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
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Rmk High Income Fund, Inc.
------------------------ ---------------------------
(Exact Name of Registrant as Specified in Charter)
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
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(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: March 31, 2004
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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:
During the period since RMK High Income Fund's inception date of June 24, 2003,
the strength among high-yield issues emanated from the more distressed sectors;
however, the strength among high-yield issues shifted to the higher credit
sectors during the quarter ended March 31, 2004. The Lehman Brothers U.S.
Corporate High Yield Index shows that the average high-yield bond returned
11.32% for the period beginning June 24, 2003 and ending March 31, 2004. Lower
credit quality issues, such as Caa, returned 13.89% during the period since the
Fund's inception, while Lehman Ba U.S. High Yield Index returned 10.22%. The
high returns among the lower credit quality sectors was a result of investors
driving prices up as they searched for higher yields while placing less
emphasis on the risk assumed in acquiring higher yields. However, in the
quarter ended March 31, 2004, investors appeared to be more discriminating in
the risk-return proposition offered by the lower rated credits in the
high-yield universe. This risk awareness is illustrated by the Lehman Brothers
U.S. Corporate High Yield Index tracking U.S. Treasury yields much closer in
the first quarter of 2004 than in the fourth quarter of 2003. In the fourth
quarter of 2003, U.S. corporate non-investment grade yields fell 104 basis
points versus a 13 basis point decrease in Treasury yields; however, in the
first quarter of 2004, U.S. corporate non-investment grade yields only fell 18
basis points versus a 10 basis point decrease for Treasury yields.
Consequently, non-investment grade corporate bonds are becoming more sensitive
to interest rates as perceived credit quality improves and absolute yields drop.
For the period from the inception date of June 24, 2003 to March 31, 2004, RMK
High Income Fund (RMH) returned 20.06% (market price) while maintaining a 200+
basis point current-yield advantage over the Lehman Ba U.S. High Yield Index.
Additionally, the fund outperformed the Lehman Ba U.S. High Yield Index return
of 10.22% during the same period. Additionally, the fund paid $1.18 in
dividends per share during the fiscal year ended March 31, 2004 with the first
dividend being paid in September of 2003. Furthermore, the fund's performance
has benefited from its tendency to trade at a premium since inception. As of
March 31, 2004, the fund traded at a 4.81% premium to its net asset value as
demand remains strong for our high-yield products as does the market's demand,
in general, for assets with a substantial yield.
1
To Our Shareholders
Given the dramatic recovery in the high-yield corporate universe over the past
20 months, we are more excited about the relative value in the structured
finance universe. While we will take advantage of opportunities in the
high-yield corporate sector, we believe that the better risk-adjusted returns
can be found in the asset-backed and commercial mortgage-backed sectors. We
continue to believe that a significant advantage of the fund is its diversity
among many different asset sectors that provide stability and income beyond the
performance of a single sector.
/s/ Carter Anthony /s/ James C. Kelsoe
Carter E. Anthony, CFA James C. Kelsoe, Jr., CFA
President Portfolio Manager
Morgan Asset Management, Inc. RMK High Income Fund Inc.
May 26, 2004
Portfolio Performance as of 3/31/04 (a)
- --------------------------------------------------------------------
Market Price Net Asset Value
----------------------------
6 Months 17.90% 13.29%
Since Inception (6/24/03) 20.06% 15.50%
Ratings Distribution as of 3/31/04 (b) (c)
- --------------------------------------------------------------------
AAA 5.3%
A 3.6%
BBB 14.2%
BB 27.3%
B 27.1%
CCC or below 13.9%
Non-rated 8.6%
(a) 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.
(b) The ratings distribution is based on the percentage of fixed income
securities.
(c) Current holdings may not reflect holdings as of the date of this report.
2
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
ASSET BACKED SECURITIES - INVESTMENT GRADE - 21.9% OF NET ASSETS
Collateralized Bond Obligation - 4.2%
2,000,000 Consec Funding 1A B, 7.18%
2/28/15 BBB $ 1,760,000 $ 1,760,000
3,440,000 E-Trade 2003-1A PSC, 11.50%
8/7/33 (a) BBB- 3,440,000 3,663,600
5,000,000 North Street 2000-2A B, 2.17%
10/30/11 (a) A- 2,306,440 2,336,700
5,000,000 Silver Leaf IA D1FX, 11.54%
5/15/13 (a) BBB 4,999,784 4,999,750
----------- -----------
$12,506,224 $12,760,050
----------- -----------
Franchise Loans - 9.6%
2,000,000 ACLC Business Trust 1998-2 A3,
6.686% 4/15/20 (a) AAA 1,836,949 1,930,000
2,778,025 Atherton Franchisee 1999-A A2,
7.23% 4/15/12 (a) A+ 2,470,435 2,697,596
Atherton Franchisee 1999-A AX,
1.254% 3/15/19 interest-only
strips (a) A+ 1,045,121 952,342
CNL Funding 1998-1, 1.935%
9/18/12 interest-only strips (a) AAA 3,555,201 3,663,944
1,000,000 FMAC Loan Trust 1997-A B, 7.66%
