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: 12/31/2006
Item 1. Report to Stockholders.
ANNUAL REPORT
December 31, 2006
Nicholas High Income Fund, Inc.
Consistency in a World of Change
[Oaktree Image]
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
February 2007
Report to Fellow Shareholders:
Overview
Nicholas High Income Fund Class I returned 9.26% for the year ending December 31, 2006, which was significantly higher than our stated outlook for the high yield market one year ago. We believe our shareholders were well compensated by the Fund's return in 2006 given our move to a more conservative strategy last year of employing defensive positions to cushion the portfolio against potential rising interest rates, an economic slowdown and accompanying spread widening. Our strategy was based on our view that the high yield market faced stiff headwinds in 2006 due to tighter monetary conditions following 17 tightening moves by the Fed totaling 425 basis points, higher mortgage and consumer rates, a decelerating economy and a high yield market that was quickly approaching historically high valuations. By May the Fed's policy had switched to a wait-and-see strategy after their last move to a 5.25% Fed Funds rate. The economy remained surprisingly resilient amidst higher interest rates and a marked slowdown in the housing market, while the high yield market generated positive, high relative returns in ten of twelve months. In fact, the excess return of the Lehman U.S. Corporate High Yield Index (the portion of return in excess of a ten-year treasury) was 10.5%, one of the best performances historically for high yield.
We felt our strategy in 2006 was a prudent one in that it focused on principal preservation rather than solely on excess relative performance given the economic and market backdrop. What most high yield investors did not anticipate, ourselves included, was a dramatic drop in default rates and a literal tsunami of liquidity aimed at the riskiest securities which supported the market as prices climbed to even richer valuations. Last year caused great uneasiness among portfolio managers skeptical over steep valuations, but cognizant of the powerful market forces demanding to keep portfolios fully invested as the high yield market marched steadily on. On a long-term basis we believe valuations are equally as important as company fundamentals to the performance of high yield bonds. At some point the price of a bond reaches a level where investors are not compensated for the potential risk of investing in the security, and that is typically followed with profit-taking. We do not make a practice of timing the markets, but it is difficult to ignore areas of extended valuations within the high yield market.
Entering 2007, we reiterate our cautious stance on the high yield market, but remain cognizant that strong fundamentals and tremendous liquidity give little apparent reason for high yield bonds to experience a significant correction in the near future. However, we will continue to accept the generosity of the market and take profits in positions that have reached what we believe to be their full valuation. Absent a negative credit event that would cause investors to re-price risk in the market, we anticipate positive, although modestly lower returns, for the high yield market this year.
Market Review
The fundamental backdrop for corporate high yield bonds was near perfection in 2006. Corporations had maintained strong relative balance sheets and sound liquidity. The stronger corporate fundamentals pushed the high yield bond default rate to the lowest level in 25 years and led recovery rates to rise. The default rate was 0.76%, as published by the Altman High Yield Default Report. The average weighted recovery rate was 65.3%, up from 61.1% in 2006. Further evidence that a potential spike in defaults is unlikely in the near term is the amount of distressed bonds, those trading 1,000 basis points or more above treasuries, has declined to just 1.7% of the high yield market. Historically, this has been one indication that near term default rates should remain subdued, which would support the high yield bond market. However, it also may be an indication of the excessive appetite for the riskiest of high yield securities, which could serve as a red flag that prices may not compensate investors for the higher levels of risk. Bonds rated below B have generated some of the best performance in recent years and could be vulnerable when a market correction eventually materializes.
The superior performance of lower quality bonds has been striking in recent years.
| | Average Annual Total Return |
| Lehman Indices: | 1 Year | 3 Year | 5 Year |
| Ba Corporate Bond | 10.07% | 7.43% | 7.89% |
| B Corporate Bond | 11.22% | 8.31% | 10.21% |
| Caa Corporate Bond | 17.66% | 10.45% | 11.22% |
| Ca - D Corporate Bond | 33.10% | 18.58% | 22.03% |
| | | | |
| Source: Lehman Indices | | | |
The decline in default rates, increase in recovery rates and large demand for yield (risk) has produced outsized returns over recent years in the lowest quality bonds, as presented above using the Lehman Indices as proxies. While we believe there will be issuer specific opportunities in the year ahead, it is unlikely the broad category of Caa-rated and lower bonds will continue this degree of relative outperformance. As the chart below indicates, Caa-rated bond spreads (in basis points) have declined measurably since 2002.
Lehman Caa Rated Corporate Bond Index
Spread to Ten-Year Treasuries
PLOT POINTS
12/31/1998 | 1202.6 |
3/31/1999 | 1279.2 |
6/30/1999 | 1081.7 |
9/30/1999 | 1227.4 |
12/31/1999 | 1443.2 |
3/31/2000 | 1360.5 |
6/30/2000 | 1341.1 |
9/29/2000 | 1477.8 |
12/29/2000 | 2279.8 |
3/30/2001 | 1661.3 |
6/29/2001 | 1978.8 |
9/28/2001 | 2415.4 |
12/31/2001 | 1870.5 |
3/29/2002 | 1643.4 |
6/28/2002 | 1832.7 |
9/30/2002 | 1989.0 |
12/31/2002 | 1666.1 |
3/31/2003 | 1261.1 |
6/30/2003 | 982.5 |
9/30/2003 | 859.4 |
12/31/2003 | 680.4 |
3/31/2004 | 744.6 |
6/30/2004 | 708.6 |
9/30/2004 | 695.1 |
12/31/2004 | 511.8 |
3/31/2005 | 580.2 |
6/30/2005 | 724.7 |
9/30/2005 | 666.4 |
12/30/2005 | 628.0 |
3/31/2006 | 512.8 |
6/30/2006 | 572.1 |
9/29/2006 | 579.7 |
12/29/2006 | 487.8 |
A high in new issuance volume also dominated the high yield landscape. New supply of $142 billion came to market in 2006, surpassing the previous high yield new issuance high of $137 billion in 1998. However, the new issuance in 2006 was far more manageable than 1998 because the net issuance (net new supply) was only $70 billion versus $111 billion in 1998. Approximately half the issuance replaced redeemed or called bonds in 2006. Going forward investors will watch carefully as to how private equity investors and leveraged buy-out deals are structured. As more new issuance goes to leverage up balance sheets to take companies private, the market may become less sanguine over accepting the new bonds at current prices.
