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 811-21487
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RMK Strategic Income Fund, Inc.
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(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
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(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, 2005
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Date of reporting period: September 30, 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):
Semi-Annual Report
September 30, 2004
RMK Strategic Income Fund,Inc.
TABLE OF CONTENTS
Letter to Shareholders Pages 2-3
Portfolio Summary Pages 3-4
Portfolio of Investments Pages 5-12
Statement of Assets and Liabilities Page 13
Statement of Operations Page 14
Statement of Changes in Net Assets Page 15
Statement of Cash Flows Page 16
Notes to Financial Statements Pages 17-21
Financial Highlights Page 22
Board of Directors and Officers Pages 23-27
Dividend Reinvestment Plan Page 28-29
Privacy Notice Page 30
Proxy Voting Policies and Procedures Page 30
Regions Morgan Keegan Fund Complex Page 31
Market forecasts provided in this report may not necessarily come to pass.
There is no assurance that the fund will achieve its investment objective. The
fund is subject to market risk, which is the possibility that the market values
of securities owned by the fund will decline and, therefore, the value of the
fund's shares may be less than what you paid for it. Accordingly, you can lose
money investing in the fund.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
RMK STRATEGIC INCOME FUND, INC.
Letter to Shareholders
Dear Fellow Shareholders:
During the first half of RMK Strategic Income Fund, Inc.'s fiscal year 2005,
which ended September 30, 2004, returns were positive across all high-yield
sectors, with strength emanating from the more distressed credits. However,
higher rated credits had better returns during the last three months due to a
decline in interest rates after reaching two-year highs during the summer. The
spread between the Lehman Brothers U.S. Corporate High Yield Index and the
Lehman Brothers U.S. Treasury Index stood at 4.36% at the end of September
2004, down from 4.64% at the end of March 2004. The Lehman Brothers U.S.
Corporate High Yield Index shows that the average high-yield bond returned
3.84% for the six month period ended September 30, 2004. Lower credit quality
issues, such as Caa, returned 5.5%, while Lehman Ba U.S. High Yield Index
returned 2.87%. Lower credit quality sectors continue to show strength as
investors search for yield and return opportunities despite narrowing spreads
versus Treasuries. Consequently, non-investment grade corporate bonds may
become more sensitive to interest rates as perceived credit quality improves
and absolute yields drop.
For the first half of fiscal year 2005, the fund returned 3.11% surpassing the
Lehman Ba U.S. High Yield Index performance of 2.87% for the same period while
maintaining a 300+ basis point current-yield advantage over the Lehman Ba U.S.
High Yield Index. Additionally, the fund paid $0.50 in dividends per share
during the first half of fiscal year 2005, with its first monthly dividend of
$0.12 paid in June. The fund experienced a performance drag during the period
due to a decline in its premium from 11.97% to 10.23%; however, we are very
pleased with its performance given that the fund returned 6.67% between its
initial public offering on March 18, 2004 and the end of its fiscal year on
March 31, 2004, while the Lehman Ba U.S. High Yield Index only returned 0.06%
during the same period. As a testament to the demand for the fund's shares and
the market's general demand for assets with above average yields, the fund's
shares traded at an average premium of 7.06% during the period, ranging from a
low of 0.64% to high of 12.77%.
The fund employs leverage within the parameters allowed by its prospectus.
Leverage increases (decreases) returns if the rate of return on the assets that
were bought with the borrowed money was higher (lower) than the interest
charged on the borrowed money. The fund employs leverage on the whole portfolio
rather than specific positions; therefore, because the fund had a positive
return for the first half of fiscal year 2005, the leverage was beneficial to
shareholders.
Given the dramatic recovery in the high-yield corporate universe over the past
two years, we are more excited about the relative value in the structured
finance
2
RMK STRATEGIC INCOME FUND, INC.
Letter to Shareholders
universe. We attribute the fund's performance to an adherence to value
investing, as well as an overweight allocation to structured finance issues,
which tend to be less volatile than corporate investment grade issues. 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 some of the more
off-the-run structural finance issues and the commercial mortgage backed
sector. 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.
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.
Sincerely,
/s/ Carter Anthony /s/ James C. Kelsoe, Jr.
- ----------------------------- -------------------------------
Carter E. Anthony, CFA James C. Kelsoe, Jr., CFA
President Portfolio Manager
Morgan Asset Management, Inc. RMK Strategic Income Fund, Inc.
November 15, 2004
PORTFOLIO PERFORMANCE
Total Returns as of September 30, 2004
Market Net Asset
Value Value
----- -----
6 months 3.11% 4.59%
Since inception (3/18/04) 9.99% 4.45%
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.
Total return performance calculations assume an investment at the common
share market price or net asset value at the beginning of the period,
reinvestment of all distributions for the period in accordance with the
fund's dividend reinvestment plan, and sale of all shares at the closing
common share market price (excluding any sales loads) or net asset value at
the end of the period.
3
RMK STRATEGIC INCOME FUND, INC.
Portfolio Summary
September 30, 2004
TOP 5 LARGEST HOLDINGS
State Street Bank & Trust Company
Eurodollar Time Deposit 3.7%
Atherton Franchisee 1999-A A2 3.5%
Enterprise Mortgage 1998-1 A2 3.5%
Diversified Asset Securitization 1A A1 3.3%
GMAC Commercial Mortgage 1998-C1 F 3.3%
ASSET ALLOCATION
Franchise Loans 21.2%
Home Equity Loans 21.2%
Corporate Bonds 21.1%
Manufactured Housing Loans 16.7%
Collateralized Obligations 16.5%
Commercial Mortgage-Backed Securities 14.8%
Common Stock 10.6%
Cash 3.7%
Equipment Leases 2.6%
Other Assets and Liabilities (28.4%)
RATINGS ALLOCATION
AAA 5.0%
A 7.5%
BBB 16.6%
BB 11.6%
B 31.3%
CCC or Below 21.3%
Non-Rated 6.7%
The ratings allocation is based on the percentage of fixed income securities.
The preceding data in the Portfolio Summary is dated as of September 30, 2004.
Current holdings may not reflect holdings as of the date of this report. Past
performance is not indicative of future results.
