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: 12/31/2007
Date of reporting period: 06/30/2007
Item 1. Report to Stockholders.
August 2007
Report to Fellow Shareholders:
Overview
Nicholas High Income Fund Class I returned 2.59% for the six months ended June 30, 2007. The last six months encompassed a period in which the high yield market rose to the highs for this cycle, paused in March and then charged ahead until the subprime mortgage fears began to dampen the market. The Fund's strategy has been to implement a more conservative stance beginning last year by employing defensive positions to help cushion the portfolio against adverse market moves such as rising interest rates, a slower economy or simply profit-taking due to high valuations. We have felt for some time the high yield market was facing stiff headwinds moving into 2007 due to tighter monetary conditions following 17 Fed Funds rate hikes totaling 425 basis points ("bp"), rising mortgage and consumer rates, signs of a decelerating economy and historically rich valuations in the high yield market. Nonetheless, until May and June, these fundamental concerns provided simply another wall of worry for investors to climb. Yet it was the one great fear that haunted investors for years, a downturn in the robust housing market that proved to be the financial catalyst to end the latest golden era in high yield bonds. The bull market started in November 2002 and seemingly ended in May 2007. During this period, the Merrill Lynch High Yield Master II Constrained Index (ML HY Index) was positive 44 out of 55 months generating a total price return of 25.9%, a total return of 82.4% and an annualized return of 14.0%. This compares to the Merrill Lynch Domestic Master Index (A-rated & above) which only had 36 out of 55 months of positive returns, a total price return of (4.8)%, a total return of a mere 18.3% and a modest annualized return of 3.7%. Clearly high yield investors were compensated for the additional credit risk during this period.
We felt a great deal of uncertainty last year, and early in 2007 skeptical that investors would continue to accept the historically steep valuations at a time when all the stars were aligned with strong company fundamentals, low default experience and abundant market liquidity. On a long-term basis we believe valuations are equally as important as company fundamentals to the performance of high yield bonds. There is a price threshold, however, where investors are not being compensated for the potential risk and the margin of safety is not adequate. Once reaching this level the market eventually elicits profit taking, either on an orderly basis or in reaction to a financial event. While we do not make a practice of timing the markets, one could not ignore the generally extended valuations, more issuer friendly bond covenants and bubble-like conditions within real estate. These concerns prodded us to move to a more conservative stance in the latter half of 2006.
The correction in high yield, which began in May, we feel is likely to continue for several quarters as investors re-value risk and the weaker financial credits are siphoned through. This re-pricing of risk may provide opportunities in the months ahead to invest in quality companies being mispriced and irrationally penalized by the market due to an association with a particular industry or a more general move away from high yield. It also may set the stage for the next bull market in high yield.
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 in the securities of companies that fall temporarily out-of-favor due to specific company or industry issues. Often times these companies are in a period of transition or restructuring when market sentiment becomes 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.
Pressure on the high yield market came from rising interest rates, a fall-out from rising subprime mortgage defaults, huge new supply of high yield issuance and historically rich valuations. The average spread on the high yield universe compared to 10-year Treasuries began the six-month period at 295 bp, declined to 253bp and rose to 314bp at period-end. Supply also weighed heavily on the market largely for the benefit of mergers and acquisitions.
The lowest quality corporate bonds generated the highest total returns for the period, as CCC and distressed bonds defended their prices better than higher quality issues. As indicated by the Lehman Indices, Caa-rated bonds returned 5.5% for the first six months in 2007, B-rated bonds 3.1% and Ba-rated bonds 1.2%. This is a familiar pattern over the past several years in which the lowest quality bonds have generated the highest returns. Over the last 12-months, Caa-rated bonds have earned 16.41%, with B-rated up 11.42% and Ba-rated up 9.36%. There may still be select opportunities in the lower-rated sectors, but we have increased our focus on buying Ba/B-rated bonds as they have lagged in the past year.
A heightened concern over credit quality deterioration and defaults from the subprime lending debacle was one of the main causes for June's market consolidation in high yield. Financials, housing and consumer-related sectors suffered the greatest impact. Homebuilders announced another dismal quarter of losses and a still difficult sales environment. Autos experienced a more favorable period as restructuring continued to give investors confidence in the sector. These sectors offer selective opportunities, such as Hovnanian Enterprises, General Motors and Ford, to invest in the debt of viable, out-of-favor companies that we believe will generate above market returns in the long-run.
