February 28, 1997
Report to Fellow Shareholders:
In a year when many fixed-income investors were disappointed, Nicholas
Income Fund came through with a total return of 12.37%, with distributions
reinvested. Lower quality bonds, which we emphasize, performed better
than high quality issues such as U.S. Government securities during 1996.
Results of the latest one, five, ten and fifteen year periods ended December
31, 1996 are shown below:
<TABLE>
Average Annual Total Return *
-------------------------------
1 Year 5 Years 10 Years 15 Years
------ ------- -------- --------
<S> <C> <C> <C> <C>
Nicholas Income Fund
(Distributions Reinvested) +12.37% +10.18% + 8.92% +11.95%
Consumer Price Index
(Inflation) + 3.31% + 2.84% + 3.68% + 3.56%
Ending value of $10,000 invested
in Nicholas Income Fund
(Distributions Reinvested) $11,237 $16,237 $23,507 $54,359
</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 December 31, 1996, the margin of return over inflation has been 8.39%
on an average annual basis (11.95% minus 3.56%). We also take pride in the
fact that Nicholas Income Fund has earned Morningstar's five star (*****)
rating for it's overall risk-adjusted performance as of December 31, 1996.
The top ten percent of the 1104 fixed income funds eligible for the overall
rating receive five stars.
At December 31, 1996, total net assets of Nicholas Income Fund were $186
million. Cash and equivalents were 9.0%. The 30-day SEC yield annualized on
Nicholas Income Fund was 8.32%.
Thank you for your interest in the shares of Nicholas Income Fund.
Sincerely,
/s/ Albert O. Nicholas
-----------------------
Albert O. Nicholas
President
*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. The one year rating is calculated using the same
methodology but is not a component of the overall rating. The
Fund's one, three, five and ten year ratings were all five
stars, as of December 31, 1996, based on a comparison of 1670,
1104, 597 and 242 fixed income funds resectively. 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.
Schedule of Investments
December 31, 1996
- ---------------------------------------------------------------------------
<TABLE>
Quoted
Shares or Market
Principal Value
Amount (Note A)
- --------- --------
NON-CONVERTIBLE BONDS - 78.5%
<S> <C>
Broadcasting and Communications - 18.2%
$4,000,000 Adelphia Communications Corporation
9.875%, 3/1/05...................................... $ 3,685,000
2,000,000 Adelphia Communications Corporation
11.875%, 9/15/04.................................... 2,012,500
5,000,000 American Radio Systems Corporation
9.00%, 2/1/06....................................... 4,925,000
6,000,000 Cablevision Systems Corporation
9.875%, 5/15/06..................................... 6,157,500
6,000,000 Century Communications Corporation
9.50%, 8/15/00...................................... 6,165,000
5,000,000 Hollinger International, Inc.
9.25%, 2/1/06....................................... 4,950,000
2,000,000 Young Broadcasting Inc.
10.125%, 2/15/05.................................... 1,970,000
4,000,000 Young Broadcasting Inc.
9.00%, 1/15/06...................................... 3,890,000
------------
33,755,000
------------
Consumer Products and Services - 16.4%
5,500,000 Coca-Cola Bottling Group Southwest, Inc.
9.00%, 11/15/03..................................... 5,582,500
1,000,000 Outboard Marine Corp.
8.25%, 3/15/98...................................... 1,013,898
3,300,000 Outboard Marine Corp.
8.625%, 3/15/01..................................... 3,377,662
2,000,000 Owens-Illinois, Inc.
10.00%, 8/1/02...................................... 2,090,000
3,000,000 Owens-Illinois, Inc.
10.25%, 4/1/99...................................... 3,022,500
6,000,000 Playtex Family Products Corp.
9.00%, 12/15/03..................................... 5,985,000
4,000,000 RC/Arby's Corp.
9.75%, 8/1/00....................................... 3,890,000
5,000,000 Samsonite Corporation
11.125% 7/15/05..................................... 5,500,000
------------
30,461,560
------------
Diversified Products and Services - 11.5%
3,750,000 Borg-Warner Security Corporation
9.125%, 5/1/03...................................... 3,745,313
2,000,000 Fort Howard Corp.
10.00%, 3/15/03..................................... 2,095,000
4,250,000 Fort Howard Corp.
9.25%, 3/15/01...................................... 4,409,375
2,400,000 IDEX Corp.
9.75%, 9/15/02...................................... 2,520,000
3,300,000 Mark IV Industries, Inc.