4
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
ASSET BACKED SECURITIES - INVESTMENT GRADE - 28.0% OF NET ASSETS
Collateralized Bond Obligation - 2.5%
2,000,000 Conseco Funding 1A B,
7.18% 2/28/15 BBB $ 1,770,964 $ 1,820,000
11,500,000 North Street 2000-2A B,
2.17% 10/30/11 (a) A- 5,777,582 7,130,000
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$ 7,548,546 $ 8,950,000
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Commercial Loans - 7.5%
12,172,843 Atherton Franchisee 1999-A A2,
7.23% 4/15/12 (a) A+ 12,343,390 12,394,815
11,740,000 GMAC Commercial Mortgage
1998-C1 F, 7.173% 5/15/30 BBB- 11,480,484 11,657,937
2,500,000 Merrill Lynch Mortgage 1998-C1
E, 6.75% 11/15/26 BBB- 2,512,477 2,575,575
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$26,336,351 $26,628,327
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Franchise Loans - 1.0%
FMAC Loan Trust 1997-C AX,
2.355% 12/15/19 interest-only
strips (a) BBB 3,039,036 2,919,004
7,500,000 Greenpoint Manufactured Housing
2000-1 M2, 8.78% 3/20/30 A 705,197 656,250
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$ 3,744,233 $ 3,575,254
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Home Equity Loans (Non-High Loan-To-Value) - 11.5%
4,000,000 Aames Mortgage Trust 2001-3 B,
7.13% 11/25/31 BBB 3,671,754 3,704,320
1,487,000 Ace Securities 2004-HS1 M6,
4.59% 2/25/34 BBB- 1,445,902 1,486,991
3,450,000 Ace Securities 2004-HE2 B1,
5.311% 10/25/34 BBB 2,750,204 2,749,754
3,260,456 Amresco Residential Securities
1999-1 B, 5.09% 11/25/29 BBB 3,088,647 3,085,206
2,000,000 Argent Securities 2004-W8 M10,
4.60% 5/25/34 BBB- 1,568,511 1,562,820
Fannie Mae 1998-M7 N,
1.057% 5/25/36 interest-only strips AAA 3,728,229 3,729,568
2,750,000 First Franklin Mortgage 2004-FF5
M9, 4.47% 8/25/34 BBB- 2,441,573 2,750,000
2,700,000 First Franklin Mortgage 2004-FF2
N3, 8.835% 4/25/34 (a) BBB 2,700,000 2,700,000
5,000,000 Long Beach Mortgage 2004-4
M10, 4.615% 10/25/34 BBB+ 4,600,836 4,600,000
1,700,000 NovaStar Home Equity 2004-3 B4,
5.238% 12/25/34 BBB 1,560,559 1,560,277
5
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
10,500,000 Option One Mortgage 2004-2 M7,
4.65% 5/25/34 BBB $ 8,883,019 $ 8,857,485
3,000,000 Park Place Securities 2004-MCW1
M10, 4.258% 10/25/34 (a) BBB- 2,310,628 2,310,000
1,763,349 Sail Net 2004-5A B,
6.75% 6/27/34 (a) BBB 1,720,118 1,719,777
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$40,469,980 $40,816,198
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Manufactured Housing Loans - 5.5%
1,000,000 BankAmerica Manufactured
Housing 1998-1 B1, 7.81% 8/10/25 BBB 500,721 575,000
3,325,000 BankAmerica Manufactured
Housing 1998-2 B1, Zero Coupon
Bond 12/10/25 (d) BBB 1,441,756 1,814,512
7,272,000 Green Tree Financial 1996-9 M1,
7.63% 1/15/28 BBB 6,391,853 6,379,471
14,545,000 Greenpoint Manufactured Housing
1999-5 M2, 9.23% 12/15/29 A 10,510,649 10,617,850
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$18,844,979 $19,386,833
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Total Asset Backed Securities - Investment Grade $96,944,089 $99,356,612
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ASSET BACKED SECURITIES - NON-INVESTMENT GRADE - 54.1% OF
NET ASSETS
Certificate-Backed Obligations - 1.1%
1,000,000 MM Community Funding II,
3.50% 12/15/31 (a) Non-Rated 937,763 937,500
2,000,000 MM Community Funding IX,
10.00% 5/1/33 (a) Non-Rated 1,940,017 1,940,000
1,000,000 Preferred Term XV, Zero Coupon
Bond 9/26/34 Non-Rated 1,000,000 1,000,000
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$ 3,877,780 $ 3,877,500
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Commercial Loans - 7.3%
2,000,000 CS First Boston Mortgage
1995-WF1 G, 8.488% 12/21/27 (a) Non-Rated 2,000,000 1,999,480
4,000,000 DLJ Commercial Mortgage
2000-CKP1 B4, 6.527% 11/10/33 (a) BB+ 2,891,148 3,098,400
5,000,000 FFCA Secured Lending 1999-2 B1,
8.27% 5/18/26 (a) CCC 3,025,750 3,004,100
6,000,000 GMAC Commercial Mortgage
1997-C2 F, 6.75% 4/15/29 B 4,126,440 4,139,406
3,000,000 GMAC Commercial Mortgage
1999-C3 G, 6.974% 8/15/36 (a) B+ 2,382,680 2,511,390
3,000,000 GMAC Commercial Mortgage
2000-C1 H, 7.00% 3/15/33 (a) BB 2,695,143 2,725,950
6
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
2,000,000 GS Mortgage 1998-C1 F,
6.00% 10/18/30 (a) BB- $ 1,728,953 $ 1,734,520
5,000,000 JP Morgan Commercial Mortgage
1997-C5 F, 7.561% 9/15/29 B+ 4,748,604 4,835,750
1,970,000 Salomon Brothers Mortgage
2000-C2 J, 6.308% 7/18/33 BB 1,711,511 1,704,917
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$25,310,229 $25,753,913
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Equipment Leases - 2.6%
1,845,870 Pegasus Aviation Lease 1999-1A
A1, 6.30% 3/25/29 (a) CCC+ 1,004,388 849,100