One of the larger issues facing the high yield market will be whether the near apparent pristine credit quality and low default rates of recent times can be sustained. By historic comparisons the current credit cycle appears to be peaking and we would expect some modest deterioration. The question is whether the deterioration will be abrupt and broad based, or a gradual adjustment with a corresponding rise in yields to compensate investors for increased risk. Absent financial stress or a credit event we would anticipate the latter outcome to be the most likely.
We continue to expect slower economic growth later this year due to high energy costs, weakness in housing, higher interest rates and tighter credit standards. Credit standards are tightening with greater restraint being exhibited against poorly underwritten new corporate issues with few covenant restrictions ("covenant light") and excessively high leverage. We view this as appropriate and one of the first steps toward tighter credit. Without ready access to the high yield market the merger activity from private equity may struggle, perhaps negatively impacting the equity markets. We would expect the slowing economy to encourage investors to refocus on companies possessing strong balance sheets and sustainable earnings potential. Such a refocus could benefit our investment style.
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, our cash position is likely to remain higher than usual during the year as we remain patient for securities to hit our valuation targets.
Returns for Nicholas High Income Fund, Inc. Class I and selected indices are provided in the chart below for the periods ended June 30, 2007. 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 | 9.15% | 7.08% | 7.11% | 3.50% |
| Merrill Lynch U.S. High Yield Master II Constrained Index | 11.44% | 8.69% | 11.52% | 6.32% |
| Morningstar High Yield Bond Funds Category | 10.57% | 8.15% | 10.49% | 4.96% |
| Ending value of $10,000 invested in Nicholas High Income Fund, Inc. - Class I | $10,915 | $12,276 | $14,098 | $14,105 |
| Fund's Gross Expense Ratio (from 04/30/07 Prospectus): .71% | | | |
The Fund's expense ratios for the period ended June 30, 2007 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 generally 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
The information above represents the opinions of the Fund manager, is subject to change, and any forecasts made cannot be guaranteed.
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%.
Ratings Definition for both Moody's and Standard and Poor's: Rating agencies such as Standard and Poor's Corporation ("S and P") and Moody's Investor Service, Inc. ("Moody's") evaluate securities on the basis of the issuer's ability to meet all required principal and interest payments. Bonds with ratings above the line in the chart below are considered "investment grade," while those with ratings below the line are regarded as "non-investment grade" or "junk bonds."
S and P | Moody's | Meaning |
AAA | Aaa | Highest Quality |
AA | Aa | High Quality |
A | A | Above-average Quality |
BBB | Baa | Average Quality |
|
BB | Ba | Average Quality |
B | B | Below-average Quality |
CCC | Caa | Poor Quality |
CC | Ca | Highly Speculative |
C | C | Lowest Quality |
D | - | In Default |
Total Price Return: The percentage change in price of a security from the beginning of the period to the end of the period. Income is NOT included.
Total Return: The percentage change in price of a security from the beginning of the period to the end of the period, plus any income earned during the period.
Annualized Return: The annualized return is determined by discounting the total return for the number of time periods represented.
The Merrill Lynch High Yield Master II 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. (08/07)
SEMIANNUAL REPORT
June 30, 2007
NICHOLAS HIGH INCOME FUND, INC.
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
Financial Highlights Class I (NCINX)
For a share outstanding throughout each period(1)
- --------------------------------------------------------------------------------------------------
Six Months Year Ended December 31,
Ended 06/30/2007 --------------------------------------------------
(unaudited) 2006 2005 2004 2003 2002
---------------- ------ ------ ------ ------ ------
NET ASSET VALUE,
BEGINNING OF PERIOD ......... $10.70 $10.50 $11.15 $10.95 $ 9.65 $11.80
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income...... .39 .75 .80 .80 .85 .95
Net gain (loss) on
securities (realized and
unrealized) .............. (.11) .20 (.65) .20 1.30 (2.10)
------ ------ ------ ------ ------ ------
Total from investment
operations ............ .28 .95 .15 1.00 2.15 (1.15)
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
From net investment income (.19) (.75) (.80) (.80) (.85) (1.00)
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD ................... $10.79 $10.70(2) $10.50(2) $11.15(2) $10.95(2) $ 9.65(2)
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
TOTAL RETURN ................. 2.59%(3) 9.26% 1.38% 9.65% 22.75% (10.13)%
SUPPLEMENTAL DATA:
Net assets, end of
period (millions) ........... $95.5 $100.1 $101.9 $114.6 $120.4 $101.4
Ratio of expenses to
average net assets .......... .72%(4) .71% .69% .64% .60% .58%
Ratio of net investment
income to average net assets 7.02%(4) 6.91% 7.06% 7.16% 7.94% 8.77%
Portfolio turnover rate ...... 67.55%(4) 49.85% 59.29% 64.17% 104.40% 57.19%
(1) Per share data for 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.
