300,000 Sara Lee Corporation
5.35%, 07/06/06 299,866
400,000 General Mills, Inc.
5.25%, 07/10/06 399,592
400,000 Sara Lee Corporation
5.28%, 07/10/06 399,589
550,000 General Mills, Inc.
5.30%, 07/12/06 549,271
750,000 Fiserv, Inc.
5.45%, 07/21/06 747,956
-----------
3,296,095
-----------
Variable Rate Security -- 0.70%
682,705 Wisconsin Corporate
Central Credit Union (3)
5.02%, 07/03/06 682,705
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $3,978,800) 3,978,800
-----------
TOTAL INVESTMENTS -- 99.00%
(cost $98,572,951) 96,398,158
-----------
OTHER ASSETS,
NET OF LIABILITIES -- 1.00% 973,230
-----------
TOTAL NET ASSETS
(basis of percentages
disclosed above) -- 100% $97,371,388
-----------
-----------
(1) Floating Rate Note based on U.S. dollar denominated 3-month LIBOR plus 220
basis points.
(2) Floating Rate Note based on U.S. dollar denominated 3-month LIBOR plus 750
basis points.
(3) 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
June 30, 2006 (unaudited)
-------------------------------------------------------------------------------
ASSETS
Investments in securities at value (cost $98,572,951) ..... $ 96,398,158
Interest receivable .................................. 1,814,651
Other ................................................ 5,427
------------
Total assets .................................... 98,218,236
------------
LIABILITIES
Payables -
Investment securities purchased ...................... 741,970
Due to adviser -
Management fee .................................. 38,663
Accounting and administrative fee ............... 4,285
12b-1 and servicing fee .............................. 176
Other payables and accrued expense ................... 61,754
------------
Total liabilities ............................... 846,848
------------
Total net assets ................................ $ 97,371,388
------------
------------
NET ASSETS CONSIST OF
Paid in capital ........................................... $177,493,880
Net unrealized depreciation on investments ................ (2,174,793)
Accumulated net realized loss on investments .............. (79,751,362)
Accumulated undistributed net investment income ........... 1,803,663
------------
Total net assets ................................ $ 97,371,388
------------
------------
Class I:
Net assets .................................................... $97,252,549
Shares outstanding ............................................ 45,952,616
NET ASSET VALUE PER SHARE ($.01 par value,
75,000,000 shares authorized),
offering price and redemption price .......................... $2.12
-----
-----
Class N:
Net assets .................................................... $118,839
Shares outstanding ............................................ 56,825
NET ASSET VALUE PER SHARE ($.01 par value,
25,000,000 shares authorized),
offering price and redemption price .......................... $2.09
-----
-----
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the six months ended June 30, 2006 (unaudited)
-------------------------------------------------------------------------------
INCOME
Interest .................................................. $ 3,795,870
Other ..................................................... 31,405
-----------
Total income ......................................... 3,827,275
-----------
EXPENSES
Management fee ............................................ 224,276
Transfer agent fees ....................................... 30,399
Registration fees ......................................... 25,454
Accounting and administrative fees ........................ 25,017
Audit and tax fees ........................................ 12,150
Accounting system and pricing service fees ................ 8,505
Postage and mailing ....................................... 8,435
Legal fees ................................................ 8,250
Directors' fees ........................................... 6,000
Printing .................................................. 5,452
Insurance ................................................. 2,758
Custodian fees ............................................ 2,585
12b-1 fees -- Class N ..................................... 106
Servicing fees -- Class N ................................. 42
Other operating expenses .................................. 1,937
-----------
Total expenses ....................................... 361,366
-----------
Net investment income ................................ 3,465,909
-----------
NET REALIZED LOSS ON INVESTMENTS .............................. (649,685)
-----------
CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION
ON INVESTMENTS ............................................... (423,552)
-----------
Net realized and unrealized loss on investments ........... (1,073,237)
-----------
Net increase in net assets resulting from operations ...... $ 2,392,672
-----------
-----------
The accompanying notes to financial statements are an integral part of this
statement.
