August 22, 1997
Report to Fellow Shareholders:
Nicholas Income Fund had a total return of +5.78% for the six months
ended June 30, 1997. Results of the latest one, five, ten and fifteen year
periods ended June 30, 1997 are shown below:
<TABLE>
Average Annual Total Return*
----------------------------
<S> <C> <C> <C> <C>
1 Year 5 Years 10 Years 15 Years
------ ------- -------- --------
Nicholas Income Fund (Distributions Reinvested)....................... +14.73% +10.29% + 9.23% +11.75%
Consumer Price Index (Inflation)...................................... + 2.30% + 2.72% + 3.50% + 3.41%
Ending value of $10,000 invested in Nicholas
Income Fund (Distributions Reinvested).............................. $11,473 $16,317 $24,176 $52,899
</TABLE>
As one can see from the table above, Nicholas Income Fund has provided a
substantial return over inflation for many years. In the fifteen year period
ended June 30, 1997, the margin of return over inflation has been 8.34% on an
average annual basis (11.75% minus 3.41%). We also take pride in the fact
that Nicholas Income Fund has earned Morningstar's five star (*****) rating
for its overall risk-adjusted performance as of June 30, 1997 based on a
comparison of 1,248 fixed income funds eligible for the overall rating. The
Fund's three, five and ten year ratings were also five stars, as of June 30
,1997 based on a comparison of 1, 248, 677 and 283 fixed income funds,
respectively. The top ten percent of funds in their respective categories
receive five stars.(*)
In addition to our constant emphasis on investment performance, I want
shareholders to know that our administrative staff is continuing to do its
job effectively and in an extremely cost-conscious manner. This effort is an
important part of achieving good investment results. The total annual
expenses (which include management fees) of running Nicholas Income Fund
amounts to about .50% of assets compared to approximately 1.14% for the
average taxable bond fund. I'm very pleased and proud of the accomplishments
of this segment of our operation.
At June 30, 1997, total net assets of Nicholas Income Fund were $218
million. Cash and equivalents were 10.44%. The 30-day SEC yield annualized
on Nicholas Income Fund was 7.80%.
Thank you for your interest in the shares of Nicholas Income Fund.
Sincerely,
/S/ Albert O. Nicholas
----------------------
Albert O. Nicholas
President
(*) Total returns are historical and include change in share price and
reinvestment of dividend and capital gain distributions. Past
performance is no guarantee of future results. Principal value,
share price, yield and return will fluctuate so an investment, when
redeemed, may be worth more or less than original cost. Morningstar
proprietary ratings reflect historical risk-adjusted performance.
The ratings are subject to change monthly. Morningstar's overall
rating is based on the Fund's three, five and ten year average annual
returns in excess of 90-day Treasury bill returns with appropriate
fee adjustments and a risk factor that reflects the Fund's
performance below 90-day Treasury bill returns.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
- -----------------------------------------------------------------------------
<TABLE>
Six Months Year ended December 31,
Ended 6/30/97 ---------------------------------------
(unaudited) 1996 1995 1994 1993 1992
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $3.53 $3.42 $3.21 $3.52 $3.38 $3.34
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .14 .30 .30 .30 .30 .31
Net gains or (losses) on securities
(realized and unrealized) .06 .11 .21 (.31) .13 .03
------ ----- ----- ----- ----- -----
Total from investment operations .20 .41 .51 (.01) .43 .34
------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS***:
Dividends (from net
investment income) (.07) (.30) (.30) (.30) (.29) (.30)
------ ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $3.66 $3.53 $3.42 $3.21 $3.52 $3.38
------ ------- ------- ------- ------- --------
------ ------- ------- ------- ------- --------
TOTAL RETURN 5.78%** 12.37% 16.16% (0.17)% 12.95% 10.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $218.4 $185.7 $162.1 $140.9 $158.3 $119.1
Ratio of expenses to average net assets .50%* .55% .58% .59% .62% .69%
Ratio of net investment income
to average net assets 8.11%* 8.55% 8.72% 8.75% 8.42% 9.23%
Portfolio turnover rate 38.4%* 33.2% 29.2% 29.2% 39.1% 56.1%
</TABLE>
*Annualized
**Not annualized
***The Fund distributed no capital gains for the time periods listed.
See notes to financial statements.
