UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21332
------------
RMK High Income Fund, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (901) 524-4100
---------------
Allen B. Morgan, Jr.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
-------------------------------------------------------
(Name and address of agent for service)
with copies to
Arthur J. Brown, Esq.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036-1800
Date of fiscal year end: March 31, 2004
Date of reporting period: September 30, 2003
ITEM 1. REPORTS TO STOCKHOLDERS.
The following is a copy of the report transmitted to stockholders pursuant to
Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1):
- --------------------------------------------------------------------------------
To Our Shareholders
Dear Fellow Shareholders:
We are pleased to announce that on September 30, 2003 RMK High Income Fund, Inc.
(RMH) completed its first full quarter of operations. Since the launch of the
fund, it successfully achieved full investment well within the 90-day benchmark
set during the underwriting process. More importantly to shareholders, the
performance of both the market price and net asset value ("NAV") of the fund has
been quite solid; the fund has traded at an average premium of 5.3% since
inception and the NAV has appreciated 1.33%. The fund's total return for the
period came in at 0.63% versus 2.11% for the Lehman Brothers Ba Index. This
underperformance resulted from the fund's transition from the predominately cash
position at the start of the first quarter to full investment by quarter-end.
The strong share-price performance, however, allowed for the exercise of the
full over-allotment option, which should further enhance the liquidity of the
fund.
The fund's launch came during an exceptionally strong high-yield bond market.
For the past quarter, the Lehman Brothers U.S. Corporate High Yield Index posted
a 2.77% total return--a good result, but not an exceptional one. On a rolling
12-month basis, however, the period ended September 30 was the best corporate
high-yield performance since March 31, 1992 (29.98% vs. 30.06% respectively,
according to the Lehman Brothers U.S. Corporate High Yield Index). The majority
of this came from price appreciation of 19.03%. In contrast, the structured
finance markets experienced relative stability over the same time period. In
fact, the Lehman Brothers CMBS High Yield Index measured an average price
decline of 4.13% despite the fact that, in general, these sectors offered better
yields than high-yield corporates.
Consequently, the environment proved to be both a challenging and an
advantageous one in which to invest. The low interest rate environment limited
the number of attractive securities available to investors; at the same time,
many speculative credits were able to refinance debt with lower coupons,
improving their credit profile. In the end, the fund's strategy of investing in
multiple asset categories paid off. We were able to rapidly deploy cash, achieve
a weighted-average net yield above the 10.25% target, and maintain a
weighted-average "BB" rating without employing any leverage. In August, the fund
declared a monthly dividend rate of $0.12 per share through November 2003,
producing an annualized yield of 9.51%. We are quite pleased with this payout
rate, given that the fund was not fully invested during much of the third
quarter.
Looking ahead, we believe shareholders will be pleased with the opportunities
this fund presents, even at its current premium. Despite the upward trend in
the high-yield corporate market and exceedingly low rates, the fund's
diversification and relatively small size should allow it to take advantage of
both pockets of value in the corporate market and the relative value still
available in the structured finance sectors. In addition, we believe that low
borrowing rates could potentially enhance the dividend payout once the fund
employs leverage.
We are extremely pleased with the performance of the fund. Thank you for
investing with us and for helping to make this endeavor a success.
/s/ Carter Anthony /s/ James C. Kelsoe, Jr.
Carter E. Anthony, CFA James C. Kelsoe, Jr., CFA
President Portfolio Manager
1
Morgan Asset Management, Inc. RMK High Income Fund, Inc.
November 26, 2003
Portfolio Performance as of 9/30/03 *
--------------------------------------------------------
Market Value Net Asset Value
----------------------------
Since Inception (6/27/03) 1.83% 2.17%
Ratings Distribution as of 9/30/03 **
-------------------------------------------
AAA 4.6%
AA 2.0%
A 3.5%
BBB 15.8%
BB 33.6%
B 28.8%
CCC or below 8.7%
Non-rated 3.0%
* Past performance is not indicative of future results. Investment return and
market value will fluctuate so that shares, when sold, may be worth more or less
than their original cost.
