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 No. 811-5399
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THE NEW AMERICA HIGH INCOME FUND, INC.
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(Exact Name of Registrant as Specified in Charter)
33 Broad Street, Boston, MA 02109
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(Address of Principal Executive Offices) (Zip Code)
Richard E. Floor, Secretary
The New America High Income Fund, Inc.
33 Broad Street
Boston, MA 02109
Registrant's telephone number, including area code: (617) 263-6400
Date of fiscal year end: December 31
Date of reporting period: July 1, 2003 to December 31, 2003
ITEM 1. REPORTS TO STOCKHOLDERS.
THE NEW
AMERICA
HIGH INCOME
FUND, INC.
[NEW AMERICA HIGH INCOME FUND LOGO]
ANNUAL
REPORT
DECEMBER 31, 2003
February 6, 2003
DEAR FELLOW SHAREHOLDER,
What a difference a year makes to the Fund's shareholders:
- The Fund's total return, based on net asset value plus dividends, was 28.6%
for the year.
- The Fund's total return, based upon market price plus dividends, was 19.2%
for the year.
- The Fund's net asset value per share increased 15.9%, from $1.89 to $2.19,
during 2003. The price of the Fund's shares rose from $2.01 to $2.16 over the
period.
- Shareholders who bought shares in the August 2003 rights offering had a 13.1%
total return on the shares purchased in the offering from the date the new
shares were issued through year-end.
- Dividends of $.0175 were paid each month, which is also the current target
for dividends going forward (subject to market conditions and portfolio
performance). At year-end, the annualized dividend, based on a market price
of $2.16 and the current monthly dividend of $.0175, was 9.7%.
These results reflect a series of major changes which occurred during the year,
some of which were under the Board of Directors' control and others which were
not. We are unable to control the high yield bond market, which for the first
year since 1999 had a positive total return. During the period 1998 - 2002, high
yield bond investors suffered the longest (four out of five years) bear market
in the history of the high yield bond market. The condition of the high yield
bond market improved dramatically in 2003, as discussed in detail below.
However, the Board does have some control over the Fund's capital structure. We
offered shareholders an opportunity to take advantage of the strong high yield
market by issuing rights to subscribe for additional shares at an attractive
price and raised an additional $41 million in equity.
Subsequently, the Fund issued $30 million of additional Auction Term Preferred
Stock (the "ATP") with the aim of restoring the Fund's leverage to its
approximate level prior to the rights offering. As our shareholders know, the
leverage is an important contributor to the Fund's dividend stream. The leverage
also exaggerates the impact of the market's price movements on the Fund's net
asset value. The Fund benefited from the leverage in 2003, a year in which the
high yield market performed very well. This was a welcome change from the
negative impact of the leverage on the Fund's shares in recent years when the
high yield market performed poorly.
The Fund's new portfolio manager, T. Rowe Price Associates (the "Adviser"),
completed the restructuring of the Fund's portfolio discussed in prior reports
and invested the new funds from the 2003 offerings without reducing the Fund's
common dividend. The Adviser has worked to diversify the Fund's portfolio, which
we hope will make its performance somewhat more stable throughout the high yield
market cycle.
We believe that as a result of the rights offering and other measures it has
undertaken, the Fund should have a lower expense ratio going forward than it did
in 2003. The portfolio is currently earning enough income to maintain the
monthly dividend at its recent level of $.0175 per share. While the Board has
currently targeted a monthly dividend of $.0175 per share, market conditions and
actual portfolio results will determine what is paid.
Like you, the Board has read with a sense of shock the news reports about
unethical and illegal activities at some mutual fund companies. During this time
of scandal in the mutual fund industry it is important to remember that as a
closed end fund, our shares are traded on a stock exchange, so the Fund cannot
have the problem of shareholders trading after a 4 p.m. pricing deadline.
Shareholders who attempt to profit by rapid-fire trading of the Fund's shares
have no direct impact on the Fund's portfolio management because their trades
are with other
market participants, not the Fund. In addition, each member of the Board of
Directors is a shareholder of the Fund. The Fund enjoys a degree of independence
from the Adviser that is extremely unusual in the industry because the entire
Board is completely financially independent of the Fund's Adviser. The Adviser
has no representation whatsoever on the Board. The Board's independence from the
Fund's investment adviser was demonstrated by the Board's action to change the
Fund's investment adviser in December 2002.