(3) Not annualized.
(4) 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(1)
- -----------------------------------------------------------------------------------
Six Months
Ended Year Period from
06/30/2007 Ended 02/28/2005 (2)
(unaudited) 12/31/2006 to 12/31/2005
----------- ---------- -----------------
NET ASSET VALUE,
BEGINNING OF PERIOD ........ $10.60 $10.40 $11.20
INCOME (LOSS) FROM
INVESTMENT OPERATIONS
Net investment income ..... .37 .70 .75
Net gain (loss) on securities
(realized and unrealized). (.14) .20 (.80)
------ ------ ------
Total from investment
operations ........... .23 .90 (.05)
------ ------ ------
LESS DISTRIBUTIONS
From net investment income. (.18) (.70) (.75)
------ ------ ------
NET ASSET VALUE, END
OF PERIOD .................. $10.65 $10.60(3) $10.40(3)
------ ------ ------
------ ------ ------
TOTAL RETURN ................ 2.16%(4) 9.04% (0.53)%(4)
SUPPLEMENTAL DATA:
Net assets, end of
period (thousands) .......... $141.6 $126.8 $52.2
Ratio of expenses to
average net assets ......... 1.07%(5) 1.07% 1.04%(5)
Ratio of net investment income
to average net assets .. 6.68%(5) 6.59% 6.85%(5)
Portfolio turnover rate ..... 67.55%(5) 49.85% 59.29%
(1) Per share data for 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
June 30, 2007 (unaudited)
- -------------------------------------------------------------------------------
Percentage
Name of Net Assets
---- -------------
Pilgrim's Pride Corporation ............................... 3.17%
General Motors Corporation ................................ 3.06%
DaVita, Inc. ............................................. 2.58%
Ford Motor Company ........................................ 2.43%
Great Lakes Dredge & Dock Company ......................... 2.32%
ARAMARK Corporation ....................................... 2.30%
Res-Care, Inc. ............................................ 2.14%
Rent-A-Center, Inc. ....................................... 2.12%
Denbury Resources Inc. .................................... 2.09%
Constellation Brands, Inc. ................................ 2.04%
------
Total of top ten .......................................... 24.25%
------
------
- -------------------------------------------------------------------------------
Sector Diversification (As a Percentage of Portfolio)
June 30, 2007 (unaudited)
- -------------------------------------------------------------------------------
BAR CHART PLOT POINTS
Industrials ............................................... 19.43%
Consumer Discretionary .................................... 17.92%
Energy .................................................... 15.13%
Consumer Staples .......................................... 11.69%
Short-Term Investments .................................... 10.38%
Health Care ............................................... 9.14%
Information Technology .................................... 6.25%
Financials ................................................ 5.56%
Utilities ................................................. 1.62%
Telecommunication Services ................................ 1.56%
Materials ................................................. 1.32%
Top Ten Portfolio Issuers and Sector Diversification exclude collateral for
securities lending.