Portfolio Review
The Fund's long-term strategy is based on a process that seeks to identify value opportunities in out of favor or under followed securities of financially sound companies. Opportunities tend to arise over time in the securities of companies that fall temporarily out of favor due to specific company or industry issues that may taint the companies. Often times these companies are in a period of transition or restructuring where market sentiment is overly harsh or negative resulting in an undervalued situation. We are keenly aware a cheap price alone does not guarantee a good investment; therefore, we seek to identify a catalyst we believe will allow the company and its securities to regain favor and be rewarded with higher valuations. We believe that investing in securities trading below their fair values due to non-fundamental short-term issues, emotion or misunderstanding offers significant long-term potential returns.
A review of the relative performance in 2006 reveals that a larger portion of the underperformance relative to the Merrill Lynch US High Yield Master II Constrained was a result of an underweighting in the CCC-rated sector, an overweight in the health care and gaming area and security selection. The Fund had an approximately 12.7% allocation in bonds rated below B, but that was well below the benchmarks 18.1% weight. Our strategy incorporates bonds rated below B when we feel strongly that the company has a high probability of improving their business, balance sheet and cash flow generation.
We held an overweight in the healthcare and gaming sectors in 2006 as we believed the demand for their services and products as well as their ability to generate positive free cash flow would benefit if the economy or market suffered. Healthcare was one of the worst performing sectors in the high yield market and hurt relative performance. However, we feel strongly that a number of issues we own are solid companies and will continue to hold the positions. The gaming sector lagged as several companies were taken private and concern over increased leveraged raised investor concerns. We feel our positions here should perform well in the future and continue to hold them.
Our allocations to the industrial sector and the auto and auto parts industry beginning in early 2005 continued to benefit the portfolio. This industry is in a multi-year transition and we anticipate the restructuring will create volatility but benefit the companies in the long run. The industrial allocations are improving credits as well and have restructured their companies to take on costs and improve productivity. We would anticipate these holdings to improve in 2007 as well.
We will remain disciplined in our approach to high yield investing adding bonds that we believe are undervalued as well as taking profits in those positions that we feel the market has pushed to an excessive value. Also, it may be a year where our cash position is higher than usual as we get more selective at higher valuations.
Returns for Nicholas High Income Fund, Inc. Class I and selected indices are provided in the chart below for the periods ended December 31, 2006. The Fund and Morningstar performance data is net of fees, while the Merrill Lynch Index is gross of fees.
| | Average Annual Total Return |
| | 1 Year | 3 Year | 5 Year | 10 Year |
| Nicholas High Income Fund, Inc. - Class I | 9.26% | 6.69% | 6.02% | 3.82% |
| Merrill Lynch U.S. High Yield Master II Constrained Index | 10.76% | 8.06% | 9.94% | 6.60% |
| Morningstar High Yield Bond Funds Category 1 | 10.14% | 7.52% | 8.93% | 5.32% |
| Ending value of $10,000 invested in Nicholas High Income Fund, Inc. - Class I | $10,926 | $12,145 | $13,398 | $14,543 |
| Fund's Class I Expense Ratio (from 04/30/06 Prospectus): 0.69% | | | |
The Fund's expense ratios for the period ended December 31, 2006 can be found in the financial highlights included within this report.
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.
Basis Point: One hundredth of a percentage point. For example 50 basis points equals .50%.
Free Cash Flow: The amount of cash that a company has left over after it has paid all of its expenses, including investments.
The Merrill Lynch High Yield Master II Constrained Index is a market value-weighted index of all domestic and yankee high-yield bonds, including deferred interest bonds and payment-in-kind securities. Issues included in the index have maturities of one year or more and have a credit rating lower than BBB-/Baa3, but are not in default. The Merrill Lynch U.S. High Yield Master II Constrained Index limits any individual issuer to a maximum of 2% benchmark exposure. The Lehman Indices are widely quoted market capitalization-weighted indices divided by the credit quality of the underlying issuers. You cannot invest directly in an index. Each Morningstar Category average represents a universe of Funds with similar invest objectives. The 10-year Treasury Note is a debt obligation issued by the U.S. Treasury that has a term of 10 years and generally since the U.S. government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Must be preceded or accompanied by a prospectus.