TOP TEN ISSUERS
June 30, 1997 (Unaudited)
- ----------------------------------------------------------------------------
Percentage of
Name Net Assets
------- ---------------
Cablevision Systems Corporation.............. 3.91%
Canandaigua Wine Company, Inc................ 3.47
Comcast Corporation.......................... 3.33
Brown Group, Inc............................. 3.29
Century Communications Corporation........... 3.25
Playtex Family Products Corporation.......... 3.24
Beverly Enterprises, Inc..................... 3.22
Adelphia Communications Corporation.......... 3.22
Young Broadcasting Inc....................... 3.19
American Radio Systems Corporation........... 3.11
------
Total of top ten issuers
as a percent of total net assets........... 33.23%
------
------
SCHEDULE OF INVESTMENTS
June 30, 1997 (unaudited)
- -----------------------------------------------------------------------------
<TABLE>
Quoted
Shares or Market
Principal Value
Amount (Note A)
- ------------- -----------------
<S> <C>
NON-CONVERTIBLE BONDS - 77.46%
BROADCASTING AND COMMUNICATIONS - 24.22%
$5,000,000 Adelphia Communications Corporation
9.875%, 3/1/05 $ 4,912,500
2,000,000 Adelphia Communications Corporation
11.875%, 9/15/04 2,110,000
6,700,000 American Radio Systems Corporation
9.00%, 2/1/06 6,783,750
8,000,000 Cablevision Systems Corporation
9.875%, 5/15/06 8,540,000
7,250,000 Century Communications Corporation
8.875%, 1/15/07 7,086,875
2,000,000 Comcast Cellular Communications, Inc.
9.50%, 5/1/07 2,005,000
5,000,000 Comcast Corporation
9.375%, 5/15/05 5,256,250
4,000,000 Heritage Media Corporation
8.750%, 2/15/06 4,120,000
5,000,000 Hollinger International, Inc.
9.25%, 2/1/06 5,087,500
2,000,000 Young Broadcasting Inc.
10.125%, 2/15/05 2,075,000
5,000,000 Young Broadcasting Inc.
9.00%, 1/15/06 4,900,000
-----------------
52,876,875
-----------------
CONSUMER PRODUCTS AND SERVICES - 16.13%
7,000,000 Brown Group, Inc.
9.50%, 10/15/06 7,175,000
5,500,000 Coca-Cola Bottling Group S.W., Inc.
9.00%, 11/15/03 5,692,500
1,000,000 Outboard Marine Corporation
8.25%, 3/15/98 1,004,213
3,600,000 Outboard Marine Corporation
8.625%, 3/15/01 3,594,751
2,000,000 Owens-Illinois Inc.
10.00%, 8/1/02 2,100,000
7,000,000 Playtex Family Products Corporation
9.00%, 12/15/03 7,070,000
3,335,000 Samsonite Corporation
11.125%, 7/15/05 3,768,550
5,000,000 Viacom, Inc.
8.00%, 7/7/06 4,825,000
-----------------
35,230,014
-----------------
DIVERSIFIED PRODUCTS AND SERVICES - 12.63%
3,750,000 Borg-Warner Security Corporation
9.125%, 5/1/03 3,806,250
2,000,000 Fort Howard Corporation
10.00%, 3/15/03 2,140,000
2,400,000 IDEX Corporation
9.75%, 9/15/02 2,502,000
3,300,000 Mark IV Industries, Inc.
8.75%, 4/1/03 3,349,500
5,000,000 McDermott (J. Ray), S.A.
9.375%, 7/15/06 5,137,500
4,150,000 Sequa Corporation
8.75%, 12/15/01 4,222,625
1,000,000 Sequa Corporation
9.625%, 10/15/99 1,022,500
5,000,000 Unisys Corporation
11.75%, 10/15/04 5,400,000
-----------------
27,580,375
-----------------
ENERGY - 5.08%
4,925,000 Energy Ventures, Inc.