- -------------------------------------------------------------------------------
Fund Expenses
For the six month period ended June 30, 2007 (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*
12/31/06 06/30/07 01/01/07 - 06/30/07
------------------------------------------------------------------
Actual $1,000.00 $1,025.90 $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**
12/31/06 06/30/07 01/01/07 - 06/30/07
------------------------------------------------------------------
Actual $1,000.00 $1,021.60 $5.36
Hypothetical 1,000.00 1,019.69 5.36
(5% return before expenses)
** Expenses are equal to the Class N six-month annualized expense ratio
of 1.07%, 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, 2007 (unaudited)
- ---------------------------------------------------------------------------------------------------
Shares or
Principal
Amount Value
- ----------- ------------
CORPORATE BONDS - 86.20%
Consumer Discretionary - Auto & Components - 3.29%
$1,000,000 American Axle & Manufacturing, Inc. 5.25%, 02/11/14 $ 870,000
1,000,000 ArvinMeritor, Inc. 8.125%, 09/15/15(1) 968,750
500,000 Ford Motor Company 7.45%, 07/16/31(1) 399,375
1,000,000 General Motors Corporation 8.25%, 07/15/23(1) 911,250
------------
3,149,375
------------
Consumer Discretionary - Consumer Durables & Apparel - 3.12%
1,000,000 Jarden Corporation 7.50%, 05/01/17 987,500
750,000 K. Hovnanian Enterprises, Inc. 6.25%, 01/15/15 637,500
500,000 Simmons Company 10.00%, 12/15/14 420,000
500,000 Standard Pacific Corp. 6.50%, 08/15/10(1) 465,000
500,000 Technical Olympic USA, Inc. 9.00%, 04/01/11(1) 470,000
------------
2,980,000
------------
Consumer Discretionary - Consumer Services - 2.08%
1,500,000 United Rentals (North America), Inc. 7.75%, 11/15/13(1) 1,501,875
500,000 Vail Resorts, Inc. 6.75%, 02/15/14 486,875
------------
1,988,750
------------
Consumer Discretionary - Hotels, Restaurants & Leisure - 2.83%
1,000,000 Herbst Gaming, Inc. 7.00%, 11/15/14 937,500
2,000,000 Station Casinos, Inc. 6.50%, 02/01/14 1,770,000
------------
2,707,500
------------
Consumer Discretionary - Media - 2.63%
1,000,000 EchoStar DBS Corporation 6.375%, 10/01/11 980,000
1,000,000 Nielsen Finance LLC 144A restricted, 10.00%, 08/01/14 1,057,500
500,000 R.H. Donnelley Corporation 6.875%, 01/15/13 473,750
------------
2,511,250
------------
Consumer Discretionary - Retail - 3.72%
1,000,000 Michaels Stores, Inc. 144A restricted, 10.00%, 11/01/14(1) 1,025,000
2,000,000 Rent-A-Center, Inc. 7.50%, 05/01/10 2,030,000
500,000 Sally Holdings LLC 144A restricted, 9.25%, 11/15/14 501,250
------------
3,556,250
------------
Consumer Staples - Food & Staple Retail - 1.75%
1,750,000 Restaurant Company (The) 10.00%, 10/01/13 1,675,625
------------
Consumer Staples - Food, Beverage & Tobacco - 7.31%
2,000,000 Constellation Brands, Inc. 144A restricted, 7.25%, 05/15/17 1,950,000
1,000,000 Pilgrim's Pride Corporation 9.625%, 09/15/11 1,038,750
2,000,000 Pilgrim's Pride Corporation 7.625%, 05/01/15 1,995,000
1,000,000 Pinnacle Foods Finance LLC 144A restricted, 9.25%, 04/01/15 965,000
1,000,000 Reynolds American Inc. 7.25%, 06/01/13 1,037,995
------------
6,986,745
------------
Consumer Staples - Household & Personal Products - 2.46%
1,500,000 Solo Cup Company 8.50%, 02/15/14(1) 1,312,500
1,000,000 Visant Holding Corporation 8.75%, 12/01/13 1,040,000
------------
2,352,500
------------
Energy - 13.67%
1,000,000 Chesapeake Energy Corporation 6.50%, 08/15/17 947,500
875,000 CONSOL Energy Inc. 7.875%, 03/01/12 905,625
500,000 Deluxe Corporation 7.375%, 06/01/15 497,500
2,000,000 Denbury Resources Inc. 7.50%, 04/01/13 2,000,000
500,000 El Paso Corporation 6.875%, 06/15/14 497,499
1,500,000 Forest Oil Corporation 7.75%, 05/01/14 1,515,000
750,000 Grant Prideco, Inc. 6.125%, 08/15/15 710,625
500,000 Harvest Operations Corp. 7.875%, 10/15/11 490,625
500,000 Hornbeck Offshore Services, Inc. 6.125%, 12/01/14 457,500
750,000 Inergy, L.P. 6.875%, 12/15/14 710,625
500,000 Newfield Exploration Company 6.625%, 09/01/14 482,500
500,000 Peabody Energy Corporation 7.375%, 11/01/16 510,000
1,000,000 Stone Energy Corporation 8.25%, 12/15/11 1,000,000
500,000 Tesoro Corporation 144A restricted, 6.50%, 06/01/17 488,750
1,750,000 Williams Companies, Inc. (The) 8.125%, 03/15/12 1,857,188
------------
13,070,937
------------
Financials - Banks - 1.07%
1,000,000 Cardtronics, Inc. 9.25%, 08/15/13 1,022,500
------------
Financials - Diversified - 4.12%
2,000,000 Ford Motor Credit Company 7.25%, 10/25/11 1,924,864
2,000,000 General Motors Acceptance Corporation 7.56%, 12/01/14(2) 2,020,180
------------
3,945,044
------------
Health Care - Services - 9.00%
2,500,000 DaVita, Inc. 7.25%, 03/15/15(1) 2,468,750
1,500,000 Fresenius Medical Care Capital Trust IV 7.875%, 06/15/11 1,552,500
1,000,000 HCA Inc. 144A restricted, 9.125%, 11/15/14 1,051,250
1,000,000 Psychiatric Solutions, Inc. 7.75%, 07/15/15 988,750
2,000,000 Res-Care, Inc. 7.75%, 10/15/13 2,050,000
500,000 United Surgical Partners International, Inc.