Statements of Changes in Net Assets
For the six months ended June 30, 2006 (unaudited) and the year ended December
31, 2005
-------------------------------------------------------------------------------
Six months ended
06/30/2006 2005
------------- -------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income .................. $ 3,465,909 $ 7,491,436
Net realized loss
on investments ........................ (649,685) (37,374)
Change in net unrealized
appreciation/depreciation
on investments ........................ (423,552) (5,877,948)
------------- -------------
Net increase in net assets
resulting from operations ........ 2,392,672 1,576,114
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income - Class I ... (1,726,471) (7,550,000)
From net investment income - Class N ... (1,999) (2,016)
------------- -------------
Total distributions ............... (1,728,470) (7,552,016)
------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares issued - Class I
(734,017 and 3,129,193
shares, respectively) ................. 1,568,368 6,824,214
Reinvestment of distributions - Class I
(668,629 and 2,927,577
shares, respectively) ................. 1,430,867 6,212,455
Cost of shares redeemed - Class I
(3,881,025 and 9,078,987
shares, respectively) ................. (8,283,357) (19,805,738)
Proceeds from shares issued - Class N
(33,838 and 51,900
shares, respectively) ................. 72,097 111,977
Reinvestment of distributions - Class N
(899 and 936
shares, respectively) ................. 1,897 1,999
Cost of shares redeemed - Class N
(2,981 and 27,767
shares, respectively) ................. (6,356) (60,254)
------------- -------------
Decrease in net assets
derived from capital share
transactions ..................... (5,216,484) (6,715,347)
------------- -------------
Total decrease in net assets ...... (4,552,282) (12,691,249)
------------- -------------
NET ASSETS
Beginning of period .................... 101,923,670 114,614,919
------------- -------------
End of period (including accumulated
undistributed net investment income
of $1,803,663 and $66,224,
respectively) ......................... $ 97,371,388 $101,923,670
------------- -------------
------------- -------------
The accompanying notes to financial statements are an integral part of these
statements.
Notes to Financial Statements
June 30, 2006 (unaudited)
------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies --
Nicholas High Income Fund, 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 high current income consistent with
the preservation and conservation of capital values. 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. 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 quarterly. 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
June 30, 2006, no reclassifications were recorded.
The tax character of distributions paid during the six months ended
June 30, 2006 and the year ended December 31, 2005 were as follows:
06/30/2006 12/31/2005
---------- ----------
Distributions paid from:
Ordinary income ............ $1,728,470 $7,552,016
---------- ----------
---------- ----------
As of June 30, 2006, investment cost for federal tax purposes was
$98,572,951 and the tax basis components of net assets were as follows:
Unrealized appreciation ....................... $ 854,530
Unrealized depreciation ....................... (3,029,323)
------------
Net unrealized depreciation.................... (2,174,793)
------------
Undistributed ordinary income ................. 1,803,663
Accumulated net realized capital loss ......... (79,751,362)
Paid in capital ............................... 177,493,880
------------
Net assets .................................... $ 97,371,388
------------
------------
There were no differences between the book-basis and tax-basis
components of net assets.
As of June 30, 2006, the Fund has capital loss carryforwards of
approximately $79,751,000, which expire as follows: $4,686,000 in
2007, $19,346,000 in 2008, $30,985,000 in 2009, $23,496,000 in 2010
and $1,238,000 in 2014. To the extent the Fund has future net realized
capital gains, distributions of capital gains to shareholders will be
offset by any unused capital loss carryforward.
As of June 30, 2006, 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 .50% of the average net asset value up to and
including $50 million, .40% of the average net asset value in excess
of $50 million and up to and including $100 million and .30% 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 $25,017 for accounting and
administrative services during the period ended June 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 $6,000 for the
period ended June 30, 2006 for legal services rendered by this law
firm.
(3) Investment Transactions --
For the period ended June 30, 2006, the cost of purchases and the proceeds
from sales of investment securities, other than short-term obligations,
aggregated $21,675,108 and $25,511,392, respectively.
(4) Concentration of Risk --
The Fund invests primarily in high yield debt securities. The market
values of these high yield debt securities tend to be more sensitive to
economic conditions and individual corporate developments than those of
higher rated securities. In addition, the market for these securities is
generally less liquid than for higher rated securities.