8.75%, 4/1/03....................................... 3,403,125
4,150,000 Sequa Corp.
8.75%, 12/15/01..................................... 4,191,500
1,000,000 Sequa Corp.
9.625%, 10/15/99.................................... 1,032,500
------------
21,396,813
------------
Electric-Utilities - 2.1%
1,000,000 Toledo Edison Co.
7.78%, 4/1/03....................................... 979,884
500,000 Toledo Edison Co.
8.00%, 11/1/03...................................... 497,858
1,000,000 Toledo Edison Co.
8.18%, 7/30/02...................................... 1,003,121
1,500,000 Toledo Edison Co.
8.70%, 9/1/02....................................... 1,467,194
------------
3,948,057
------------
Energy - 5.9%
4,925,000 Energy Ventures, Inc.
10.25%, 3/15/04..................................... 5,331,312
1,000,000 Maxus Energy Corp.
10.63%, 8/19/98..................................... 1,034,535
2,000,000 Maxus Energy Corp.
10.75%, 4/02/02..................................... 2,082,526
1,000,000 Maxus Energy Corp.
8.46%, 9/29/03...................................... 965,713
1,500,000 Maxus Energy Corp.
9.375%, 11/1/03..................................... 1,522,500
------------
10,936,586
------------
Finance and Insurance - 2.5%
1,000,000 American Annuity Group, Inc.
11.125%, 2/1/03..................................... 1,072,500
2,000,000 Amresco, Inc.
8.75%, 7/1/99....................................... 2,005,000
1,000,000 Litchfield Financial Corp.
10.00%, 11/1/04..................................... 1,030,000
475,000 Litchfield Financial Corp.
8.875%, 11/01/03.................................... 465,500
------------
4,573,000
------------
Food and Beverages - 7.0%
3,000,000 ARA Group, Inc.
8.50%, 6/1/03....................................... 3,125,463
6,000,000 Canandaigua Wine Company, Inc.
8.75%, 12/15/03..................................... 5,850,000
3,000,000 Chiquita Brands International, Inc.
9.125%, 3/1/04...................................... 3,022,500
1,000,000 Chiquita Brands International, Inc.
9.625%, 1/15/04..................................... 1,035,000
------------
13,032,963
------------
Food Retailer - 2.6%
4,470,000 Stater Brothers Holdings, Inc.
11.00%, 3/1/01...................................... 4,782,900
------------
Health Care - 12.3%
3,860,000 Beverly Enterprises, Inc.
8.75%, 12/31/03..................................... 3,729,725
3,000,000 Beverly Enterprises, Inc.
9.00%, 2/15/06...................................... 3,003,750
3,000,000 Magellan Health Services, Inc.
11.25%, 4/15/04..................................... 3,330,000
7,000,000 Paracelsus Healthcare Corporation
10.00%, 8/15/06..................................... 6,562,500
4,000,000 Quorum Health Group, Inc.
8.75%, 11/1/05...................................... 4,105,000
2,000,000 Universal Health Services, Inc.
8.75%, 8/15/05...................................... 2,052,500
------------
22,783,475
------------
TOTAL NON-CONVERTIBLE BONDS
(cost $143,873,238)................................. 145,670,354
------------
CONVERTIBLE BONDS - 2.3%
500,000 Continental Pacific Bank
8.00%, 4/30/03...................................... 525,000
4,631,000 Emeritus Corporation
6.25%, 1/1/06....................................... 3,739,532
------------
TOTAL CONVERTIBLE BONDS
(cost $4,267,925)................................. 4,264,532
------------
STOCKS - 10.2%
5,000 Homestead Savings
Convertible Preferred,
Series A, $2.95 *.................................... 5,000
100,000 Healthcare Realty Trust Incorporated................. 2,650,000
130,000 Hospitality Properties Trust......................... 3,770,000
100,000 Meditrust............................................ 4,000,000
130,000 National Health Investors, Inc....................... 4,923,750
110,000 Omega Healthcare Investors, Inc...................... 3,657,500
------------
TOTAL STOCKS
(cost $15,098,417)................................. 19,006,250
------------
SHORT-TERM INVESTMENTS - 7.5%
Commercial Paper - 5.7%
$1,500,000 Houston Industries, Inc.
5.60%, due January 2, 1997........................... 1,500,000
1,500,000 Schreiber Foods, Inc.
5.55%, due January 2, 1997........................... 1,500,000
1,500,000 Houston Industries, Inc.
5.60%, due January 3, 1997........................... 1,499,763
1,000,000 Quad/Graphics, Inc.
