| |
| 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 number811-00216 | |
| |
| Nicholas High Income Fund, Inc. |
|
| (Exact Name of Registrant as specified in charter) |
| |
| 411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202 |
|
| (Address of Principal Executive Offices) | (Zip Code) |
| |
| Jennifer R. Kloehn, Senior Vice President and Treasurer |
| 411 East Wisconsin Avenue |
| 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:12/31/2019
Date of reporting period:06/30/2019
Item 1. Report to Stockholders.
SEMIANNUAL REPORT
June 30, 2019
NICHOLAS HIGH
INCOME FUND, INC.
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Fund’s website, www.nicholasfunds.com, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund or your financial intermediary electronically by contacting your financial intermediary (such as a broker-dealer or bank); direct shareholders may call the Fund at 1-800-544-6547.
You may elect to receive all future reports in paper free of charge. You can inform the Fund or your financial intermediary that you wish to continue receiving paper copies of your shareholder reports by contacting your financial intermediary (such as a broker-dealer or bank); direct shareholders may call the Fund at 1-800-544-6547. Your election to receive reports in paper will apply to all funds held with the Fund complex or your financial intermediary.
WWW.NICHOLASFUNDS.COM
NICHOLAS HIGH INCOME FUND, INC.
August 2019
Report to Fellow Shareholders:
Market Overview
The Nicholas High Income Fund (Fund) Class I had a return of 8.69% for the six-month period ended June 30, 2019, compared to the Morningstar High Yield Bond Funds Category (Morningstar Category) return of 8.79%. Performance was in line with the Morningstar Category over the last six months while it trailed the ICE BofAML US High Yield Constrained Index (Index) return of 10.16%, which is gross of fees. This six-month period offered a strong recovery following a difficult 4Q18 period in which the Fund was -3.35%, the Index -4.67% and the Morningstar Category -4.33%. The recovery was influenced by stronger than expected corporate earnings growth, equity markets posting solid returns and the Federal Reserve reversing course from raising rates to cutting rates. These actions provided a significant lift to the high yield market in the first half of 2019. Over the last twelve months ended June 30, 2019, the Fund generated a 7.06% return compared to 6.19% for the Morningstar Category.
The Fund benefitted from earlier decisions to raise the overall quality of its holdings by investing in higher quality companies with less leverage, better business models and a history of more consistent earnings. These characteristics generally led to securities with higher credit ratings, primarily BB-rated, and an underweight in companies with more cyclical businesses and higher leverage. Bonds with superior quality characteristics generally offer a tighter correlation to interest rate movements, which was beneficial as rates declined approximately 70 basis points during this six-month period. As measured by the ICE BofAML US High Yield BB Index, BB-rated bonds generated a return of 10.77%, while those CCC and Lower-rated bonds in the The ICE BofAML US High Yield CCC and Lower Rated Index earned 8.60%, during this time. The outperformance of the higher quality BB-rated bonds is a departure from recent times when riskier investments were rewarded over higher quality. From a sector perspective the Retail, Services and Financials sectors offered better performance. The portfolio’s largest overweight was in Services, which was additive to performance. Sectors lagging during the period included Transportation and Real Estate.
Our view remains cautiously optimistic for the balance of 2019. Potential headwinds for the market will include moderating economic growth, tariff concerns, slowing corporate earnings growth and a lower margin of error for investors due to the low level of interest rates and fully priced valuations. The backstop to support the market will be provided by the Federal Reserve’s willingness to cut interest rates to support the economy should it begin to falter. We think the Federal Reserve will likely follow expectations by cutting rates one to two more times in 2019 taking the Fed Funds rate to 1.50-1.75%, which would likely produce a flat to inverted yield curve.
On a security level basis our emphasis will be on companies offering a competitive advantage, a sound balance sheet, manageable leverage, the ability to produce free cash flow and reasonable valuations. We believe the securities of companies with these characteristics tend to persevere when faced with financial challenges, which we anticipate occurring over the balance of 2019.
Performance
Nicholas High Income Fund – Class I produced a net return of 8.69% for the period ended June 30, 2019. Returns for Nicholas High Income Fund, Inc. Class I and N, and selected indices are provided in the chart below for the periods ended June 30, 2019. The Fund and Morningstar performance data is net of fees, while the ICE BofAML Indices are gross of fees.
| | | | | | | | | | | | | | |
| | | | | | Average Annual Total Return | |
| | | 6 Month | | | 1 Year | | 3 Year | | | 5 Year | | | 10 Year | |
| Nicholas High Income | | | | | | | | | | | | | | |
| Fund, Inc. – Class I | | 8.69 | % | | 7.06 | % | 4.81 | % | | 2.40 | % | | 6.74 | % |
| Nicholas High Income | | | | | | | | | | | | | | |
| Fund, Inc. – Class N | | 8.43 | % | | 6.68 | % | 4.48 | % | | 2.05 | % | | 6.36 | % |
| ICE BofAML US High Yield | | | | | | | | | | | | | | |
| Constrained Index | | 10.16 | % | | 7.58 | % | 7.54 | % | | 4.70 | % | | 9.20 | % |
| ICE BofAML US High Yield | | | | | | | | | | | | | | |
| BB-B Bond Index | | 10.36 | % | | 8.63 | % | 7.15 | % | | 4.79 | % | | 8.62 | % |
| Morningstar High Yield | | | | | | | | | | | | | | |
| Bond Funds Category | | 8.79 | % | | 6.19 | % | 6.31 | % | | 3.47 | % | | 7.95 | % |
| Ending value of $10,000 invested | | | | | | | | | | | | | | |
| in Nicholas High Income | | | | | | | | | | | | | | |
| Fund, Inc. – Class I | $ | 10,869 | | $ | 10,706 | $ | 11,514 | | $ | 11,257 | | $ | 19,190 | |
| Ending value of $10,000 invested | | | | | | | | | | | | | | |
| in Nicholas High Income | | | | | | | | | | | | | | |
| Fund, Inc. – Class N | $ | 10,843 | | $ | 10,668 | $ | 11,406 | | $ | 11,070 | | $ | 18,523 | |
| Fund’s Class I Expense Ratio (from 04/30/19 Prospectus): 0.72% | | | | | | | |
| Fund’s Class N Expense Ratio (from 04/30/19 Prospectus): 1.03% | | | | | | | |
The Fund’s expense ratios for the for the current period 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. 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 I shares and Class N shares are invested in the same portfolio of securities. Annual returns will generally differ only to the extent that the classes do not have the same expenses. Please see the respective prospectus for details.
Philosophy and Process
The returns earned by the Fund are consistent with our investment philosophy and style. The approach has been to identify undervalued securities using rigorous financial analysis to verify that the fundamental outlook is properly aligned with current valuations. An analysis of trends in earnings, EBITDA, leverage and asset coverage are critical for making a sound investment. Security valuation is the primary gatekeeper in deciding whether to add or eliminate a holding from the portfolio. Financially, sound companies with fully priced securities do not necessarily represent a good value, while companies that have stumbled financially should not automatically be dismissed as bad investments if we believe the valuations offer a sufficient “margin of safety”. This process suggests a more conservative approach to investing in high yield bonds, which we believe has the potential to allow for more consistent returns with less downside risk.