** Current holdings may not reflect holdings as of the date of this report.
- --------------------------------------------------------------------------------
Investments (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc. Schedule of Investments
Principal
Amount/ S&P Rating Market
Shares Description (Unaudited) Cost Value (b)
Asset Backed Securities - Investment Grade - 21.4%
2
Collateralized Bond Obligation - 3.1%
3,440,000 E-Trade 2003-1A PSC, Zero Coupon Bond 8/7/33 (a) BBB- $ 3,440,000 $ 3,440,000
5,000,000 Silver Leaf IA D1FX, 11.54% 5/15/13 (a) BBB 4,999,771 4,999,750
----------- -----------
$ 8,439,771 $ 8,439,750
Commerical Loans - 4.9%
3,000,000 Atherton Franchisee 1999-A A2, 7.23% 4/15/12 (a) A+ 2,647,128 2,842,860
Atherton Franchisee 1999-A AX, 1.254% 3/15/19
interest-only strips (a) A+ 1,145,300 1,147,231
7,500,000 Commercial Mortgage 2001-J1A F, 6.958% 2/14/34 (a) BBB 6,440,135 6,642,952
4,000,000 Commercial Mortgage 2001-J2A F, 7.031% 7/16/34 (a) BBB- 3,043,006 3,019,840
----------- -----------
$13,275,569 $13,652,883
Credit Cards - 2.1%
7,000,000 Metris Master 2001-2 B, 2.20% 11/20/09 BBB 5,795,187 5,938,506
Franchise Loans - 1.5%
CNL Funding 1998-1, 1.935% 9/18/12 interest-only
strips (a) AAA 3,977,582 4,019,188
Home Equity Loans (Non-High Loan-To-Value) - 3.3%
2,000,000 Ameriquest 2003-8 M6A, Zero Coupon Bond 10/25/33 BBB- 1,672,817 1,657,142
4,000,000 Long Beach Holdings 2002-5 M4B, 6.00% 11/25/32 BBB- 3,409,712 3,363,040
4,750,000 Long Beach Holdings 2003-4 M6, 5.11% 8/25/33 BBB- 4,014,884 3,938,667
----------- -----------
$ 9,097,413 $ 8,958,849
Manufactured Housing Loans- 0.2%
1,000,000 Conseco Finance 2001-1 M1, 7.535% 7/1/32 BBB+ 682,390 665,520
Small Business Loans - 6.3%
2,000,000 ACLC Business Trust 1998-2 A3, 6.686% 4/15/20 (a) AAA 1,831,830 1,840,000
1,000,000 FMAC Loan Trust 1997-A B, 7.66% 4/15/19 (a) A 694,839 683,770
3,776,218 FMAC Loan Trust 1997-C A, 6.75% 12/15/19 (a) BBB 3,483,907 3,474,120
6,000,000 FMAC Loan Trust 1998-CA A2, 6.66% 1/15/12 (a) A 4,132,839 4,126,920
FMAC Loan Trust 1998-CA AX, 1.796% 9/15/18
interst-only strips (a) AA 4,369,777 4,892,837
27,447,956 United Capital 2003-A NOTE, 2.30% 11/8/27 (a) AAA 2,248,568 2,403,069
----------- -----------
$16,761,760 $17,420,716
- ----------------------------------------------------------------------------------------------------------
Total Asset Backed Securities - Investment Grade $58,029,672 $59,095,412
- ----------------------------------------------------------------------------------------------------------
3
Asset Backed Securities - Non-Investment Grade - 42.3%
Auto Loans - 0.9%
2,865,000 Union Acceptance 2001-A C, 10.00% 4/8/09 (a) Non-rated 2,423,886 2,423,675
Commercial Loans - 20.1%
9,082,312 Asset Securitization 1997-D4 B2, 7.525% 4/14/29 BB- 7,127,006 7,083,568
7,000,000 CS First Boston Mortgage 1997 C-1 F, 7.50% 6/20/29 (a) B+ 4,941,423 5,031,320
3,000,000 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a) B 2,495,835 2,666,700
9,000,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a) B 4,740,695 4,837,590
2,341,929 Enterprise Mortgage 2000-1 A1, 7.92% 1/15/27 (a) B 1,420,336 1,525,087
11,800,000 Enterprise Mortgage 2000-1 A2, 8.21% 1/15/27 (a) B 6,231,964 6,446,576
2,568,000 First Union NB-Bank of America Mortgage 2001-C1 K,
6.00% 3/15/33 (a) BB+ 2,121,175 2,180,923
- ----------------------------------------------------------------------------------------------------------
Investments (Unaudited)
- -------------------------------------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc. Schedule of Investments
Principal
Amount/ S&P Rating Market
Shares Description (Unaudited) Cost Value (b)
7,000,000 First Union-Lehman Brothers Mortgage 1997-C2 G,
7.50% 11/18/29 BB $ 5,676,629 $ 5,863,760
20,271,000 GMAC Commercial Mortgage 1997-C2 F, 6.75% 4/15/29 B 13,359,059 13,223,584
8,000,000 GS Mortgage 1998-GLII F, 7.19% 4/13/31 (a) BB 6,571,647 6,376,720
------------ ------------
$ 54,685,769 $ 55,235,828
Credit Cards - 5.7%
6,538,488 First Consumers 2001-A, 1.43% 9/15/08 BB 5,984,875 6,290,444
4
5,000,000 Metris Master 2000-1 C, 2.504% 8/20/08 (a) B+ 3,905,200 3,850,000
2,000,000 Metris Master 2000-3 C, 2.484% 9/21/09 (a) B+ 1,441,007 1,420,000
5,000,000 Metris Master 2001-3 C, 2.804% 7/21/08 (a) B+ 4,185,281 4,200,000