4/15/19 (a) A 704,680 725,130
2,927,187 FMAC Loan Trust 1997-C A, 6.75%
12/15/19 (a) BBB 2,707,603 2,897,915
7,000,000 FMAC Loan Trust 1998-CA A2,
6.66% 1/15/12 (a) BBB 4,989,034 5,670,000
FMAC Loan Trust 1998-CA AX,
1.796% 9/15/18 interst-only
strips (a) AAA 4,023,075 4,603,052
3,548,000 Falcon Franchise Loan 2003-1 D,
7.836% 1/5/25 (a) BBB- 3,260,962 3,228,467
26,695,806 United Capital 2003-A NOTE,
2.30% 11/8/27 (a) AAA 2,027,645 2,362,579
----------- -----------
$26,620,705 $28,731,025
----------- -----------
Home Equity Loans (Non-High Loan-To-Value) - 3.9%
2,000,000 Ameriquest 2003-8 MV6, 4.87%
10/25/33 BBB- 1,678,269 1,794,966
2,535,068 Amresco Residential Securities
1999-1 B, 5.09% 11/25/29 BBB 2,398,822 2,398,808
2,542,910 Delta Funding Home Equity 1997-2
B3, 7.80% 6/25/27 BBB 1,810,787 1,797,049
3,500,000 Delta Funding Home Equity 1999-3
B, 7.60% 1/15/30 BBB- 2,943,486 3,004,995
3
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
3,000,000 Delta Funding Home Equity 2000-1
B, 8.09% 5/15/30 BBB- $ 2,640,866 $ 2,647,860
----------- -----------
$11,472,230 $11,643,678
----------- -----------
Manufactured Housing Loans - 3.4%
5,000,000 Green Tree Financial 1996-9 M1,
7.63% 1/15/28 BBB+ 4,381,819 4,364,600
8,000,000 Greenpoint Manufactured Housing
1999-5 M2,
9.23% 12/15/29 A 5,740,535 5,716,400
----------- -----------
$10,122,354 $10,081,000
----------- -----------
Certificate-Backed Obligations - 0.8%
2,500,000 MMPACS Funding,
4.25% 8/1/31 (a) BBB 2,478,280 2,525,000
----------- -----------
Total Asset Backed Securities - Investment Grade $63,199,793 $65,740,753
----------- -----------
ASSET BACKED SECURITIES - NON-INVESTMENT GRADE - 68.5% OF NET ASSETS
Auto Loans - 0.7%
2,865,000 Union Acceptance 2001-A C, 10.00%
4/8/09 (a) Non-rated 2,463,928 2,058,302
Collateralized Bond Obligation - 3.0%
1,700,000 US Capital Funding I, Zero Coupon
Bond 5/1/34 Non-rated 1,700,000 1,700,000
5,000,000 Travelers Funding 1A B, 6.90%
2/18/14 (a) BB- 3,747,551 3,725,000
7,000,000 Valeo 2X A2, 1.95% 6/1/13 BB+ 3,535,166 3,570,000
----------- -----------
$ 8,982,717 $ 8,995,000
----------- -----------
Commercial Loans - 23.3%
7,000,000 Asset Securitization 1997-D4 B2,
7.525% 4/14/29 BB- 5,502,066 5,903,590
2,000,000 Chase Commerical Mortgage 2000-2
H, 6.65% 7/15/32 (a) BB 1,803,413 1,800,680
7,500,000 Commercial Mortgage 2001-J1A F,
6.958% 2/14/34 (a) BB 6,457,619 6,657,015
7,000,000 CS First Boston Mortgage 1997 C-1
F, 7.50% 6/20/29 (a) B+ 4,981,525 5,522,650
5,000,000 CS First Boston 1997-C2 F, 7.46%
1/17/35 BB 4,440,008 4,508,050
3,000,000 DLJ Mortgage 2000-CPK1 B4,
6.527% 10/10/10 (a) BB+ 2,199,775 2,233,650
4
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
2,568,000 First Union NB-Bank of America
Mortgage 2001-C1 K, 6.00%
3/15/33 (a) BB+ $ 2,128,775 $ 2,239,874
7,000,000 First Union-Lehman Brothers
Mortgage 1997-C2 G, 7.50%
11/18/29 BB 5,702,002 5,953,010
20,271,000 GMAC Commercial Mortgage 1997-
C2 F, 6.75% 4/15/29 B 13,494,660 13,772,117
5,000,000 GS Mortgage 1998-GLII F, 7.19%
4/13/31 (a) BB 4,123,371 4,440,750
2,500,000 JP Morgan Commercial Mortgage
1999-C8 H, 6.00% 7/15/31 (a) B- 1,621,527 1,773,750
4,000,000 LB Commercial Mortgage 1998-C4
J, 5.60% 10/15/35 (a) B+ 2,065,029 2,210,776
5,000,000 Merrill Lynch Mortgage 1997-C1 F,
7.12% 6/18/29 B 3,982,015 4,105,400
5,000,000 Salomon Brothers Mortgage 2000-
C3 H, 7.00% 12/18/33 (a) BB+ 4,151,454 4,319,100
5,000,000 Salomon Brothers Mortgage 2000-
C2 H, 6.308% 7/18/33 (a) BB+ 4,109,477 4,310,200
----------- -----------
$66,762,716 $69,750,612
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Credit Cards - 3.5%
8,794,111 First Consumers 2001-A 1.40%
9/15/08 BB 8,091,876 8,090,582
5,000,000 Nextcard Credit Card Master Trust
2000-1A C, 2.744% 12/15/06 (a) CCC- 2,649,903 2,550,000
----------- -----------
$10,741,779 $10,640,582
----------- -----------
Equipment Leases - 3.2%
10,000,000 Pegasus Aviation Lease 1999-1A
A2, 6.30% 3/25/29 (a) B- 5,400,594 5,262,500
2,000,000 Pegasus Aviation Lease 2000-1 A2,
8.37% 3/25/30 (a) BB 1,152,634 1,310,000
5,448,199 Pegasus Aviation Lease 2001-1A
B2, 7.27% 5/10/31 (a) BB+ 2,633,993 2,887,545
----------- -----------
$ 9,187,221 $ 9,460,045
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Franchise Loans - 19.7%
9,000,000 Enterprise Mortgage 1998-1 A2,
6.38% 1/15/25 (a) B 7,908,406 8,193,690
12,000,000 Enterprise Mortgage 1998-1 A3,
6.63% 1/15/25 (a) B 6,469,588 6,706,800
5
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
Enterprise Mortgage 1998-1, 1.349%
1/15/25 interest-only strips (a) B $ 2,253,727 $ 2,356,000
5,000,000 Enterprise Mortgage 1999-1 A2,
6.90% 10/15/25 (a) CCC 1,568,755 1,547,800
8,587,072 Enterprise Mortgage 2000-1 A1,
7.712% 1/15/27 (a) B- 5,489,991 5,215,358
19,800,000 Enterprise Mortgage 2000-1 A2,
8.21% 1/15/27 (a) B- 10,689,122 10,660,716
3,265,877 FMAC Loan Trust 1996-B A1,
7.629% 11/15/18 (a) DDD 2,209,986 2,351,432
5,433,950 FMAC Loan Trust 1996-B A2,
2.10% 11/15/18 (a) DDD 3,331,242 3,314,709
8,068,581 FMAC Loan Trust 1997-B A, 6.85%
9/15/19 (a) B 6,335,402 6,938,980
4,059,457 FMAC Loan Trust 1998-A A3,
6.69% 9/15/20 (a) BB 2,933,903 3,024,296
8,335,284 FMAC Loan Trust 1998-BA A2,
6.74% 11/15/20 (a) B 5,945,778 6,084,758
1,500,000 Falcon Franchise 1999-1 E, 6.50%
1/5/14 BB 1,172,766 1,185,855
2,000,000 Falcon Franchise Loan 200-1 E,
6.50% 4/5/16 (a) BB 1,442,028 1,456,340
