8/19/98
Report to Fellow Shareholders:
The halcyon years of 1995, through 1997 are not being repeated so far in
1998. Nicholas Income Fund's total return through June 30 was 2.47%, which
means we have experienced some capital loss. Results of the latest one, five,
ten and fifteen year periods ended June 30, 1998 are shown below:
<TABLE>
Average Annual Total Return*
6 Months 1 Year 5 Years 10 Years 15 Years
-------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
Nicholas Income Fund (Distributions Reinvested)........... +2.47% +9.60% +9.62% +9.45% +10.20%
Consumer Price Index (Inflation).......................... +0.68% +1.68% +2.45% +3.27% + 3.35%
Ending value of $10,000 invested in Nicholas
Income Fund (Distributions Reinvested)................. $10,247 $10,960 $15,827 $24,673 $42,948
</TABLE>
Lower quality bond funds have not kept pace with their higher quality
counterparts. This is the reverse of last year's performance. Moreover,
Nicholas Income Fund has been adversely affected by its 8% position in real
estate investment trust stocks. We believe these equities, which we have
owned for many years, are suitable investments for the Fund based on their
high yield and the good possibility of dividend increases over the long-run.
More recently, the Fund has reflected the on-going and significant stock
market corrections.
Despite these conditions, Nicholas Income Fund continues to provide a
substantial SEC yield of 8.45% and a distribution rate of 8.31% at July 31,
1998, and management has confidence in our long-term investment program.
At June 30, 1998, total net assets of Nicholas Income Fund were $269
million. Cash and equivalents were 8.8%.
Thank you for your interest in the Nicholas Income Fund.
Sincerely,
/S/ Albert O. Nicholas
----------------------
Albert O. Nicholas
President
(1) 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 and return will fluctuate so
an investment, when redeemed, may be worth more or less than original cost.
Financial Highlights
(For a share outstanding throughout each period)
- -------------------------------------------------------------------------------
<TABLE>
Six Months
Ended 6/30/98 Year ended December 31,
---------------------------------------
(unaudited) 1997 1996 1995 1994 1993
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $3.69 $3.53 $3.42 $3.21 $3.52 $3.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .15 .30 .30 .30 .30 .30
Net gains (losses) on securities
(realized and unrealized) (.06) .15 .11 .21 (.31) .13
------ ----- ----- ----- ----- -----
Total from investment operations .09 .45 .41 .51 (.01) .43
------ ----- ----- ----- ----- -----
LESS DISTRIBUTIONS***:
Dividends (from net
investment income) (.07) (.29) (.30) (.30) (.30) (.29)
------ ----- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $3.71 $3.69 $3.53 $3.42 $3.21 $3.52
------ ------- ------- ------- ------- --------
------ ------- ------- ------- ------- --------
TOTAL RETURN 2.47%** 13.13% 12.37% 16.16% (0.17)% 12.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions) $268.6 $254.2 $185.7 $162.1 $140.9 $158.3
Ratio of expenses to average net assets 0.46%* .50% .55% .58% .59% .62%
Ratio of net investment income
to average net assets 8.05%* 8.29% 8.55% 8.72% 8.75% 8.42%
Portfolio turnover rate 52.9%* 32.2% 33.2% 29.2% 29.2% 39.1%
*Annualized.
**Not annualized.
***The Fund distributed no capital gains for the time periods listed.
See notes to financial statements.
</TABLE>
- -------------------------------------------------------------------------------
TOP TEN ISSUERS
June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
Percentage of
Name Net Assets
- ------------ ----------------
Stater Brothers Holdings, Inc. ......................... 3.95%
Century Communications Corp. ........................... 3.26
Greyhound Lines, Inc. .................................. 3.25
CSC Holdings, Inc. ..................................... 3.25
McDermott (J.Ray), S.A. ................................ 3.20
Advanced Micro Devices, Inc. ........................... 3.13
Paging Network, Inc. ................................... 3.13
Playtex Family Products Corp. .......................... 3.06
Doman Industries Inc. .................................. 2.98
Magellan Health Services, Inc. ......................... 2.96
------
Total of top ten issuers............................. 32.17%
------
------
Schedule of Investments
June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
Quoted
Shares or Market
Principal Value
Amount (Note A)
- ------------- -----------------
-----------------
NON-CONVERTIBLE BONDS - 79.45%
CONSUMER PRODUCTS AND SERVICES - 18.32%
7,000,000 Brown Group, Inc.