------------ ------------
$ 15,516,363 $ 15,760,444
Equipment Leases - 2.0%
5,000,000 Pegasus Aviation Lease 2000-1 A2, 8.37% 3/25/30 (a) BB- 2,841,071 2,900,000
5,448,199 Pegasus Aviation Lease 2001-1A B2, 7.27% 5/10/31 (a) BB+ 2,581,973 2,724,100
------------ ------------
$ 5,423,044 $ 5,624,100
Home Equity Loans (Non-High Loan-To-Value) - 6.5%
10,000,000 Conseco Finance 2000-D B2, 11.30% 4/15/26 BB 8,610,968 8,600,000
6,060,000 Conseco Finance 2001-A IB2, 10.30% 3/15/32 BB+ 5,560,626 5,606,833
5,000,000 Long Beach Holdings 2003-3 N2, 10.00% 7/25/33 (a) BB 3,711,008 3,700,000
------------ ------------
$ 17,882,602 $ 17,906,833
Manufactured Housing Loans - 4.2%
2,930,166 Bombardier Capital Mortgage 1999-A A3, 5.98% 1/15/18 BB 2,483,764 2,602,667
5,000,000 Conseco Finance 2000-6 M1, 7.72% 9/1/32 BB+ 2,609,505 2,600,000
1,661,527 Green Tree Financial 1994-1 B2, 7.85% 4/15/19 C 941,868 940,092
16,505,000 Madison Avenue Manufactured Housing 2002-A B2,
4.285% 3/25/32 BB- 5,364,062 5,281,600
------------ ------------
$ 11,399,199 $ 11,424,359
Small Business Loans - 1.5%
5,264,513 FMAC Loan Trust 1997-B A, 6.85% 9/15/19 (a) B 3,859,488 4,068,258
Special Purpose Entity - 1.4%
2,000,000 MMCAPS Funding, 10.00% 5/1/33 Non-rated 1,940,375 1,940,000
735,981 Preferred Term Securities X, Zero Coupon Bond 7/3/33 (a) Non-rated 725,298 724,941
1,316,750 TPREF Funding III, 11.00% 1/15/33 (a) Non-rated 1,284,569 1,290,415
------------ ------------
$ 3,950,242 $ 3,955,356
- ------------------------------------------------------------------------------------------------------------
Total Asset Backed Securities - Non-Investment Grade $115,140,593 $116,398,853
5
- ------------------------------------------------------------------------------------------------------------
Corporate Bonds - Investment Grade - 0.1%
Finance - 0.1%
220,000 Doral Financial, 7.84% Bond 10/10/06 BBB- 210,403 210,100
- ------------------------------------------------------------------------------------------------------------
Total Corporate Bonds - Investment Grade $ 210,403 $ 210,100
- ------------------------------------------------------------------------------------------------------------
Corporate Bonds - Non-Investment Grade - 24.6%
Electronics - 1.9%
1,000,000 Avalon Cable, Zero Coupon Bond Bond 12/1/08 CCC- 998,673 1,025,000
2,500,000 Interface, 9.50% Bond 11/15/05 CCC+ 2,284,029 2,287,500
2,000,000 Knowles Electronics, 13.125% Bond 10/15/09 CCC- 1,882,062 1,860,000
------------ ------------
$ 5,164,764 $ 5,172,500
- ------------------------------------------------------------------------------------------------------------
Investments (Unaudited)
- ------------------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc. Schedule of Investments
Principal
Amount/ S&P Rating Market
Shares Description (Unaudited) Cost Value (b)
Energy - 3.2%
3,000,000 Calpine, 8.25% Bond 8/15/05 CCC+ $ 2,875,143 $ 2,865,000
3,000,000 Calpine Canada, 8.50% Bond 5/1/08 CCC+ 2,516,829 2,287,470
4,000,000 Edison Mission Energy, 10.00% Bond 8/15/08 BB- 3,852,669 3,640,000
----------- -----------
$ 9,244,641 $ 8,792,470
Finance - 2.5%
5,000,000 Cerro Negro Finance, 7.90% Bond 12/1/20 (a) B+ 4,080,823 3,900,000
6
3,525,000 Petrozuata Finance, 8.22% Bond 4/1/17 (a) B 3,035,725 3,031,500
----------- -----------
$ 7,116,548 $ 6,931,500
Food & Agriculture - 0.9%
3,000,000 Land O Lakes, 8.75% Bond 11/15/11 B- 2,512,094 2,520,000
Insurance - 0.6%
2,000,000 PXRE Capital Trust I, 8.85% Bond 2/1/27 BB+ 1,740,068 1,740,000
Machinery - 0.5%
1,500,000 Cincinnati Milacron, 8.375% Bond 3/15/04 CCC+ 1,235,230 1,222,500
Manufacturing - 12.4%
2,913,138 Airbus, 8.027% Bond 10/1/19 (a) BB- 2,058,775 2,251,244
3,000,000 Blount, 13.00% Bond 8/1/09 CCC 2,605,657 2,670,000
3,000,000 Collins & Aikman, 10.75% Bond 12/31/11 B- 2,765,853 2,595,000
3,000,000 Crown Cork & Seal, 8.00% Bond 4/15/23 B 2,434,404 2,445,000
2,000,000 Goodyear Tire, 7.857% Bond 8/15/11 B+ 1,488,544 1,680,000
4,000,000 International Wire, 11.75% Bond 6/1/05 CCC- 2,697,137 2,360,000
3,000,000 Lyondell Chemical, 9.875% Bond 5/1/07 BB- 2,971,370 2,857,500
3,000,000 Playtex, 9.375% Bond 6/1/11 B- 2,981,583 2,880,000
3,500,000 Shaw Group, 10.75% Bond 3/15/10 (a) BB- 3,263,465 3,150,000
2,000,000 Stanadyne Automotive, 10.25% Bond 12/15/07 B 1,739,720 1,850,000