----------- -----------
$57,750,694 $59,036,734
----------- -----------
Home Equity Loans (Non-High Loan-To-Value) - 8.0%
2,500,000 Ace Securities 2004-FM1 B1A,
4.59% 9/25/33 BB 1,980,233 1,977,200
5,000,000 Conseco Finance 2000-D B2,
11.30% 4/15/26 CCC 4,320,839 4,350,000
6,060,000 Conseco Finance 2001-A IB2,
10.30% 3/15/32 BB+ 5,569,408 5,768,878
2,845,782 IMC Home Equity 1997-3 B, 7.87%
8/20/28 CC 1,417,960 1,472,095
5,299,288 IMC Home Equity 1997-5 B, 7.59%
11/20/28 D 3,140,512 3,208,613
5,000,000 Long Beach Holdings 2003-3 N2,
10.00% 7/25/33 (a) BB 3,732,668 4,000,000
4,000,000 Long Beach Mortgage 2004-1 B,
4.59% 2/25/34 (a) Non-rated 3,239,524 3,235,640
----------- -----------
$23,401,144 $24,012,426
----------- -----------
Manufactured Housing Loans - 4.4%
5,000,000 Conseco Finance 2000-6 M1, 7.72%
9/1/32 CCC 2,650,920 2,600,000
6
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
1,000,000 Conseco Finance 2001-1 M1,
7.535% 7/1/32 CCC $ 687,925 $ 658,170
1,661,527 Green Tree Financial 1994-1 B2,
Zero Coupon Bond 4/15/19 (d) CC 965,074 963,685
2,000,000 Green Tree Financial 1997-3 M1,
7.53 % 3/15/28 B 1,284,245 1,335,180
21,505,000 Madison Avenue Manufactured
Housing 2002-A B2, 4.37%
3/25/32 BB- 7,307,465 7,741,800
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$ 12,895,629 $ 13,298,835
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Certificate-Backed Obligations - 2.7%
2,000,000 Preferred Term III, Zero Coupon
Bond 11/5/33 Non-rated 1,898,814 1,898,000
2,500,000 INCAPS Funding 2003-2A SIN,
Zero Coupon Bond 1/15/34 (a) Non-rated 2,363,665 2,362,500
2,000,000 MMCAPS Funding, 10.00%
5/1/33 Non-rated 1,941,385 1,940,000
735,981 Preferred Term Securities X, Zero
Coupon Bond 7/3/33 (a) Non-rated 725,477 724,941
1,316,750 TPREF Funding III, 11.00%
1/15/33 (a) Non-rated 1,285,119 1,290,415
------------ ------------
$ 8,214,460 $ 8,215,856
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Total Asset Backed Securities - Non-Investment Grade $200,400,288 $205,468,392
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CORPORATE BONDS - INVESTMENT GRADE - 0.6% OF NET ASSETS
Telecommunications - 0.6%
2,000,000 Tele Norte Leste, 8.00% Bond
12/18/13 (a)(e) BBB- 1,811,122 1,810,000
------------ ------------
Total Corporate Bonds - Investment Grade $ 1,811,122 $ 1,810,000
------------ ------------
CORPORATE BONDS - NON-INVESTMENT GRADE - 13.8% OF NET ASSETS
Electronics - 1.3%
2,000,000 Applied Extrusion Technology,
10.75% Bond 7/1/11 CCC 1,720,513 1,640,000
2,000,000 Knowles Electronics, 13.125%
Bond 10/15/09 CCC- 1,888,358 2,110,000
------------ ------------
$ 3,608,871 $ 3,750,000
------------ ------------
Energy - 3.7%
3,600,000 Calpine, 10.25% Bond 5/15/06 CCC+ 3,511,421 3,498,840
7
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
3,000,000 Calpine, 8.25% Bond 8/15/05 CCC+ $ 2,906,025 $ 2,865,000
1,000,000 Crown Central Petroleum, 10.875%
Bond 2/1/05 CCC- 740,783 745,000
2,000,000 Mission Resources, 10.875% Bond
4/1/07 CCC- 2,034,813 2,035,000
2,000,000 United Refining, 10.75% Bond
6/15/07 B- 1,837,140 1,850,000
----------- -----------
$11,030,182 $10,993,840
----------- -----------
Finance - 1.1%
2,250,000 Cerro Negro Finance, 7.90% Bond
12/1/20 (a)(e) B+ 1,844,288 1,923,750
1,525,000 Petrozuata Finance, 8.22% Bond
4/1/17 (a)(e) B 1,319,618 1,387,750
----------- -----------
$ 3,163,906 $ 3,311,500
----------- -----------
Food & Agriculture - 0.8%
500,000 New World Pasta, 9.25% Bond
2/15/09 Non-rated 122,939 85,000
3,000,000 Sbarro, 11.00% Bond 9/15/09 CCC 2,458,590 2,392,500
----------- -----------
$ 2,581,529 $ 2,477,500
----------- -----------
Manufacturing - 2.7%
5,000,000 US Can, 12.375% Bond 10/1/10 CCC+ 4,427,804 4,712,500
3,500,000 VITRO SA, 11.75% Bond 11/1/13 (a)(e) B- 3,469,033 3,351,250
----------- -----------
$ 7,896,837 $ 8,063,750
----------- -----------
Recreational - 1.2%
4,400,000 Bally Total Fitness, 9.875% Bond
10/15/07 B- 3,754,910 3,608,000
Technology - 0.3%
1,000,000 Aavid Thermal, 12.75% Bond 2/1/07 Non-rated 1,061,547 1,063,750
Telecommunications - 1.6%
400,000 BARAK I.T.C., 12.50% Bond
11/15/07 (e) B- 300,723 296,000
4,000,000 Charter, 10.00% Bond 5/15/11 CCC- 3,368,447 3,320,000
1,500,000 Level 3 Communications, 10.50%
Bond 12/1/08 CC 1,456,165 1,230,000
----------- -----------
$ 5,125,335 $ 4,846,000
----------- -----------
Transportation - 1.1%
5,000,000 Evergreen International Aviation,
12.00% Bond 5/15/10 (a) Non-rated 4,238,972 3,181,250
----------- -----------
Total Corporate Bonds - Non-Investment Grade $42,462,089 $41,295,590
----------- -----------
8
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
MORTGAGE BACKED SECURITIES - 9.3% OF NET ASSETS
Collateralized Mortgage Obligation - 9.3%
GNMA 2003-59 XA, 0.304% 6/16/34
interest-only strips (c) Non-rated $ 3,877,403 $ 3,993,017
GNMA 2003-64 XA, 0.496% 8/16/43
interest-only strips (c) Non-rated 5,648,017 5,800,938
5,000,000 GE Capital Commercial Mortgage
2000-1 G, 6.131% 1/15/33 (a) BB+ 4,350,617 4,337,700
Harborview Mortgage 2003-2 1X,
2.115% 10/19/33 interest-only strips AAA 2,485,551 2,552,471
2,000,000 Inner Harbor 2001-1A B2, 11.19%
6/15/13 (a) BB 2,009,859 2,015,000
Mellon Residential 2002-TBC2 X,
1.101% 8/15/32 interest-only strips AAA 2,557,712 3,006,812
2,167,000 Structured Asset 2003-BC1 B2,
9.00% 5/25/32 BBB- 2,114,136 2,226,267
3,837,278 Structured Asset 2003-S A, 7.50%
