NICHOLAS INCOME FUND, INC.
February 25, 2000
Report to Fellow Shareholders:
Nicholas Income Fund had a total return of (0.07)% for calendar
year 1999. While not pleasing, this flat return was better than
government bonds and other high-grade fixed-income securities.
Returns for Nicholas Income Fund and selected indices are
provided in the chart below for the periods ended December 31, 1999.
<TABLE>
<CAPTION>
Average Annual Total Return*
----------------------------
1 Year 5 Year 10 Years 15 Years
------ ------ -------- --------
<S> <C> <C> <C> <C>
Nicholas Income Fund, Inc.
(Distributions Reinvested) ............. (0.07)% 8.19% 8.43% 8.93%
Lehman Brothers U.S. Corporate
Intermediate High Yield Bond Index...... 2.64% 8.96% 10.46% 10.77%
Consumer Price Index (Inflation)........ 2.68% 2.36% 2.93% 3.18%
Ending value of $10,000 invested in
Nicholas Income Fund, Inc.
(Distributions Reinvested).............. $9,993 $14,826 $22,462 $36,089
</TABLE>
Total net assets of the Fund were $203 million at December 31,
1999. Cash and equivalents were 3.58% at year end. Results in 1999
were hurt by rising interest rates (which depress bond prices) and
poor performing real estate investment trust stocks. It appears
likely the Federal Reserve Board will continue to raise short-term
rates which will continue to impact the Fund.
At December 31, 1999, 26% of the Fund's bonds were rated BB by
Standard & Poor's and 69% were rated B. Nicholas Income Fund tends to
have higher quality bonds than the average high-yield bond fund. This
will likely cause the Fund to fluctuate less than other funds in its
category in both "up" and "down" markets.
Lastly, because of declining debt security prices last year and
into 2000, the Nicholas Income Fund is yielding a very high current
return. The Fund's 30-day annualized yield was 10.93%* at December
31, 1999.
Thank you for your investment in the Fund. Please call if you
have any questions.
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,
return and yield will fluctuate so an investment, when redeemed,
may be worth more or less than original cost.
Financial Highlights
(For a share outstanding throughout the period)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE,
BEGINNING OF PERIOD... $3.39 $3.69 $3.53 $3.42 $3.21 $3.52 $3.38 $3.34 $3.01 $3.44
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.. .33 .32 .30 .30 .30 .30 .30 .31 .35 .39
Net gains (losses) on
securities (realized
and unrealized)....... (.33) (.30) .15 .11 .21 (.31) .13 .03 .33 (.43)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations.......... -- .02 .45 .41 .51 (.01) .43 .34 .68 (.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS:*
From net
investment income..... (.33) (.32) (.29) (.30) (.30) (.30) (.29) (.30) (.35) (.39)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE, END OF
PERIOD................ $3.06 $3.39 $3.69 $3.53 $3.42 $3.21 $3.52 $3.38 $3.34 $3.01
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL RETURN............. (0.07)% 0.47% 13.13% 12.37% 16.16% (0.17)% 12.95% 10.33% 23.05% (1.03)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(millions).............. $202.8 $239.4 $254.2 $185.7 $162.1 $140.9 $158.3 $119.1 $79.9 $60.6
Ratio of expenses to
average net assets...... .50% .48% .50% .55% .58% .59% .62% .69% .76% .77%
Ratio of net investment
income to average net
assets.................. 9.81% 8.69% 8.29% 8.55% 8.72% 8.75% 8.42% 9.23% 10.70% 11.74%
Portfolio turnover rate.. 47.2% 49.3% 32.2% 33.2% 29.2% 29.2% 39.1% 56.1% 27.5% 40.4%
* No capital gains were distributed for the periods presented.
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
Top Ten Issuers
December 31, 1999 (unaudited)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percentage
Name of Net Assets
- ---- -------------
<C> <C>
Triton Energy Limited ....................... 3.99%
Perkins Family Restaurants, L.P. ............ 3.98%
Advanced Micro Devices, Inc. ................ 3.94%
Polaroid Corporation ........................ 3.91%
Hollinger International, Inc. ............... 3.91%
Parker Drilling Company ..................... 3.86%
KinderCare Learning Centers, Inc. ........... 3.85%
NEXTLINK Communications, Inc. ............... 3.85%
Sequa Corp. ................................. 3.82%
Fisher Scientific International Inc. ........ 3.78%
------
Total of top ten ........................... 38.89%
------
------
</TABLE>
Schedule of Investments
December 31, 1999
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quoted
Shares or Market
Principal Value
Amount (Note A)
- --------- ------------
<C> <C>
NON-CONVERTIBLE BONDS -- 86.70%
Consumer Cyclicals - Products -- 13.00%
$7,000,000 Brown Shoe Company, Inc.