T. Rowe Price's discussion of the condition of the high yield bond market and
its strategy are below.
HIGH YIELD MARKET UPDATE
The high yield market ended its second best year ever with impressive fourth
quarter returns. The intensity of the year-long rally left the asset class with
the lowest yield in its history, tempting managers to continue dipping lower in
credit quality to preserve their income streams. Cautious optimism has been
replaced by a general sense of euphoria, and risk taking is back in vogue again.
In spite of valuations that grew increasingly rich, investors continued to bid
up the prices of non-investment grade bonds to record levels. As a result, the
high yield market in 2003 generated more return from capital appreciation than
income.
Our increasingly cautious outlook on the market's absolute valuation is tempered
by what we believe is an ideal macro environment for high yield companies and
the relative appeal of high yield bonds against other fixed income sectors. The
credit cycle continues to improve significantly, and defaults should not be a
major problem for the asset class in 2004. We see productivity gains, the
overall corporate profit outlook, a healthier stock market, low interest rates
and fiscal stimulus as all positive factors for highly indebted companies. High
yield bond market cycles tend to last longer than one year, implying that the
first half of 2004 should remain constructive. We also base this outlook on the
assumption that interest rates may remain low in the near term because of the
weak employment picture in the United States.
STRATEGY REVIEW
Our belief that there is a low probability of significant capital appreciation
in the high yield market in 2004 necessitated a shift in overall strategy from a
year ago. We anticipate that coupon clipping will be the primary driver of total
return and that reinvestment risk of callable debt will challenge high yield
managers. The overall yield of the high yield bond market at year-end stood at
approximately 7.5% as measured by the J.P. Morgan Global High Yield Bond Index,
and is lower already because of a strong January effect. Higher quality BB-rated
bonds have dropped to a 5.8% average yield and carry significant interest rate
risk. Meanwhile, most lower-rated companies in the portfolio have continued to
exhibit improving operating fundamentals, and their bonds still offer low
double-digit income. These factors lead us to maintain healthy weightings in the
lower middle (B) and bottom credit tiers (CCC) of the market, subject to the
Fund's portfolio investment restrictions related to maintaining the AAA rating
on the Fund's ATP. We also expect meaningful upgrade activity in this lower
rated basket of the portfolio throughout the year.
Sector themes are currently much harder to discern, with most of our industries
trading at yields tightly clustered around the market average. We continued to
increase our exposure in utilities in the last three months of the year because
we see more balance sheet repair on the horizon. Telecommunications looks
attractive for the same reason, but we have reached our maximum targeted
exposures in both sectors. Both industries include a number of rising stars
which should regain investment grade status during the next two years. For
example, Nextel remains one of our largest positions, but its bonds now yield
5.5%. In our last report, we lamented Nextel's 7% yield.
2
We also note that with the high yield bond market yielding approximately 7.3%,
as measured by the J.P. Morgan Global High Yield Bond Index, and prices at
record levels, credit mistakes will hurt performance much more than in 2003.
Traditional credit disciplines mattered less last year than in the bear market
of 1998 to 2002. This trend will not continue indefinitely, because the market
already is witnessing the underwriting of speculative transactions at a
disturbing pace. We are gratified by the performance achieved last year, but we
remain committed to preserving those gains when the high yield market eventually
turns south.
Thank you for your continued interest in the Fund.
Sincerely,
/s/ Robert F. Birch /s/ Mark Vaselkiv
Robert F. Birch Mark Vaselkiv
President Vice President
The New America High Income Fund, Inc. T. Rowe Price Associates, Inc.
THE VIEWS EXPRESSED IN THIS UPDATE ARE AS OF THE DATE OF THIS LETTER. THESE
VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS. THE
FUND AND THE ADVISER DISCLAIM ANY DUTY TO UPDATE THESE VIEWS, WHICH MAY NOT BE
RELIED UPON AS INVESTMENT ADVICE. IN ADDITION, REFERENCES TO SPECIFIC COMPANY
SECURITIES SHOULD NOT BE REGARDED AS INVESTMENT RECOMMENDATIONS.