7,500,000 Pegasus Aviation Lease 1999-1A
A2, 6.30% 3/25/29 (a) CCC+ 3,558,123 3,372,465
7,700,000 Pegasus Aviation Lease 2000-1
A2, 8.37% 3/25/30 (a) B- 4,963,052 4,905,493
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$ 9,525,563 $ 9,127,058
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Franchise Loans - 20.2%
12,775,000 Enterprise Mortgage 1998-1 A2,
6.38% 1/15/25 (a) B 11,742,163 12,265,341
12,170,000 Enterprise Mortgage 1998-1 A3,
6.63% 1/15/25 (a) B 6,821,628 7,302,000
19,807,858 Enterprise Mortgage 1999-1 A1,
6.42% 10/15/25 (a) CCC 9,854,227 8,913,536
9,250,694 Enterprise Mortgage 1999-1 A2,
6.90% 10/15/25 (a) CCC 3,022,528 2,867,715
20,218,075 Enterprise Mortgage 2000-1 A1,
7.575% 1/15/27 (a) B- 12,188,513 11,524,303
17,930,260 Enterprise Mortgage 2000-1 A2,
8.21% 1/15/27 (a) B- 9,871,413 10,220,248
1,000,000 Falcon Franchise Loan 1999-1 E,
6.50% 1/5/14 BB 819,193 820,320
1,000,000 Falcon Franchise Loan 2001-1 F,
6.50% 1/5/23 B 669,823 672,560
2,706,082 FMAC Loan Trust 1996-B A1,
7.629% 11/15/18 (a) DDD 1,968,956 1,923,600
1,836,884 FMAC Loan Trust 1997-B A,
6.85% 9/15/19 (a) B 1,588,409 1,697,856
8,463,717 FMAC Loan Trust 1998-A A3,
6.69% 9/15/20 (a) BB 6,373,957 6,305,469
4,563,104 FMAC Loan Trust 1998-BA A2,
6.74% 11/15/20 (a) B 3,369,770 3,376,697
FMAC Loan Trust 1998-BA AX,
2.266% 11/15/20 interest-only
strips (a) B 682,299 614,616
6,000,000 FMAC Loan Trust 1998-CA A3,
6.99% 6/15/12 (a) CCC+ 3,415,428 3,371,340
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$72,388,307 $71,875,601
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7
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
Home Equity Loans (Non-High Loan-To-Value) - 9.7%
8,892,000 Ace Securities 2004-HE1 B,
4.60% 2/25/34 BB $ 7,568,209 $ 7,545,396
10,855,000 Ace Securities 2004-OP1 B,
4.60% 4/25/34 BB 8,882,158 8,852,144
4,114,000 Ace Securities 2004-RM1 B2,
1.436% 7/25/34 (a) Non-Rated 3,315,846 3,311,235
2,057,000 Ace Securities 2004-RM1 B3,
1.436% 7/25/34 (a) Non-Rated 1,536,756 1,533,740
1,646,019 Delta Funding Home Equity
2000-4 B, 7.15% 2/15/31 D 628,567 609,027
2,100,000 Equifirst Mortgage 2004-2 B1,
4.74% 7/25/34 (a) BB+ 1,717,998 1,715,448
2,732,000 Equifirst Mortgage 2004-2 B2,
4.74% 7/25/34 (a) BB 2,153,620 2,149,756
2,750,000 First Franklin Mortgage 2004-FF5
B, 4.47% 8/25/34 (a) Non-Rated 2,203,205 2,750,000
2,500,000 First Franklin Mortgage 2004-FFH3
B1, 5.10% 10/25/34 (a) BB+ 2,066,259 2,065,625
3,000,000 Long Beach Mortgage 2004-2 B,
5.50% 6/25/34 (a) BB+ 2,407,004 2,398,800
1,830,000 Terwin Mortgage 2004-16SL B3,
6.34% 10/25/34 (a) BB 1,499,977 1,499,941
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$33,979,599 $34,431,112
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Manufactured Housing Loans - 11.2%
2,300,000 BankAmerica Manufactured
Housing 1997-1 B1, Zero Coupon
Bond 6/10/21 (d) B 581,437 591,629
8,309,659 Bombardier Capital Mortgage
1999-B M1, 8.12% 12/15/29 CC 699,385 643,999
4,693,541 Conseco Finance 2000-5 M2,
9.03% 2/1/32 CCC- 478,365 448,843
2,000,000 Conseco Finance 2001-1 M1,
7.535% 7/1/32 CCC- 697,084 700,000
3,576,357 Green Tree Financial 1996-4 M1,
7.75% 6/15/27 B+ 2,881,899 2,895,026
8,000,000 Green Tree Financial 1997-8 M1,
7.02% 10/15/27 B+ 5,331,692 5,390,000
7,000,000 Green Tree Financial 1999-4 M1,
7.60% 5/1/31 CCC- 1,830,721 1,769,320
18,000,000 Green Tree Financial 1999-5 M1,
8.05% 3/1/30 CCC- 4,880,136 4,734,720
10,000,000 Greenpoint Manufactured Housing
2000-3 IM1, 9.01% 6/20/31 B- 4,581,068 3,858,090
10,000,000 Madison Avenue Manufactured
Housing 2002-A B2,
4.34% 3/25/32 B+ 3,670,449 3,600,000
8
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
5,389,000 Merit Securities 12-1 1M2,
7.35% 7/28/33 CC $ 4,017,209 $ 3,467,768
5,886,000 Merit Securities 13 M2,
7.88% 12/28/33 CC 3,138,008 2,940,999
3,000,000 Meritage Mortgage 2004-2 B1,
4.829% 1/25/35 (a) Non-Rated 2,418,563 2,415,930
2,000,000 Meritage Mortgage 2004-2 B2,
4.829% 1/25/35 (a) Non-Rated 1,562,289 1,560,320
1,500,000 Oakwood Mortgage 2002-A M1,
7.76% 3/15/32 CCC 493,423 484,335
10,000,000 Oakwood Mortgage 2002-B M1,
7.62% 6/15/32 B 3,637,100 3,672,100
5,000,000 UCFC Manufactured Housing
1997-2 B1, Zero Coupon
Bond 2/15/18 CC 683,180 525,000
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$ 41,582,008 $ 39,698,079
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Recreational Equipment - 2.0%
7,100,745 FMAC Loan Trust 1996-B A2,
2.60% 11/15/18 (a) DDD 4,524,953 4,508,973
2,920,960 Green Tree Recreational
Equipment 1996-B CTFS,
7.70% 7/15/18 CCC- 2,539,106 2,526,630
------------ ------------
$ 7,064,059 $ 7,035,603
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Total Asset Backed Securities - Non-Investment Grade $193,727,545 $191,798,866