12/28/33 (a) BBB 3,799,252 3,798,906
----------- -----------
Total Mortgage Backed Securities $26,842,547 $27,731,111
----------- -----------
COMMON STOCKS - 7.9% OF NET ASSETS
27,800 AMB Property Corporation 777,089 1,033,326
35,500 American Capital Strategies, Ltd. 947,139 1,180,020
32,000 Andrx Corporation (d) 608,786 870,400
52,000 Anthracite Capital, Inc. 566,009 661,960
600 Autozone, Inc. (d) 50,730 51,582
12,250 Bank of America Corporation 986,712 992,005
17,500 Baxter International Inc. 432,750 540,575
15,400 Black & Decker Corporation 708,697 876,876
14,100 CVS Corporation 515,853 497,730
80,100 Christopher & Banks Corporation 1,451,744 1,690,911
210,400 Cincinnati Bell Inc. (d) 1,040,202 856,328
129,450 General Cable Corporation 1,009,335 955,341
13,700 General Motors Corporation 652,798 645,270
16,600 Harley-Davidson, Inc. 762,014 885,444
15,000 J.P. Morgan Chase & Co. 604,326 629,250
22,100 Kerr-McGee Corporation 1,040,094 1,138,150
77,000 KFX Inc. (d) 496,521 800,030
47,200 King Pharmaceuticals, Inc. (d) 662,905 794,848
12,700 L-3 Communications Corporation 583,195 755,396
24,000 Limited Brands, Inc. 379,652 480,000
25,300 Maytag Corporation 638,496 798,721
47,500 MCG Capital Corporation 777,805 958,550
31,000 Microsoft Corporation 799,552 772,830
9
Investments
March 31, 2004
RMK High Income Fund, Inc. Schedule of Investments
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
139,500 Sanmina-SCI Corporation $ 1,617,249 $ 1,540,080
38,100 Technology Investment Capital
Corporation (d) 574,525 555,879
9,100 Wells Fargo & Company 481,890 515,697
50,150 Knightsbridge Tankers, Ltd. 801,998 1,066,691
15,900 XL Capital Ltd. 1,253,054 1,209,036
------------ ------------
Total Common Stocks $ 21,221,120 $ 23,752,926
------------ ------------
INVESTMENT COMPANIES - 0.3% OF NET ASSETS
15,400 Pioneer High Income Trust 234,787 255,178
23,000 Royce Value Trust, Inc. 379,650 409,400
17,800 Salomon Brothers High Income
Fund II Inc. 225,318 227,484
------------ ------------
Total Investment Companies $ 839,755 $ 892,062
------------ ------------
PREFERRED STOCKS - 0.2% OF NET ASSETS
50,000 The Williams Companies, Inc. 670,500 637,000
EURODOLLAR TIME DEPOSITS - 1.7% OF NET ASSETS
State Street Bank & Trust Company
Eurodollar time deposits dated
March 31, 2004, 0.50%, maturing at
$ 5,015,070 on April 1, 2004. $ 5,015,000 $ 5,015,000
------------ ------------
Total Investments - 124.2% of Net Assets $362,462,214 $372,342,834
------------ ------------
Other Assets and Liabilities, net - (24.2%) of Net Assets (72,571,140)
------------
Net Assets $299,771,694
============
(a) Securities sold within the terms of a private placement memorandum, exempt
from registration under Rule 144A under the Securities Act of 1933, as
ended, 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.
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
(c) The issuer is a publicly-traded company that operates under a congressional
charter; its securities are neither issued nor guaranteed by the U. S.
government.
(d) These securities are non-income producing.
(e) These securities are classified as Yankee Bonds, which are U.S. dollar
denominated bonds issued in the United States by a foreign entity.
10
Statement of Assets and Liabilities
March 31, 2004
RMK High Income Fund, Inc.
ASSETS:
Investments, in securities as detailed in the accompanying
schedules at market (cost $362,462,214) $372,342,834
Cash on deposit with custodian 11,062
Dividends and interest receivable 5,628,606
Receivable for securities sold 2,942,929
Other assets 13,524
Debt issue costs 202,269
------------
TOTAL ASSETS 381,141,224
LIABILITIES:
Demand loan payable to bank (Note 5) 75,000,000
Interest payable 185,677
Accrued expenses 47,631
Due to affiliates 242,558
Payable for securities purchased 5,893,664
------------
TOTAL LIABILITIES 81,369,530
------------
NET ASSETS $299,771,694
============
NET ASSETS consist of:
Net unrealized appreciation of investments 9,880,620
Common stock, $.0001 par value (1,000,000,000 shares authorized) 1,956
Paid-in capital 280,171,553
Undistributed net investment income 1,016,118
Accumulated net realized gain on investments 8,701,447
------------
NET ASSETS $299,771,694
============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE:
Common shares outstanding, $.0001 par value (1,000,000,000 shares authorized) 19,563,806
Net asset value per share $15.32
See accompanying Notes to Financial Statements.
11
Statement of Operations
For the Period From June 24, 2003
to March 31, 2004
RMK High Income Fund, Inc.
INVESTMENT INCOME:
Interest $23,341,781
Dividends 390,926
-----------
Total Investment Income 23,732,707
EXPENSES:
Management fee 1,433,432
Accounting fee 330,792
Interest expense 218,829
Debt issue expense 48,248
Legal fees 122,066
Audit fees 25,000
Transfer agent fees 34,236
Custodian fees 11,388
Registration fees 32,632
Directors fees 49,000
Other 38,046
-----------
Total Expenses 2,343,669
-----------
NET INVESTMENT INCOME 21,389,038
-----------
Realized and Unrealized Gains on Investments:
Change in unrealized appreciation 9,880,620
Net realized gain on securities 11,000,226
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $42,269,884
===========
See accompanying Notes to Financial Statements.
12
Statement of Changes in Net Assets
For the Period From June 24, 2003
to March 31, 2004
RMK High Income Fund, Inc.