3
The New America High Income Fund, Inc.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2003 (Dollar Amounts in Thousands)
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- 155.26% (d)
AEROSPACE AND DEFENSE -- 3.67%
$ 850 Aviall, Inc., Senior Notes,
7.625%, 07/01/11 B1 $ 884
2,500 GenCorp, Inc.,
Senior Subordinated Notes,
9.50%, 08/15/13 (g) B2 2,600
600 Sequa Corporation, Senior Notes,
9%, 08/01/09 B1 660
650 Transdigm, Inc., Senior
Subordinated Notes,
8.375%, 07/15/11 B3 657
2,650 Vought Aircraft Industries, Inc.,
Senior Notes, 8%, 07/15/11 (g) B2 2,703
------------
7,504
------------
AUTOMOBILE -- 3.06%
125 Accuride Corporation,
Senior Subordinated Notes,
9.25%, 02/01/08 Caa1 129
700 Ashbury Automotive Group, Inc.,
Senior Subordinated
Notes, 8%, 03/15/14 (g) B3 704
365 Cummins, Inc., Senior Notes,
10.25%, 12/01/10 (g) Ba2 421
50 Dana Corporation,
Notes, 7%, 03/15/28 Ba3 50
420 Dana Corporation,
Notes, 7%, 03/01/29 Ba3 416
50 Dana Corporation, Senior
Notes, 9%, 08/15/11 Ba3 60
175 Dura Operating Corporation,
Senior Subordinated
Notes, 9%, 05/01/09 B2 175
850 HLI Operating Company Inc.,
Senior Notes, 10.50%, 06/15/10 B1 977
1,325 TRW Automotive Inc.,
Senior Notes, 9.375%, 02/15/13 B1 1,517
1,525 TRW Automotive Inc.,
Senior Subordinated Notes,
11%, 02/15/13 B2 1,807
------------
6,256
------------
BEVERAGE, FOOD AND TOBACCO -- 4.23%
281 Agrilink Foods, Inc.,
Senior Subordinated Notes,
11.875%, 11/01/08 B3 296
1,200 B&G Foods, Inc.,
Senior Subordinated Notes,
9.625%, 08/01/07 B3 1,242
$ 1,125 DIMON Incorporated, Senior Notes,
9.625%, 10/15/11 Ba3 $ 1,257
400 Dole Food Company, Inc.,
Senior Notes, 8.625%, 05/01/09 B2 439
1,175 Dole Food Company, Inc.,
Senior Notes, 8.875%, 03/15/11 B2 1,284
150 Domino's, Inc.,
Senior Subordinated Notes,
8.25%, 07/01/11 (g) B3 162
1,975 Le-Nature's, Inc.,
Senior Subordinated Notes,
9.50%, 06/15/13 (g) B3 2,064
575 Luigino's Inc.,
Senior Subordinated Notes,
10%, 02/01/06 B3 594
775 Pinnacle Foods Holding Corporation,
Senior Subordinated Notes,
8.25%, 12/01/13 (g) B3 790
525 Premium Standard Farms, Inc.,
Senior Notes, 9.25%, 06/15/11 B1 530
------------
8,658
------------
BROADCASTING AND ENTERTAINMENT -- 11.62%
1,450 CCO Holdings, LLC, Senior
Notes, 8.75%, 11/15/13 (g) B3 1,475
1,675 Charter Communications
Holdings II, 10.25%, 09/15/10 (g) Caa1 1,755
100 Charter Communications
Holdings, LLC, Senior Notes,
10%, 04/01/09 Ca 89
100 Charter Communications
Holdings, LLC, Senior Notes,
10.75%, 10/01/09 Ca 92
1,875 Charter Communications
Holdings, LLC, Senior Notes,
11.125%, 01/15/11 Ca 1,716
2,500 Comcast Cable Communications,
Inc., Notes, 6.75%, 01/30/11 Baa3 2,779
2,550 CSC Holdings, Inc.,
Senior Notes, 7.625%, 04/01/11 B1 2,677
50 CSC Holdings, Inc.,
Senior Notes, 7.875%, 12/15/07 B1 53
750 DIRECTV Holdings LLC,
Senior Notes, 8.375%, 03/15/13 B1 870
644 Echostar DBS Corporation,
Senior Notes, 9.125%,
01/15/09 Ba3 720
The accompanying notes are an integral
part of these financial statements.