------------ ------------
CORPORATE BONDS - NON-INVESTMENT GRADE - 21.1% OF NET ASSETS
Basic Materials - 0.6%
2,000,000 Resolution Performance,
13.50% Bond 11/15/10 CCC 1,853,997 1,940,000
Electronics - 0.5%
2,000,000 Xerox Capital Trust I,
8.00% Bond 2/1/27 B- 2,000,000 1,910,520
Energy - 0.8%
3,000,000 United Refining,
10.50% Bond 8/15/12 (a) B- 2,960,620 2,947,500
Finance - 0.3%
1,000,000 Labranche,
9.50% Bond 5/15/09 (a) B 1,002,500 1,002,500
Food & Agriculture - 0.1%
725,000 New World Pasta, Zero Coupon
Bond 2/15/09 in default Non-Rated 166,454 87,000
9
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
Health Care - 2.3%
5,300,000 Alliance Imaging,
10.375% Bond 4/15/11 B- $ 5,299,933 $ 5,238,467
3,000,000 Team Health, 9.00% Bond 4/1/12 (a) B- 2,964,074 2,985,000
----------- -----------
$ 8,264,007 $ 8,223,467
----------- -----------
Manufacturing - 8.7%
1,500,000 Braskem S.A.,
11.75% Bond 1/22/14 (a) BB- 1,477,676 1,477,500
3,000,000 Consolidated Container,
10.125% Bond 7/15/09 CCC 2,812,016 2,850,000
4,000,000 Foamex, 10.75% Bond 4/1/09 B- 3,878,731 3,760,000
4,000,000 Intermet, 9.75% Bond 6/15/09 D 3,326,891 1,600,000
4,000,000 Knowles Electronics,
13.125% Bond 10/15/09 CCC 4,224,313 4,210,000
4,000,000 Lyondell Chemical,
10.875% Bond 5/1/09 B- 4,072,717 4,240,000
1,000,000 Milacron Escrow,
11.50% Bond 5/15/11 (a) CCC+ 1,007,283 1,060,000
3,000,000 MMI Products,
11.25% Bond 4/15/07 CCC 3,024,775 3,030,000
5,500,000 US Can, 12.375% Bond 10/1/10 CCC+ 5,189,425 5,060,000
4,000,000 VITRO S.A.,
11.75% Bond 1/1/13 (a)(e) B- 3,843,418 3,710,000
----------- -----------
$32,857,245 $30,997,500
----------- -----------
Telecommunications - 6.7%
4,050,000 BARAK I.T.C.,
12.50% Bond 11/15/07 (e) B- 3,111,589 2,308,500
2,000,000 Call-Net Enterprises,
10.625% Bond 12/31/08 (e) B 1,971,544 1,975,000
5,000,000 Charter, 10.00% Bond 5/15/11 CCC- 4,171,782 3,850,000
1,500,000 Cincinnati Bell,
8.375% Bond 1/15/14 B- 1,335,905 1,334,130
1,650,000 Level 3 Financing,
10.75% Bond 10/15/11 (a) CCC- 1,436,221 1,435,500
2,000,000 MasTec, 7.75% Bond 2/1/08 B 1,818,868 1,809,000
4,000,000 Rural Cellular, 9.75% Bond 1/15/10 CCC 3,666,840 3,601,640
4,000,000 Time Warner, 10.125% Bond 2/1/11 CCC+ 3,801,074 3,450,000
4,040,000 Time Warner, 9.75% Bond 7/15/08 CCC+ 3,848,656 3,999,600
----------- -----------
$25,162,479 $23,763,370
----------- -----------
Transportation - 1.1%
4,000,000 Greyhound Lines,
11.50% Bond 4/15/07 CC 3,911,333 4,010,000
----------- -----------
Total Corporate Bonds - Non-Investment Grade $78,178,635 $74,881,857
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10
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
MORTGAGE BACKED SECURITIES - 12.9% OF NET ASSETS
Collateralized Mortgage Obligation - 12.9%
2,000,000 Crest 2000-1A D, 10.00% 8/31/36 BB $ 1,390,784 $ 1,390,000
6,000,000 CS First Boston 1998-C2 H,
6.75% 11/11/30 (a) B 4,038,344 4,069,800
11,481,104 Diversified Asset Securitization 1A
A1, 7.873% 9/15/35 AAA 11,852,957 11,854,239
3,000,000 First Franklin Mortgage
2004-FFH2 B2, 4.25% 6/25/34 (a) BB 2,420,021 2,415,000
GNMA 2003-64 XA,
0.457% 8/16/43 interest-only
strips (c) Non-Rated 9,787,077 8,893,549
Harborview Mortgage 2004-1 X,
1.90% 4/19/34 interest-only strips AAA 3,181,062 3,435,690
Mellon Residential 2004-TBC1 X,
0.716% 2/26/34 interest-only
strips (a) AAA 1,498,173 1,465,202
9,000,000 MCPA2 1998-PA B2,
7.32% 6/23/10 (a) B+ 7,689,078 7,560,000
3,688,452 Structured Asset 1999-SP1,
9.00% 5/25/29 BBB 3,742,630 3,718,535
1,000,000 US Capital Funding II,
6.90% 8/1/34 Non-Rated 1,000,000 1,000,000
----------- -----------
Total Mortgage Backed Securities $46,600,126 $45,802,015
----------- -----------
COMMON STOCKS - 10.6% OF NET ASSETS
9,500 AMB Property Corporation 332,896 351,690
128,762 American Capital Strategies, Ltd. 4,041,743 4,035,401
41,500 Andrx Corporation (d) 839,750 927,940
78,100 Anthracite Capital, Inc. 889,194 868,472
99,500 AU Optronics Corporation 1,381,926 1,245,740
37,600 Bank of America Corporation 1,509,406 1,629,208
2,400 BP Prudhoe Bay Royalty Trust 94,360 94,800
320,200 Cincinnati Bell Inc. (d) 1,503,035 1,117,498
20,850 CVS Corporation 796,591 878,411
5,400 Devon Energy Corporation 389,070 383,454
12,400 Exxon Mobil Corporation 595,337 599,292
197,700 General Cable Corporation 1,456,955 2,103,528
14,950 Kerr-McGee Corporation 751,444 855,888
181,300 KFx Inc. (d) 1,432,754 1,397,823
2,900 Kinder Morgan Energy Partners, L.P. 134,225 135,836
18,200 L-3 Communications Holdings, Inc. 1,087,079 1,219,400
96,500 Limited Brands, Inc. 1,927,113 2,150,985
7,200 Magellan Midstream Partners, L.P. 390,140 395,856
6,100 Magyar Tavkozlesi Rt. 119,240 124,684
11
RMK STRATEGIC INCOME FUND, INC.