9.50%, 10/15/06 .................................... $ 7,000,000
3,700,000 Outboard Marine Corp.
8.625%, 03/15/01 ................................... 3,703,992
8,000,000 Polaroid Corporation
11.50%, 02/15/06 ................................... 7,920,000
8,000,000 Sequa Corp.
9.00%, 08/01/09 .................................... 7,740,000
------------
26,363,992
------------
Consumer Cyclicals - Services -- 10.79%
5,875,000 Greyhound Lines, Inc.
11.50%, 04/15/07 ................................... 6,521,573
8,000,000 KinderCare Learning Centers, Inc.
9.50%, 02/15/09 .................................... 7,800,000
8,000,000 United Rentals, Inc.
9.00%, 04/01/09 .................................... 7,560,000
------------
21,881,573
------------
Communication Services -- 16.20%
7,000,000 Adelphia Communications Corp.
9.375%, 11/15/09 ................................... 6,860,000
7,000,000 Call-Net Enterprises, Inc.
9.375%, 05/15/09 ................................... 5,757,500
8,000,000 Level 3 Communications, Inc.
9.125%, 05/01/08 ................................... 7,540,000
8,000,000 NEXTLINK Communications, Inc.
9.625%, 10/01/07 ................................... 7,800,000
5,000,000 Nextel Communications, Inc.
9.375%, 11/15/09 ................................... 4,900,000
------------
32,857,500
------------
Consumer Staples -
Drug, Retail, Food & Beverage -- 12.60%
3,000,000 Chiquita Brands International, Inc.
10.25%, 11/01/06 ................................... 2,175,000
1,000,000 Chiquita Brands International, Inc.
9.625%, 01/15/04 ................................... 740,000
3,000,000 Chiquita Brands International, Inc.
9.125%, 03/01/04 ................................... 2,205,000
4,000,000 Fleming Companies, Inc.
10.50%, 12/01/04 ................................... 3,670,000
4,000,000 Fleming Companies, Inc.
10.625%, 07/31/07 .................................. 3,610,000
8,000,000 Perkins Family Restaurants, L.P.
10.125%, 12/15/07 .................................. 8,080,000
5,000,000 Stater Brothers Holdings, Inc.
10.75%, 08/15/06 ................................... 5,062,500
------------
25,542,500
------------
Consumer Staples -
Media & Entertainment -- 11.53%
8,000,000 AMC Entertainment Inc.
9.50%, 03/15/09 .................................... 7,120,000
7,000,000 Cinemark USA, Inc.
9.625%, 08/01/08 ................................... 6,300,000
8,000,000 Hollinger International, Inc.
9.25%, 02/01/06 .................................... 7,920,000
2,000,000 Young Broadcasting Inc.
10.125%, 02/15/05 .................................. 2,047,500
------------
23,387,500
------------
Energy -- 11.55%
7,850,000 Canadian Forest Oil Ltd.
8.75%, 09/15/07 .................................... 7,506,562
8,000,000 Parker Drilling Company
9.75%, 11/15/06 .................................... 7,820,000
8,000,000 Triton Energy Limited
9.25%, 04/15/05 .................................... 8,100,000
------------
23,426,562
------------
Health Care - Services -- 7.09%
8,000,000 Fisher Scientific International Inc.
9.00%, 02/01/08 .................................... 7,670,000
7,000,000 Quorum Health Group, Inc.
8.75%, 11/01/05 .................................... 6,702,500
------------
14,372,500
------------
Technology - Products -- 3.94%
8,000,000 Advanced Micro Devices, Inc.
11.00%, 08/01/03 .................................... 7,980,000
------------
TOTAL NON-CONVERTIBLE BONDS
(cost $185,276,856) ............................ 175,812,127
------------
CONVERTIBLE BONDS -- 1.04%
$ 750,000 Assisted Living Concepts, Inc.