5.60%, due January 3, 1997........................... 999,844
2,500,000 Fiserv, Inc.
5.60%, due January 6, 1997........................... 2,498,444
2,500,000 Fiserv, Inc.
6.00%, due January 7, 1997........................... 2,497,917
------------
10,495,968
------------
Variable Demand Notes - 1.8%
1,066,051 Sara Lee Corporation
5.32%, due January 2, 1997........................... 1,066,051
2,120,214 Johnson Controls, Inc.
5.36%, due January 2, 1997........................... 2,120,214
170,856 Pitney Bowes Credit Corporation
5.34%, due January 2, 1997........................... 170,856
------------
3,357,121
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $13,811,847)................................... 13,853,089
------------
TOTAL INVESTMENTS.................................... 182,794,225
------------
CASH AND RECEIVABLES,
NET OF LIABILITIES - 1.5%............................ 2,873,694
------------
TOTAL NET ASSETS
(Basis of percentages
disclosed above).................................... $185,667,919
------------
------------
</TABLE>
* This security has been classified as non-income producing.
See notes to financial statements.
Statement of Operations
For the Year Ended December 31, 1996
- --------------------------------------------------------------------
<TABLE>
<S> <C>
INCOME: (Note A)
Interest......................................................... $14,034,414
Dividends........................................................ 1,427,913
Other............................................................ 47,164
----------
Total income................................................ 15,509,491
----------
EXPENSES:
Management fee (Note C)......................................... 661,606
Transfer agent fees............................................. 115,380
Registration fees............................................... 33,460
Legal fees...................................................... 27,707
Postage......................................................... 24,777
Audit and tax consulting fees................................... 14,200
Printing........................................................ 12,712
Custodian fees.................................................. 10,521
Pricing service fees............................................ 9,164
Directors' fees.................................................. 9,000
Insurance....................................................... 7,147
Telephone....................................................... 3,404
Other operating expenses......................................... 1,653
-----------
Total expenses.................................................. 930,731
------------
Net investment income...................................... 14,578,760
-----------
NET REALIZED GAIN ON INVESTMENTS..................................... 458,971
NET INCREASE IN UNREALIZED APPRECIATION ON INVESTMENTS............... 5,006,476
-----------
Net gain on investments.................................... 5,465,447
-----------
Net increase in net assets resulting from operations....... $20,044,207
-----------
-----------
See notes to financial statements.
</TABLE>
Statements of Changes in Net Assets
For the Years Ended December 31, 1996 and 1995
- ---------------------------------------------------------------------------
<TABLE>
1996 1995
----------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income........................................... $ 14,578,760 $ 13,236,512
Net realized gain (loss) on investments......................... 458,971 (1,504,358)
Net increase in unrealized appreciation on investments.......... 5,006,476 10,919,434
------------ ------------
Net increase in net assets resulting from operations....... 20,044,207 22,651,588
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.2960 and $0.2950 per share, respectively)................. (14,615,595) (13,329,923)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (10,614,891 and 7,902,672
shares, respectively)......................................... 36,879,473 26,523,048
Net asset value of shares issued in distributions from net
investment income (3,051,652 and 2,823,597 shares,
respectively)................................................. 10,528,296 9,538,891
Cost of shares redeemed (8,444,524 and 7,246,075
shares, respectively)......................................... (29,248,401) (24,222,850)
----------- -----------
Increase in net assets derived from
capital share transactions............................... 18,159,368 11,839,089
----------- -----------
Total increase in net assets............................... 23,587,980 21,160,754
----------- -----------
NET ASSETS:
Beginning of year (including undistributed net
investment income of $646,026 and $739,437, respectively).... 162,079,939 140,919,185
------------ ------------
End of year (including undistributed net
investment income of $609,191 and $646,026, respectively)..... $185,667,919 $162,079,939
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
Statement of Assets and Liabilities
December 31, 1996
- --------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments in securities at market value (cost $177,051,427) (Note A)............ $182,794,225
Receivables-
Interest and dividends....................................................... 4,108,609
------------
Total assets............................................................ 186,902,834
------------
LIABILITIES:
Payables-
Dividends payable............................................................ 1,099,057
Management fee (Note C)...................................................... 59,406
Other payables and accrued expenses.......................................... 76,452
------------
Total liabilities....................................................... 1,234,915
------------
Total net assets........................................................ $185,667,919
------------
------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding................................................ $188,573,013
Net unrealized appreciation on investments (Note B)............................... 5,701,556
Accumulated net realized losses on investments.................................... (9,215,841)
Undistributed net investment income............................................... 609,191
------------
$185,667,919
------------
------------
NET ASSET VALUE PER SHARE ($.01 par value, 100,000,000 shares authorized),
offering price and redemption price ($185,667,919./.52,650,373
shares outstanding)............................................................... $3.53
-----
-----
</TABLE>
See notes to financial statements.