Portfolio of Investments
September 30, 2004 (unaudited)
Principal S & P
Amount/ Rating Market
Shares Description (Unaudited) Cost Value (b)
149,900 MCG Capital Corporation $ 2,755,267 $ 2,602,264
48,500 Microsoft Corporation 1,187,059 1,341,025
10,500 Oceaneering International, Inc. (d) 387,333 386,820
37,000 OmniVision Technologies, Inc. 404,913 523,550
5,500 Petroleo Brasileiro S.A. 195,655 193,875
21,800 Regal Entertainment Group 412,202 416,380
32,000 SanDisk Corporation (d) 725,186 931,840
273,900 Sanmina-SCI Corporation 2,818,500 1,930,995
16,400 Storage Technology Corporation 393,087 414,264
59,100 Technology Investment Capital
Corporation (d) 837,187 826,809
22,500 The Black & Decker Corporation 1,342,186 1,742,400
29,000 The Home Depot, Inc. 1,038,013 1,136,800
15,600 Tsakos Energy Navigation
Limited 546,962 548,340
67,150 UTStarcom, Inc. (d) 1,385,246 1,081,786
900 Valero L.P. 49,762 50,139
7,500 Wal-Mart Stores, Inc. 388,500 399,000
14,250 Wells Fargo & Company 812,963 849,727
24,800 XL Capital Ltd. 1,858,760 1,834,952
------------ -------------
Total Common Stocks $ 37,211,039 $ 37,726,872
------------ -------------
EURODOLLAR TIME DEPOSITS - 3.7% OF NET ASSETS
State Street Bank & Trust
Company Eurodollar time
deposits dated September 30,
2004, 1.25% maturing at
$13,180,458 on October 1, 2004. $ 13,180,000 $ 13,180,000
------------ -------------
Total Investments - 130.4% of Net Assets $465,841,434 $ 462,746,222
------------ -------------
Other Assets and Liabilities, net - (30.4%) of Net Assets (107,880,096)
=============
Net Assets $ 354,866,126
=============
(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.
(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.
12
RMK STRATEGIC INCOME FUND, INC.
Statement of Assets and Liabilities
September 30, 2004 (unaudited)
ASSETS:
Investments, in securities as detailed in the accompanying
schedules at market (cost $465,841,434) $462,746,222
Cash on deposit with custodian 359,112
Dividends and interest receivable 6,380,065
Receivable for securities sold 1,671,279
Debt issue costs 97,348
------------
TOTAL ASSETS 471,254,026
LIABILITIES:
Demand loan payable to bank (Note 5) 100,000,000
Interest payable 316,629
Accrued expenses 572
Due to affiliates 290,871
Payable for securities purchased 15,779,828
------------
TOTAL LIABILITIES 116,387,900
------------
NET ASSETS $354,866,126
============
NET ASSETS Consist of:
Net unrealized depreciation of investments (3,095,212)
Common stock, $.0001 par value (1,000,000,000 shares authorized) 2,452
Paid-in capital 350,951,022
Undistributed net investment income 6,585,693
Accumulated net realized gain on investments 422,171
------------
NET ASSETS $354,866,126
============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE:
Common shares outstanding 24,520,165
Net asset value per share $14.47
See accompanying Notes to Financial Statements.
13
RMK STRATEGIC INCOME FUND, INC.
Statement of Operations
For the six months ended September 30, 2004 (unaudited)
INVESTMENT INCOME:
Interest $19,856,818
Dividends 667,799
-----------
TOTAL INVESTMENT INCOME 20,524,617
EXPENSES:
Management fee 1,203,228
Accounting fee 277,668
Interest expense 324,987
Debt issue expense 23,850
Legal fees 45,661
Audit fees 4,797
Transfer agent fees 17,378
Custodian fees 4,525
Registration fees 601
Directors fees 22,625
Other 33,613
-----------
TOTAL EXPENSES 1,958,933
NET INVESTMENT INCOME 18,565,684
Realized and Unrealized Gains (Losses) on Investments:
Change in unrealized depreciation (2,739,301)
Net realized gain on securities 174,425
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,000,808
===========
See accompanying Notes to Financial Statements.
14
RMK STRATEGIC INCOME FUND, INC.
Statement of Changes in Net Assets
For the six months ended September 30, 2004 (unaudited) and from March 18, 2004
to March 31, 2004
For the For the
Period Ended Period Ended
September 30, March 31,
2004 (unaudited) 2004(a)
Increase (decrease) in net assets from operations:
Net investment income $ 18,565,684 $ 414,724
Unrealized depreciation, net (2,739,301) (355,911)
Net realized gain from investment transactions 174,425 3,256
------------ ------------
Increase in Net Assets Resulting From Operations 16,000,808 62,069
------------ ------------
Distributions to Shareholders
Distributions to shareholders from net investment income (12,150,225) -
Distributions to shareholders in excess of net investment
income - -
Distributions to shareholders from net realized gain on
investments - -
------------ ------------
Total Distribution to Shareholders (12,150,225) -
------------ ------------
Capital Share Transactions
Proceeds from shares sold (3,150,000 and 21,000,000
shares) 45,123,750 300,385,664
Proceeds from sales of shares as a result of reinvested
dividends (363,184 shares) 5,344,057 -
------------ ------------
Increase in Net Assets From Share Transactions 50,467,807 300,385,664
------------ ------------
Total Increase in Net Assets 54,318,390 300,447,733
NET ASSETS:
Beginning of Period 300,547,736 100,003
------------ ------------
End of Period $354,866,126 $300,547,736
============ ============
- --------
(a)For the period from March 18, 2004 (commencement of operations) to March 31,
2004.
See accompanying Notes to Financial Statements.
15
RMK STRATEGIC INCOME FUND, INC.