10.25%, 3/15/04 5,294,375
1,000,000 Maxus Energy Corporation
10.63%, 8/19/98 1,033,789
2,000,000 Maxus Energy Corporation
10.75%, 4/02/02 2,127,314
1,000,000 Maxus Energy Corporation
8.46%, 9/29/03 1,038,022
1,500,000 Maxus Energy Corporation
9.375%, 11/1/03 1,608,750
-----------------
11,102,250
-----------------
FINANCE AND INSURANCE - 3.76%
1,000,000 American Annuity Group, Inc.
11.125%, 2/1/03 1,055,000
5,565,000 Amresco, Inc.
10.00%, 3/15/04 5,648,475
1,000,000 Litchfield Financial Corporaton
10.00%, 11/1/04 1,033,750
475,000 Litchfield Financial Corporation
8.875%, 11/01/03 465,500
-----------------
8,202,725
-----------------
FOOD AND BEVERAGES - 6.81%
3,000,000 ARA Group, Inc.
8.50%, 06/1/03 3,117,591
7,500,000 Canandaigua Wine Company, Inc.
8.75%, 12/15/03 7,575,000
3,000,000 Chiquita Brands International, Inc.
9.125%, 3/1/04 3,112,500
1,000,000 Chiquita Brands International, Inc.
9.625%, 1/15/04 1,061,250
-----------------
14,866,341
-----------------
FOOD RETAILER - 2.20%
4,470,000 Stater Brothers Holdings, Inc.
11.00%, 3/1/01 4,805,250
-----------------
HEALTH CARE - 6.63%
3,860,000 Beverly Enterprises, Inc.
8.75%, 12/31/03 3,937,200
3,000,000 Beverly Enterprises, Inc.
9.00%, 2/15/06 3,090,000
3,000,000 Magellan Health Services Inc.
11.25%, 4/15/04 3,345,000
4,000,000 Quorum Health Group, Inc.
8.75%, 11/1/05 4,110,000
-----------------
14,482,200
-----------------
TOTAL NON-CONVERTIBLE BONDS
(cost $164,818,698) 169,146,030
-----------------
CONVERTIBLE BOND - 2.94%
7,531,000 Emeritus Corporation
6.25%, 1/1/06
(cost $6,155,675) 6,410,764
-----------------
STOCKS - 9.16%
5,000 Homestead Savings Convertible
Preferred, Series A, $2.95 * 5,000
20,000 Excel Realty Trust, Inc. Convertible
Preferred, Series A, $2.125 545,000
100,000 Healthcare Realty Trust Incorporated 2,787,500
130,000 Hospitality Properties Trust 3,981,250
100,000 Meditrust 3,987,500
130,000 National Health Investors Inc. 5,102,500
110,000 Omega Healthcare Investors, Inc. 3,595,625
-----------------
TOTAL STOCKS
(cost $15,611,918) 20,004,375
-----------------
SHORT-TERM INVESTMENTS - 8.45%
Commercial Paper - 7.43%
1,000,000 Ford Motor Credit Corporation
6.10%, due July 1, 1997 1,000,000
1,800,000 Harnischfeger Industries, Inc.
5.70%, due July 1, 1997 1,800,000
1,600,000 Lockheed Martin Corporation
5.82%, due July 3, 1997 1,599,483
3,250,000 Houston Industries, Inc.
5.80%, due July 7, 1997 3,246,858
2,000,000 Houston Industries, Inc.
5.80%, due July 8, 1997 1,997,744
1,300,000 Tyson Foods, Inc.
5.83%, due July 9, 1997 1,298,316
2,000,000 Fiserv, Inc.
5.70%, due July 10, 1997 1,997,150
2,045,000 Fiserv, Inc.
5.75%, due July 11, 1997 2,041,734
1,250,000 Manpower, Inc.
5.70%, due July 14, 1997 1,247,427
-----------------
16,228,712
-----------------
Variable Rate Demand Notes - 1.02%
1,681,537 Johnson Controls, Inc.
5.28%, due July 1, 1997 1,681,537
534,598 Wisconsin Electric Power Company
5.30%, due July 1, 1997 534,598
-----------------
2,216,135
-----------------
TOTAL SHORT-TERM INVESTMENTS
(cost $18,419,145) 18,444,847
-----------------
TOTAL INVESTMENTS 214,006,016
-----------------
CASH AND RECEIVABLES,
NET OF LIABILITIES - 1.99% 4,355,598
-----------------
TOTAL NET ASSETS
(Basis of percentages
disclosed above) $218,361,614
=================
* This security has been classified as non-income producing.