The Nicholas Funds are distributed by Quasar Distributors, LLC. (02/07)
The line graphs which follow compare 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 periods in two different peer group indices. The graphs assume 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 first graph includes the Merrill Lynch U.S. High Yield Master II Index. This peer group is consistent with the peer group used in the performance graph which appeared in the Fund's Annual Report, dated December 31, 2005. The peer group in the second graph includes the Merrill Lynch U.S. High Yield Master II Constrained Index. The Fund intends to use the peer group index in the second graph in its performance graph in Fund Annual Reports in future years as the Fund believes the Merrill Lynch U.S. High Yield Master II Constrained Index is more representative of the universe of securities in which the Fund invests.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
NICHOLAS HIGH INCOME FUND, INC. CLASS I AND
MERRILL LYNCH U.S. HIGH YIELD MASTER II INDEX
| | Nicholas High Income Fund, Inc. - Class I | % Total Return | Merrill Lynch High Yield Master II Index | % Total Return |
12/31/1996 | $10,000.00 | | $10,000.00 | |
12/31/1997 | 11,313.00 | 13.13% | 11,326.60 | 13.27% |
12/31/1998 | 11,366.17 | 0.47% | 11,661.07 | 2.95% |
12/31/1999 | 11,358.21 | (0.07)% | 11,953.88 | 2.51% |
12/31/2000 | 9,980.46 | (12.13)% | 11,342.20 | (5.12)% |
12/31/2001 | 10,854.75 | 8.76% | 11,849.99 | 4.48% |
| 12/31/2002 | 9,755.17 | (10.13)% | 11,625.56 | (1.89)% |
| 12/31/2003 | 11,974.47 | 22.75% | 14,898.03 | 28.15% |
| 12/31/2004 | 13,130.00 | 9.65% | 16,517.45 | 10.87% |
| 12/31/2005 | 13,311.09 | 1.38% | 16,970.03 | 2.74% |
| 12/31/2006 | 14,543.47 | 9.26% | 18,966.89 | 11.77% |
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
NICHOLAS HIGH INCOME FUND, INC. CLASS I AND
MERRILL LYNCH U.S. HIGH YIELD MASTER II CONSTRAINED INDEX
| | Nicholas High Income Fund, Inc. - Class I | % Total Return | Merrill Lynch High Yield Master II Constrained Index | % Total Return |
12/31/1996 | $10,000.00 | | $10,000.00 | |
12/31/1997 | 11,313.00 | 13.13% | 11,290.80 | 12.91% |
12/31/1998 | 11,366.17 | 0.47% | 11,623.20 | 2.94% |
12/31/1999 | 11,358.21 | (0.07)% | 11,905.76 | 2.43% |
12/31/2000 | 9,980.46 | (12.13)% | 11,287.26 | (5.20)% |
12/31/2001 | 10,854.75 | 8.76% | 11,793.26 | 4.48% |
| 12/31/2002 | 9,755.17 | (10.13)% | 11,730.76 | (0.53)% |
| 12/31/2003 | 11,974.47 | 22.75% | 15,011.62 | 27.97% |
| 12/31/2004 | 13,130.00 | 9.65% | 16,643.68 | 10.87% |
| 12/31/2005 | 13,311.09 | 1.38% | 17,105.88 | 2.78% |
| 12/31/2006 | 14,543.47 | 9.26% | 18,945.79 | 10.76% |
The Fund's Class I average annual total returns for the one, five and ten year periods ended on the last day of the most recent fiscal year are as follows:
| | One Year Ended December 31, 2006 | Five Years Ended December 31, 2006 | Ten Years Ended December 31, 2006 |
| | | | |
| Average Annual Total Return | 9.26% | 6.02% | 3.82% |
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 (NCINX)
For a share outstanding throughout each period (1)
-------------------------------------------------------------------------
Year Ended December 31,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $10.50 $11.15 $10.95 $9.65 $11.80
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income .... .75 .80 .80 .85 .95
Net gain (loss) on
securities (realized and
unrealized) ............. .20 (.65) .20 1.30 (2.10)
----- ----- ----- ----- ------
Total from investment
operations ........... .95 .15 1.00 2.15 (1.15)
----- ----- ----- ----- ------
LESS DISTRIBUTIONS
From net investment
income .................. (.75) (.80) (.80) (.85) (1.00)
----- ----- ----- ----- ------
NET ASSET VALUE, END
OF PERIOD (2) .............. $10.70 $10.50 $11.15 $10.95 $ 9.65
------ ------ ------ ------ -----
------ ------ ------ ------ -----
----- ----- ----- ----- -----
TOTAL RETURN ................ 9.26% 1.38% 9.65% 22.75% (10.13)%
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) .......... $100.1 $101.9 $114.6 $120.4 $101.4
Ratio of expenses to
average net assets ......... .71% .69% .64% .60% .58%
Ratio of net investment
income to average
net assets ............... 6.91% 7.06% 7.16% 7.94% 8.77%
Portfolio turnover rate ..... 49.85% 59.29% 64.17% 104.40% 57.19%
(1) Per share data for all periods presented reflect a reverse stock split of one
share for every five shares outstanding effected January 29, 2007, except for net
asset values referenced in footnote 2 of these Class I highlights (Note 7).
(2) The net asset value reported at the original dates prior to the reverse stock
split were $2.14, $2.10, $2.23, $2.19 and $1.93 for the years ended December 31,
2006, 2005, 2004, 2003 and 2002, respectively.
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 (1)
-----------------------------------------------------------------------------------
Year Period from
Ended 02/28/2005 (2)
12/31/2006 to 12/31/2005
---------- -------------
NET ASSET VALUE,
BEGINNING OF PERIOD .......... $10.40 $11.20
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income ...... .70 .75
Net gain (loss) on securities
(realized and unrealized).. .20 (.80)
------ ------
Total from investment
operations ............. .90 (.05)
------ ------
LESS DISTRIBUTIONS
From net investment income . (.70) (.75)
------ ------
NET ASSET VALUE, END
OF PERIOD (3) ................ $10.60 $10.40
------ ------
------ ------
TOTAL RETURN .................. 9.04% (0.53)%(4)
SUPPLEMENTAL DATA:
Net assets, end of
period (thousands) ............ $126.8 $52.2
Ratio of expenses to
average net assets ........... 1.07% 1.04%(5)
Ratio of net investment
income to average net assets . 6.59% 6.85%(5)
Portfolio turnover rate ....... 49.85% 59.29%
(1) Per share data for all periods presented reflect a reverse stock split of one
share for every five shares outstanding effected January 29, 2007, except for net
asset values referenced in footnote 3 of these Class N highlights (Note 7).
(2) Commencement of operations.
(3) The net asset value reported at the original dates prior to the reverse stock
split were $2.12 and $2.08 for the years ended December 31, 2006 and 2005,
respectively.
(4) Not annualized.
(5) Annualized.
The accompanying notes to financial statements are an integral part of these
highlights.