Statement of Cash Flows
For the six months ended September 30, 2004 (unaudited)
Increase (Decrease) in Cash -
Cash flows from operating activities
Net increase in net assets from operations $ 16,000,808
Adjustments to reconcile net increase in net assets from
operations to net cash used in operating activities
Purchase of investment securities (310,737,601)
Proceeds from disposition of investment securities 94,515,704
Purchase of short-term investment securities, net 67,987,521
Proceeds from principal payments 12,437,198
Change in unrealized appreciation on securities 2,739,301
Amortization/accretion of premiums/discount on securities (2,934,743)
Net realized gain on investments (174,425)
Net realized gain on principal payments (244,490)
Amortization of debt issue costs 23,850
Increase in dividends and interest receivable (2,878,773)
Increase in receivables for securities purchased (1,632,656)
Increase in payables for securities purchased (13,464,486)
Increase in interest payable 316,629
Increase in accrued expenses (32,503)
Increase in due to affiliates 231,635
-------------
Net cash used in operating activities (137,847,031)
-------------
Cash flows from financing activities
Increase in loan payable 100,000,000
Cash paid for debt issue costs (121,198)
Proceeds from shares sold 45,123,750
Cash distributions paid (6,806,169)
-------------
Net cash provided by financing activities 138,196,383
-------------
Net decrease in cash 349,352
=============
Cash
Beginning balance 9,760
Ending balance $ 359,112
=============
Supplemental disclosure of cash flow information: Noncash financing activities
not included herein consist of reinvestment of dividends and distributions of
$5,344,057.
Total cash paid for interest was $8,359.
See accompanying Notes to Financial Statements.
16
RMK STRATEGIC INCOME FUND, INC.
Notes to Financial Statements
September 30, 2004 (unaudited)
Note 1: Summary of Significant Accounting Policies
RMK Strategic Income Fund, Inc. ("the fund") 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 a diversified portfolio of securities that offers attractive yield
and capital appreciation potential and consists primarily of debt securities
and secondarily of equity securities. The ability of the issuers of the
securities held by the fund to meet their obligations might be affected by
economic developments in their specific industry, state, or region. The fund
seeks capital growth as a secondary objective when consistent with the fund's
primary objective. The fund's adviser, Morgan Asset Management, Inc., will
continually analyze the markets for income-producing securities and will
periodically reallocate the fund's investments among various fixed-income and
equity asset classes and between investment grade and below-investment grade
securities to pursue its investment objectives. The fund began operations on
March 18, 2004.
Capitalization for the fund was provided by the Adviser as follows:
Organization date January 16, 2004
Initial capitalization date March 11, 2004
Amount of initial capitalization $100,003
Shares issued at capitalization 6,981
Shares authorized 1,000,000,000
Public offering date March 18, 2004
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. 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.
17
RMK STRATEGIC INCOME FUND, INC.
Notes to Financial Statements
September 30, 2004 (unaudited)
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.
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 $23,850 at September 30, 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 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
18
RMK STRATEGIC INCOME FUND, INC.
Notes to Financial Statements
September 30, 2004 (unaudited)
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 for the fund. Morgan
Keegan & Company, Inc. 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, 2004, Morgan Keegan and Company, Inc. earned
no underwriting discounts, direct commissions, or dealer incentives on the
sales and purchases of securities.
Directors and officers of the fund who are "interested persons" as defined in
the 1940 Act receive no salary or fees from the fund. Independent Directors
receive an annual retainer of $4,000 and a fee of $1,000 per quarterly meeting
with reimbursement for related expenses for each meeting of the Board one
attends. Each chairperson of the Independent Directors Committee and Audit
Committee receives annual compensation of $500. An additional $1,500 is paid to
the Independent Directors for attending special meetings in person, and an
additional $500 is paid for attending special meetings by telephone. No
Director is entitled to receive pension or retirement benefits from the fund.
The table below sets forth the compensation paid to the Directors by the fund
during the period covered by this report.
Aggregate Compensation From the
Fund During the Six Month Period Ended
Name September 30, 2004
Independent Directors
William Jefferies Mann $4,875
James Stillman R. McFadden $4,375
W. Randall Pittman $4,125
Mary S. Stone $4,125
Archie W. Willis III $4,125
James D. Witherington, Jr.* $2,000
Directors Who Are "Interested Persons"
J. Kenneth Alderman None
Allen B. Morgan, Jr. None
* Effective July 1, 2004, James D. Witherington, Jr. resigned from the Board
of Directors.
19
RMK STRATEGIC INCOME FUND, INC.
Notes to Financial Statements
September 30, 2004 (unaudited)
Note 3: Investment Securities
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $310,737,601 and
$109,142,209, respectively. As of September 30, 2004, the fund's unrealized
appreciation and depreciation of investments were as follows.
Unrealized appreciation $ 9,059,380
Unrealized depreciation (12,154,592)
------------
Net unrealized depreciation (3,095,212)
------------
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.
Pursuant to federal income tax regulations applicable to investment companies,
the fund has elected to treat net capital losses realized between November 1
and December 31 of each year as occurring on the first day of the following tax
year. For the period ended September 30, 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.
The timing and character of income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
GAAP. These differences are primarily due to differing treatments for
gains/losses on principal payments of mortgage- and asset-backed securities.
For the period ended September 30, 2004, permanent differences identified and
reclassified among the components of net assets were as follows:
Undistributed net investment income $(244,490)
Accumulated net realized gain on investments 244,490
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
20
RMK STRATEGIC INCOME FUND, INC.
Notes to Financial Statements
September 30, 2004 (unaudited)
as leveraging. The fund has a collateralized $125,000,000 bank line of credit
for this purpose, which matures in June of 2005. All of the fund's investment
securities are pledged as collateral under the borrowing arrangement and the
collateral may be sold. As of September 30, 2004, the outstanding balance on
the line of credit was $100,000,000. Borrowings under this agreement bear
interest at a fixed rate on the date of borrowing at LIBOR plus 0.60% 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 September 30, 2004 was
$29,285,714 or $1.23 per share, based on average shares outstanding of
23,837,821. The average interest rate during the period ended September 30,
2004 was 2.295%. The maximum amount of borrowings outstanding at any month-end
during the period was $100,000,000.
21
RMK STRATEGIC INCOME FUND, INC.