Increase in net assets from operations:
Net investment income $ 21,389,038
Unrealized appreciation, net 9,880,620
Net realized gain from investment transactions 11,000,226
------------
Increase in net assets resulting from operations 42,269,884
------------
Distributions to Shareholders
Distributions to shareholders from net investment income (19,406,371)
Distributions to shareholders from net realized gain on investments (3,265,328)
------------
Total distribution to shareholders (22,671,699)
------------
Capital share transactions:
Proceeds from shares sold (18,933,400 shares) 270,609,979
Proceeds from sales of shares as a result of reinvested dividends (623,425 shares) 9,463,527
------------
Increase in net assets from share transactions 280,073,506
------------
Total increase in net assets 299,671,691
NET ASSETS:
Beginning of period 100,003
End of period $299,771,694
============
See accompanying Notes to Financial Statements.
13
Statement of Cash Flows
For the Period From June 24, 2003
to March 31, 2004
RMK High Income Fund, Inc.
Increase (Decrease) in Cash -
Cash flows from operating activities
Net increase in net assets from operations $ 42,269,884
Adjustments to reconcile net increase in net assets from
operations to net cash used in operating activities
Purchase of investment securities (541,701,003)
Proceeds from disposition of investment securities 190,486,720
Purchase of short-term investment securities, net (5,264,224)
Proceeds from principal payments 7,707,278
Unrealized appreciation on securities (9,880,620)
Amortization/accretion of premiums/discount on securities (1,732,230)
Net realized gain on investments (11,000,226)
Net realized gain on principal payments (958,529)
Amortization of debt issue costs 48,248
Increase in dividends and interest receivable (5,628,606)
Increase in receivables for securities purchased (2,942,929)
Increase in other assets (13,524)
Increase in payables for securities purchased 5,893,664
Increase in interest payable 185,677
Increase in accrued expenses 47,631
Increase in due to affiliates 242,558
-------------
Net cash used in operating activities (332,240,231)
-------------
Cash flows from financing activities
Increase in loan payable 75,000,000
Cash paid for debt issue costs (250,517)
Proceeds from shares sold 270,609,979
Cash distributions paid (13,208,172)
-------------
Net cash provided by financing activities 332,151,290
-------------
Net decrease in cash (88,941)
=============
Cash
Beginning balance 100,003
Ending balance $ 11,062
=============
Supplemental disclosure of cash flow information: Noncash financing activities
not included herein consist of reinvestment of dividends and distributions of
$9,463,527.
Total cash paid for interest was $33,152.
See accompanying Notes to Financial Statements.
14
Notes to Financial Statements
March 31, 2004
RMK High Income Fund, Inc.
Note 1: Organization and Summary of Significant Accounting Policies
RMK High Income Fund, Inc. is registered under the Investment Company Act of
1940 as a diversified, 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
ability of the issuers of the securities held by the fund to meet their
obligations might be affected by economic developments in a specific industry,
state, or region. 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 adviser, Morgan Asset Management, Inc., believes offer
attractive yield and capital appreciation potential. The fund began operations
on June 24, 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 value. Investments in open-end registered
investment companies are valued at net asset value. 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. The values assigned to fair value
investments are based on available information and do not necessarily represent
amounts that might ultimately be realized, since such amounts depend on future
developments inherent in long-term investments. Further, because of the
inherent uncertainty of valuation, such estimated values may differ
significantly from the values that would have been used had a ready market for
the investments existed, and the differences could be material.
15
Notes to Financial Statements
March 31, 2004
RMK High Income Fund, Inc.
Option Writing:
When a fund writes an option, an amount equal to the premium received by the
fund is recorded as a liability and is subsequently adjusted to the current
fair value of the option written. Premiums received from writing options that
expire unexercised are treated by the fund on the expiration date as realized
gains from investments. If a call option is exercised, the premium is added to
the proceeds from the sale of the underlying security in determining whether
the fund has realized a gain or loss. If a put option is exercised, the premium
reduces the cost basis of the securities purchased by the fund. The fund as
writer of an option bears the market risk of an unfavorable change in the price
of the security underlying the written option.
Transactions in options written during the period ended March 31, 2004 were as
follows:
Number of Premiums
Contracts Received
--------- ---------
Options outstanding at June 24, 2003
(commencement of operations) - $ -
Options written 3,720 190,670
Options expired (1,952) (80,057)
Options exercised (1,768) (110,613)
Options outstanding at March 31, 2004 - $ -
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. Debt issue costs are amortized using the straight-line
method over the life of the debt and are shown net of accumulated amortization
of $48,248 at March 31, 2004.
Repurchase Agreements:
The fund may engage in repurchase agreement transactions. Under the terms of a
typical repurchase agreement, a fund takes possession of an underlying debt
obligation subject to an obligation of the seller to repurchase, and a fund to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during a fund's holding period. The value of the collateral is at all
times at
16
Notes to Financial Statements
March 31, 2004
RMK High Income Fund, Inc.
least equal to the total amount of the repurchase obligation, including
interest. In the event of counterparty default, a fund has the right to use the
collateral to satisfy the terms of the repurchase agreement. However, there
could be potential loss to the fund in the event the fund is delayed or
prevented from exercising its right to dispose of the collateral securities,
including the risk of possible decline in the value of the collateral
securities during the period while the fund seeks to assert its rights. The
fund's investment adviser reviews the creditworthiness of those banks and
dealers with which the fund enters into repurchase agreements to evaluate
potential risks.
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 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 and administrator of
the fund. Investment advisory fees 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 administrative
services. Morgan Asset Management, Inc. is a wholly owned subsidiary of Regions
Financial Corporation.
For the period ended March 31, 2004, Morgan Keegan & Company, Inc. earned no
underwriting discounts, direct commissions, or dealer incentives on the sales
and purchases of securities.
Directors of the fund who are "interested persons" as defined in the 1940 Act
receive no salary or fees from the fund. Independent Directors of the fund
receive from the fund an annual retainer of $4,000 and a fee of $1,000 and
reimbursement for related expenses for each meeting of the Board he or she
attends. Each chairperson of the Independent Directors Committee and Audit
Committee receives from the Fund annual compensation of $500. No Director is
entitled to receive pension or retirement benefits from the fund.
17
Notes to Financial Statements
March 31, 2004
RMK High Income Fund, Inc.
Note 3: Investment Securities
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $541,701,003 and
$198,193,998, 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.
The classification of distributions for tax purposes for the period ended March
31, 2004 was $22,671,699 in ordinary income.