-------------------------------------------------------------------------------
Top Ten Portfolio Issuers
December 31, 2006 (unaudited)
-------------------------------------------------------------------------------
Percentage
Name of Net Assets
---- -------------
General Motors Corporation ................................ 3.83%
DaVita, Inc. .............................................. 3.56%
Ford Motor Credit Company ................................ 2.94%
Constellation Brands, Inc. ................................ 2.59%
Great Lakes Dredge & Dock Company ......................... 2.19%
Solo Cup Company .......................................... 2.16%
Sequa Corporation ......................................... 2.14%
Fresenius Medical Care Capital Trust IV ................... 2.09%
Waste Services, Inc. ...................................... 2.08%
Geo Group, Inc. (The) ..................................... 2.06%
------
Total of top ten .......................................... 25.64%
------
------
-------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
December 31, 2006 (unaudited)
-------------------------------------------------------------------------------
BAR CHART PLOT POINTS
Consumer Discretionary .................................... 22.73%
Industrials ............................................... 18.90%
Health Care ............................................... 13.38%
Energy .................................................... 11.46%
Consumer Staples .......................................... 11.39%
Financials ................................................ 6.60%
Information Technology .................................... 5.53%
Short-term Investments .................................... 3.87%
Utilities ................................................. 3.14%
Telecommunication Services ................................ 2.00%
Materials ................................................. 1.00%
-------------------------------------------------------------------------------
Fund Expenses
For the six month period ended December 31, 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*
06/30/06 12/31/06 07/01/06 - 12/31/06
------------------------------------------------------------------
Actual $1,000.00 $1,063.90 $3.62
Hypothetical 1,000.00 1,021.49 3.55
(5% return before expenses)
* Expenses are equal to the Class I six-month annualized expense ratio
of 0.70%, multiplied by the average account value over the period,
multiplied by 183 then divided by 365 to reflect the one-half year
period.
Class N
Beginning Ending Expenses
Account Account Paid During
Value Value Period**
06/30/06 12/31/06 07/01/06 - 12/31/06
------------------------------------------------------------------
Actual $1,000.00 $1,067.00 $5.44
Hypothetical 1,000.00 1,019.74 5.32
(5% return before expenses)
** Expenses are equal to the Class N six-month annualized expense ratio
of 1.05%, multiplied by the average account value over the period,
multiplied by 183 then divided by 365 to reflect the one-half year
period.
Schedule of Investments
December 31, 2006
---------------------------------------------------------------------------------------------------
Shares or
Principal
Amount Value
--------- ------------
NON-CONVERTIBLE BONDS -- 95.42%
Consumer Discretionary - Auto & Components -- 2.34%
$1,000,000 American Axle & Manufacturing, Inc. 5.25%, 02/11/14 $ 847,500
500,000 ArvinMeritor, Inc. 8.125%, 09/15/15 493,125
1,000,000 Goodyear Tire & Rubber Company (The) 7.857%, 08/15/11 (1) 1,005,000
------------
2,345,625
------------
Consumer Discretionary - Consumer Durables & Apparel -- 3.63%
1,500,000 Eastman Kodak Company 7.25%, 11/15/13 1,491,196
750,000 General Motors Corporation 8.25%, 07/15/23 (1) 697,500
750,000 K. Hovnanian Enterprises, Inc. 6.25%, 01/15/15 712,500
500,000 Standard Pacific Corp. 6.50%, 08/15/10 488,750
250,000 Technical Olympic USA, Inc. 8.25%, 04/01/11 243,750
------------
3,633,696
------------
Consumer Discretionary - Hotels, Restaurants & Leisure -- 5.16%
500,000 Harrah's Operating Company, Inc. 5.375%, 12/15/13 440,058
1,000,000 Herbst Gaming, Inc. 7.00%, 11/15/14 955,000
2,000,000 MGM MIRAGE 6.00%, 10/01/09 (1) 1,995,000
2,000,000 Station Casinos, Inc. 6.50%, 02/01/14 1,777,500
------------
5,167,558
------------
Consumer Discretionary - Media -- 5.50%
1,250,000 DIRECTV Holdings LLC 6.375%, 06/15/15 1,198,438
2,000,000 EchoStar DBS Corporation 6.375%, 10/01/11 1,987,500
500,000 Liberty Media Corporation 5.70%, 05/15/13 471,069
1,000,000 Nielsen Finance LLC 144A restricted, 10.00%, 08/01/14 1,083,750
750,000 Reader's Digest Association, Inc. (The) 6.50%, 03/01/11 770,625
------------
5,511,382
------------
Consumer Discretionary - Retail -- 3.04%
1,000,000 Michaels Stores, Inc. 144A restricted, 10.00%, 11/01/14 1,040,000
2,000,000 Rent-A-Center, Inc. 7.50%, 05/01/10 2,005,000
------------
3,045,000
------------
Consumer Discretionary - Services -- 3.00%
2,000,000 United Rentals (North America), Inc. 7.75%, 11/15/13 (1) 2,007,500
1,000,000 Vail Resorts, Inc. 6.75%, 02/15/14 1,000,000
------------
3,007,500
------------
Consumer Staples - Food, Beverage & Tobacco -- 5.16%
2,500,000 Constellation Brands, Inc. 8.125%, 01/15/12 2,600,000
1,500,000 Pinnacle Foods Group Inc. 8.25%, 12/01/13 1,535,625
1,000,000 Reynolds American Inc. 7.25%, 06/01/13 1,039,496
------------
5,175,121
------------
Consumer Staples - Food & Staples Retail -- 3.01%
750,000 Denny's Holdings, Inc. 10.00%, 10/01/12 791,250
1,000,000 Pilgrim's Pride Corporation 9.625%, 09/15/11 1,045,000
1,250,000 Restaurant Company (The) 10.00%, 10/01/13 1,176,563
------------
3,012,813
------------