Historical Record
(unaudited)
--------------------------------------------------------------------------------------------------
Net Investment Growth of
Net Income an Initial
Asset Value Distributions $10,000
Per Share Per Share Investment (2)
----------- -------------- --------------
Class I
November 21, 1977 (1) .. $5.10 $ -- $10,000
December 31, 1987 ...... 3.64 0.4660 22,560
December 31, 1988 ...... 3.68 0.3710 25,164
December 31, 1989 ...... 3.44 0.3830 26,155
December 31, 1990 ...... 3.01 0.3970 25,886
December 31, 1991 ...... 3.34 0.3460 31,853
December 31, 1992 ...... 3.38 0.2955 35,143
December 31, 1993 ...... 3.52 0.2890 39,695
December 31, 1994 ...... 3.21 0.3010 39,626
December 31, 1995 ...... 3.42 0.2950 46,029
December 31, 1996 ...... 3.53 0.2960 51,721
December 31, 1997 ...... 3.69 0.2903 58,514
December 31, 1998 ...... 3.39 0.3155 58,788
December 31, 1999 ...... 3.06 0.3312 58,749
December 31, 2000 ...... 2.40 0.3060 51,620
December 31, 2001 ...... 2.36 0.2430 56,144
December 31, 2002 ...... 1.93 0.1985 50,459
December 31, 2003 ...... 2.19 0.1690 61,937
December 31, 2004 ...... 2.23 0.1640 67,915
December 31, 2005 ...... 2.10 0.1579 68,849
June 30, 2006 .......... 2.12 0.0369(a) 70,703
Class N
February 28, 2005 (1) .. $2.24 $ -- $10,000
December 31, 2005 ...... 2.08 0.1464 9,947
June 30, 2006 .......... 2.09 0.0360(a) 10,165
(1) Initial date under Nicholas Company, Inc. management.
(2) Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
(a) Paid on April 28, 2006, $0.0369 and $0.0360 to respective Class I and
Class N shareholders of record on April 27, 2006.
Approval of Investment Advisory Contract
(unaudited)
-------------------------------------------------------------------------------
In February 2006, 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 February 2007. 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 December 31, 2005, the management fee was
0.44% and the Fund's Class I and Class N total expense ratios (including the
management fee) were 0.69% and 1.04%, respectively. 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 low 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, including the Merrill Lynch High Yield Master II Index; and
(v) the range and quality of the services offered by the Adviser. The peer
group fund data included high-yield bond funds with similar asset sizes. In
terms of the peer group data used for performance comparisons, the Fund's Class
I was ranked 9th, 8th, 8th and 11th out of 15 funds for the one-, three-, five-
and ten-year periods ending December 31, 2006. The Fund's Class I had the
third lowest expense ratio among its peer group.
The Board considered the range of services to be provided by the Adviser to the
Fund under the Advisory Agreement. The Board concluded that the nature and
extent of the services to be provided were appropriate and that the Adviser had
historically provided such services in accordance with the Board's expectations
and the terms of the Advisory Agreement. Turning to the quality of services
provided, the Board considered the Adviser's portfolio management capabilities
and the scope and quality of its research capacity. The Board also considered
the Adviser's experience in fund accounting, administration and regulatory
compliance. The Board agreed that historically the quality of services
provided by the Adviser had met or exceeded the Board's expectations and the
service levels contemplated by the Advisory Agreement.
The Board considered the investment performance of the Fund and the Adviser.
Among other things, the Board noted its consideration of the Fund's performance
relative to peer funds and its benchmarks. The Board reviewed the actual and
relative short-term and long-term performance of the Fund. The Board agreed
that the Fund demonstrated satisfactory performance with respect to comparable
funds and its benchmarks. The Board also discussed the extent to which
economies of scale would be realized, and whether such economies were reflected
in the Fund's fee levels and concluded that the Adviser had been instrumental
in holding down Fund costs, citing consistently low fees in an environment
where fund fees have been on an upward trend.
The Board considered the cost of services provided by the Adviser. The Board
also considered the profits realized by the Adviser in connection with the
management and distribution of the Fund, as expressed by the Adviser's
management in general terms. The Board expressed satisfaction that the
Adviser's financial condition was strong and that it was capable of delivering
the range of services contemplated by the Advisory Agreement. The Board
expressed the opinion that given the Board's focus on performance and
maintaining a low fee structure that the Adviser's profits were not relevant.
The Board determined that the Adviser had fully and adequately carried out the
terms and conditions of its contract with the Fund. The Board expressed
satisfaction with the Fund's performance, management's control of expenses and
the rate of the management fee for the Fund and the overall level of services
provided by the Adviser.
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.
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
LAWRENCE J. PAVELEC, Senior 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
Distributor
Quasar Distributors, LLC
Milwaukee, Wisconsin
Custodian
U.S. BANK N.A.
Milwaukee, Wisconsin
Independent Registered Public Accounting Firm
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
Counsel
MICHAEL BEST & FRIEDRICH LLP
Milwaukee, Wisconsin
This report is submitted for the information of shareholders of the Fund. It
is not authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus.
SEMIANNUAL REPORT
NICHOLAS HIGH INCOME FUND, INC.
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
June 30, 2006
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 High Income Fund, Inc.
By: /s/ David O. Nicholas
Name: David O. Nicholas
Title: Principal Executive Officer
Date: 08/29/2006
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: 08/29/2006
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: 08/29/2006