We remain committed to the Fund’s long-term strategy, which is based on a process that seeks to identify value opportunities in out-of-favor or poorly followed securities of financially sound companies. Opportunities tend to arise over time in securities of companies that fall temporarily out-of-favor due to specific company or industry issues that may taint the issuers. 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 that 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.
Thank you for your investment in the Nicholas High Income Fund.
Lawrence J. Pavelec, CFA
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. The Fund may invest in illiquid securities which involve the risk that the securities will not be able to be sold at the time or prices desired by the fund, particularly during times of market turmoil.
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.
Current and future portfolio holdings are subject to risk.
Basis Pointis one-hundredth of a percentage point. For example, 50 basis points equals .50%.
Cash Flowmeasures the cash generating capability of a company by adding non-cash charges (e.g. depreciation) and interest expense to pretax income.
Correlationis a statistical measure of how one investment moves in relation to another and ranges from -1 for a perfectly negative correlation to +1 for a perfectly positive correlation. An uncorrelated investment pair would have a correlation coefficient close to zero.
Earnings before interest, taxes, depreciation and amortization (EBITDA)is an approximate measure of a company’s operating cash flow based on data from the company’s income statement. Calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization.
Free Cash Flowmeasures the cash flow from operating activities minus total capital expenditures. It may be specifically defined as Earnings before interest, taxes, depreciation and amortization (EBITDA) less capital expenditures and interest expense.
Index Definitions – You cannot invest directly in an index.
The ICE BofAML US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have at least one year remaining term to final maturity, a fixed coupon schedule and a minimum amount outstanding of $250 million.
The ICE BoAML US High Yield Constrained Index limits any individual issuer included in the ICE BoAML US High Yield Index to a maximum of 2% benchmark exposure.
The ICE BoAML US High Yield BB-B Bond Index is a subset of the ICE BoAML US High Yield Index including all securities rated BB1 through B3, inclusive.
The ICE BofAML US High Yield BB Index is a subset of the Bank of America Merrill Lynch US High Yield Index including all securities rated BB1 through BB3.
The BofAML US High Yield CCC and Lower Rated Index is a subset of the Merrill Lynch US High Yield Index including all securities rated CCC1 or lower.
Credit Quality reflects the credit rating assigned by Fitch, Moody’s or S&P. Ratings are subject to change and generally expressed as a scale from AAA to D, where higher-rated bonds are in the A’s and lower-rated in the C’s. Any bond rated BBB or higher is considered investment grade debt. Any bond rated BBB- or below is considered below investment grade and are seen as having higher default risk or other adverse credit events, but typically pay higher yields than better quality bonds in order to make them attractive. The credit quality of the investments in the portfolio does not apply to the stability or safety of the Fund or its shares.
Each Morningstar Category average represents a universe of Funds with similar invest objectives.
Must be preceded or accompanied by a prospectus.
The Nicholas Funds are distributed by Quasar Distributors, LLC.
Earnings growth is not representative of the fund’s future performance.
Financial Highlights Class I (NCINX)
For a share outstanding throughout each period
| | | | | | | | | | | | | | | | | | |
| | | Six Months | | | | | | | | | | | | | | | | |
| | | Ended | | | | | | | | | | | | | | | | |
| | | 06/30/2019 | | | | | | Years Ended December 31, | | | | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| NET ASSET VALUE, | | | | | | | | | | | | | | | | | | |
| BEGINNING OF PERIOD | $ | 8.36 | | $ | 9.00 | | $ | 9.08 | | $ | 8.65 | | $ | 9.52 | | $ | 9.86 | |
| INCOME (LOSS) FROM | | | | | | | | | | | | | | | | | | |
| INVESTMENT OPERATIONS | | | | | | | | | | | | | | | | | | |
| Net investment income. | | .19 | (1) | | .39 | (1) | | .44 | (1) | | .43 | (1) | | .43 | | | .52 | |
| Net gain (loss) on securities | | | | | | | | | | | | | | | | | | |
| (realized and unrealized) | | .54 | | | (.64 | ) | | (.05 | ) | | .42 | | | (.84 | ) | | (.35 | ) |
| Total from | | | | | | | | | | | | | | | | | | |
| investment operations | | .73 | | | (.25 | ) | | .39 | | | .85 | | | (.41 | ) | | .17 | |
| LESS DISTRIBUTIONS | | | | | | | | | | | | | | | | | | |
| From net investment income | | (.10 | ) | | (.39 | ) | | (.47 | ) | | (.42 | ) | | (.46 | ) | | (.51 | ) |
| NET ASSET VALUE, | | | | | | | | | | | | | | | | | | |
| END OF PERIOD | $ | 8.99 | | $ | 8.36 | | $ | 9.00 | | $ | 9.08 | | $ | 8.65 | | $ | 9.52 | |
| |
| TOTAL RETURN | | 8.69 | %(2) | | (2.86 | )% | | 4.28 | % | | 9.94 | % | | (4.54 | )% | | 1.62 | % |
| |
| SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | |
| Net assets, end of | | | | | | | | | | | | | | | | | | |
| period (millions) | $ | 102.2 | | $ | 95.0 | | $ | 101.9 | | $ | 100.5 | | $ | 93.1 | | $ | 101.1 | |
| Ratio of expenses | | | | | | | | | | | | | | | | | | |
| to average net assets | | .73 | %(3) | | .72 | % | | .69 | % | | .68 | % | | .70 | % | | .67 | % |
| Ratio of net investment income | | | | | | | | | | | | | | | | | | |
| to average net assets | | 4.38 | %(3) | | 4.38 | % | | 4.80 | % | | 4.83 | % | | 4.61 | % | | 5.24 | % |
| Portfolio turnover rate | | 27.87 | %(3) | | 45.30 | % | | 44.80 | % | | 44.28 | % | | 41.30 | % | | 50.76 | % |
| (1) | Computed based on average shares outstanding. |
| (2) | Not annualized. |
| (3) | Annualized. |
The accompanying notes to financial statements are an integral part of these highlights.