Consumer Staples - Household & Personal Products -- 3.19%
2,500,000 Solo Cup Company 8.50%, 02/15/14 (1) 2,162,500
1,000,000 Visant Holding Corporation 8.75%, 12/01/13 1,030,000
------------
3,192,500
------------
Energy -- 11.01%
875,000 CONSOL Energy Inc. 7.875%, 03/01/12 923,125
1,000,000 Chesapeake Energy Corporation 6.50%, 08/15/17 (1) 977,500
2,000,000 Denbury Resources Inc. 7.50%, 04/01/13 2,030,000
1,500,000 Forest Oil Corporation 7.75%, 05/01/14 1,526,250
1,250,000 Grant Prideco, Inc. 6.125%, 08/15/15 1,218,750
500,000 Harvest Operations Corp. 7.875%, 10/15/11 473,750
500,000 Hornbeck Offshore Services, Inc. 6.125%, 12/01/14 476,875
500,000 Peabody Energy Corporation 7.375%, 11/01/16 532,500
1,000,000 Stone Energy Corporation 8.25%, 12/15/11 982,500
1,750,000 Williams Companies, Inc. (The) 8.125%, 03/15/12 1,894,375
------------
11,035,625
------------
Financials - Diversified -- 6.07%
3,000,000 Ford Motor Credit Company 5.625%, 10/01/08 2,945,991
3,000,000 General Motors Acceptance Corporation 7.57%, 12/01/14 (2) 3,137,397
------------
6,083,388
------------
Financials - Real Estate -- 0.51%
500,000 Corrections Corporation of America 7.50%, 05/01/11 515,000
------------
Health Care - Services -- 13.34%
1,250,000 AmeriPath, Inc. 10.50%, 04/01/13 1,353,125
3,500,000 DaVita, Inc. 7.25%, 03/15/15 (1) 3,570,000
2,000,000 Fresenius Medical Care Capital Trust IV 7.875%, 06/15/11 2,095,000
500,000 HCA Inc. 144A restricted, 9.125%, 11/15/14 534,375
500,000 Inverness Medical Innovations, Inc. 8.75%, 02/15/12 520,000
1,250,000 Psychiatric Solutions, Inc. 10.625%, 06/15/13 1,375,000
500,000 Psychiatric Solutions, Inc. 7.75%, 07/15/15 498,750
2,000,000 Res-Care, Inc. 7.75%, 10/15/13 2,050,000
1,500,000 Tenet Healthcare Corporation 6.375%, 12/01/11 (1) 1,372,500
------------
13,368,750
------------
Industrials - Capital Goods -- 7.78%
2,000,000 Bombardier Inc. 144A restricted, 6.30%, 05/01/14 1,880,000
1,000,000 DRS Technologies, Inc. 6.875%, 11/01/13 1,007,500
750,000 L-3 Communications Corporation 6.375%, 10/15/15 742,500
1,500,000 Manitowoc Company, Inc. (The) 7.125% 11/01/13 1,515,000
2,000,000 Sequa Corporation 9.00%, 08/01/09 2,140,000
500,000 Terex Corporation 7.375%, 01/15/14 507,500
------------
7,792,500
------------
Industrials - Commercial Services & Supplies -- 10.11%
1,500,000 ARAMARK Services, Inc. 5.00%, 06/01/12 1,285,225
1,000,000 Alliance Laundry Systems LLC 8.50%, 01/15/13 982,500
1,000,000 Allied Waste North America, Inc. 6.50%, 11/15/10 (1) 1,002,500
2,000,000 GEO Group, Inc. (The) 8.25%, 07/15/13 2,060,000
2,250,000 Great Lakes Dredge & Dock Company 7.75%, 12/15/13 2,193,750
500,000 IKON Office Solutions, Inc. 7.75%, 09/15/15 523,750
2,000,000 Waste Services, Inc. 9.50%, 04/15/14 2,085,000
------------
10,132,725
------------
Industrials - Transportation -- 0.95%
500,000 CMA CGM S.A. 144A restricted, 7.25%, 02/01/13 487,500
500,000 Park-Ohio Industries, Inc. 8.375%, 11/15/14 466,250
------------
953,750
------------
Information Technology - Hardware & Equipment -- 1.44%
1,500,000 Flextronics International Ltd. 6.25%, 11/15/14 1,447,500
------------
Information Technology - Software & Services -- 4.06%
1,500,000 Iron Mountain Incorporated 8.625%, 04/01/13 1,548,750
1,000,000 SunGard Data Systems Inc. 9.125%, 08/15/13 1,050,000
1,500,000 Unisys Corporation 6.875%, 03/15/10 1,473,750
------------
4,072,500
------------
Materials -- 1.00%
500,000 Georgia-Pacific Corporation 144A restricted, 7.00%, 01/15/15 498,750
500,000 Owens-Illinois, Inc. 8.10%, 05/15/07 501,250
------------
1,000,000
------------
Telecommunication Services -- 1.99%
500,000 Citizens Communications Company 6.25%, 01/15/13 490,625
1,000,000 Nextel Communications, Inc. 6.875%, 10/31/13 1,010,330
500,000 Syniverse Technologies Inc. 7.75%, 08/15/13 498,750
------------
1,999,705
------------
Utilities -- 3.13%
1,000,000 AES Corporation (The) 144A restricted, 8.75%, 05/15/13 1,071,250
1,000,000 NRG Energy, Inc. 7.25%, 02/01/14 1,007,500
1,000,000 Sonat Inc. 7.625%, 07/15/11 1,060,000
------------
3,138,750
------------
TOTAL NON-CONVERTIBLE BONDS (cost $94,504,571) 95,631,388
------------
COMMON STOCK -- 0.41%
Energy -- 0.41%
15,700 Teekay Offshore Partners L.P. (cost $392,243) 413,852
------------
SHORT-TERM INVESTMENTS -- 3.86%
Commercial Paper -- 3.12%
$ 575,000 Fiserv, Inc. 5.37%, 01/02/07 575,000
100,000 UBS Finance (Delaware) LLC 5.30%, 01/02/07 100,000
1,250,000 ConocoPhillips 5.39%, 01/03/07 1,249,813
250,000 CVS Corporation 5.40%, 01/03/07 249,962
950,000 General Mills, Inc. 5.34%, 01/23/07 947,040
------------
3,121,815
------------
Variable Rate Security -- 0.74%
739,702 Wisconsin Corporate Central Credit Union 5.02%, 01/02/07 (3) 739,702
------------
TOTAL SHORT-TERM INVESTMENTS (cost $3,861,517) 3,861,517
------------
INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM SECURITIES LENDING -- 11.13%
Money Market Fund -- 0.15%
152,090 BlackRock Provident Institutional Funds TempCash Fund 5.20%, 01/02/07 152,090
------------
Repurchase Agreement -- 10.98%
11,000,000 Barclay's Capital, Inc. Repurchase Agreement:
(Dated 12/29/06), 5.27%, Due 01/02/07
(Repurchase Proceeds $6,441), (Collateralized by
Investment Grade Corporate Bonds) 11,000,000
------------
TOTAL INVESTMENTS PURCHASED WITH CASH PROCEEDS
FROM SECURITIES LENDING (cost $11,152,090) 11,152,090
------------
TOTAL INVESTMENTS (cost $109,910,421) -- 110.82% 111,058,847
------------
LIABILITIES, NET OF OTHER ASSETS -- (10.82)% (10,838,949)
------------
TOTAL NET ASSETS
(basis of percentages disclosed above) -- 100% $100,219,898
------------
------------
(1) All or a portion of principal or shares are on loan.