6.00%, 11/01/02 .................................... $ 447,188
2,781,000 Emeritus Corporation
6.25%, 01/01/06 .................................... 1,658,171
------------
TOTAL CONVERTIBLE BONDS
(cost $2,810,730) .............................. 2,105,359
------------
STOCKS -- 8.68%
Consumer Staples -
Drug, Retail, Food & Beverage -- 1.86%
265,000 Glacier Water Trust I
Preferred, 9.0625%, 01/31/28 ....................... 3,776,250
------------
Financial - Banks & Diversified Financials -- 0.00%
5,000 Homestead Savings Convertible
Preferred, Series A, $2.95 * ....................... 5,000
------------
Financial - Real Estate Investment Trusts -- 6.82%
120,000 Healthcare Realty Trust Inc. ........................ 1,875,000
300,000 National Health Investors, Inc. ..................... 4,462,500
611,828 National Health Realty, Inc. ........................ 5,047,581
160,000 Omega Healthcare Investors, Inc. .................... 2,030,000
20,500 Reckson Associates Realty Corp.
Convertible Preferred, 7.625%, Series A ............ 407,438
------------
13,822,519
------------
TOTAL STOCKS
(cost $29,627,813) ............................. 17,603,769
------------
SHORT-TERM INVESTMENTS -- 0.96%
Variable Rate Demand Note -- 0.96%
1,939,776 Firstar Bank U.S.A., N.A.
6.16%, due January 3, 2000
(cost $1,939,776) ................................. 1,939,776
------------
TOTAL INVESTMENTS
(cost $219,655,175) -- 97.38% .................. 197,461,031
------------
OTHER ASSETS,
NET OF LIABILITIES -- 2.62% ........................ 5,313,637
------------
TOTAL NET ASSETS
(Basis of percentages
disclosed above) -- 100.00% .................... $202,774,668
------------
------------
</TABLE>
* This security has been classified as non-income producing.
The accompanying notes to financial statements
are an integral part of this statement.
Statement of Assets and Liabilities
December 31, 1999
- ------------------------------------------------------------------------------
<TABLE>
<C> <C>
ASSETS:
Investments in securities at market value (cost $219,655,175) (Note A) ........... $197,461,031
Interest and dividends receivable ................................................ 5,452,340
------------
Total assets ........................................................... 202,913,371
------------
LIABILITIES:
Payables-
Management fee (Note B) ..................................................... 69,712
Other payables and accrued expenses ......................................... 68,991
------------
Total liabilities ...................................................... 138,703
------------
Total net assets ....................................................... $202,774,668
------------
------------
NET ASSETS CONSIST OF:
Fund shares issued and outstanding ............................................... $237,289,407
Net unrealized depreciation on investments (Note C) .............................. (22,194,144)
Accumulated net realized losses on investments ................................... (13,062,027)
Accumulated undistributed net investment income .................................. 741,432
------------
$202,774,668
------------
------------
NET ASSET VALUE PER SHARE ($.01 par value, 100,000,000 shares authorized),
offering price and redemption price ($202,774,668 / 66,314,898
shares outstanding) .............................................................. $3.06
-----
-----
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
Statement of Operations
For the Year Ended December 31, 1999
- -------------------------------------------------------------------------------
<TABLE>
<C> <C>
INCOME: (Note A)
Interest ..................................... $ 19,127,891
Dividends .................................... 2,967,088
Other ........................................ 1,078,240
-----------
Total income ............................ 23,173,219
-----------
EXPENSES:
Management fee (Note B) ...................... 821,950
Transfer agent fees .......................... 131,516
Legal fees ................................... 62,856
Postage and mailing .......................... 32,146
Audit and tax consulting fees ................ 16,200
Printing ..................................... 14,392
Registration fees ............................ 13,846
Directors' fees .............................. 12,000
Custodian fees ............................... 10,696
Pricing service fees ......................... 8,062
Telephone .................................... 2,663
Insurance .................................... 2,632
Other operating expenses ..................... 2,786
-----------
Total expenses .......................... 1,131,745
-----------
Net investment income ................... 22,041,474
-----------
NET REALIZED LOSS ON INVESTMENTS .................. (9,476,444)
NET INCREASE IN UNREALIZED DEPRECIATION
ON INVESTMENTS .................................. (12,577,039)
-----------
Net realized and unrealized
loss on investments .................... (22,053,483)
-----------
Net decrease in net assets
resulting from operations ............... $ (12,009)
-----------
-----------
</TABLE>
The accompanying notes to financial statements
are an integral part of this statement.