– 5–
Financial Highlights Class N (NNHIX)
For a share outstanding throughout each period
| | | | | | | | | | | | | | | | | | |
| | | Six Months | | | | | | | | | | | | | | | | |
| | | Ended | | | | | | | | | | | | | | | | |
| | | 06/30/2019 | | | | | | Years Ended December 31, | | | | |
| | | (unaudited) | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| NET ASSET VALUE, | | | | | | | | | | | | | | | | | | |
| BEGINNING OF PERIOD | $ | 8.52 | | $ | 9.16 | | $ | 9.22 | | $ | 8.78 | | $ | 9.66 | | $ | 9.99 | |
| INCOME (LOSS) FROM | | | | | | | | | | | | | | | | | | |
| INVESTMENT OPERATIONS | | | | | | | | | | | | | | | | | | |
| Net investment income. | | .18 | (1) | | .36 | (1) | | .43 | (1) | | .40 | (1) | | .39 | | | .48 | |
| Net gain (loss) on securities | | | | | | | | | | | | | | | | | | |
| (realized and unrealized) | | .54 | | | (.64 | ) | | (.06 | ) | | .43 | | | (.85 | ) | | (.34 | ) |
| Total from | | | | | | | | | | | | | | | | | | |
| investment operations | | .72 | | | (.28 | ) | | .37 | | | .83 | | | (.46 | ) | | .14 | |
| LESS DISTRIBUTIONS | | | | | | | | | | | | | | | | | | |
| From net investment income | | (.09 | ) | | (.36 | ) | | (.43 | ) | | (.39 | ) | | (.42 | ) | | (.47 | ) |
| NET ASSET VALUE, | | | | | | | | | | | | | | | | | | |
| END OF PERIOD | $ | 9.15 | | $ | 8.52 | | $ | 9.16 | | $ | 9.22 | | $ | 8.78 | | $ | 9.66 | |
| |
| TOTAL RETURN | | 8.43 | %(2) | | (3.12 | )% | | 4.03 | % | | 9.58 | % | | (4.97 | )% | | 1.34 | % |
| |
| SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | | | |
| Net assets, end of | | | | | | | | | | | | | | | | | | |
| period (millions) | $ | 1.4 | | $ | 2.4 | | $ | 3.3 | | $ | 8.1 | | $ | 2.7 | | $ | 6.6 | |
| Ratio of expenses | | | | | | | | | | | | | | | | | | |
| to average net assets | | 1.01 | %(3) | | 1.03 | % | | 1.02 | % | | 1.03 | % | | 1.05 | % | | 1.02 | % |
| Ratio of net investment income | | | | | | | | | | | | | | | | | | |
| to average net assets | | 4.10 | %(3) | | 4.08 | % | | 4.55 | % | | 4.42 | % | | 4.29 | % | | 4.90 | % |
| Portfolio turnover rate | | 27.87 | %(3) | | 45.30 | % | | 44.80 | % | | 44.28 | % | | 41.30 | % | | 50.76 | % |
| (1) | Computed based on average shares outstanding. |
| (2) | Not annualized. |
| (3) | Annualized. |
The accompanying notes to financial statements are an integral part of these highlights.
– 6–
Top Ten Portfolio Issuers
June 30, 2019 (unaudited)
| | |
| | Percentage | |
| Name | of Net Assets | |
| Lamb Weston Holdings, Inc. | 2.00 | % |
| CCO Holdings, LLC | 1.99 | % |
| LPL Holdings, Inc. | 1.98 | % |
| Allison Transmission, Inc. | 1.97 | % |
| CyrusOne LP | 1.78 | % |
| XPO Logistics, Inc. | 1.75 | % |
| IQVIA Inc. | 1.74 | % |
| Teleflex Incorporated | 1.71 | % |
| Valvoline Inc. | 1.67 | % |
| Koppers Inc. | 1.58 | % |
| Total of top ten | 18.17 | % |
Sector Diversification(as a percentage of portfolio)
June 30, 2019 (unaudited)
– 7–
Fund Expenses
For the six month period ended June 30, 2019 (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 are not the Fund’s actual returns. 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* |
| | | 12/31/18 | | 06/30/19 | | 01/01/19 - 06/30/19 |
| Actual | $ | 1,000.00 | $ | 1,086.90 | $ | 3.78 |
| Hypothetical | | 1,000.00 | | 1,021.38 | | 3.66 |
| (5% return before expenses) | | | | | | |
| * | Expenses are equal to the Class I six-month annualized expense ratio of 0.73%, multiplied by the average account value over the period, multiplied by 181 then divided by 365 to reflect the one-half year period. |
– 8–
Fund Expenses(continued)
For the six month period ended June 30, 2019 (unaudited)
| | | | | | |
| Class N | | | | | | |
| | | Beginning | | Ending | | Expenses |
| | | Account | | Account | | Paid During |
| | | Value | | Value | | Period** |
| | | 12/31/18 | | 06/30/19 | | 01/01/19 - 06/30/19 |
| Actual | $ | 1,000.00 | $ | 1,084.30 | $ | 5.22 |
| Hypothetical | | 1,000.00 | | 1,019.99 | | 5.06 |
| (5% return before expenses) | | | | | | |
| ** | Expenses are equal to the Class N six-month annualized expense ratio of 1.01%, multiplied by the average account value over the period, multiplied by 181 then divided by 365 to reflect the one-half year period. |
– 9–
Schedule of Investments
June 30, 2019 (unaudited)
| | | | |
| | Shares or | | | |
| | Principal | | | |
| | Amount | | | Value |
| NON-CONVERTIBLE BONDS — 90.90% | | |
| | | Automotive – Parts & Equipment — 4.91% | | |
| $ | 2,000,000 | Allison Transmission, Inc. 144A restricted, 5.00%, 10/01/24 | $ | 2,040,000 |
| | 1,500,000 | American Axle & Manufacturing, Inc. 6.25%, 04/01/25 | | 1,492,500 |
| | 1,500,000 | Panther BF Aggregator 2 LP 144A restricted, 6.25%, 05/15/26 | | 1,558,125 |
| | | | | 5,090,625 |
| | | Banking — 1.13% | | |
| | 1,100,000 | CIT Group Inc. 5.00%, 08/01/23 | | 1,174,250 |
| | | Basic Industry – Building & Construction — 1.53% | | |
| | 500,000 | KB Home 7.625%, 05/15/23 | | 558,750 |
| | 1,000,000 | Lennar Corporation 4.125%, 01/15/22 | | 1,025,950 |
| | | | | 1,584,700 |
| | | Basic Industry – Building Materials — 3.71% | | |
| | 750,000 | American Woodmark Corporation 144A restricted, 4.875%, 03/15/26 | | 740,625 |
| | 1,500,000 | Beacon Roofing Supply, Inc. 6.375%, 10/01/23 | | 1,558,125 |
| | 1,000,000 | HD Supply, Inc. 144A restricted, 5.375%, 10/15/26 | | 1,055,000 |
| | 500,000 | JELD-WEN, Inc. 144A restricted, 4.625%, 12/15/25 | | 490,625 |
| | | | | 3,844,375 |
| | | Basic Industry – Chemicals — 4.78% | | |
| | 1,750,000 | Koppers Inc. 144A restricted, 6.00%, 02/15/25 | | 1,640,625 |
| | 1,500,000 | PolyOne Corporation 5.25%, 03/15/23 | | 1,582,500 |
| | 1,680,000 | Valvoline Inc. 5.50%, 07/15/24 | | 1,730,400 |
| | | | | 4,953,525 |
| | | Basic Industry – Forestry & Paper — 1.93% | | |
| | 1,500,000 | Louisiana-Pacific Corporation 4.875%, 09/15/24 | | 1,524,375 |
| | 459,000 | Mercer International Inc. 7.75%, 12/01/22 | | 476,213 |
| | | | | 2,000,588 |
| | | Basic Industry – Metal/Mining Excluding Steel — 1.43% | | |
| | 500,000 | Alcoa Nederland Holding B.V. 144A restricted, 6.75%, 09/30/24 | | 528,125 |
| | 1,000,000 | Grinding Media Inc. 144A restricted, 7.375%, 12/15/23 | | 957,500 |
| | | | | 1,485,625 |
| | | Basic Industry – Steel Producers & Products — 1.29% | | |
| | 1,500,000 | United States Steel Corporation 6.25%, 03/15/26 | | 1,335,000 |
| | | Capital Goods – Diversified — 0.97% | | |
| | 1,000,000 | Park-Ohio Industries, Inc. 6.625%, 04/15/27 | | 1,000,000 |
| | | Capital Goods – Machinery — 0.98% | | |
| | 1,000,000 | Terex Corporation 144A restricted, 5.625%, 02/01/25 | | 1,015,000 |
The accompanying notes to financial statements are an integral part of this schedule.