Financial Highlights
For the For the
Period Ended Period Ended
September 30, March 31,
2004 (unaudited) 2004(a)
Net Asset Value, Beginning of Period $ 14.31 $ 14.33(b)
Net investment income 0.76 0.02
Net gains on securities, realized and unrealized (0.10) (0.02)
-------- --------
Total From Investment Operations 0.66 -
======== ========
Dividends from net investment income (0.50) -
Distributions from capital gains - -
Return of capital - -
-------- --------
Total Distributions (0.50) -
======== ========
Offering costs charged to paid-in capital - (0.02)
-------- --------
Net Asset Value, End of Period $ 14.47 $ 14.31
======== ========
Total Return, Net Asset Value(c) 4.59% (0.14)%
======== ========
Common Share Price, End of Period $ 15.95 $ 16.00
Total Return, Market Value(c) 3.11% 6.67%
Net Assets, End of Period (000's) $354,866 $300,547
Ratio of Expenses to Average Net Assets(d) 1.15% 0.87%
Ratio of Net Income to Average Net Assets(d) 10.89% 3.87%
Portfolio Turnover Rate 31% 0%
======== ========
- --------
(a)For the period from March 18, 2004 (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 the periods less than one year.
22
RMK STRATEGIC INCOME FUND, INC.
Board of Directors and Officers
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 the other registered investment companies in the Regions
Morgan Keegan fund complex overseeing a total of fifteen portfolios. The
Regions Morgan Keegan fund complex includes Morgan Keegan Select Fund, Inc.,
Regions Morgan Keegan Select Funds, RMK High Income Fund, Inc., RMK Strategic
Income Fund, Inc. and RMK Advantage Income Fund, Inc.
An asterisk (*) indicates directors and/or officers who are interested persons
of the fund as defined by the Investment Company Act of 1940. 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
Morgan Keegan at 1-800-564-2188.
Information about the Fund's Directors
Name, Age, Position,
Length of Service Principal Occupation During Past Five Years
----------------- ---------------------------------------------
Allen B. Morgan, Jr.*, Mr. Morgan has been Chairman of Morgan
Age 62, Director, Keegan & Company, Inc. since 1969 and
Since 2004 Executive 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.
J. Kenneth Alderman*, Mr. Alderman has been President of Regions
Age 52, Director, Morgan Keegan Trust Company and Chief
Since 2004 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 a
Chartered Financial Analyst.
23
RMK STRATEGIC INCOME FUND, INC.
Board of Directors and Officers
Information about the Fund's Directors
Name, Age, Position,
Length of Service Principal Occupation During Past Five Years
----------------- --------------------------------------------
William Jefferies Mann, Mr. Mann has been Chairman and President of
Age 71, Director, Mann Investments, Inc. (real estate
Since 2004 investments/private investing) since 1985.
James Stillman R. McFadden, Mr. McFadden has been Chief Manager of
Age 47, Director, McFadden Communications, LLC
Since 2004 (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.
W. Randall Pittman, Mr. Pittman has been Chief Financial Officer
Age 51, Director, of Emageon, Inc. (healthcare information
Since 2004 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, Ms. Stone has held the Hugh Culverhouse
Age 54, Director, Endowed Chair of Accountancy at the
Since 2004 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.
24
RMK STRATEGIC INCOME FUND, INC.
Board of Directors and Officers
Information about the Fund's Directors
Name, Age, Position,
Length of Service Principal Occupation During Past Five Years
----------------- --------------------------------------------
Archie W. Willis III, Mr. Willis has been President of Community
Age 47, Director, Capital (financial advisory and real estate
Since 2004 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.
The address of each Director is c/o RMK Strategic Income Fund, Inc., Fifty
North Front Street, 21/st/ Floor, Memphis, TN 38103.
25
RMK STRATEGIC INCOME FUND, INC.
Board of Directors and Officers
Information about the Fund's Officers
Name, Age, Position,
Length of Service Principal Occupation During Past Five Years
----------------- ----------------------------------------------
Carter E. Anthony*, From 2002 to present, Mr. Anthony has served
Age 60, President, as President and Chief Investment Officer of
Since 2004 Morgan Asset Management, Inc. From 2000
to 2002, he served as Executive Vice President
and Director of Capital Management Group,
Regions Financial Corporation. From 1989 to
2000, Mr. Anthony was Vice President-Trust
Investments, National Bank of Commerce.
Thomas R. Gamble*, Mr. Gamble has been an executive at Regions
Age 61, Vice-President, Financial Corporation since 1981. He was a
Since 2004 Corporate IRA Manager from 2000 to 2001 and a
Senior Vice President and Manager of Employee
Benefits at the Birmingham Trust Department of
Regions Bank from 1981 to 2000.
Joseph C. Weller*, Mr. Weller has been Executive Vice President
Age 65, Treasurer, and Chief Financial Officer of Morgan
Since 2004 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.
Charles D. Maxwell*, Mr. Maxwell has been a Managing Director of
Age 50, Secretary and Morgan Keegan & Company, Inc. since 1998
Assistant Treasurer, and Assistant Treasurer and Assistant
Since 2004 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 the
accounting firm of Ernst & Young, LLP from
1976 to 1986 and served as a Senior Manager
from 1984 to 1986.
26
RMK STRATEGIC INCOME FUND, INC.
Board of Directors and Officers
Information about the Fund's Officers
Name, Age, Position,
Length of Service Principal Occupation During Past Five Years
----------------- ----------------------------------------------
J. Thompson Weller*, Mr. Weller has been a Managing Director and
Age 39, Assistant Secretary, Controller of Morgan Keegan & Company,
Since 2004 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.
David M. George*, Mr. George has been the Chief Compliance
Age 52, Chief Officer of Morgan Asset Management, Inc.
Compliance Officer, and a Senior Vice President of Morgan
Since 2004 Keegan & Company, Inc. since August 2004.
He was an Assistant Director of Compliance
and Senior Vice President of Morgan Keegan
& Company, Inc. from April 2002 to August
2004. He was a Branch Manager and First
Vice President of Morgan Keegan &
Company, Inc. from April 2001 to April 2002.
He was a Branch Administrative Officer of the
Private Client Group and First Vice President
of Morgan Keegan & Company, Inc. from
July 1999 to April 2001. He was a
Compliance Administrator and Vice President
of Morgan Keegan & Company, Inc. from
August 1995 to July 1999.