144A restricted, 8.875%, 05/01/17 501,250
------------
8,612,500
------------
Industrials - Capital Goods - 6.34%
250,000 Actuant Corporation 144A restricted, 6.875%, 06/15/17 247,500
350,000 American Railcar Industries, Inc. 7.50%, 03/01/14(1) 348,250
1,500,000 Bombardier Inc. 144A restricted, 6.30%, 05/01/14 1,425,000
1,000,000 DRS Technologies, Inc. 6.875%, 11/01/13 970,000
500,000 Interline Brands, Inc. 8.125%, 06/15/14 503,750
750,000 L-3 Communications Corporation 6.375%, 10/15/15 708,750
500,000 Manitowoc Company, Inc. (The) 7.125% 11/01/13 501,250
350,000 Mueller Water Products, Inc. 144A restricted, 7.375%, 06/01/17 347,063
500,000 RBS Global, Inc. & Rexnord Corporation 9.50%, 08/01/14 512,500
500,000 Terex Corporation 7.375%, 01/15/14 500,000
------------
6,064,063
------------
Industrials - Commerical Services & Supplies - 10.68%
1,750,000 Alliance Laundry Systems LLC 8.50%, 01/15/13 1,736,875
500,000 Allied Waste North America, Inc. 6.875%, 06/01/17 483,750
2,500,000 ARAMARK Services, Inc. 5.00%, 06/01/12 2,200,000
1,000,000 GEO Group, Inc. (The) 8.25%, 07/15/13 1,031,250
2,250,000 Great Lakes Dredge & Dock Company 7.75%, 12/15/13 2,216,250
1,000,000 Mobile Mini, Inc. 144A restricted, 6.875%, 05/01/15 970,000
1,500,000 Waste Services, Inc. 9.50%, 04/15/14 1,576,875
------------
10,215,000
------------
Industrials - Transportation - 1.54%
500,000 CMA CGM S.A. 144A restricted, 7.25%, 02/01/13 510,000
1,000,000 Park-Ohio Industries, Inc. 8.375%, 11/15/14 962,500
------------
1,472,500
------------
Information Technology - Hardware & Equipment - 1.43%
1,500,000 Flextronics International Ltd. 6.25%, 11/15/14(1) 1,365,000
------------
Information Technology - Semiconductors &
Semiconductor Equipment - 0.52%
500,000 Spansion LLC 144A restricted, 8.485%, 06/01/13 499,375
------------
Information Technology - Software & Services - 4.20%
1,500,000 Iron Mountain Incorporated 8.625%, 04/01/13 1,503,750
1,000,000 SunGard Data Systems Inc. 10.25%, 08/15/15 1,057,500
1,500,000 Unisys Corporation 6.875%, 03/15/10 1,460,625
------------
4,021,875
------------
Materials - 1.30%
500,000 Georgia-Pacific Corporation 144A restricted, 7.00%, 01/15/15 481,250
500,000 Nalco Company 7.75%, 11/15/11 503,750
250,000 Tronox Worldwide LLC 9.50%, 12/01/12 260,625
------------
1,245,625
------------
Telecommunication Services - 1.54%
1,000,000 Nextel Communications, Inc. 6.875%, 10/31/13 992,529
500,000 Syniverse Technologies Inc. 7.75%, 08/15/13 477,500
------------
1,470,029
------------
Utilities - 1.60%
500,000 AES Corporation (The) 144A restricted, 8.75%, 05/15/13 527,500
1,000,000 NRG Energy, Inc. 7.25%, 02/01/14 1,002,500
------------
1,530,000
------------
TOTAL NON-CONVERTIBLE BONDS
(cost $83,491,714) 82,442,443
------------
COMMON STOCKS - 2.11%
Energy - 1.24%
7,500 Energy Transfer Partners, L.P. 462,975
25,000 Kayne Anderson Energy Total Return Fund, Inc. 723,750
------------
1,186,725
------------
Financials - Banks - 0.29%
15,000 Citizens Banking Corporation(1) 274,500
------------
Industrials - Transportation - 0.58%
25,000 Eagle Bulk Shipping Inc. 560,250
------------
TOTAL COMMON STOCKS
(cost $2,040,939) 2,021,475
------------
SHORT-TERM INVESTMENTS - 10.23%
Commercial Paper - 9.28%
$ 800,000 Starbucks Corporation 5.32%, 07/02/07 800,000
575,000 SABMiller plc 5.45%, 07/03/07 574,913
750,000 SABMiller plc 5.40%, 07/06/07 749,550
282,000 Time Warner Cable Inc. 5.35%, 07/06/07 281,832
600,000 Kraft Foods Inc. 5.33%, 07/10/07 599,289
590,000 Fiserv, Inc. 5.33%, 07/11/07 589,214
800,000 SABMiller plc 5.37%, 07/13/07 798,687
575,000 Wisconsin Electric Power Company 5.35%, 07/13/07 574,060
317,000 Hitachi Capital America Corp. 5.31%, 07/16/07 316,346
475,000 Walt Disney Company (The) 5.37%, 07/16/07 474,008