– 10 –
Schedule of Investments(continued)
June 30, 2019 (unaudited)
| | | | |
| | Shares or | | | |
| | Principal | | | |
| | Amount | | | Value |
| | NON-CONVERTIBLE BONDS — 90.90% (continued) | | |
| | | Capital Goods – Packaging — 4.02% | | |
| $ | 500,000 | Ball Corporation 4.00%, 11/15/23 | $ | 516,875 |
| | 1,000,000 | Ball Corporation 5.25%, 07/01/25 | | 1,082,500 |
| | 500,000 | Crown Americas LLC 4.25%, 09/30/26 | | 510,000 |
| | 1,500,000 | Reynolds Group Holdings Limited 144A restricted, 5.125%, 07/15/23 | | 1,528,125 |
| | 500,000 | Sealed Air Corporation 144A restricted, 5.50%, 09/15/25 | | 532,500 |
| | | | | 4,170,000 |
| | | Consumer Goods – Food-Wholesale — 3.49% | | |
| | 500,000 | JBS USA, LLC/Finance, Inc. 144A restricted, 5.875%, 07/15/24 | | 514,375 |
| | 1,000,000 | Lamb Weston Holdings, Inc. 144A restricted, 4.625%, 11/01/24 | | 1,036,250 |
| | 1,000,000 | Lamb Weston Holdings, Inc. 144A restricted, 4.875%, 11/01/26 | | 1,040,000 |
| | 1,000,000 | Post Holdings, Inc. 144A restricted, 5.625%, 01/15/28 | | 1,027,500 |
| | | | | 3,618,125 |
| | | Consumer Goods – Personal & Household Products — 1.20% | | |
| | 500,000 | Tempur Sealy International, Inc. 5.625%, 10/15/23 | | 515,000 |
| | 750,000 | Vista Outdoor Inc. 5.875%, 10/01/23 | | 731,565 |
| | | | | 1,246,565 |
| | | Energy – Exploration & Production — 1.85% | | |
| | 500,000 | Oasis Petroleum Inc. 6.875%, 03/15/22 | | 498,750 |
| | 1,500,000 | Southwestern Energy Company 7.50%, 04/01/26 | | 1,421,070 |
| | | | | 1,919,820 |
| | | Energy – Gas-Distribution — 5.67% | | |
| | 500,000 | Cheniere Corpus Christi Holdings, LLC 5.125%, 06/30/27 | | 543,125 |
| | 1,400,000 | Suburban Propane Partners L.P. 5.50%, 06/01/24 | | 1,407,000 |
| | 1,000,000 | Tallgrass Energy Partners, LP 144A restricted, 5.50%, 01/15/28 | | 1,011,250 |
| | 1,550,000 | Tesoro Logistics LP 5.25%, 01/15/25 | | 1,640,100 |
| | 1,000,000 | Transcontinental Gas Pipe Line Company, LLC 7.85%, 02/01/26 | | 1,276,802 |
| | | | | 5,878,277 |
| | | Energy – Oil Field Equipment & Services — 0.51% | | |
| | 500,000 | Transocean Inc. 144A restricted, 9.00%, 07/15/23 | | 532,500 |
| | | Financial Services – Brokerage — 1.98% | | |
| | 2,000,000 | LPL Holdings, Inc. 144A restricted, 5.75%, 09/15/25 | | 2,047,500 |
| Financial Services – Consumer, Commercial & Lease Financing — 0.52% |
| | 500,000 | Springleaf Finance Corporation 6.125%, 03/15/24 | | 537,500 |
| | | Healthcare – Facilities — 2.77% | | |
| | 1,000,000 | HCA Inc. 5.00%, 03/15/24 | | 1,089,438 |
| | 750,000 | HealthSouth Corporation 5.75%, 09/15/25 | | 779,063 |
| | 1,000,000 | Tenet Healthcare Corporation 5.125%, 05/01/25 | | 1,005,000 |
| | | | | 2,873,501 |
The accompanying notes to financial statements are an integral part of this schedule.
– 11 –
Schedule of Investments(continued)
June 30, 2019 (unaudited)
| | | | |
| | Shares or | | | |
| | Principal | | | |
| | Amount | | | Value |
| | NON-CONVERTIBLE BONDS — 90.90% (continued) | | |
| | | Healthcare – Medical Products — 1.71% | | |
| $ | 1,725,000 | Teleflex Incorporated 5.25%, 06/15/24 | $ | 1,771,899 |
| | | Healthcare – Pharmaceuticals — 0.46% | | |
| | 500,000 | Teva Pharmaceutical Finance Netherlands III B.V. 6.00%, 04/15/24 | | 471,563 |
| | | Healthcare – Services — 4.20% | | |
| | 1,000,000 | DaVita HealthCare Partners Inc. 5.125%, 07/15/24 | | 1,000,300 |
| | 1,750,000 | IQVIA Inc. 144A restricted, 5.00%, 05/15/27 | | 1,806,875 |
| | 1,500,000 | Service Corporation International 5.375%, 05/15/24 | | 1,543,125 |
| | | | | 4,350,300 |
| | | Leisure – Gaming — 1.06% | | |
| | 1,000,000 | International Game Technology PLC 144A restricted, 6.25%, 01/15/27 | | 1,093,750 |
| | | Leisure – Hotels — 1.52% | | |
| | 1,500,000 | Wyndham Hotels & Resorts, Inc. 144A restricted, 5.375%, 04/15/26 | | 1,569,375 |
| | | Leisure – Recreation & Travel — 0.71% | | |
| | 250,000 | ClubCorp Holdings, Inc. 144A restricted, 8.50%, 09/15/25 | | 231,875 |
| | 500,000 | Viking Ocean Cruises Ltd 144A restricted, 5.00%, 02/15/28 | | 506,875 |
| | | | | 738,750 |
| | | Leisure – Theaters & Entertainment — 0.98% | | |
| | 1,000,000 | Cinemark USA, Inc. 5.125%, 12/15/22 | | 1,015,000 |
| | | Media – Cable & Satellite TV — 1.99% | | |
| | 500,000 | CCO Holdings, LLC 5.75%, 01/15/24 | | 511,187 |
| | 1,500,000 | CCO Holdings, LLC 144A restricted, 5.125%, 05/01/27 | | 1,553,040 |
| | | | | 2,064,227 |
| | | Media – Content — 1.96% | | |
| | 1,500,000 | AMC Networks Inc. 4.75%, 08/01/25 | | 1,515,000 |
| | 500,000 | Netflix, Inc. 4.375%, 11/15/26 | | 511,400 |
| | | | | 2,026,400 |
| | | Real Estate – REITs — 1.97% | | |
| | 1,000,000 | Brookfield Property REIT Inc. 144A restricted, 5.75%, 05/15/26 | | 1,030,000 |
| | 1,000,000 | Sabra Health Care Limited Partnership 5.50%, 02/01/21 | | 1,013,750 |
| | | | | 2,043,750 |
| | | Retail – Specialty Retail — 2.94% | | |
| | 1,000,000 | Levi Strauss & Co. 5.00%, 05/01/25 | | 1,035,000 |
| | 1,000,000 | Murphy Oil USA, Inc. 6.00%, 08/15/23 | | 1,027,500 |
| | 1,000,000 | Wolverine World Wide, Inc. 144A restricted, 5.00%, 09/01/26 | | 987,500 |
| | | | | 3,050,000 |
| | | Services – Environmental — 1.00% | | |
| | 1,000,000 | Covanta Holding Corporation 5.875%, 07/01/25 | | 1,040,000 |
The accompanying notes to financial statements are an integral part of this schedule.