At March 31, 2004, the tax basis components of net assets were as follows:
Unrealized appreciation $ 13,482,500
Unrealized depreciation (3,755,162)
------------
Net unrealized appreciation 9,727,338
Undistributed ordinary income 9,948,932
Other temporary differences (78,085)
------------
Distributable earnings 19,598,185
Common stock and paid-in capital 280,173,509
------------
Net assets 299,771,694
============
Pursuant to federal income tax regulations applicable to investment companies,
the fund has elected to treat net capital losses realized between November 1
and March 31 of each year as occurring on the first day of the following tax
year. For the period ended March 31, 2004 there were no realized losses of the
fund reflected in the accompanying financial statements which will not be
recognized for federal income tax purposes until next year.
18
Notes to Financial Statements
March 31, 2004
RMK High Income Fund, Inc.
The timing and character of income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America. These
differences are primarily due to differing treatments for gains/losses on
principal payments of mortgage- and asset-backed securities. For the period
ended March 31, 2004, permanent differences identified and reclassified among
the components of net assets were as follows:
Undistributed net investment income $(966,549)
Accumulated net realized gain on investments $ 966,549
At March 31, 2004, the cost of investments for federal income tax purposes was
$362,615,496.
Note 5: Bank Loans
The fund is permitted to borrow up to one-third of the value of its net assets,
before such borrowings, for investment purposes. Such borrowing is referred to
as leveraging. The fund has a collateralized $100,000,000 bank line of credit
for this purpose, which matures in December of 2004. All of the fund's
investment securities are pledged as collateral under the borrowing arrangement
and the collateral may be sold. As of March 31, 2004, the outstanding balance
on the line of credit was $75,000,000 with $25,000,000 in unused borrowings.
Borrowings under this agreement bear interest at a fixed rate determined on the
date of borrowing as LIBOR plus 0.75% per annum. Fees of 0.10% per annum are
paid on the unused portion of the line of credit. The average balance during
the period ended March 31, 2004 was $17,500,000 or $0.94 per share, based on
average shares outstanding of 18,688,047. The average interest rate during the
period ended March 31, 2004 was 1.925%. The maximum amount of borrowings
outstanding at any month-end during the period was $75,000,000.
19
Financial Highlights
RMK High Income Fund, Inc.
For the Period
Ended
March 31,
2004 (a)
Net Asset Value, Beginning of Period $ 14.33(b)
Net investment income 1.11
Net gains on securities, realized and unrealized 1.09
--------
Total From Investment Operations 2.20
========
Dividends from net investment income (1.01)
Distributions from capital gains (0.17)
--------
Total Distributions (1.18)
========
Offering Costs Charged to Paid-in Capital (0.03)
========
Net Asset Value, End of Period $ 15.32
========
Total Return, Net Asset Value(c) 15.50%
========
Common Share Price, End of Period $ 16.67
Total Return, Market Value(c) 20.06%
Net Assets, End of Period (000's) $299,772
Ratio of Expenses to Average Net Assets(d) 1.11%
Ratio of Net Income to Average Net Assets(d) 10.15%
Portfolio Turnover Rate 76%
========
- --------
(a) For the period from June 24, 2003 (commencement of operations) to March 31,
2004.
(b) Net of sales load of $0.675 on initial shares issued.
(c) Total investment return is calculated assuming a purchase of common shares
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions are assumed, for
purposes of this calculation, to be reinvested at prices obtained under the
fund's reinvestment plan. Total investment return is not annualized for
periods of less than one year. Brokerage commissions are not reflected.
(d) Ratio annualized for period of less than one year.
20
Report of Independent Auditors
To the Shareholders and Board of Directors of RMK High Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of RMK High Income
Fund, Inc. (the "Fund") at March 31, 2004, and the results of its operations,
the changes in its net assets, cash flows, and the financial highlights for the
period from June 24, 2003 (commencement of operations) through March 31, 2004,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States), which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit, which included confirmation of
securities at March 31, 2004 by correspondence with the custodian and brokers,
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Memphis, Tennessee
May 12, 2004
21
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 recordholder 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 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
22
RMK High Income Fund, Inc.
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.
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.
23
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., RMK Strategic 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.
24
RMK High Income Fund, Inc.
The following tables set forth information concerning the directors and
officers of the fund. All persons named as directors and officers also serve in
similar capacities for other funds in the Regions Morgan Keegan fund complex.
The Statement of Additional Information for the fund includes additional
information about the fund's directors and is available upon request, without
charge, by calling 1-800-366-7426.
Information about the Fund's Directors
Position(s) Number of
Held with Portfolios in
Fund and Fund Other
Length of Complex Directorships
Name, Address, Time Principal Occupation During Overseen by Held by
Age(1) Served(2) Past Five Years Director(3) Director
- ----------------- ----------- --------------------------------- ------------- -------------
CLASS I
Independent Directors
William Jefferies Director, Mr. Mann has been Chairman 16 None
Mann, Since 2003 and President of Mann
Age 70 Investments, Inc. (real estate
investments/private investing)
since 1985.
James Stillman Director, Mr. McFadden has been Chief 16 None
R. McFadden, Since 2003 Manager of McFadden
Age 46 Communications, LLC
(commercial printing) since 2002
and President and Director of
1703, Inc. (restaurant
management) since 1998. He also
has served as a Director for
several private companies since
1997.
Director Who Is An "Interested Person"
J. Kenneth Director, Mr. Alderman has been President 16 None
Alderman*, Since 2003 of Regions Morgan Keegan Trust
Age 51 Company and Chief Executive
Officer of Morgan Asset
Management, Inc. since 2002. He
has been Executive Vice
President of Regions Financial
Corporation since 2000. He
served Regions as Senior Vice
President and Capital
Management Group Director and
investment adviser to the Regions
Financial Corporation proprietary
fund family from 1995 to 2000.
He is a Certified Public
Accountant and Chartered
Financial Analyst.
25
RMK High Income Fund, Inc.
Position(s) Number of
Held with Portfolios in
Fund and Fund Other
Length of Complex Directorships
Name, Address, Time Principal Occupation During Overseen by Held by
Age(1) Served(2) Past Five Years Director(3) Director
- -------------- ----------- --------------------------------- ------------- -------------
CLASS II
Independent Directors
W. Randall Director, Director. Mr. Pittman has been 16 None
Pittman, Since 2003 Chief Financial Officer of
Age 50 Emageon, Inc. (healthcare
information systems) since 2002.
From 1999 to 2002, he was Chief
Financial Officer of BioCryst
Pharmaceuticals, Inc.
(biotechnology). From 1998 to
1999, he was Chief Financial
Officer of ScandiPharm, Inc.