</TABLE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1997 (unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value (cost $205,005,436) (Note A) $214,006,016
Receivables --
Interest and dividends 4,480,761
------------
Total assets 218,486,777
------------
LIABILITIES:
Payables --
Management fee (Note C) 63,172
Other payables and accrued expenses 61,991
------------
Total liabilities 125,163
------------
Total net assets $218,361,614
------------
------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding $213,708,941
Net unrealized appreciation on investments (Note B) 8,974,878
Accumulated net realized losses on investments ( 9,091,726)
Accumulated undistributed net investment income 4,769,521
------------
$218,361,614
------------
------------
NET ASSET VALUE PER SHARE ($.01 par value, 100,000,000 shares authorized),
offering price and redemption price ($218,361,614 ./. 59,661,168 shares outstanding) $3.66
------------
------------
</TABLE>
See notes to financial statements.
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 (unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
INCOME: (Note A)
Interest $ 7,845,867
Dividends 661,625
Other 125,012
-----------
Total income 8,632,504
-----------
EXPENSES:
Management fee (Note C) 370,523
Transfer agent fees 58,219
Registration fees 18,082
Legal fees 17,627
Postage and mailing fees 8,384
Audit and tax consulting fees 7,000
Custodian fees 5,705
Printing 5,190
Directors' fees 4,500
Pricing service fees 4,366
Telephone 2,500
Other operating expenses 727
-----------
Total expenses 502,823
-----------
Net investment income 8,129,681
-----------
NET REALIZED GAIN ON INVESTMENTS 124,115
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS 3,273,322
-----------
Net gain on investments 3,397,437
-----------
Net increase in net assets resulting from operations $11,527,118
-----------
-----------
See notes to financial statements.
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
- -----------------------------------------------------------------------------
</TABLE>
<TABLE>
1997 1996
---------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,129,681 $ 14,578,760
Net realized gain on investments 124,115 458,971
Net increase in unrealized appreciation on investments 3,273,322 5,006,476
----------- ------------
Net increase in net assets resulting
from operations 11,527,118 20,044,207
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.0710 and $0.2960 per share, respectively) (3,969,351) (14,615,595)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (10,683,021 and 10,614,891 shares,
respectively) 38,332,264 36,879,473
Net asset value of shares issued in distributions from net
investment income (850,906 and 3,051,652 shares, respectively) 2,986,679 10,528,296
Cost of shares redeemed (4,523,132 and 8,444,524 shares,
respectively) (16,183,015) (29,248,401)
------------ ------------
Increase in net assets derived from
capital share transactions 25,135,928 18,159,368
----------- ------------
Total increase in net assets 32,693,695 23,587,980
----------- ------------
NET ASSETS:
Beginning of period (including undistributed net
investment income of $609,191 and $646,026) 185,667,919 162,079,939
----------- ------------
End of period (including undistributed net
investment income of $4,769,521 and $609,191) $218,361,614 $185,667,919
----------- ------------
----------- ------------
</TABLE>
See notes to financial statements.
HISTORICAL RECORD (Unaudited)
- -----------------------------------------------------------------------------
Net Investment
Net Income Growth of An
Asset Value Distributions Initial $10,000
Per Share Per Share Investment**
----------- -------------- ---------------
December 31, 1986*........... $4.01 0.3800 10,000
December 31, 1987............ 3.64 0.4660 10,253
December 31, 1988............ 3.68 0.3710 11,437
December 31, 1989............ 3.44 0.3830 11,887
December 31, 1990............ 3.01 0.3970 11,765
December 31, 1991............ 3.34 0.3460 14,477
December 31, 1992............ 3.38 0.2955 15,972
December 31, 1993............ 3.52 0.2890 18,041
December 31, 1994............ 3.21 0.3010 18,010
December 31, 1995............ 3.42 0.2950 20,920
December 31, 1996............ 3.53 0.2960 23,507
June 30, 1997................ 3.66 0.0710 24,866
* Date of initial investment.
** Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 (unaudited)
- -----------------------------------------------------------------------------
Note A -- Summary of significant accounting policies:
The Fund is an open-end diversified investment company. The primary
objective of the Fund is high current income consistent with the preservation
and conservation of capital values.