– 12 –
Schedule of Investments(continued)
June 30, 2019 (unaudited)
| | | | |
| | Shares or | | | |
| | Principal | | | |
| | Amount | | | Value |
| | NON-CONVERTIBLE BONDS — 90.90% (continued) | | |
| | | Services – Support-Services — 11.42% | | |
| $ | 1,500,000 | ADT Corporation (The) 3.50%, 07/15/22 | $ | 1,496,250 |
| | 1,500,000 | Aramark Services, Inc. 5.125%, 01/15/24 | | 1,541,250 |
| | 500,000 | Hertz Corporation (The) 144A restricted, 7.625%, 06/01/22 | | 519,375 |
| | 1,500,000 | IHS Markit Ltd. 144A restricted, 4.75%, 02/15/25 | | 1,608,900 |
| | 1,500,000 | Iron Mountain Incorporated 144A restricted, 4.875%, 09/15/27 | | 1,486,875 |
| | 1,350,000 | KAR Auction Services, Inc. 144A restricted, 5.125%, 06/01/25 | | 1,373,625 |
| | 1,500,000 | Ritchie Bros. Auctioneers Incorporated 144A restricted, 5.375%, 01/15/25 | | 1,554,375 |
| | 673,000 | ServiceMaster Company, LLC (The) 144A restricted, 5.125%, 11/15/24 . | | 692,349 |
| | 1,500,000 | United Rentals (North America), Inc. 5.50%, 07/15/25 | | 1,561,875 |
| | | | | 11,834,874 |
| | | Technology & Electronics – Electronics — 0.96% | | |
| | 1,000,000 | Amkor Technology, Inc. 144A restricted, 6.625%, 09/15/27 | | 993,850 |
| | | Technology & Electronics – Hardware & Equipment — 2.46% | | |
| | 725,000 | CDW LLC 5.00%, 09/01/23 | | 737,687 |
| | 750,000 | CDW LLC 5.50%, 12/01/24 | | 801,750 |
| | 1,000,000 | NCR Corporation 5.875%, 12/15/21 | | 1,012,990 |
| | | | | 2,552,427 |
| | | Technology & Electronics – Software & Services — 1.00% | | |
| | 1,000,000 | SS&C Technologies, Inc. 144A restricted, 5.50%, 09/30/27 | | 1,037,500 |
| | | Telecommunications – Wireless — 1.49% | | |
| | 500,000 | SBA Communications Corporation 4.875%, 09/01/24 | | 515,000 |
| | 1,000,000 | T-Mobile USA, Inc. 4.50%, 02/01/26 | | 1,023,750 |
| | | | | 1,538,750 |
| | | Telecommunications – Wireline Integrated & Services — 5.65% | | |
| | 1,000,000 | Cincinnati Bell Inc. 144A restricted, 7.00%, 07/15/24 | | 882,500 |
| | 1,800,000 | CyrusOne LP 5.00%, 03/15/24 | | 1,849,500 |
| | 1,500,000 | Equinix, Inc. 5.875%, 01/15/26 | | 1,588,125 |
| | 1,500,000 | Zayo Group, LLC 6.00%, 04/01/23 | | 1,533,750 |
| | | | | 5,853,875 |
| | | Transportation – Infrastructure/Services — 1.75% | | |
| | 250,000 | XPO Logistics, Inc. 144A restricted, 6.50%, 06/15/22 | | 255,000 |
| | 1,500,000 | XPO Logistics, Inc. 144A restricted, 6.125%, 09/01/23 | | 1,554,375 |
| | | | | 1,809,375 |
| | | Utility – Electric-Generation — 1.00% | | |
| | 500,000 | Dynegy Inc. 5.875%, 06/01/23 | | 511,250 |
| | 500,000 | Vistra Operations Company LLC 144A restricted, 5.50%, 09/01/26 | | 528,125 |
| | | | | 1,039,375 |
| | | TOTAL NON-CONVERTIBLE BONDS | | |
| | | (cost $92,880,615) | | 94,202,516 |
The accompanying notes to financial statements are an integral part of this schedule.
– 13 –
Schedule of Investments(continued)
June 30, 2019 (unaudited)
| | | | |
| | Shares or | | | |
| | Principal | | | |
| | Amount | | | Value |
| | CONVERTIBLE PREFERRED STOCK — 0.53% | | |
| | | Real Estate – REITs — 0.53% | | |
| | 21,859 | Digital Realty Trust, Inc. 5.25%, | | |
| | | Cumulative, Redeemable, Series J | | |
| | | (cost $523,345) | $ | 542,759 |
| | COMMON STOCK — 0.29% | | |
| | | Real Estate — 0.29% | | |
| | 11,500 | Weyerhaeuser Company | | |
| | | (cost $299,715) | | 302,910 |
| SHORT-TERM INVESTMENTS — 6.91% | | |
| | | U.S. Government Securities — 5.78% | | |
| $ | 1,200,000 | U.S. Treasury Bill 07/05/2019, 2.232% | | 1,199,706 |
| | 1,200,000 | U.S. Treasury Bill 07/18/2019, 2.089% | | 1,198,834 |
| | 1,300,000 | U.S. Treasury Bill 08/01/2019, 2.032% | | 1,297,760 |
| | 1,300,000 | U.S. Treasury Bill 08/13/2019, 2.038% | | 1,296,885 |
| | 1,000,000 | U.S. Treasury Bill 08/22/2019, 2.085% | | 997,038 |
| | | | | 5,990,223 |
| | | Money Market Fund — 1.13% | | |
| | 1,174,565 | Morgan Stanley Liquidity Funds | | |
| | | Government Portfolio (Institutional Class), 7-day net yield 2.25% | | 1,174,565 |
| | | TOTAL SHORT-TERM INVESTMENTS | | |
| | | (cost $7,164,788) | | 7,164,788 |
| | | TOTAL INVESTMENTS | | |
| | | (cost $100,868,463) — 98.63% | | 102,212,973 |
| | | OTHER ASSETS, NET OF LIABILITIES — 1.37% | | 1,424,285 |
| | | TOTAL NET ASSETS | | |
| | | (basis of percentages disclosed above) — 100% | $ | 103,637,258 |
Securities purchased pursuant to Rule 144A under the Securities Act of 1933 may be sold in transactions exempt from registration only to qualified institutional buyers or in a public offering registered under the Securities Act of 1933.