2,500,000 Sweetheart Cup, 12.00% Bond 7/15/04 CCC- 2,439,252 2,437,500
1,000,000 Tembec Industries, 8.625% Bond 6/30/09 BB 938,465 985,000
5,000,000 USEC, 6.625% Bond 1/20/06 BB- 4,717,500 4,675,000
1,500,000 US Can, 12.375% Bond 10/1/10 CCC+ 1,256,151 1,252,500
----------- -----------
$34,357,876 $34,088,744
Mining - 0.7%
2,000,000 Vale Overseas, 9.00% Bond 8/15/13 (a) BB 1,968,016 1,967,720
Recreational - 1.4%
4,000,000 Bally Total Fitness, 9.875% Bond 10/15/07 B- 3,761,805 3,840,000
Telecommunications - 0.2%
2,000,000 WorldCom, Zero Coupon Bond 5/15/31 D 651,548 669,640
Transportation - 0.3%
1,250,000 Ultrapetrol, 10.50% Bond 4/1/08 BB- 923,718 921,875
- -----------------------------------------------------------------------------------------
Total Corporate Bonds - Non-Investment Grade $68,676,308 $67,866,949
- -----------------------------------------------------------------------------------------
7
Investments (Unaudited)
- -------------------------------------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc. Schedule of Investments
Principal
Amount/ S&P Rating Market
Shares Description (Unaudited) Cost Value (b)
Mortgage Backed Securities - 2.4%
Collateralized Mortgage Obligation - 2.4%
Mellon Residential 2002-TBC2 X, 1.101% 8/15/32
interest-only strips AAA $ 2,960,668 $ 3,111,368
GNMA 2003-64 XA, 0.502% 8/16/43 interest-only strips Non-rated 1,239,039 1,243,126
2,167,000 Structured Asset 2003-BC1 B2, 9.00% 5/25/32 BBB- 2,113,195 2,137,746
- -------------------------------------------------------------------------------------------------------------
Total Mortgage Backed Securities $ 6,312,902 $ 6,492,240
- -------------------------------------------------------------------------------------------------------------
Common Stocks - 5.2%
27,400 Adolph Coors Company** 1,320,759 1,473,024
27,300 AMB Property Corporation 759,449 841,113
37,500 American Capital Strategies, Ltd. 1,002,582 932,250
34,500 Anadarko Petroleum Corporation 1,494,458 1,440,720
30,000 * Andrx Corporation 573,685 559,800
48,000 Anthracite Capital, Inc. 525,839 463,200
2,000 Bank of America Corporation 157,500 156,080
13,000 Baxter International Inc. 301,600 377,780
17,000 Black & Decker Corporation 706,147 689,350
100,000 * Cincinnati Bell 551,699 509,000
8
14,000 Harley-Davidson, Inc. 637,620 674,800
17,200 HCA Inc. 575,903 633,992
58,000 * King Pharmaceuticals, Inc. 807,966 878,700
24,000 Limited Brands, Inc. 379,652 361,920
25,300 Maytag Corporation 638,496 631,741
45,000 MCG Capital Corporation 727,680 702,000
36,000 * Nextel Communications, Inc.** 641,744 709,560
10,000 Nordic American Tanker Shipping Limited 142,020 138,000
19,000 Safeway, Inc. 384,368 435,860
11,600 * Stone Energy Corporation 429,000 409,248
100 The Stanley Works 2,885 2,952
5,000 Wells Fargo & Company 256,500 257,500
13,400 XL Capital Ltd 1,074,846 1,037,696
- -------------------------------------------------------------------------------------------------------------
Total Common Stocks $14,092,398 $14,316,286
- -------------------------------------------------------------------------------------------------------------
* Non-income producing
** A portion or all of the security is pledged as collateral for call options written
- -------------------------------------------------------------------------------------------------------------
Investments (Unaudited)
- -------------------------------------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc. Schedule of Investments
Principal
Amount/ S&P Rating Market
Shares Description (Unaudited) Cost Value (b)
Preferred Stocks - 1.9%
9
50,097 Cablevision Systems Corporation $ 5,234,187 $ 5,253,923
- ----------------------------------------------------------------------------------------------
Total Preferred Stocks $ 5,234,187 $ 5,253,923
- ----------------------------------------------------------------------------------------------
Investment Companies - 0.1%
10,000 Pioneer High Income Trust 150,619 152,900
- ---------------------------------------------------------------------------------------------
Total Investment Companies $ 150,619 $ 152,900
- ----------------------------------------------------------------------------------------------
Eurodollar Time Deposits - 2.6%
State Street Bank & Trust Company Eurodollar