(2) Floating Rate Note based on U.S. dollar denominated 3-month LIBOR plus 220 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
December 31, 2006
-------------------------------------------------------------------------------
ASSETS
Investments in securities at value (cost $98,758,331) ..... $ 99,906,757
Securities lending collateral (cost $11,152,090) .......... 11,152,090
------------
Total Investments ............................... 111,058,847
------------
Receivables -
Interest ............................................. 1,796,022
Other ................................................ 5,229
------------
Total receivables ............................... 1,801,251
------------
Other ..................................................... 4,235
------------
Total assets .................................... 112,864,333
------------
LIABILITIES
Payables -
Payables for collateral received
for securities loaned ............................... 11,152,090
Investment securities purchased ...................... 1,137,860
Fund income distributions ............................ 260,124
Due to adviser -
Management fee .................................. 39,591
Accounting and administrative fee ............... 4,383
12b-1 and servicing fee .............................. 347
Other payables and accrued expense ................... 50,040
------------
Total liabilities ............................... 12,644,435
------------
Total net assets ................................ $100,219,898
------------
------------
NET ASSETS CONSIST OF
Paid in capital ........................................... $179,004,904
Net unrealized appreciation on investments ................ 1,148,426
Accumulated net realized loss on investments .............. (80,004,617)
Undistributed net investment income ....................... 71,185
------------
Total net assets ................................ $100,219,898
------------
------------
Class I:
Net assets .................................................... $100,093,064
Shares outstanding (1) ........................................ 9,335,812
NET ASSET VALUE PER SHARE ($.05 par value,
75,000,000 shares authorized),
offering price and redemption price (1)(2) ................... $10.70
------
------
Class N:
Net assets .................................................... $126,834
Shares outstanding (1) ........................................ 11,968
NET ASSET VALUE PER SHARE ($.05 par value,
25,000,000 shares authorized),
offering price and redemption price (1) ...................... $10.60
------
------
(1) Shares and per share data reflect a reverse stock split of one share for
every five shares outstanding effective January 29, 2007 (Note 7).
(2) The computed net asset value per share of Class I is $10.72. The net
assets value per share at December 31, 2006 reported here and in the financial
highlights is based on the net asset value per share prior to the reverse stock
split of $2.14, multiplied times five to reflect the effect of the reverse five
for one split (Note 7). The difference of $0.02 is a result of rounding
arising from calculating the amounts to the nearest cent.
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the year ended December 31, 2006
-------------------------------------------------------------------------------
INCOME
Interest .................................................. $7,508,978
Securities lending ........................................ 5,229
Other ..................................................... 99,635
----------
Total income ......................................... 7,613,842
----------
EXPENSES
Management fee ............................................ 447,509
Transfer agent fees ....................................... 61,877
Accounting and administrative fees ........................ 50,030
Registration fees ......................................... 36,695
Audit and tax fees ........................................ 24,600
Accounting system and pricing service fees ................ 20,467
Directors' fees ........................................... 16,440
Legal fees ................................................ 16,321
Printing .................................................. 11,248
Postage and mailing ....................................... 10,710
Custodian fees ............................................ 5,514
Insurance ................................................. 5,294
12b-1 fees -- Class N ..................................... 258
Servicing fees -- Class N ................................. 103
Other operating expenses .................................. 3,454
----------
Total expenses ....................................... 710,520
----------
Net investment income ................................ 6,903,322
----------
NET REALIZED LOSS ON INVESTMENTS .............................. (902,940)
----------
CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION
ON INVESTMENTS ............................................... 2,899,667
----------
Net realized and unrealized gain on investments ........... 1,996,727
----------
Net increase in net assets resulting from operations ...... $8,900,049
----------
----------
The accompanying notes to financial statements are an integral part of this
statement.