The accompanying notes to financial statements are an integral part of this schedule.
– 14 –
Statement of Assets and Liabilities
June 30, 2019 (unaudited)
| | | |
| ASSETS | | | |
| Investments in securities at value (cost $100,868,463) | $ | 102,212,973 | |
| Interest receivable | | 1,512,188 | |
| Other | | 25,020 | |
| Total assets | | 103,750,181 | |
| |
| LIABILITIES | | | |
| Payables — | | | |
| Due to adviser — | | | |
| Management fee | | 35,224 | |
| Accounting and administrative fee | | 3,836 | |
| Total due to adviser | | 39,060 | |
| 12b-1 and servicing fee | | 24,184 | |
| Other payables and accrued expense | | 49,679 | |
| Total liabilities | | 112,923 | |
| Total net assets | $ | 103,637,258 | |
| |
| NET ASSETS CONSIST OF | | | |
| Paid in capital | $ | 111,756,612 | |
| Accumulated distributable earnings (loss) | | (8,119,354 | ) |
| Total net assets | $ | 103,637,258 | |
| |
| Class I | | | |
| Net assets | $ | 102,183,718 | |
| Shares outstanding | | 11,368,629 | |
| NET ASSET VALUE PER SHARE ($.05 par value, 75,000,000 | | | |
| shares authorized), offering price and redemption price | $ | 8.99 | |
| |
| Class N | | | |
| Net assets | $ | 1,453,540 | |
| Shares outstanding | | 158,871 | |
| NET ASSET VALUE PER SHARE ($.05 par value, 25,000,000 | | | |
| shares authorized), offering price and redemption price | $ | 9.15 | |
The accompanying notes to financial statements are an integral part of this statement.
– 15 –
Statement of Operations
For the six months ended June 30, 2019 (unaudited)
| | | |
| INCOME | | | |
| Interest | $ | 2,564,897 | |
| Dividend | | 16,440 | |
| Other | | 1,000 | |
| Total income | | 2,582,337 | |
| |
| EXPENSES | | | |
| Management fee | | 225,687 | |
| Transfer agent fees | | 32,279 | |
| Accounting and administrative fees | | 24,795 | |
| Registration fees | | 20,116 | |
| Accounting system and pricing service fees | | 18,654 | |
| Audit and tax fees | | 17,400 | |
| Printing | | 8,694 | |
| Directors’ fees | | 7,938 | |
| Legal fees | | 5,658 | |
| Custodian fees | | 2,596 | |
| Insurance | | 2,224 | |
| Postage and mailing | | 1,985 | |
| 12b-1 fees - Class N | | 1,761 | |
| Servicing fees - Class N | | 508 | |
| Other operating expenses | | 2,924 | |
| Total expenses | | 373,219 | |
| Net investment income | | 2,209,118 | |
| |
| NET REALIZED LOSS ON INVESTMENTS | | (351,686 | ) |
| |
| CHANGE IN NET UNREALIZED APPRECIATION/DEPRECIATION | | | |
| ON INVESTMENTS | | 6,460,263 | |
| Net realized and unrealized gain on investments | | 6,108,577 | |
| Net increase in net assets resulting from operations | $ | 8,317,695 | |
The accompanying notes to financial statements are an integral part of this statement.
– 16 –
Statements of Changes in Net Assets
For the six months ended June 30, 2019 (unaudited)
and the year ended December 31, 2018
| | | | | | |
| | | Six Months Ended | | | | |
| | | 06/30/2019 | | | Year Ended | |
| | | (unaudited) | | | 12/31/2018 | |
| INCREASE (DECREASE) IN | | | | | | |
| NET ASSETS FROM OPERATIONS | | | | | | |
| Net investment income | $ | 2,209,118 | | $ | 4,463,083 | |
| Net realized loss on investments | | (351,686 | ) | | (2,007,934 | ) |
| Change in net unrealized | | | | | | |
| appreciation/depreciation on investments | | 6,460,263 | | | (5,383,118 | ) |
| Net increase (decrease) in net | | | | | | |
| assets resulting from operations | | 8,317,695 | | | (2,927,969 | ) |
| |
| DISTRIBUTIONS TO SHAREHOLDERS | | | | | | |
| From investment operations – Class I | | (1,082,413 | ) | | (4,360,774 | ) |
| From investment operations – Class N | | (14,885 | ) | | (105,877 | ) |
| Total distributions | | (1,097,298 | ) | | (4,466,651 | ) |
| |
| CAPITAL SHARE TRANSACTIONS | | | | | | |
| Proceeds from shares issued – Class I | | | | | | |
| (218,246 and 256,850 shares, respectively) | | 1,928,776 | | | 2,269,129 | |
| Reinvestment of distributions – Class I | | | | | | |
| (109,665 and 454,830 shares, respectively) | | 972,731 | | | 3,917,803 | |
| Cost of shares redeemed – Class I | | | | | | |
| (321,734 and 663,437 shares, respectively) | | (2,844,370 | ) | | (5,819,770 | ) |
| Proceeds from shares issued – Class N | | | | | | |
| (91,025 and 183,503 shares, respectively) | | 808,687 | | | 1,647,518 | |
| Reinvestment of distributions – Class N | | | | | | |
| (1,303 and 10,485 shares, respectively) | | 11,764 | | | 91,935 | |
| Cost of shares redeemed – Class N | | | | | | |
| (212,567 and 273,637 shares, respectively) | | (1,880,723 | ) | | (2,457,083 | ) |
| Change in net assets derived from | | | | | | |
| capital share transactions | | (1,003,135 | ) | | (350,468 | ) |
| Total increase (decrease) in net assets | | 6,217,262 | | | (7,745,088 | ) |
| |
| NET ASSETS | | | | | | |
| Beginning of period | | 97,419,996 | | | 105,165,084 | |
| End of period | $ | 103,637,258 | | $ | 97,419,996 | |
The accompanying notes to financial statements are an integral part of these statements.
– 17 –
Notes to Financial Statements
June 30, 2019 (unaudited)
These financial statements have been prepared pursuant to reporting rules for interim
financial statements. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles (“GAAP”) for
annual financial statements. These financial statements should be read in conjunction with the
financial statements and financial highlights and notes in the Fund’s Annual Report on Form
N-CSR for the year ended December 31, 2018.
These financial statements have not been audited. Management believes that these financial
statements include all adjustments (which, unless otherwise noted, include only normal
recurring adjustments) necessary for a fair presentation of the financial results for each
period shown.