(pharmaceuticals). From 1995 to
1998, he served as Senior Vice
President - Finance of
CaremarkRx (pharmacy benefit
management). From 1983 to
1995, he held various positions
with AmSouth Bancorporation
(bank holding company),
including Executive Vice
President and Controller. He is a
Certified Public Accountant, and
was with the accounting firm of
Ernst & Young, LLP from 1976
to 1983.
Mary S. Stone, Director, Ms. Stone has held the Hugh 16 None
Age 53 Since 2003 Culverhouse Endowed Chair of
Accountancy at the University of
Alabama, Culverhouse School of
Accountancy since 1981. She is
also a member of Financial
Accounting Standards Advisory
Council, AICPA, Accounting
Standards Executive Committee
and AACSB International
Accounting Accreditation
Committee.
26
RMK High Income Fund, Inc.
Position(s) Number of
Held with Portfolios in
Fund and Fund Other
Length of Complex Directorships
Name, Address, Time Principal Occupation During Overseen by Held by
Age(1) Served(2) Past Five Years Director(3) Director
- ------------------ ----------- -------------------------------- ------------- -------------
Director Who Is An "Interested Person"
Allen B. Director, Mr. Morgan has been Chairman 16 Regions
Morgan, Jr.*, Since 2003 of Morgan Keegan & Company, Financial
Age 61 Inc. since 1969 and Executive Corporation
Managing Director of Morgan
Keegan & Company, Inc. since
1969. He also has served as a
Director of Morgan Asset
Management, Inc. and of Regions
Financial Corporation since 1993
and 2001, respectively.
CLASS III
Independent Directors
Archie W. Director, Mr. Willis has been President of 16 None
Willis III, Since 2003 Community Capital (financial
Age 46 advisory and real estate
development consulting) since
1999 and Vice President of
Community Realty Company
(real estate brokerage) since
1999. He was a First Vice
President of Morgan Keegan &
Company, Inc. from 1991 to
1999. He also has served as a
Director of Memphis Telecom,
LLC since 2001.
James D. Director, Mr. Witherington has been 16 None
Witherington, Jr., Since 2003 President of SSM Corp.
Age 55 (management of venture capital
funds) since 1995. He also has
served as a Director for several
private companies since 1995.
(1) The address of each Director is c/o the Fund, Fifty North Front Street,
21st Floor, Memphis, Tennessee 38103.
(2) The Board is divided as equally as possible into three classes of Directors
designated Class I, Class II, and Class III. The terms of office of Class
I, Class II and Class III Directors shall expire at the annual meetings of
stockholders held in 2004, 2005, and 2006, respectively, and at each third
annual meeting of stockholders thereafter. Each Director serves until the
expiration of his or her term and until his or her successor is elected and
qualified, or until his or her death or resignation, or removal as provided
in the Fund's by-laws or charter or by statute.
(3) Each of the Directors oversees the other registered investment companies in
the Regions Morgan Keegan fund complex.
27
RMK High Income Fund, Inc.
Information about the Fund's Officers
Position(s) Number of
Held with Portfolios in
Fund and Fund Other
Length of Complex Directorships
Name, Address, Time Principal Occupation During Overseen by Held by
Age(1) Served(2) Past Five Years Director Director
- -------------- ----------- -------------------------------- ------------- -------------
Carter E. President, From 2002-present, Mr. N/A N/A
Anthony*, Since 2003 Anthony has served as President
Age 59 and Chief Investment Officer of
Morgan Asset Management Inc.
From 2000-2002, he served as
Executive Vice President and
Director of Capital Management
Group, Regions Financial
Corporation. From 1989-2000,
Mr. Anthony was Vice
President-Trust Investments,
National Bank of Commerce.
Thomas R. Vice- Mr. Gamble has been an N/A N/A
Gamble*, President, executive at Regions Financial
Age 61 Since 2003 Corporation since 1981. He was
a Corporate IRA Manager from
2000 to 2001 and a Senior Vice
President & Manager of
Employee Benefits at the
Birmingham Trust Department
of Regions Bank from 1981 to
2000.
Joseph C. Treasurer, Mr. Weller has been Executive N/A N/A
Weller*, Since 2003 Vice President and Chief
Age 65 Financial Officer of Morgan
Keegan & Company, Inc. since
1969, Treasurer and Secretary of
Morgan Keegan & Company,
Inc. since 1969 and Executive
Managing Director of Morgan
Keegan & Company, Inc. since
1969. He also has served as a
Director of Morgan Asset
Management, Inc. since 1993.
28
RMK High Income Fund, Inc.
Position(s) Number of
Held with Portfolios in
Fund and Fund Other
Length of Complex Directorships
Name, Address, Time Principal Occupation During Overseen by Held by
Age(1) Served(2) Past Five Years Director Director
- -------------- ------------- ------------------------------- ------------- -------------
Charles D. Secretary Mr. Maxwell has been a N/A N/A
Maxwell*, and Assistant Managing Director of Morgan
Age 49 Treasurer, Keegan & Company, Inc. since
Since 2003 1998 and Assistant Treasurer
and Assistant Secretary of
Morgan Keegan & Company,
Inc. since 1994. He has been
Secretary and Treasurer of
Morgan Asset Management, Inc.
since 1993. He was Senior Vice
President of Morgan Keegan &
Company, Inc. from 1995 to
1997. Mr. Maxwell was also
with Ernst & Young, LLP
(accountants) from 1976 to 1986
and served as a Senior Manager
from 1984 to 1986.
J. Thompson Assistant Mr. Weller has been a Managing N/A N/A
Weller*, Secretary, Director and Controller of
Age 39 Since 2003 Morgan Keegan & Company,
Inc. since October 2001. He was
Senior Vice President and
Controller of Morgan Keegan &
Company, Inc. from October
1998 to October 2001,
Controller and First Vice
President from February 1997 to
October 1998, Controller and
Vice President from 1995 to
February 1997 and Assistant
Controller from 1992 to 1995.
(1) Joseph C. Weller is the father of J. Thompson Weller. The address of
Messrs. Maxwell, Weller and Weller is Fifty North Front Street, 21st
Floor, Memphis, Tennessee 38103. The address of Messrs. Anthony and Gamble
is 417 North 20th Street, 15th Floor, Birmingham, Alabama 35203.
(2) Officers of the Fund are elected and appointed by the Board of Directors
and hold office until they resign, are removed or are otherwise
disqualified to serve.
29
RMK High Income Fund, Inc.
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.
FEDERAL TAX INFORMATION (unaudited)
Of the fund's ordinary income distributions paid during the year ended December
31, 2003, 0.32% was attributable to Federal obligations. In calculating the
percentage, fund expenses have been allocated on a pro rata basis.