time deposits dated September 30, 2003, .50%,
maturing at $ 7,185,100 on October 1, 2003. $ 7,185,000 $ 7,185,000
- ----------------------------------------------------------------------------------------------
Total Investments - 100.6% $275,032,082 $276,971,663
- ----------------------------------------------------------------------------------------------
Other Assets and Liabilities, net - (0.6%) (1,504,906)
- ----------------------------------------------------------------------------------------------
Net Assets $275,466,757
- ----------------------------------------------------------------------------------------------
Call Options Written
September 30, 2003
Shares
Subject Market
to Call Common Stocks/Expiration Date/Exercise Price Value (b)
27,000 Adolph Coors Company/October/55.00 16,200
36,000 Nextel Communications, Inc./October/22.50 5,400
- --------------------------------------------------------------------------------
Total Call Options Written (Premiums Received $32,436) $21,600
- --------------------------------------------------------------------------------
(a) Securities sold within the terms of a private placement memorandum, exempt
from registration under Rule 144A under the Securities Act of 1933, as
amended, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. Pursuant to guidelines adopted
by the Board of Directors, these issues have been determined to be liquid
by Morgan Asset Management, Inc., the fund's investment adviser.
10
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc.
Assets
Investments, in securities as detailed in the
accompanying schedule at market $276,971,663
(cost $275,032,082)
Cash on deposit with custodian 12,375
Dividends and interest receivable 3,873,442
- ----------------------------------------------------------------------------
Total Assets 280,857,480
- ----------------------------------------------------------------------------
Liabilities
Call options written, at market (premiums
received $32,436) 21,600
Accrued expenses 2,531
Due to affiliates 179,911
Payable for securities purchased 2,282,172
Distributions payable 2,904,509
- ----------------------------------------------------------------------------
Total Liabilities 5,390,723
- ----------------------------------------------------------------------------
Net Assets 275,466,757
- ----------------------------------------------------------------------------
Net Assets Consist of
Net unrealized appreciation of investments 1,950,417
Paid-in capital 271,753,566
11
Undistributed net investment income 195,842
Accumulated net realized gain on investments 1,566,932
- ----------------------------------------------------------------------------
Net Assets $275,466,757
- ----------------------------------------------------------------------------
Shares Outstanding and Net Asset Value Per Share
Shares outstanding 19,012,226
Net asset value per share $ 14.49
- ----------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
- ----------------------------------------------------------------------------
Statement of Operations (Unaudited)
- --------------------------------------------------------------------------------
For the Period From June 27, 2003
- --------------------------------------------------------------------------------
to September 30, 2003
RMK High Income Fund, Inc.
Investment Income
Interest $5,975,366
Dividends 81,152
------------------------------------------------------------
Total Investment Income 6,056,518
------------------------------------------------------------
Expenses
Management fee 431,237
Accounting fee 99,516
Legal fees 85,599
Audit fees 15,000
Transfer agent fees 15,624
Custodian fees 2,945
Registration fees 18,600
Directors fees 12,000
Other 2,800
------------------------------------------------ ----------
Total Expenses 683,321
------------------------------------------------ ----------
Net Investment Income 5,373,197
------------------------------------------------ ----------
12
Realized and Unrealized Gains on Investments
Change in unrealized appreciation 1,950,417
Net realized gain on securities 1,566,932
------------------------------------------------ ----------
Increase in Net Assets Resulting From Operations $8,890,546
------------------------------------------------ ----------
See accompanying Notes to Financial Statements.