9.50%, 10/15/06 7,385,000
7,875,000 Greyhound Lines, Inc.
11.50%, 4/15/07 8,741,250
8,000,000 Nine West Group Inc.
9.00%, 8/15/07 7,760,000
3,600,000 Outboard Marine Corp.
8.625%, 3/15/01 3,681,904
6,200,000 Paging Network, Inc.
10.125%, 8/1/07 6,432,500
2,000,000 Paging Network, Inc.
8.875%, 2/1/06 1,970,000
8,000,000 Playtex Family Products Corp.
9.00%, 12/15/03 8,220,000
5,000,000 Revlon Consumer Products Corp.
8.625%, 2/1/08 5,006,250
-------------
49,196,904
-------------
DIVERSIFIED PRODUCTS AND SERVICES - 5.15%
8,000,000 McDermott (J. Ray), S.A.
9.375%, 7/15/06 8,600,000
4,150,000 Sequa Corp.
8.75%, 12/15/01 4,212,250
1,000,000 Sequa Corp.
9.625%, 10/15/99 1,027,500
-------------
13,839,750
-------------
ENERGY - 2.14%
5,850,000 Canadian Forest Oil Ltd.
8.75%, 9/15/07 5,737,136
-------------
FINANCE AND INSURANCE - 0.55%
1,000,000 Litchfield Financial Corp.
10.00%, 11/1/04 1,020,000
475,000 Litchfield Financial Corp.
8.875%, 11/1/03 467,875
-------------
1,487,875
-------------
FOOD AND BEVERAGES - 8.32%
7,500,000 Canandaigua Wine Company, Inc.
8.75%, 12/15/03 7,706,250
3,000,000 Chiquita Brands International, Inc.
10.25%, 11/1/06 3,240,000
3,000,000 Chiquita Brands International, Inc.
9.125%, 3/1/04 3,082,500
1,000,000 Chiquita Brands International, Inc.
9.625%, 1/15/04 1,042,500
4,000,000 Fleming Companies, Inc.
10.50%, 12/1/04 4,160,000
3,000,000 Fleming Companies, Inc.
10.625%, 7/31/07 3,127,500
-------------
22,358,750
-------------
FOOD RETAILER - 3.95%
6,070,000 Stater Brothers Holdings, Inc.
11.00%, 3/1/01 6,540,425
4,000,000 Stater Brothers Holdings, Inc.
9.00%, 7/1/04 4,080,000
-------------
10,620,425
-------------
HEALTH CARE PRODUCTS - 2.96%
8,000,000 Fisher Scientific International Inc.
9.00%, 2/1/08 7,940,000
-------------
HEALTH CARE SERVICES - 10.46%
3,000,000 Beverly Enterprises, Inc.
9.00%, 2/15/06 3,105,000
5,000,000 Genesis Health Ventures, Inc.
9.25%, 10/1/06 5,050,000
8,000,000 Magellan Health Services, Inc.
9.00%, 2/15/08 7,940,000
4,000,000 Quorum Health Group, Inc.
8.75%, 11/1/05 4,120,000
8,000,000 Vencor, Inc.
9.875%, 5/1/05 7,870,000
-------------
28,085,000
-------------
INDUSTRIAL PRODUCTS AND SERVICES - 2.98%
8,000,000 Doman Industries Inc.
9.25%, 11/15/07 8,000,000
-------------
MEDIA, COMMUNICATIONS AND
ENTERTAINMENT - 21.49%
5,000,000 Adelphia Communications Corp.
9.875%, 3/1/05 5,312,500
2,000,000 Adelphia Communications Corp.
11.875%, 9/15/04 2,205,000
7,000,000 American Media, Inc.
11.625%, 11/15/04 7,542,500
8,250,000 Century Communications Corp.
8.875%, 1/15/07 8,745,000
5,000,000 Cinemark USA, Inc.
9.625%, 8/1/08 5,150,000
2,000,000 Comcast Cellular Communications, Inc.
9.50%, 5/1/07 2,085,000
5,000,000 Comcast Corp.
9.375%, 5/15/05 5,350,000
8,000,000 CSC Holdings, Inc.
9.875%, 5/15/06 8,740,000
5,000,000 Hollinger International, Inc.
9.25%, 2/1/06 5,237,500
2,000,000 Young Broadcasting Inc.