750,000 General Mills, Inc. 5.33%, 07/18/07 748,223
500,000 Time Warner Cable Inc. 5.38%, 07/25/07 498,281
900,000 Integrys Energy Group, Inc. 5.38%, 07/27/07 896,638
475,000 Fiserv, Inc. 5.38%, 07/31/07 472,942
500,000 Starbucks Corporation 5.35%, 08/03/07 497,622
------------
8,871,605
------------
Variable Rate Security - 0.95%
907,943 Wisconsin Corporate Central Credit Union 4.99%, 07/02/07(3) 907,943
TOTAL SHORT-TERM INVESTMENTS ------------
(cost $9,779,548) 9,779,548
------------
INVESTMENTS PURCHASED WITH CASH PROCEEDS
FROM SECURITES LENDING - 11.60%
Money Market Fund - 0.10%
99,780 BlackRock Provident Institutional Funds
TempCash Fund 5.21%, 07/02/07 99,780
------------
Repurchase Agreement - 11.50%
11,000,000 JP Morgan Chase Repurchase Agreement: (Dated 06/29/07),
5.375%, Due 07/02/07 (Repurchase Proceeds $4,927),
(collateralized by US Agency Pass-thru Securities) 11,000,000
------------
TOTAL INVESTMENTS PURCHASED WITH CASH PROCEEDS
FROM SECURITIES LENDING (cost $11,099,780) 11,099,780
------------
TOTAL INVESTMENTS (cost $106,411,981) - 110.14% 105,343,246
------------
LIABILITIES, NET OF OTHER ASSETS - (10.14)% (9,700,993)
------------
TOTAL NET ASSETS
(basis of percentages disclosed above) - 100% $ 95,642,253
-----------
------------
(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
June 30, 2007 (unaudited)
- -------------------------------------------------------------------------------
ASSETS
Investments in securities at value (cost $95,312,201) ..... $ 94,243,466
Securities lending collateral (cost $11,099,780) .......... 11,099,780
------------
Total investments ............................... 105,343,246
------------
Receivables -
Dividend and interest ................................ 1,566,770
Investment securities sold ........................... 423,144
------------
Total receivables ............................... 1,989,914
------------
Other ..................................................... 20,882
------------
Total assets .................................... 107,354,042
------------
LIABILITIES
Payables -
Collateral received for securities loaned ............ 11,099,780
Investment securities purchased ...................... 511,167
Due to adviser -
Management fee .................................. 37,149
Accounting and administrative fee ............... 4,247
12b-1 and servicing fee .............................. 496
Other payables and accrued expense ................... 58,950
------------
Total liabilities ............................... 11,711,789
------------
Total net assets ................................ $ 95,642,253
------------
------------
NET ASSETS CONSIST OF
Paid in capital ........................................... $173,794,817
Net unrealized depreciation on investments ................ (1,068,735)
Accumulated net realized loss on investments .............. (78,886,631)
Accumulated undistributed net investment income ........... 1,802,802
------------
Total net assets ................................ $ 95,642,253
------------
------------
Class I:
Net assets .................................................... $95,500,614
Shares outstanding ............................................ 8,854,408
NET ASSET VALUE PER SHARE ($.05 par value,
75,000,000 shares authorized),
offering price and redemption price .......................... $10.79
------
------
Class N:
Net assets .................................................... $141,639
Shares outstanding ............................................ 13,300
NET ASSET VALUE PER SHARE ($.05 par value,
25,000,000 shares authorized),
offering price and redemption price .......................... $10.65
------
------
The accompanying notes to financial statements are an integral part of this
statement.