Securities valuation -- Market values of most debt securities are based
on valuations provided by a pricing service, which determines valuations for
normal, institutional-size trading units of securities using market
information, transactions for comparable securities and various other
relationships between securities which are generally recognized by
institutional traders. Other securities, excluding short-term investments,
are generally valued at the last sale price reported by the principal
security exchange on which the issue is traded or the NASDAQ national market
system. If no sale is reported, the latest bid price is used. U.S. Treasury
Bills and commercial paper, if any, are stated at market value with the
resultant difference between market value and original purchase price being
recorded as interest income. Variable demand notes are valued at cost which
approximates market vale.
Securities transactions and related investment income -- Securities
transactions are recorded no later than the first business day after the
trade date (date the order to buy or sell is executed). Gains or losses on
sales of investments are calculated on an identified cost basis. Dividend
income is recorded on the ex-dividend date and interest income is recorded on
the accrual basis. Distributions to shareholders are recorded on the
ex-dividend date.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates.
Note B -- Income taxes:
No provision has been made for Federal income taxes or excise taxes
because it is the policy of the Fund to distribute all taxable net income and
qualify as a "regulated investment company" under the provisions in the
Internal Revenue Code applicable to regulated investment companies. The Fund
is not subject to State of Wisconsin income taxes. As of June 30, 1997, the
Fund has approximately $9,092,000 of net capital losses which may be used to
offset capital gains in future years. Capital loss carryovers of
approximately $219,000 will expire in 1997, $4,805,000 in 1998, $482,000 in
1999, $2,081,000 in 2000, and $1,505,000 in 2003.
At June 30, 1997, the net unrealized appreciation based on cost was as
follows (the Fund's book and Federal income tax cost of investment assets
were substantially identical):
Aggregate gross unrealized appreciation for all
investments in which there was an excess of
value over tax cost......................... $9,856,871
----------
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value......................... ( 881,993)
-----------
-----------
Net unrealized appreciation............ $8,974,878
-----------
-----------
Note C -- Expenses:
The Fund has an investment advisory agreement with Nicholas Company,
Inc. (with whom certain officers and directors of the Fund are affiliated) to
serve as investment adviser and manager. The management fee of Nicholas
Company, Inc. is payable at an annual rate of 1/2 of 1% of the average daily
net assets of the Fund up to and including $50,000,000. On average daily net
assets over $50,000,000 up to and including $100,000,000, the management fee
is reduced to an annual rate of 4/10 of 1% and on average daily net assets
over $100,000,000, the fee is further reduced to an annual rate of 3/10 of
1%. Nicholas Company, Inc. has agreed to reduce such management fee by any
operating expenses (other than management fee) incurred by the Fund in excess
of 1/2 of 1% of average daily net assets.
At June 30, 1997, liabilities of the Fund included $63,172 payable to
the investment adviser.
Note D -- Investment portfolio transactions:
For the six months ended June 30, 1997, the cost of purchases and the
proceeds from sales of investments, other than short-term obligations,
aggregated $58,095,903 and $34,873,308 respectively.
Officers and Directors
ALBERT O. NICHOLAS
President and Director
FREDERICK F. HANSEN
Director
JAY H. ROBERTSON
Director
MELVIN L. SCHULTZ
Director
DAVID L. JOHNSON
Executive Vice President
THOMAS J. SAEGER
Executive Vice President and Secretary
JEFFREY T. MAY
Senior Vice President and Treasurer
DAVID O. NICHOLAS
Senior Vice President
CANDACE L. LESAK
Vice President
KATHLEEN A. EVANS
Assistant Vice President
Investment Adviser
NICHOLAS COMPANY, INC.
414-272-6133 or 800-227-5987
Custodian and Transfer Agent
FIRSTAR TRUST COMPANY
414-276-0535 or 800-544-6547
Counsel
MICHAEL, BEST & FRIEDRICH
Milwaukee
Auditors
DELOITTE & TOUCHE LLP
Milwaukee
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.
NICHOLAS INCOME
FUND, INC.
700 North
Water Street
Milwaukee,
Wisconsin 53202
June 30, 1997