Statements of Changes in Net Assets
For the years ended December 31, 2006 and 2005
-------------------------------------------------------------------------------
2006 2005
------------ ------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income .................. $ 6,903,322 $ 7,491,436
Net realized loss on investments ....... (902,940) (37,374)
Change in net unrealized
appreciation/depreciation
on investments ........................ 2,899,667 (5,877,948)
------------ ------------
Net increase in net assets
resulting from operations ........ 8,900,049 1,576,114
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income - Class I ... (6,890,281) (7,550,000)
From net investment income - Class N ... (8,080) (2,016)
------------ ------------
Total distributions ............... (6,898,361) (7,552,016)
------------ ------------
CAPITAL SHARE TRANSACTIONS (1)
Proceeds from shares issued - Class I
(416,315 and 625,839
shares, respectively) ................. 4,458,130 6,824,214
Reinvestment of distributions - Class I
(545,280 and 585,515
shares, respectively) ................. 5,786,373 6,212,455
Cost of shares redeemed - Class I
(1,311,982 and 1,815,797
shares, respectively) ................. (14,023,906) (19,805,738)
Proceeds from shares issued - Class N
(7,446 and 10,380
shares, respectively) ................. 79,197 111,977
Reinvestment of distributions - Class N
(730 and 187
shares, respectively) ................. 7,661 1,999
Cost of shares redeemed - Class N
(1,222 and 5,553
shares, respectively) ................. (12,915) (60,254)
------------ ------------
Decrease in net assets
derived from capital share
transactions ..................... (3,705,460) (6,715,347)
------------ ------------
Total decrease in net assets ...... (1,703,772) (12,691,249)
------------ ------------
NET ASSETS
Beginning of period .................... 101,923,670 114,614,919
------------ ------------
End of period (including accumulated
undistributed net investment income
of $71,185 and $66,224, respectively) .. $100,219,898 $101,923,670
------------ ------------
------------ ------------
(1) Transactions have been restated or adjusted to reflect a reverse stock
split of one share for every five shares outstanding effected January 29, 2007
(Note 7).
The accompanying notes to financial statements are an integral part of these
statements.
Notes to Financial Statements
December 31, 2006
------------------------------------------------------------------------------
(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. 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.
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 debt security
purchases, if any, are amortized over the expected 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
December 31, 2006, no reclassifications were recorded.
The tax character of distributions paid during the years ended
December 31 were as follows:
12/31/2006 12/31/2005
---------- ----------
Distributions paid from:
Ordinary income ............ $6,898,361 $7,552,016
---------- ----------
---------- ----------
As of December 31, 2006, investment cost for federal tax purposes was
$109,910,421 and the tax basis components of net assets were as
follows:
Unrealized appreciation ....................... $ 2,147,896
Unrealized depreciation ....................... (999,470)
------------
Net unrealized appreciation ................... 1,148,426
------------
Undistributed ordinary income ................. 71,185
Accumulated net realized capital loss ......... (80,004,617)
Paid in capital ............................... 179,004,904
------------
Net assets .................................... $100,219,898
------------
------------
There were no differences between the book-basis and tax-basis
components of net assets.
As of December 31, 2006 the Fund has capital loss carryforwards of
approximately $80,000,000, which expire expire as follows: $4,686,000
in 2007, $19,346,000 in 2008, $30,985,000 in 2009, $23,496,000 in 2010
and $1,487,000 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 December 31, 2006, the Fund realized post-October losses of
approximately $5,000, which for tax purposes, will be deferred and
recognized in the following year.
As of December 31, 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 $50,030 for accounting and
administrative services during the year ended December 31, 2006.
(b) Legal Counsel --
A director of the Adviser is affiliated with a law firm that provides
services to the Fund. The Fund incurred expenses of $11,821 for the
year ended December 31, 2006 for legal services rendered by this law
firm.
(3) Investment Transactions --
For the year ended December 31, 2006, the cost of purchases and the
proceeds from sales of investment securities, other than short-term
obligations, aggregated $46,912,677 and $50,222,346, 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. To the extent that a
tax benefit of a position is not deemed to meet the more-likely-than-not
threshold, the Fund would report an income tax expense in the statement of
operations. The adoption of FIN 48 is required for the last net asset
value calculation in the first financial statement reporting period for
fiscal years beginning after December 15, 2006. The Fund will apply FIN 48
to all open tax years on the date of adoption. 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 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 December 31,
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.
(5) 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.
(6) Securities Lending --
The Fund may lend up to one-third of its portfolio securities to borrowers
as permitted under the 1940 Act and pursuant to a securities lending
agreement with Marshall & Ilsley Trust Company N.A. The Agreement requires
that loans are fully collateralized based on values that are
marked-to-market daily. The Fund may, subject to certain notice
requirements, at any time call the loan and obtain the return of the
securities on loan.
The Fund receives compensation in the form of fees and earns interest on
the cash collateral. The Fund continues to receive interest or dividends
on the securities on loan during the borrowing period. The Fund has the
right under the terms of the securities lending agreement to recover the
securities from the borrower on demand.
As of December 31, 2006, the Fund had lent securities that were
collateralized by cash equivalents. Although risk is mitigated by the
collateral, the Fund could experience a delay in recovering its securities
and possible loss of income or value, if the borrower fails to return the
borrowed securities. As of December 31, 2006, the value of the Fund's
securities on loan was $10,882,625 and the value of the related collateral
was $11,152,090.
(7) Subsequent Event --
Pursuant to the approval of the Fund's Board of Directors, on January 29,
2007, the Fund executed a reverse stock split whereby each shareholder of
Class I and Class N shares received one share for every five held (0.20
shares received for each share outstanding). All periods presented in this
report have been adjusted to reflect the one for five reverse stock split.
The purpose for the split was to make the net asset value per share more
responsive to moves in the high-yield bond market.