10.125%, 2/15/05 2,160,000
5,000,000 Young Broadcasting Inc.
9.00%, 1/15/06 5,200,000
-------------
57,727,500
-------------
TECHNOLOGY - 3.13%
8,000,000 Advanced Micro Devices, Inc.
11.00%, 8/1/03 8,420,000
-------------
TOTAL NON-CONVERTIBLE BONDS
(cost $210,184,531) 213,413,340
-------------
CONVERTIBLE BOND - 2.21%
7,531,000 Emeritus Corp. - 6.25%, 1/1/06
(cost $6,155,675) 5,940,076
-------------
STOCKS - 9.55%
5,000 Homestead Savings Convertible
Preferred, Series A, $2.95 * 5,000
265,000 Glacier Water Trust I
Preferred, 9.0625%, 1/31/28 6,525,625
100,000 Healthcare Realty Trust Inc. 2,725,000
18,000 Hospitality Properties Trust 578,250
204,272 Meditrust Corporation, Paired ctf 5,706,849
180,000 National Health Investors, Inc. 5,962,500
110,000 Omega Healthcare Investors, Inc. 3,863,750
36,471 Omega Worldwide, Inc. * 275,812
-------------
TOTAL STOCKS
(cost $23,510,260) 25,642,786
-------------
SHORT-TERM INVESTMENTS - 6.55%
Commercial Paper - 5.70%
3,040,000 Universal Foods Corp.
5.70%, due July 1, 1998 3,040,000
2,000,000 Heller Financial, Inc.
5.72%, due July 7, 1998 1,998,093
1,300,000 Universal Foods Corp.
5.75%, due July 7, 1998 1,298,754
4,000,000 Heller Financial, Inc.
5.75%, due July 9, 1998 3,994,889
2,000,000 Schreiber Foods, Inc.
5.70%, due July 9, 1998 1,997,467
1,400,000 Badger Meter, Inc.
5.75%, due July 13, 1998 1,397,317
1,600,000 Schreiber Foods, Inc.
5.75%, due July 13, 1998 1,596,933
-------------
15,323,453
-------------
Variable Rate Demand Notes - 0.85%
321,799 General Mills, Inc.
5.27%, due July 1, 1998 321,799
916,615 Johnson Controls, Inc.
5.27%, due July 1, 1998 916,615
867,138 Pitney Bowes Credit Corp.
5.27%, due July 1, 1998 867,138
181,460 Warner-Lambert Co.
5.25%, due July 1, 1998 181,460
-------------
2,287,012
-------------
TOTAL SHORT-TERM INVESTMENTS
(cost $17,593,262) 17,610,465
-------------
TOTAL INVESTMENTS
(cost $257,443,728) 262,606,667
-------------
CASH AND RECEIVABLES,
NET OF LIABILITIES - 2.24% 6,022,956
-------------
TOTAL NET ASSETS
(Basis of percentages
disclosed above) 268,629,623
=============
* This security has been classified as non-income producing.
Statement of Assets and Liabilities
June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
ASSETS:
Investments in securities at
market value (cost $257,443,728) (Note A) $262,606,667
------------
Receivables -
Dividends and interest 5,927,000
Investment securities sold 1,233,480
---------
Total receivables 7,160,480
---------
Total assets 269,767,147
-----------
LIABILITIES:
Payables -
Investment securities purchased 988,000
Management fee (Note C) 78,269
Other payables and accrued expenses 71,255
------------
Total liabilities 1,137,524
------------
Total net assets $268,629,623
------------
------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding $260,608,144
Net unrealized appreciation on investments (Note B) 5,145,736
Accumulated net realized losses on investments (3,484,760)
Accumulated undistributed net investment income 6,360,503
------------
$268,629,623
------------
------------
NET ASSET VALUE PER SHARE ($.01 par value, 100,000,000 shares authorized),
offering price and redemption price ($268,629,623./.72,316,689 shares
outstanding) $3.71
------------
------------
See notes to financial statements.