Financial Highlights
(For a share outstanding throughout the year)
- ----------------------------------------------------------------------
<TABLE>
Year ended December 31,
----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR....... $3.42 $3.21 $3.52 $3.38 $3.34 $3.01 $3.44 $3.68 $3.64 $4.01
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income... .30 .30 .30 .30 .31 .35 .39 .38 .38 .38
Net gains or (losses) on
securities (realized
and unrealized)........ .11 .21 (.31) .13 .03 .33 (.43) (.24) .03 (.28)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations........... .41 .51 (.01) .43 .34 .68 (.04) .14 .41 .10
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS *:
Dividends (from net
investment income)..... (.30) (.30) (.30) (.29) (.30) (.35) (.39) (.38) (.37) (.47)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF
YEAR................... $3.53 $3.42 $3.21 $3.52 $3.38 $3.34 $3.01 $3.44 $3.68 $3.64
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL RETURN.............. 12.37% 16.16% (0.17)% 12.95% 10.33% 23.05% (1.03)% 3.94% 11.55% 2.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(millions)............... $185.7 $162.1 $140.9 $158.3 $119.1 $79.9 $60.6 $75.4 $78.2 $69.6
Ratio of expenses to
average net assets....... .55% .58% .59% .62% .69% .76% .77% .81% .83% .86%
Ratio of net investment
income to average net
assets................... 8.55% 8.72% 8.75% 8.42% 9.23% 10.70% 11.74% 10.46% 10.03% 9.79%
Portfolio turnover rate... 33.2% 29.2% 29.2% 39.1% 56.1% 27.5% 40.4% 39.6% 11.9% 47.5%
* The Fund distributed no capital gains for the time periods listed.
</TABLE>
See notes to financial statements.
Notes to Financial Statements
December 31, 1996
- ------------------------------------------------------------------
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.
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. As of
December 31, 1996, the Fund has approximately $9,216,000 of net capital
losses which may be used to offset capital gains in future years. Capital
loss carryovers of approximately $343,000 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 December 31, 1996, 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......................... $ 7,772,402
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value......................... (2,070,846)
----------
Net unrealized appreciation............ $5,701,556
----------
----------
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 December 31, 1996, liabilities of the Fund included $59,406 payable to
the investment adviser.
Note D -- Investment portfolio transactions:
Purchases and sales of investments, other than short-term obligations,
aggregated $62,922,863 and $52,982,921, respectively, for the year ended
December 31, 1996.
Independent Auditors' Report
- -----------------------------
To the Board of Directors and Shareholders
of Nicholas Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of
Nicholas Income Fund, Inc., including the schedule of investments, as of
December 31, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the ten years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned at December 31, 1996 by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Nicholas Income
Fund, Inc. as of December 31, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the ten years in the
period then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 9, 1997
Fifteen Year Historical Record (Unaudited)
- --------------------------------------------------------------------
<TABLE>
Net Investment Growth of
Net Income An Initial
Asset Value Distributions $10,000
Per Share Per Share Investment**
----------- ------------- ------------
<S> <C> <C> <C>
December 31, 1981 *.......... 3.14 $ --- $10,000
December 31, 1982............ 3.68 0.4630 13,514
December 31, 1983............ 3.67 0.4430 15,181
December 31, 1984............ 3.65 0.4420 17,109
December 31, 1985............ 3.96 0.4170 20,752
December 31, 1986............ 4.01 0.3800 23,124
December 31, 1987............ 3.64 0.4660 23,710
December 31, 1988............ 3.68 0.3710 26,448
December 31, 1989............ 3.44 0.3830 27,488
December 31, 1990............ 3.01 0.3970 27,206
December 31, 1991............ 3.34 0.3460 33,478
December 31, 1992............ 3.38 0.2955 36,935
December 31, 1993............ 3.52 0.2890 41,719
December 31, 1994............ 3.21 0.3010 41,647
December 31, 1995............ 3.42 0.2950 48,376
December 31, 1996............ 3.53 0.2960 54,359
</TABLE>
* Date of initial investment.
** Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