The law varies in each state as to whether and what percentage of dividend
income attributable to Federal obligations is exempt from state income tax.
Please consult your tax advisor to determine if any portion of the dividends
you received is exempt from state income tax.
30
ITEM 2. CODE OF ETHICS.
RMK High Income Fund, Inc. (the "Fund") has adopted a code of ethics that
applies to the Fund's principal executive officer and principal financial
officer. The Fund has not made any amendments to its code of ethics during the
covered period. The Fund has not granted any waivers from any provisions of the
code of ethics during the covered period. A copy of this code of ethics is filed
as an exhibit to this Form N-CSR. The Fund undertakes to provide to any person
without charge, upon request, a copy of its code of ethics by mail when they
call the Fund at 1-800-366-7426.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Fund's Board of Directors has determined that James Stillman R. McFadden, W.
Randall Pittman and Mary S. Stone are audit committee financial experts, as
defined in Item 3 of Form N-CSR, serving on its audit committee. Messrs.
McFadden and Pittman and Ms. Stone are independent for purposes of Item 3 of
Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT AND NON-AUDIT FEES
- ------------------------
The SEC's auditor independence rules require the Audit Committee of the Fund to
pre-approve (a) all audit and permissible non-audit services provided by the
Fund's independent accountants directly to the Fund and (b) those permissible
non-audit services provided by the Fund's independent accountants to the Fund's
investment adviser and any entity controlling, controlled by or under common
control with the Fund's investment adviser that provides ongoing services to the
Fund (the "Affiliated Service Providers"), if the services relate directly to
the operations and financial reporting of the Fund.
The first table below sets forth for the Fund, for its fiscal period ended March
31, 2004, the fees billed by its independent accountants for all audit and
non-audit services provided directly to the Fund. The Fund's independent
accountants did not provide any audit or non-audit services to the Fund's
Affiliated Service Providers. The Fund commenced operations on June 27, 2003.
Fees for audit and non-audit services provided directly to the Fund:
AUDIT FEES AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
---------- ------------------ -------- ---------------
$45,000 None None None
Fees for audit and non-audit services provided to the Fund's Affiliated Service
Providers:
AUDIT FEES AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
---------- ------------------ -------- ---------------
None None None None
Aggregate non-audit fees for services provided to the Fund and its Affiliated
Service Providers:
AGGREGATE NON-AUDIT FEES
------------------------
None
PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
- --------------------------------------------
Audit, audit-related and tax compliance services provided to the Fund on an
annual basis require pre-approval by the Fund's Audit Committee. The Audit
Committee pre-approves these services on a case-by-case basis. As noted above,
the Audit Committee also must approve other non-audit services provided to the
Fund and those non-audit services provided to the Fund's Affiliated Service
Providers that relate directly to the operations and financial reporting of the
Fund. Any individual project that does not exceed $15,000 may be pre-approved by
the chair of the Audit Committee. Any proposed services exceeding that cost
level requires specific pre-approval by the Audit Committee.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Fund has a separately-designated standing audit committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934 consisting of William
Jefferies Mann, James Stillman R. McFadden, W. Randall Pittman, Mary S. Stone,
Archie W. Willis III and James D. Witherington, Jr.
ITEM 6. SCHEDULE OF INVESTMENTS.
Form N-CSR disclosure requirement not yet effective with respect to the Fund.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Fund's Board of Directors has delegated to the Fund's investment adviser,
Morgan Asset Management, Inc. (the "Adviser), the responsibility to vote proxies
related to the securities held in the fund's portfolios. Under this authority,
the Adviser is required to vote proxies related to portfolio securities in the
best interests of each fund and its stockholders. The Board permits the Adviser
to contract with a third party to obtain proxy voting and related services,
including research of current issues.
The Adviser has implemented written Proxy Voting Policies and Procedures ("Proxy
Voting Policy") that are designed to reasonably ensure that the Adviser votes
proxies prudently and in the best interest of its clients for whom the Adviser
has voting authority, including the fund. The Proxy Voting Policy also describes
how the Adviser addresses any conflicts that may arise between its interests and
those of its clients with respect to proxy voting.
The Adviser's Proxy Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, the Adviser
utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies in
accordance with the Adviser's voting guidelines.
The Adviser's guidelines adopt the voting recommendations of ISS. The Adviser
retains final authority and fiduciary responsibility for proxy voting. The
Adviser believes that this process is reasonably designed to address material
conflicts of interest that may arise between the Adviser and a client as to how
proxies are voted.
In the event that an investment professional at the Adviser believes that it is
in the best interests of a client or clients to vote proxies in a manner
inconsistent with the Adviser's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between the Adviser and the client with respect
to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as recommended by
the investment professional presents a material conflict of interest between the
Adviser and the client or clients with respect to the voting of the proxy, the
Proxy Committee shall: (i) take no further action, in which case ISS shall vote
such proxy in accordance with the proxy voting guidelines or as ISS recommends;
(ii) disclose such conflict to the client or clients and obtain written
direction from the client as to how to vote the proxy; (iii) suggest that the
client or clients engage another party to determine how to vote the proxy; or
(iv) engage another independent third party to determine how to vote the proxy.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Form N-CSR disclosure requirement not yet effective with respect to the Fund.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which stockholders may
recommend nominees to the Fund's Board of Directors since the Fund last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A or this Item 9.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-3(c) under the Act), the President and Treasurer
of the Fund have concluded as of a date within 90 days of the filing
date of this report that such disclosure controls and procedures are
effectively designed to ensure that information required to be
disclosed by the Fund is accumulated and communicated to the Fund's
management to allow timely decisions regarding required disclosure.
(b) There has been no change in the Fund's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act) that
occurred during the second fiscal quarter of the period covered by
this report that has materially affected, or is reasonably likely to
materially affect, the Fund's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a) The code of ethics pursuant to Item 2 of Form N-CSR is filed
herewith.
(b) The certifications required by Rule 30a-2(a) 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 Fund has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Fund) Rmk High Income Fund, Inc.
---------------------------------------------------------
By (Signature and Title) /s/ Carter E. Anthony
-------------------------------------------------
Carter E. Anthony, President
Date June 2, 2004
--------------------------------------------------------------------
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 Fund and in the capacities and on the dates
indicated.
By (Signature and Title) /s/ Carter E. Anthony
-------------------------------------------------
Carter E. Anthony, President
Date June 2, 2004
--------------------------------------------------------------------
By (Signature and Title) /s/ Joseph C. Weller
-------------------------------------------------
Joseph C. Weller, Treasurer
Date June 2, 2004
--------------------------------------------------------------------