Statement of Operations
For the six months ended June 30, 2007 (unaudited)
- -------------------------------------------------------------------------------
INCOME
Interest .................................................. $ 3,574,300
Dividend .................................................. 21,705
Securities lending ........................................ 5,576
Other ..................................................... 182,665
-----------
Total income ......................................... 3,784,246
-----------
EXPENSES
Management fee ............................................ 220,417
Transfer agent fees ....................................... 30,473
Accounting and administrative fees ........................ 24,795
Registration fees ......................................... 22,905
Audit and tax fees ........................................ 12,400
Accounting system and pricing service fees ................ 9,742
Directors' fees ........................................... 8,220
Legal fees ................................................ 6,250
Postage and mailing ....................................... 5,669
Printing .................................................. 5,580
Insurance ................................................. 2,433
Custodian fees ............................................ 2,073
12b-1 fees - Class N ...................................... 170
Servicing fees - Class N .................................. 68
Other operating expenses .................................. 2,123
-----------
Total expenses ....................................... 353,318
-----------
Net investment income ................................ 3,430,928
-----------
NET REALIZED GAIN ON INVESTMENTS .............................. 1,117,986
-----------
CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION
ON INVESTMENTS ............................................... (2,217,161)
-----------
Net realized and unrealized loss on investments ........... (1,099,175)
-----------
Net increase in net assets resulting from operations ...... $ 2,331,753
-----------
------------
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, 2007 (unaudited) and the year ended
December 31, 2006
- -------------------------------------------------------------------------------
Six Months
Ended
06/30/2007 Year Ended
(unaudited) 12/31/2006
------------- -------------
INCREASE IN NET ASSETS
FROM OPERATIONS
Net investment income .................. $ 3,430,928 $ 6,903,322
Net realized gain (loss)
on investments ........................ 1,117,986 (902,940)
Change in net unrealized
appreciation/depreciation
on investments ........................ (2,217,161) 2,899,667
------------ ------------
Net increase in net assets
resulting from operations ........ 2,331,753 8,900,049
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income - Class I ... (1,696,983) (6,890,281)
From net investment income - Class N ... (2,328) (8,080)
------------ ------------
Total distributions ............... (1,699,311) (6,898,361)
------------ ------------
CAPITAL SHARE TRANSACTIONS(1)
Proceeds from shares issued - Class I
(208,087 and 416,315
shares, respectively) ................. 2,268,148 4,458,130
Reinvestment of distributions - Class I
(134,607 and 545,280
shares, respectively) ................. 1,467,211 5,786,373
Cost of shares redeemed - Class I
(824,098 and 1,311,982
shares, respectively) ................. (8,959,772) (14,023,906)
Proceeds from shares issued - Class N
(1,782 and 7,446 shares, respectively) 19,183 79,197
Reinvestment of distributions - Class N
(206 and 730 shares, respectively) .... 2,217 7,661
Cost of shares redeemed - Class N
(656 and 1,222 shares, respectively) .. (7,074) (12,915)
------------ ------------
Decrease in net assets
derived from capital share
transactions ..................... (5,210,087) (3,705,460)
------------ ------------
Total decrease in net assets ...... (4,577,645) (1,703,772)
------------ ------------
NET ASSETS
Beginning of period .................... 100,219,898 101,923,670
------------ ------------
End of period (including accumulated
undistributed net investment income
of $1,802,802 and $71,185,
respectively) ......................... $ 95,642,253 $100,219,898
------------ ------------
------------ ------------
(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
June 30, 2007 (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. 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. 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) Dividends and distributions paid to shareholders are recorded on the
ex-dividend date. 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, 2007, no reclassifications were recorded.