(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.
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. Investments in shares of open-end mutual funds, including money
market funds, are valued at their daily net asset value, which is calculated as of the
close of regular trading on the New York Stock Exchange. 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. Short-term investments
purchased at par are valued at cost, which approximates market value. Short-term
investments purchased at a premium or discount are stated at amortized cost, which
approximates market value. The Fund did not maintain any positions in derivative
instruments or engage in hedging activities during the year. Investment transactions
for financial statement purposes are recorded on trade date.
In accordance with Accounting Standards Codification (“ASC”) 820-10, “Fair Value
Measurements and Disclosures” (“ASC 820-10”), fair value is defined as the price
that the Fund would receive upon selling an investment in a timely transaction to an
independent buyer in the principal or most advantageous market of the investment.
ASC 820-10 established a three-tier hierarchy to maximize the use of observable
market data and minimize the use of unobservable inputs and to establish
classification of fair value measurements for disclosure purposes. Inputs refer
broadly to the assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk, for example, the risk inherent in a
particular valuation technique used to measure fair value such as a pricing model
– 18 –
Notes to Financial Statements(continued)
June 30, 2019 (unaudited)
and/or the risk inherent in the inputs to the valuation technique. Inputs may be
observable or unobservable. Observable inputs are inputs that reflect the
assumptions market participants would use in pricing the asset or liability based
on market data obtained from sources independent of the reporting entity.
Unobservable inputs are inputs that reflect the reporting entity’s own assumptions
about the assumptions market participants would use in pricing the asset or liability
based on the best information available in the circumstances. The three-tier
hierarchy of inputs is summarized in the three broad levels listed below.
Level 1 – quoted prices in active markets for identical investments
Level 2 – other significant observable inputs (including quoted prices for
similar investments, interest rates, benchmark yields, bids, offers,
transactions, spreads and other relationships observed in the
markets among market securities, underlying equity of the issuer,
proprietary pricing models, credit risk, etc.)
Level 3 – significant unobservable inputs (including the Fund’s own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of June 30, 2019 in valuing the
Fund’s investments carried at value:
| | |
| | | Investments |
| Valuation Inputs | | in Securities |
| Level 1 – | | |
| Common Stock(1) | $ | 302,910 |
| Money Market Fund | | 1,174,565 |
| Level 2 – | | |
| Convertible Preferred Stock(1) | | 542,759 |
| Non-Convertible Bonds(1) | | 94,202,516 |
| U.S. Government Securities | | 5,990,223 |
| Level 3 | | |
| None | | — |
| Total | $ | 102,212,973 |
| (1) See Schedule of Investments for further detail by industry. | | |
The Fund did not hold any Level 3 investments during the period.
(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.
– 19 –
Notes to Financial Statements(continued)
June 30, 2019 (unaudited)
(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.
Class N shares are subject to a 0.25% 12b-1 fee and a 0.10% servicing fee, as
described in its prospectus. The 12b-1 fee from May 1, 2019 through period-end
and the servicing fee from May 1, 2017 through period-end were voluntarily
reduced to 0.10% and 0.06%, respectively. 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.
(e) Dividends and distributions paid to shareholders are recorded on the ex-dividend
date. Distributions from net investment income are generally declared and paid at
least 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 (“U.S. GAAP”) for
financial reporting purposes. Financial reporting records are adjusted for
permanent book-to-tax differences to reflect tax character.
The tax character of distributions paid during the six months ended June 30, 2019
and the year ended December 31, 2018 was as follows:
| | | | |
| | | 06/30/2019 | | 12/31/2018 |
| Distributions paid from: | | | | |
| Ordinary income | $ | 1,097,298 | $ | 4,466,651 |
As of June 30, 2019, investment cost for federal tax purposes was $100,895,578
and the tax basis components of net assets were as follows:
| | | |
| Unrealized appreciation | $ | 2,170,768 | |
| Unrealized depreciation | | (853,373 | ) |
| Net unrealized appreciation | $ | 1,317,395 | |
The difference between financial statement and tax-basis investment cost is
attributable primarily to the deferral of wash sales losses.
For the year ended December 31, 2018, the Fund had capital loss carryforwards of
approximately $10,246,000, which have no expiration date. 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 carryforwards.
– 20 –
Notes to Financial Statements(continued)
June 30, 2019 (unaudited)
The Fund had no material uncertain tax positions and has not recorded a liability for
unrecognized tax benefits as of June 30, 2019. Also, the Fund recognized no
interest and penalties related to uncertain tax benefits during the period ended
June 30, 2019. At June 30, 2019, the fiscal years 2015 through 2018 remain open
to examination in the Fund’s major tax jurisdictions.
(f) The Fund is considered an investment company under U.S. GAAP and follows the
accounting and reporting guidance applicable to investment companies in the
Financial Accounting Standards Board (“FASB”) ASC 946, “Financial Services –
Investment Companies.” U.S. GAAP guidance requires management to make
estimates and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from estimates.
(g) In the normal course of business the Fund enters into contracts that contain general
indemnification clauses. The Fund’s maximum exposure under these arrangements
is unknown, as this would involve future claims against the Fund that have not yet
occurred. Based on experience, the Fund expects the risk of loss to be remote.
(h) In connection with the preparation of the Fund’s financial statements, management
evaluated subsequent events after the date of the Statement of Assets and
Liabilities of June 30, 2019. There have been no material subsequent events since
June 30, 2019 that would require adjustment to or additional disclosure in these
financial statements.
(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 0.50% of the average net asset
value up to and including $50 million, 0.40% of the average net asset value in
excess of $50 million and up to and including $100 million and 0.30% of the
average net asset value in excess of $100 million.
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 $2,856 for the period ended June 30, 2019
for legal services rendered by this law firm.
– 21 –
Notes to Financial Statements(continued)
June 30, 2019 (unaudited)
(3) Investment Transactions —
For the period ended June 30, 2019, the cost of purchases and the proceeds from sales
of investment securities, other than short-term obligations, aggregated $15,243,055 and
$12,902,500, respectively.
(4) Concentration of Risk —
The Fund invests primarily in high yield debt securities. The market values of these high
yield debt securities tend to be more sensitive to economic conditions and individual
corporate developments than those of higher rated securities. In addition, the market for
these securities is generally less liquid than for higher rated securities.
(5) New Accounting Pronouncement —
On August 28, 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13,
“Disclosure Framework – Changes to the Disclosure Requirements for Fair Value
Measurement,” which amends the fair value measurement disclosure requirements of
ASC 820. The amendments of ASU 2018-13 include new, eliminated, and modified
disclosure requirements of ASC 820. In addition, the amendments clarify that materiality
is an appropriate consideration of entities when evaluating disclosure requirements. The
ASU is effective for fiscal years beginning after December 15, 2019, including interim
periods therein. Early adoption is permitted for any eliminated or modified disclosures
upon issuance of this ASU. The Fund has early adopted ASU 2018-13 for these
financial statements.