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets (Unaudited)
- --------------------------------------------------------------------------------
For the Period From June 27, 2003
- --------------------------------------------------------------------------------
to September 30, 2003
RMK High Income Fund, Inc.
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations
Net investment income $ 5,373,197
Unrealized appreciation net 1,950,417
Net realized gain from investment transactions 1,566,932
- ------------------------------------------------------------------ ------------
Increase in Net Assets Resulting From Operations 8,890,546
- ------------------------------------------------------------------ ------------
Distributions to shareholders from net investment income (5,177,355)
- ------------------------------------------------------------------ ------------
Total Distribution to Shareholders (5,177,355)
- ------------------------------------------------------------------ ------------
Capital Share Transactions
Proceeds from shares sold 270,709,982
Proceeds from sales of shares as a result of reinvested
dividends 1,043,584
- ------------------------------------------------------------------ ------------
Net Increase in Net Assets From Share Transactions 271,753,566
- ------------------------------------------------------------------ ------------
Total Increase in Net Assets 275,466,757
- ------------------------------------------------------------------ ------------
Net Assets
Beginning of period -
End of period $275,466,757
- ------------------------------------------------------------------ ------------
See accompanying Notes to Financial Statements.
- -------------------------------------------------------------------------------
13
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
September 30, 2003
RMK High Income Fund, Inc.
Note 1: Summary of Significant Accounting Policies
RMK High Income Fund, Inc. is a closed-end management investment company. The
fund's primary investment objective is to seek a high level of income by
investing in below investment grade bonds (commonly referred to as "junk
bonds"). The fund seeks capital growth as a secondary objective when consistent
with the fund's primary objective. Under normal circumstances, the fund invests
a majority of its total assets in below investment-grade bonds that the fund's
investment adviser, Morgan Asset Management, Inc., believes offer attractive
yield and capital appreciation potential. The fund commenced operations on June
27, 2003. Capitalization for the fund was provided by the Adviser as follows:
Organization date April 16, 2003
Initial capitalization date June 11, 2003
Amount of initial capitalization $100,003
Shares issued at capitalization 6,981
Shares authorized 1,000,000,000
Public offering date June 24, 2003
Security Valuation
Investments in securities that trade on national securities exchanges are stated
at the last reported sales price on the day of valuation. Securities traded in
the over-the-counter market and listed securities for which no sale was reported
on that date are stated at the last quoted bid price. The fund normally obtains
market values for their securities from an independent pricing service or from
the use of an internal matrix system that derives value based on comparable
securities. Debt securities with remaining maturities of 60 days or less are
valued at amortized cost, or original cost plus accrued interest, both of which
approximate market. When the fund believes that a market quote does not reflect
a security's true value, the fund may substitute for the market value a fair
value estimate made according to methods approved by the Board of Directors.
Premiums and Discounts
Premiums and discounts on debt securities are amortized for financial reporting
purposes. All gain/loss on principal payments of mortgage-and asset-backed
securities are accounted for as interest income.
Other Policies
The fund follows industry practice and records security transactions on the
trade date. Dividend income and distributions to shareholders are recognized on
the ex-dividend date and interest is recognized on an accrual basis. Realized
gains and losses on securities transactions are determined using the specific
identification method.
Repurchase Agreements
The fund's policy for securities purchased under agreements to resell is to have
market value equal to or greater than the fund's purchase price and to have such
securities taken into possession by the fund's custodian. If the custodian
becomes bankrupt, the fund might be delayed, or may incur costs or possible
losses of principal and income, in selling the collateral.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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
14
the financial statements and the reported amounts of increase (decrease) in net
assets from operations during the period. Actual results could differ from those
estimates.
Note 2: Payment to Related Parties
Morgan Asset Management, Inc. is the investment adviser for the fund. Morgan
Keegan & Company provides accounting and other administrative services to the
fund. Investment advisory fees and accounting and administrative fees are based
on a percentage of the fund's average daily total assets minus the sum of
accrued liabilities other than debt entered into for purposes of leverage. The
fund is charged 0.65% for investment advisory services and 0.15% for accounting
and administrative services.
For the period ended September 30, 2003, Morgan Keegan and Company, Inc earned
no underwriting discounts, direct commissions or dealer incentives on the sales
and purchases of securities.
Note 3: Investment Securities
During the period, the cost of purchases and proceeds from sales of investment,
excluding short-term investments, were $309,207,644 and $47,356,256,
respectively.
Note 4: Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute to
shareholders all of its taxable income and capital gains. Because federal income
tax regulations differ from generally accepted accounting principles, income and
capital gain distributions determined in accordance with tax regulations differ
from net investment income and realized gains recognized for financial reporting
purposes. Accordingly the character of distributions and composition of net
assets for tax purposes differ from those reflected in the accompanying
financial statements.