Statement of Operations
For the six months ended June 30, 1998 (unaudited)
- -------------------------------------------------------------------------------
INCOME: (Note A)
Interest.......................................... $10,161,924
Dividends......................................... 991,514
Other............................................. 171,115
-----------
Total income............................... 11,324,553
-----------
EXPENSES:
Management fee (Note C)........................... 467,429
Transfer agent fees............................... 67,937
Registration fees................................. 30,293
Legal fees........................................ 13,431
Postage and mailing fees.......................... 9,358
Printing.......................................... 6,513
Custodian fees.................................... 6,374
Directors' fees................................... 6,000
Pricing service fees.............................. 3,899
Other operating expenses.......................... 2,895
-----------
Total expenses............................. 614,129
-----------
Net investment income...................... 10,710,424
-----------
NET REALIZED GAIN ON INVESTMENTS 3,949,615
NET DECREASE IN UNREALIZED APPRECIATION ON INVESTMENTS (8,279,850)
-----------
Net loss on investments.................... (4,330,235)
-----------
Net increase in net assets resulting
from operations............................ $ 6,380,189
-----------
-----------
See notes to financial statements.
Statements of Changes in Net Assets
For the six months ended June 30, 1998 (unaudited)
and the year ended December 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
1998 1997
---------- ------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,710,424 $ 18,216,084
Net realized gain on investments 3,949,615 1,781,466
Net increase (decrease) in unrealized appreciation on investments (8,279,850) 7,724,030
----------- ------------
Net increase in net assets resulting
from operations 6,380,189 27,721,580
----------- ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.0710 and $0.2903 per share, respectively) (5,072,589) (18,102,607)
----------- ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (10,438,580 and 21,707,323 shares,
respectively) 38,960,255 79,140,388
Net asset value of shares issued in distributions from net
investment income (1,049,845 and 3,765,603 shares, respectively) 3,884,425 13,707,776
Cost of shares redeemed (7,976,657 and 9,318,378 shares,
respectively) (29,728,645) (33,929,068)
------------ ------------
Increase in net assets derived from
capital share transactions 13,116,035 58,919,096
----------- ------------
Total increase in net assets 14,423,635 68,538,069
----------- ------------
NET ASSETS:
Beginning of period (including undistributed net
investment income of $722,668 and $609,191) 254,205,988 185,667,919
----------- ------------
End of period (including undistributed net
investment income of $6,360,503 and $722,668) $268,629,623 $254,205,988
----------- ------------
----------- ------------
</TABLE>
Historical Record (unaudited)
- -------------------------------------------------------------------------------
Net Investment
Net Income Growth of An
Asset Value Distributions Initial $10,000
Per Share Per Share Investment**
----------- -------------- ---------------
November 21, 1977*........... $5.10 $ ---- $10,000
December 31, 1987............ 3.64 0.4660 22,560
December 31, 1988............ 3.68 0.3710 25,164
December 31, 1989............ 3.44 0.3830 26,155
December 31, 1990............ 3.01 0.3970 25,886
December 31, 1991............ 3.34 0.3460 31,853
December 31, 1992............ 3.38 0.2955 35,143
December 31, 1993............ 3.52 0.2890 39,695
December 31, 1994............ 3.21 0.3010 39,626
December 31, 1995............ 3.42 0.2950 46,029
December 31, 1996............ 3.53 0.2960 51,721
December 31, 1997............ 3.69 0.2903 58,514
June 30, 1998................ 3.71 0.0710 59,960
* Initial date under Nicholas Company, Inc. management.
** Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
See notes to financial statements.
Notes to Financial Statements
June 30, 1998
- -------------------------------------------------------------------------------
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 rate demand notes are valued at cost
which approximates market value.
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 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, 1998, the
Fund has approximately $3,485,000 of net capital losses which may be used to
offset capital gains in future years. Capital loss carryovers of
approximately $1,980,000 will expire in 2000, and $1,505,000 in 2003.
At June 30, 1998, 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......................... $8,424,355
----------
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value......................... (3,278,619)
-----------
-----------
Net unrealized appreciation............ $5,145,736
-----------
-----------
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, 1998, liabilities of the Fund included $78,269 payable to
the investment adviser.
Note D -- Investment portfolio transactions:
For the six months ended June 30, 1998, the cost of purchases and the
proceeds from sales of investments, other than short-term obligations,
aggregated $84,360,748 and $64,657,585, 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, Wisconsin
Auditors
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
This report is submitted for the information of shareholders of
the Fund. It is not authorized for distribution to prospective
investors unless preceded or accompanied by an effective
prospectus.
ANNUAL REPORT
NICHOLAS INCOME FUND, INC.
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
June 30, 19987