– 22 –
Historical Record Class I(1)
(unaudited)
| | | | | | | |
| | | Net | | Net Investment | | | Growth of an |
| | | Asset Value | | Income Distributions | | | Initial $10,000 |
| | | Per Share | | Per Share | | | Investment(3) |
| November 21, 1977(2) | $ | 25.50 | $ | — | | $ | 10,000 |
| 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 |
| December 31, 2007 | | 10.18 | | 0.7502 | | | 76,820 |
| December 31, 2008 | | 7.18 | | 0.7140 | | | 58,955 |
| December 31, 2009 | | 9.09 | | 0.6581 | | | 80,426 |
| December 31, 2010 | | 9.52 | | 0.7230 | | | 90,876 |
| December 31, 2011 | | 9.28 | | 0.7070 | | | 95,354 |
| December 31, 2012 | | 9.86 | | 0.6375 | | | 108,095 |
| December 31, 2013 | | 9.86 | | 0.5757 | | | 114,488 |
| December 31, 2014 | | 9.52 | | 0.5065 | | | 116,347 |
| December 31, 2015 | | 8.65 | | 0.4592 | | | 111,068 |
| December 31, 2016 | | 9.08 | | 0.4204 | | | 122,109 |
| December 31, 2017 | | 9.00 | | 0.4675 | | | 127,333 |
| December 31, 2018 | | 8.36 | | 0.3876 | | | 123,690 |
| June 30, 2019 | | 8.99 | | 0.0954 | (a) | | 134,442 |
(1) Per share amounts presented for the periods prior to December 31, 2007 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.
(2) Initial date under Nicholas Company, Inc. management.
(3) Assuming reinvestment of distributions.
(a) Paid on April 24, 2019 to shareholders of record on April 23, 2019.
The Fund distributed no capital gains for the time periods listed.
– 23 –
Historical Record Class N(1)
(unaudited)
| | | | | | | |
| | | Net | | Net Investment | | | Growth of an |
| | | Asset Value | | Income Distributions | | | Initial $10,000 |
| | | Per Share | | Per Share | | | Investment(3) |
| 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 |
| December 31, 2007 | | 10.06 | | 0.7119 | | | 11,018 |
| December 31, 2008 | | 7.24 | | 0.5238 | | | 8,448 |
| December 31, 2009 | | 9.18 | | 0.6323 | | | 11,501 |
| December 31, 2010 | | 9.64 | | 0.6683 | | | 12,946 |
| December 31, 2011 | | 9.39 | | 0.6782 | | | 13,522 |
| December 31, 2012 | | 9.98 | | 0.6062 | | | 15,275 |
| December 31, 2013 | | 9.99 | | 0.5367 | | | 16,121 |
| December 31, 2014 | | 9.66 | | 0.4697 | | | 16,337 |
| December 31, 2015 | | 8.78 | | 0.4197 | | | 15,525 |
| December 31, 2016 | | 9.22 | | 0.3926 | | | 17,012 |
| December 31, 2017 | | 9.16 | | 0.4313 | | | 17,698 |
| December 31, 2018 | | 8.52 | | 0.3587 | | | 17,145 |
| June 30, 2019 | | 9.15 | | 0.0867 | (a) | | 18,590 |
(1) Per share amounts presented for the periods prior to December 31, 2007 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.
(2) Date of Initial Public Offering.
(3) Assuming reinvestment of distributions.
(a) Paid on April 24, 2019 to shareholders of record on April 23, 2019.
The Fund distributed no capital gains for the time periods listed.
– 24 –
Approval of Investment Advisory Contract
(unaudited)
In January 2019, 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 January 2020. In connection with the 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, 2018, the management fee was 0.45% and the Fund’s Class I and Class N total expense ratios (including the management fee) were 0.72% and 1.03%, 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 Class I expense ratio; (ii) the Fund’s performance on a short-term and long-term basis; (iii) the Fund’s management fee; and (iv) 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 7th, 6th and 8th out of 8 funds for the one-, three- and five-year periods and 5th out of 7 funds for the 10-year period all ending December 31, 2018. The Fund’s Class I had the lowest expense ratio among its peer group and ranked 6th in terms of 12-month yield out of the 8 funds.
The Board considered the range of services to be provided by the Adviser to the Fund under the Advisory Agreement. The Board discussed the nature, extent, and quality of the services to be provided by the Adviser and concluded that the services provided were consistent with the terms of the advisory agreement and the needs of the Fund, and that the services provided were appropriate in nature and the quality level is high.
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. The Board reviewed the actual relative short-term and long-term performance of the Fund. The Board expressed satisfaction with the Fund’s performance. 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.
The Board also discussed the fees and services provided by the Adviser with the fees and services under its other advisory contracts and concluded such fees and services are reasonable when compared to the fees and services provided by the Adviser under its other advisory contracts.
The Board considered the cost of services provided by the Adviser. The Board also considered the profits to be realized by the Adviser from the relationship with the Fund. The Board expressed the opinion that given the Board’s focus on performance and maintaining a low fee structure, 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 discussed the Fund’s relatively low fees, historical returns and risk profile and management’s strategies to improve the absolute and relative performance of the Fund. The Board agreed that the Adviser had the resources, financial management and administrative capacity to continue to provide quality services. The Board expressed satisfaction with management’s control of expenses and the rate of the management fee for the Fund and the overall level of services provided to the Fund by the Adviser.
– 25 –
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 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 or as an exhibit to its reports on Form N-PORT (for first and third quarters ending March 31, 2019 or after). The Fund’s Form N-Q or Form N-PORT reports 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 800-SEC-0330.
– 26 –
Privacy Policy
(unaudited)
Nicholas High Income Fund, Inc. respects each shareholder’s 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.
– 27 –
Nicholas Funds Services Offered
(unaudited)
| | |
| • | IRAs | |
| | • Traditional | • SIMPLE |
| | • Roth | • SEP |
| • | Coverdell Education Accounts |
| • | Automatic Investment Plan |
| • | Direct Deposit of Dividend and Capital Gain Distributions |
| • | Systematic Withdrawal Plan |
| • | Monthly Automatic Exchange between Funds |
| • | Telephone Purchase and Redemption |
| • | Telephone Exchange | |
| • | 24-hour Automated Account Information (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 (800-544-6547).
– 28 –
Directors and Officers
DAVID O. NICHOLAS, President and Director
JOHN A. HAUSER, Director
JAY H. ROBERTSON, Director
DAVID L. JOHNSON, Executive Vice President
JENNIFER R. KLOEHN, Senior Vice President,
Treasurer and Chief Compliance Officer
LAWRENCE J. PAVELEC, Senior Vice President and Secretary
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. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Applicable only to closed-end funds.
Item 13. 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 Rule 30a-2(a) under the Investment Company Act of 1940, 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.
(a)(4) Change in the registrant’s independent public accountant.
Not applicable to this filing.
(b) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rule 30a-2(b) under the Investment Company Act of 1940, 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:August 29, 2019
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:August 29, 2019
By:/s/ Jennifer R. Kloehn
Name: Jennifer R. Kloehn
Title: Principal Financial Officer
Date:August 29, 2019