- --------------------------------------------------------------------------------
Financial Highlights (Unaudited)
RMK High Income Fund, Inc.
For the Period
Ended
September 30,
2003(a)
-------------------------------------------------------------------
Net Asset Value, Beginning of Period $14.30
Net investment income 0.31
Net gains on securities, realized and unrealized 0.18
------------------------------------------------------------------
Total From Investment Operations 0.49
------------------------------------------------------------------
Dividends from net investment income (0.30)
Distributions from capital gains --
Return of capital --
------------------------------------------------------------------
15
Total Distributions (0.30)
------------------------------------------------------------------
Net Asset Value, End of Period $14.49
------------------------------------------------------------------
Total Return, Net Asset Value 2.17%
------------------------------------------------------------------
Market Value, End of Period $15.15
Total Return, Market Value 1.83%
Net Assets, End of Period $275,466,757
Ratio of Expenses to Average Net Assets^ 0.94%
Ratio of Net Income to Average Net Assets^ 7.38%
Portfolio Turnover Rate 34%
------------------------------------------------------------------
(a) For the period from June 27, 2003 (commencement of operations) to September
30, 2003.
^ Ratio annualized for the periods less than one year.
RMK High Income Fund, Inc.
Dividend Reinvestment Plan
The fund offers a dividend reinvestment plan (the "Plan") pursuant to
which shareholders, unless they elect otherwise, automatically have dividends
and capital gains distributions reinvested in common shares of the fund by
EquiServe Trust Company, N.A. and EquiServe, Inc. (together, the "Plan Agent").
Shareholders who elect not to participate in the Plan receive all distributions
in cash paid by wire or check mailed directly to the record holder by the Plan
Agent.
How the Plan Works
After the fund declares a dividend or determines to make a capital gain
distribution, the Plan Agent will acquire shares for the participants' accounts,
depending upon the circumstances described below, either (i) through receipt of
newly-issued shares of the fund or (ii) by open-market purchases as follows:
. If, on the payment date, the NAV is equal to or less than the market
price per share plus estimated brokerage commissions, the Plan Agent
will invest the distribution amount in newly-issued shares on behalf
of the participants. The number of newly-issued shares to be credited
to each participant's account will be determined by dividing the
dollar amount of the distribution by the NAV on the date the shares
are issued. However, if the NAV is less than 95% of the market price
on the payment date, the dollar amount of the distribution will be
divided by 95% of the market price on the payment date. Because
common shares may be issued at less than their market price, Plan
participants may get a benefit that non-participants do not.
. If, on the payment date, the NAV is greater than the market value per
share plus estimated brokerage commissions, the Plan Agent will
invest the distribution amount in shares acquired on behalf of the
participants in open-market purchases, which may be made on the NYSE,
in the over-the-counter market or in negotiated transactions and may
be on such terms as to price, delivery and otherwise as the Plan
16
Agent shall determine. It is possible that the market price for the
shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per share the Plan
Agent pays may exceed the market price thereof on the payment date.
If the market price per share increases so that it equals or exceeds
the NAV per share (minus estimated brokerage commissions), the Plan
Agent will cease its purchases. Otherwise, the Plan Agent will use
all distributions received in cash to purchase shares in the open
market on or shortly after the payment date, but in no event more
than thirty (30) days after the payment date, except where temporary
curtailment or suspension of purchase is necessary to comply with
applicable provisions of the federal securities laws. If the Plan
Agent is unable to invest the full amount through open-market
purchases during the purchase period, the Plan Agent will request
that, with respect to the uninvested portion of such amount, the fund
issue new shares at the close of business on the earlier of the last
day of the purchase period or the first day during the purchase
period on which the NAV per share (minus estimated brokerage
commissions) equals or is less than the market price per share.
- --------------------------------------------------------------------------------
RMK High Income Fund, Inc.
Dividend Reinvestment Plan (Continued)
Costs of the Plan
The Plan Agent's fees for the handling of the reinvestment of dividends
and other distributions will be paid by the fund. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open-market purchases in connection with the reinvestment of dividends
and other distributions. If a participant elects to have the Plan Agent sell
part or all of his or her shares and remit the proceeds, the participant will be
subject to a $15.00 service fee and a $0.12 per share sold processing fee (which
includes applicable brokerage commissions the Plan Agent is required to pay).
The participant will not be charged any other fees for this service. However,
the fund reserves the right to amend the Plan to include a service fee payable
by the participant.
Tax Implications
The automatic reinvestment of dividends or distributions does not relieve
participants of any taxes which may be payable on such dividends or
distributions. Participants will receive tax information annually for their
personal records and to help them prepare their federal income tax return. For
further information as to the tax consequences of participation in the Plan,
participants should consult with their own tax advisors.