The tax character of distributions paid during the six months ended
June 30, 2007 and the year ended December 31, 2006 was as follows:
06/30/2007 12/31/2006
---------- ----------
Distributions paid from:
Ordinary income ............ $1,699,311 $6,898,361
---------- ----------
---------- ----------
As of June 30, 2007, investment cost for federal tax purposes was
$106,406,902 and the tax basis components of net assets were as
follows:
Unrealized appreciation ....................... $ 838,159
Unrealized depreciation ....................... (1,901,815)
------------
Net unrealized depreciation ................... (1,063,656)
------------
Undistributed ordinary income .................. 1,796,392
Accumulated net realized loss ................. (78,885,300)
Paid in capital ............................... 173,794,817
------------
Net assets .................................... $ 95,642,253
------------
------------
The differences between book-basis and tax-basis unrealized
appreciation (depreciation), undistributed ordinary income and
accumulated realized capital loss are attributable primarily to
holdings in partnership interests and the return of capital from
investments.
As of June 30, 2007, the Fund has capital loss carryforwards of
approximately $78,885,000, which expire as follows: $3,566,000 in
2007, $19,346,000 in 2008, $30,985,000 in 2009, $23,496,000 in 2010,
$1,487,000 in 2014 and $5,000 in 2015. 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, 2007, the Fund realized no post-October losses for tax
purposes.
As of June 30, 2007, the Fund had no tax deferral of wash loss sales.
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 Fund
has applied FIN 48 to all open tax years and has determined that there
is no financial statement implication.
(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, subject to the following guidelines: (i) up to five basis
points, on an annual basis, of the average net asset value of the Fund
up to and including $2 billion and up to three basis points, on an
annual basis, of the average net asset value of the Fund greater than
$2 billion, based on the average net asset value of the Fund as
determined by valuations made at the close of each business day of
each month, and (ii) where the preceding calculation results in an
annual payment of less than $50,000, the Adviser, in its discretion,
may charge the Fund up to $50,000 for such services.
(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 $4,000 for the
period ended June 30, 2007 for legal services rendered by this law
firm.
(3) Investment Transactions --
For the period ended June 30, 2007, the cost of purchases and the proceeds
from sales of investment securities, other than short-term obligations,
aggregated $29,918,423 and $40,390,808, respectively.
(4) Future Adoption of New Accounting Standard --
In September 2006, 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 June 30, 2007, 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 June 30, 2007, 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 June 30, 2007, the value of the Fund's securities on loan was
$10,826,529 and the value of the related collateral was $11,099,780.
(7) Reverse Stock Split --
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 prior to and
including December 31, 2006 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.
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 75,221
June 30, 2007 .......... 10.79 0.1895 (a) 77,172
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 10,846
June 30, 2007 .......... 10.65 0.1806 (a) 11,080
(1) Per share amounts for and prior to December 31, 2006, presented in this historical record,
have been restated or adjusted to reflect a reverse stock split of one share for every five shares
outstanding effected 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 27, 2007 to shareholders of record as of April 26, 2007.
Approval of Investment Advisory Contract
(unaudited)
- -------------------------------------------------------------------------------
In February 2007, 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 2008. 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, 2006, the management fee was
0.45% and the Fund's Class I and Class N total expense ratios (including the
management fee) were 0.71% and 1.07%, 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 Constrained
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, credit quality and number of holdings. In terms of the peer group data
used for performance comparisons, the Fund's Class I was ranked 10th, 14th,
15th and 5th out of 17 funds for the one-, three-, five- and ten-year periods
ended December 31, 2006. The Fund's Class I had the lowest expense ratio among
its peer group and ranked 5th in terms of 12-month yield and 1st in terms of
SEC yield out of the 17 funds during the same period.
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.
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.
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: 08/30/2007
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: 08/30/2007
By: /s/ Jeffrey T. May
Name: Jeffrey T. May
Title: Principal Financial Officer
Date: 08/30/2007