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.
Joseph C. Weller is the father of J. Thompson Weller. The address of Messrs.
Maxwell, Weller, Weller, and George is Fifty North Front Street, Memphis,
Tennessee 38103. The address of Messrs. Anthony and Gamble is 417 North 20/th/
Street, 15/th/ Floor, Birmingham, Alabama 35203.
27
RMK STRATEGIC 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 of
28
RMK STRATEGIC INCOME FUND, INC.
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.
29
RMK STRATEGIC 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 your 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 1-800-366-7426.
Proxy Voting Policies and Procedures and Record of Voting Activity
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
1-800-564-2188 or by visiting the SEC's website at www.sec.gov. You may also
view the proxy voting activity for each fund during the most recent twelve
month period ended June 30 by visiting Regions' website at www.regions.com.
* The Regions family of companies include Regions Bank, Regions Mortgage,
EquiFirst Corp., Morgan Keegan & Company, Inc., Morgan Asset Management, Inc.,
Regions Morgan Keegan Select Funds, Morgan Keegan Select Fund, Inc., RMK High
Income Fund, Inc., RMK Strategic Income Fund, Inc., RMK Advantage Income Fund,
Inc., Regions Morgan Keegan Trust, Rebsamen Insurance, and other Regions
affiliates.
30
REGIONS MORGAN KEEGAN FUND COMPLEX
Morgan Asset Management, Inc. serves as investment adviser to Morgan Keegan
Select Fund, Inc., Regions Morgan Keegan Select Funds, RMK High Income Fund,
Inc., RMK Strategic Income Fund, Inc., and RMK Advantage Income Fund, Inc.
Morgan Keegan Select Fund, Inc. and Regions Morgan Keegan Select Funds are
registered diversified, open-end investment companies. RMK High Income Fund,
Inc., RMK Strategic Income Fund, Inc. and RMK Advantage Income Fund, Inc. are
NYSE-listed, diversified, closed-end investment companies that seek a high
level of current income with capital appreciation as a secondary investment
objective. With locations throughout the South, Morgan Asset Management, Inc.
manages more than $13 billion for institutions and high net worth individuals.
Regions Morgan Keegan Select Family of Funds
.. Equity Funds
Regions Morgan Keegan Select Mid Cap Growth Fund
Regions Morgan Keegan Select Growth Fund
Regions Morgan Keegan Select Mid Cap Value Fund
Regions Morgan Keegan Select Value Fund
.. Balanced Fund
Regions Morgan Keegan Select Balanced Fund
.. Bond Funds
Regions Morgan Keegan Select Limited Maturity Government Fund
Regions Morgan Keegan Select Fixed Income Fund
Regions Morgan Keegan Select Intermediate Bond Fund/*/
Regions Morgan Keegan Select High Income Fund/*/
.. Tax-Exempt Bond Fund
Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund
.. Money Market Funds
Regions Morgan Keegan Select Treasury Money Market Fund
Regions Morgan Keegan Select Government Money Market Fund
Regions Morgan Keegan Closed-End Funds
.. RMK High Income Fund, Inc. (NYSE: RMH)/*/
.. RMK Strategic Income Fund, Inc. (NYSE: RSF)/*/
.. RMK Advantage Income Fund, Inc. (NYSE: RMA)/*/
* Bond funds managed by James C. Kelsoe, Jr., CFA
31
RMK STRATEGIC INCOME FUND, INC.
Investment Adviser Administrator
Morgan Asset Management, Inc. Morgan Keegan & Company, Inc.
417 North 20th Street, 15th Floor Morgan Keegan Tower
Birmingham, AL 35203 50 North Front Street
Memphis, TN 38103
Custodian Legal Counsel
State Street Bank & Trust Company Kirkpatrick & Lockhart LLP
108 Myrtle Street 1800 Massachusetts Avenue, N.W.
Quincy, MA 02171 Washington, D.C. 20036
Transfer Agent Independent Auditors
EquiServe PricewaterhouseCoopers LLP
P. O. Box 43010 Morgan Keegan Tower
Providence, RI 02940-3011 50 North Front Street, Suite 1000
Memphis, TN 38103
This semi-annual 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 semi-annual report are as dated and are
subject to change.
32
ITEM 2. CODE OF ETHICS.
Form N-CSR disclosure requirement not applicable to filing for period covered by
this report.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of RMK Strategic Income Fund, Inc. (the "Fund") 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.
Form N-CSR disclosure requirement not applicable to filing for period covered by
this report.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Form N-CSR disclosure requirement not applicable to filing for period covered by
this report.
ITEM 6. SCHEDULE OF INVESTMENTS.
Form N-CSR disclosure requirement not applicable. See Item 1.
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.
No reportable purchases for the period covered by this report.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Shareholders submitting recommendations for Independent Directors should forward
them to Charles D. Maxwell, Secretary of the Fund, and provide at least the
following information regarding a candidate: (1) name; (2) date of birth; (3)
education; (4) business, professional or other relevant experience and areas of
expertise; (5) current business and home addresses and contact information; (6)
other board positions or prior experience; and (7) any knowledge and experience
relating to investment companies and investment company governance. Prospective
candidates that appear likely to be able to fill a significant need of the Board
will be contacted by a member of the Board's Independent Directors Committee
(the "Committee") by telephone to discuss the position; if there appears to be
sufficient interest, an in-person meeting with one or more Committee members
would be arranged, and, if the member(s), based on the results of these
contacts, believes it has identified a viable candidate, it will air the matter
with the full Committee for its input.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based on an evaluation of the disclosure controls and procedures (as
defined in rule 30a-2(c) under the Act), the President and Treasurer
of the Fund have concluded 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 Fund's most recent half-year that has materially affected,
or is reasonably likely to materially affect, the Fund's internal
control over financial reporting.
ITEM 11. EXHIBITS.
(a) Form N-CSR disclosure requirement not applicable to filing for period
covered by this report.
(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 Fund has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Fund) RMK Strategic Income Fund, Inc.
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By (Signature and Title) /s/ Carter E. Anthony
---------------------------------------
Carter E. Anthony, President
Date December 2, 2004
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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 December 2, 2004
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By (Signature and Title) /s/ Joseph C. Weller
-----------------------------------------------------
Joseph C. Weller, Treasurer
Date December 2, 2004
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