Statements of Changes in Net Assets
For the years ended December 31, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
OPERATIONS:
Net investment income........................................... $ 22,041,474 $ 22,352,579
Net realized gain (loss) on investments......................... (9,476,444) 1,478,353
Net increase in unrealized depreciation on investments.......... (12,577,039) (23,042,691)
------------ -------------
Net increase (decrease) in net assets resulting
from operations........................................... (12,009) 788,241
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income
($0.3312 and $0.3155 per share, respectively)................. (22,043,838) (22,331,451)
------------ -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (13,812,153 and 18,725,675
shares, respectively)......................................... 45,693,672 67,790,328
Reinvestment of distributions
(5,210,003 and 4,867,962 shares, respectively)................ 16,763,222 16,989,161
Cost of shares redeemed (23,298,958 and 21,806,858
shares, respectively)......................................... (77,046,234) (78,022,412)
------------ ------------
Increase (decrease) in net assets derived from
capital share transactions............................... (14,589,340) 6,757,077
------------ ------------
Total decrease in net assets............................... (36,645,187) (14,786,133)
------------ ------------
NET ASSETS:
Beginning of year (including undistributed net
investment income of $743,796 and $722,668, respectively).... 239,419,855 254,205,988
------------ ------------
End of year (including undistributed net
investment income of $741,432 and $743,796, respectively)..... $202,774,668 $239,419,855
------------ ------------
------------ ------------
</TABLE>
The accompanying notes to financial statements.
are an integral part of these statements.
Notes to Financial Statements
December 31, 1999
- -----------------------------------------------------------------------------
Note A -- Summary of significant accounting policies:
Nicholas Income Fund, Inc. (the "Fund") is an open-end diversified
investment company registered 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.
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. Equity securities are generally valued at the last
sale price reported by the principal security exchange on which the issue is
traded or 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. Investments for which market
quotations are not readily available are valued at their fair value.
Securities transactions and related investment income -- Securities
transactions are generally 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. Dividends from net investment income are generally
declared and paid on a quarterly basis. Net realized gains on investments,
if any, are declared and distributed at least annually.
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 net
investment 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.
Use of estimates -- 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 those
estimates.
Note B -- Management Fees
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, 1999, liabilities of the Fund included $69,712 payable to
the investment adviser.
Note C -- Investment portfolio transactions:
At December 31, 1999, the net unrealized depreciation 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......................... $ 574,482
Aggregate gross unrealized depreciation for all
investments in which there was an excess of
tax cost over value......................... (22,768,626)
-----------
Net unrealized depreciation............ $(22,194,144)
-----------
-----------
As of December 31, 1999, the Fund has approximately $13,062,000 of net
capital losses which may be used to offset capital gains in future years.
Capital loss carryovers of approximately $2,081,000 will expire in 2000,
$1,505,000 in 2003, and $9,476,000 in 2007
For the year ended December 31, 1999, the cost of purchases and the
proceeds from sales of investments, other than short-term obligations,
aggregated $98,561,506 and $111,860,015, respectively.
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.(the "Fund"), including the schedule of
investments, as of December 31, 1999, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the years in the two year period then ended and the financial highlights for
each of the years in the ten year 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 accounting
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, 1999 by correspondence with the Fund's
custodian. An audit 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, the financial statements and financial highlights
referred to above, present fairly, in all material respects, the financial
position of Nicholas Income Fund, Inc. as of December 31, 1999, the results
of its operations, the changes in its net assets and the financial highlights
for the years presented, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 11, 2000
Historical Record (unaudited)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Investment Growth of
Net Income An Initial
Asset Value Distributions $10,000
Per Share Per Share Investment**
----------- ------------- ------------
<C> <C> <C> <C>
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
December 31, 1998............ 3.39 0.3155 58,788
December 31, 1999............ 3.06 0.3312(a) 58,749
</TABLE>
* Initial date under Nicholas Company, Inc. management.
** Assuming reinvestment of distributions.
The Fund distributed no capital gains for the time periods listed.
(a) Paid $0.0770 in net investment income on April 23, 1999 to shareholders
of record April 22, 1999.
Paid $0.0820 in net investment income on July 22, 1999 to shareholders
of record July 21, 1999.
Paid $0.0877 in net investment income on October 21, 1999 to shareholders
of record October 20, 1999.
Paid $0.0845 in net investment income on December 30, 1999 to shareholders
of record December 29, 1999.
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.
Milwaukee, Wisconsin
414-272-6133 or 800-227-5987
Transfer Agent
FIRSTAR MUTUAL FUND SERVICES, LLC
Milwaukee, Wisconsin
414-276-0535 or 800-544-6547
Custodian
FIRSTAR INSTITUTIONAL CUSTODY SERVICES
Milwaukee, Wisconsin
Auditors
DELOITTE & TOUCHE LLP
Chicago, Illinois
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.
ANNUAL REPORT
NICHOLAS INCOME FUND, INC.
700 North Water Street
Milwaukee, Wisconsin 53202
www.nicholasfunds.com
December 31, 1999