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------------------------------
To the Stockholders and Board of Directors of Nicholas High Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Nicholas High Income Fund, Inc. (the "Fund"), including the schedule of
investments, as of December 31, 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 five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
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. The Fund is not required to have, nor were we engaged to
perform, an audit of their 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, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of December 31, 2006,
by correspondence with the custodian and brokers. 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 the
Fund as of December 31, 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 its financial highlights for each of the five years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 12, 2007
Historical Record (1)
(unaudited)
-------------------------------------------------------------------------------
Net Investment Growth of
Net Income an Initial
Asset Value Distributions $10,000
Per Share Per Share Investment (3)
----------- -------------- --------------
Class I
November 21, 1977 (2) .. $25.50 $ -- $10,000
December 31, 1987 ...... 18.20 2.3300 22,560
December 31, 1988 ...... 18.40 1.8550 25,164
December 31, 1989 ...... 17.20 1.9150 26,155
December 31, 1990 ...... 15.05 1.9850 25,886
December 31, 1991 ...... 16.70 1.7300 31,853
December 31, 1992 ...... 16.90 1.4775 35,143
December 31, 1993 ...... 17.60 1.4450 39,695
December 31, 1994 ...... 16.05 1.5050 39,626
December 31, 1995 ...... 17.10 1.4750 46,029
December 31, 1996 ...... 17.65 1.4800 51,721
December 31, 1997 ...... 18.45 1.4515 58,514
December 31, 1998 ...... 16.95 1.5775 58,788
December 31, 1999 ...... 15.30 1.6560 58,749
December 31, 2000 ...... 12.00 1.5300 51,620
December 31, 2001 ...... 11.80 1.2150 56,144
December 31, 2002 ...... 9.65 0.9925 50,459
December 31, 2003 ...... 10.95 0.8450 61,937
December 31, 2004 ...... 11.15 0.8200 67,915
December 31, 2005 ...... 10.50 0.7895 68,849
December 31, 2006 10.70 0.7455 (a) 75,221
Class N
February 28, 2005 (2) .. $11.20 -- $10,000
December 31, 2005 ...... 10.40 0.7320 9,947
December 31, 2006 ...... 10.60 0.7140 (a) 10,846
(1) Per share amounts presented and in footnote (a) of this historical record
have been restated or adjusted to reflect a reverse stock split of one share
for every five shares outstanding effective on January 29, 2007 (Note 7).
(2) Initial date under Nicholas Company, Inc. management.
(3) Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
(a) Paid on April 28, 2006, $0.1845 and $0.1800 to respective Class I and Class
N shareholders of record as of April 27, 2006.
Paid on July 26, 2006, $0.1885 and $0.1800 to respective Class I and Class
N shareholders of record as of July 25, 2006.
Paid on October 30, 2006, $0.1845 and $0.1755 to respective Class I and
Class N shareholders of record as of October 27, 2006.
Paid on December 29, 2006, $0.1880 and $0.1785 to respective Class I and
Class N shareholders of record as of December 28, 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 June 30,
2006.
Tax Information
December 31, 2006 (unaudited)
------------------------------------------------------------------------------
The Fund designates none of its ordinary income distribution for the year ended
December 31, 2006, as qualified dividend income under the Jobs and Growth Tax
Relief Reconciliation Act of 2003.
For the year ended December 31, 2006, none of the dividends paid from net
ordinary income qualify for the dividends received deduction available to
corporate shareholders.
The Fund had no capital gain distributions during the year ended December 31,
2006 and therefore does not designate an amount as a capital gain dividend for
this period.
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 December 31,
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 Company,
Co-Portfolio Inc., the Adviser to the
Manager Fund. He is Portfolio Manager
of Nicholas II, Inc. and
Nicholas Limited Edition, Inc.
and is Co-Portfolio Manager
of Nicholas Fund, Inc.,
Nicholas High Income Fund, Inc. and
Nicholas Equity Income Fund, Inc.
DISINTERESTED DIRECTORS
Robert H. Bock, 74 Director (2), 4 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), 2 years Private Investor, Consultant, 6 None
Chairman and Chief Financial
Officer, Musicnotes, Inc.,
October 2001 to present.
Investment Analyst from 1987
to October 2001, Tucker Anthony
Incorporated, a brokerage firm.
He is a Chartered Financial
Analyst.
Jay H. Robertson, 55 Director (2), 12 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, President and
Vice President 29 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 25 years Nicholas Company, Inc., the
Adviser to the Fund.
Jeffrey T. May, 50 Senior Vice Annual, Senior Vice President, Treasurer
President, 13 years and Chief Compliance Officer, Nicholas
Secretary, Company, Inc., the Adviser to the
Treasurer and Fund. He is Portfolio
Chief Compliance Manager of Nicholas Money Market
Officer Fund, Inc.
Lawrence J. Pavelec, 48 Senior Vice Annual, Senior Vice President, Nicholas
President 4 years Company, Inc., the Adviser to the
and Co-Portfolio Fund. He has been Co-Portfolio
Manager Manager of Nicholas High Income Fund,
Inc. since April 2003. He was a
portfolio manager for Brandes
Investment Partners from 1999 to
April 2003.
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 is the son of Albert O. Nicholas. David L. Johnson is the 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 High Income Fund, 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.
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
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
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.
ANNUAL REPORT
NICHOLAS HIGH INCOME FUND, INC.
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
December 31, 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 $22,350 in 2006 and $19,400 in 2005.
(b) Audit-Related Fees. There were no fees billed in each of the last two fiscal years for assurance and related services rendered by the Auditor to the Fund that are reasonably related to the performance of the audit of the Fund's financial statements and are not reported under paragraph (a) of this Item 4.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning ("Tax Services") were $3,100 in 2006 and $2,950 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. There were no fees billed in each of the last two fiscal years for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4.
There were no fees billed in each of the last two fiscal years for Non-Audit Services by the Auditor to the Fund's investment adviser which required pre-approval by the Board of Directors as described in paragraph (e)(1) of this Item 4.
(e) Audit Committee Pre-Approval Policies and Procedures. The Fund's Board of Director's has not adopted any pre-approval policies and procedures as described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. The Fund's Board of Directors meets with the Auditors and management to review and pre-approve the Auditor's engagements for audit and non-audit services to the Fund and its Adviser prior to each engagement.
(f) No disclosures are required by this Item 4(f).
(g) There were no non-audit fees billed in each of the last two fiscal years by the Auditor for services rendered to the Fund or the Fund's investment adviser that provides ongoing services.
(h) No disclosures are required by this Item 4(h).
Item 5. Audit Committee of Listed Registrants.
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: 02/28/2007
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: 02/28/2007
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: 02/28/2007