Right to Withdraw
Participants may withdraw from the Plan by calling the Plan Agent at
1-800-426-5523, writing to the Plan Agent at P.O. Box 43010, Providence, Rhode
Island 02940-3010 or completing and returning the transaction form attached to
each Plan statement. The withdrawal will be effective immediately if the
participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date. Otherwise, the withdrawal will be
effective the first trading day after the payment date for the dividend or
distribution with respect to any subsequent dividend or distribution.
17
- --------------------------------------------------------------------------------
RMK High Income Fund, Inc.
Privacy Notice
The Regions family of companies* is committed to safeguarding the personal
financial information you entrust to us. The information we collect is limited
to what we believe is necessary or useful to conduct our business; to administer
your records, accounts and funds; to comply with laws and regulations; to help
us design or improve products and services; and to understand your financial
needs so that we can provide you with quality products and superior service. We
collect this information from you on applications or other forms and from the
transactions you conduct with us, our affiliates or others. We do not disclose
any nonpublic personal information about you or any of our former customers to
anyone, except as permitted by applicable law. For instance, we may share
information with Regions companies providing financial and related services,
such as our securities broker-dealers, our insurance companies and agencies, our
banks and our mortgage companies as well as Regions companies providing
non-financial services, such as our operations and servicing companies. In
addition, to conduct company business and to offer products or services that may
complement your relationship with us, we may also share information we collect
about you with companies that perform services for us or on our behalf, such as
vendors we hire to prepare account statements or to provide support for one or
more of our products and services. These companies act on our behalf, and are
contractually obligated to keep the information we provide to them confidential
and to use the information only for the purposes authorized. To protect your
nonpublic personal information internally, we permit access to it only by
authorized employees and maintain physical, electronic and procedural safeguards
to guard your information. If you have any questions about our privacy policy,
please call us at 1-800-564-2113.
Proxy Voting Policies and Procedures
The fund votes proxies related to the portfolio's securities according to
a set of policies and procedures approved by the fund's board. A description of
the policies and procedures may be obtained, without charge, by calling
1-800-564-2113 or by visiting the SEC's website at www.sec.gov.
* Includes RMK High Income Fund, Inc., Regions Morgan Keegan Select Funds,
Morgan Keegan Select Fund, Inc., Morgan Asset Management, Inc., Morgan Keegan &
Company, Inc., Regions Bank, Regions Morgan Keegan Trust, FSB as well as other
Regions affiliates.
- --------------------------------------------------------------------------------
RMK High Income Fund, Inc.
18
Board of Directors
Allen B. Morgan Jr.* - Chairman and Director
J. Kenneth Alderman* - Director
William Jefferies Mann - Director
James D. Witherington, Jr. - Director
James Stillman R. McFadden - Director
Archie W. Willis III - Director
W. Randall Pittman - Director
Mary S. Stone - Director
Officers
Carter E. Anthony - President
Thomas R. Gamble - Vice-President
Joseph C. Weller - Treasurer
Charles D. Maxwell - Secretary and Assistant Treasurer
J. Thompson Weller - Assistant Secretary
Investment Adviser
Morgan Asset Management, Inc.
417 North 20th Street
Birmingham, AL 35203
Custodian
State Street Bank & Trust Company
108 Myrtle Street
Quincy, MA 02171
Transfer Agent
Equiserve
P.O. Box 43010
Providence, RI 02940-3011
Legal Counsel
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, DC 20036
Independent Auditors
PricewaterhouseCoopers LLP
1000 Morgan-Keegan Tower
50 North Front Street
Memphis, TN 38103
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of fund shares. Statements and other information
contained in this report are as dated and are subject to change.
* Directors who are "interested persons" of the fund as defined by the
Investment Company Act of 1940, as amended.
19
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Form N-CSR disclosure requirement not yet effective with respect to registrant.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-2(c) under the Act) within 90 days of this filing,
the President and Treasurer of the registrant have concluded that such
disclosure controls and procedures are effectively designed to ensure
that information required to be disclosed by the registrant is
accumulated and communicated to the registrant's management to allow
timely decisions regarding required disclosure.
(b) There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
ITEM 10. EXHIBITS.
(a) Form N-CSR disclosure requirement not yet effective with respect to
registrant.
(b) The certifications required by Rule 30a-2 under the Investment Company
Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley
Act of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) RMK High Income Fund, Inc.
By (Signature and Title) /s/ Carter E. Anthony
---------------------------------
Carter E. Anthony, President
Date November 25, 2003
------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Carter E. Anthony
---------------------------------
Carter E. Anthony, President
Date November 25, 2003
------------------------------------------------------
By (Signature and Title) /s/ Joseph C. Weller
-----------------------------------
Joseph C. Weller, Treasurer
Date November 25, 2003
------------------------------------------------------