4
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 375 Echostar DBS Corporation,
Senior Notes, 10.375%, 10/01/07 Ba3 $ 412
350 Granite Broadcasting Corporation,
Senior Secured Notes,
9.75%, 12/01/10 (g) B3 347
375 Insight Midwest, L.P.,
Senior Notes, 9.75%, 10/01/09 B2 396
750 Insight Midwest, L.P.,
Senior Notes, 10.50%, 11/01/10 B2 814
1,025 Mediacom Broadband LLC,
Senior Notes, 11%, 07/15/13 B2 1,148
475 Paxson Communications Corp.
Senior Subordinated Notes,
10.75%, 07/15/08 Caa1 513
2,350 Quebecor Media Inc.,
Senior Notes, 11.125%, 07/15/11 B2 2,720
500 Spanish Broadcasting System, Inc.,
Senior Subordinated Notes,
9.625%, 11/01/09 Caa1 534
1,915 Vivendi Universal, S.A., Senior
Notes, 9.25%, 04/15/10 (g) B1 2,260
800 XM Satellite Radio Inc.,
Senior Secured Notes,
12%, 06/15/10 Caa1 906
1,400 Young Broadcasting, Inc.,
Senior Subordinated Notes,
10%, 03/01/11 Caa1 1,505
------------
23,781
------------
BUILDING AND REAL ESTATE -- 7.03%
1,550 Associated Materials, Inc.,
Senior Subordinated Notes,
9.75%, 04/15/12 B3 1,697
1,050 Collins & Aikman Floorcoverings,
Inc., Senior Subordinated Notes,
9.75%, 02/15/10 B2 1,124
50 D.R. Horton, Inc., Senior Notes,
8.50%, 04/15/12 Ba1 57
775 Interface, Incorporated,
Senior Notes, 7.30%, 04/01/08 Caa1 740
750 LNR Property Corporation,
Senior Notes,
7.25%, 10/15/13 (g) Ba3 763
425 LNR Property Corporation,
Senior Subordinated Notes,
7.625%, 07/15/13 Ba3 446
$ 775 Mobile Mini, Inc., Senior Notes,
9.50%, 07/01/13 B2 $ 854
850 Norcroft Companies, L.P.,
Senior Subordinated
Notes, 9%, 11/01/11 (g) B3 910
1,600 Shaw Group, Inc., Senior Notes,
10.75%, 03/15/10 (g) Ba2 1,696
2,000 Standard Pacific Corp.,
Senior Notes, 8%, 02/15/08 Ba2 2,055
725 Texas Industries, Inc.,
Senior Notes, 10.25%, 06/15/11 B1 814
400 Wackenhut Corrections Corporation,
Senior Notes, 8.25%, 07/15/13 B1 426
675 WCI Communities, Inc.,
Senior Subordinated
Notes, 9.125%, 05/01/12 Ba3 744
975 WCI Communities, Inc.,
Senior Subordinated
Notes, 10.625%, 02/15/11 Ba3 1,099
250 Williams Scotsman, Inc.,
Senior Notes,
9.875%, 06/01/07 B3 252
650 Williams Scotsman, Inc.,
Senior Secured Notes,
10%, 08/15/08 B2 718
------------
14,395
------------
CHEMICALS, PLASTICS AND RUBBER -- 6.92%
975 ARCO Chemical Company,
Debentures, 9.80%, 02/01/20 B1 980
1,850 Avecia Group plc, Senior Notes,
11%, 07/01/09 Caa1 1,665
1,650 Compass Minerals Group, Inc.,
Senior Subordinated Notes,
10%, 08/15/11 B3 1,848
300 Equistar Chemicals, LP,
Senior Notes,
10.625%, 05/01/11 B2 330
1,125 Ethyl Corporation, Senior Notes,
8.875%, 05/01/10 B2 1,204
625 Huntsman Advanced Materials LLC,
Senior Secured Notes,
11%, 07/15/10 (g) B2 691
600 Huntsman International LLC,
Senior Notes, 9.875%, 03/01/09 B3 657
The accompanying notes are an integral
part of these financial statements.
5
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 250 Huntsman International LLC,
Senior Subordinated Notes,
10.125%, 07/01/09 Caa1 $ 259
1,050 Koppers Inc., Senior Secured
Notes, 9.875%, 10/15/13 (g) B2 1,160
500 Lyondell Chemical Company,
Senior Notes, 9.50%, 12/15/08 B1 527
500 Nalco Company, Senior Notes,
7.75%, 11/15/11 (g) B2 535
625 Omnova Solutions, Inc., Senior
Notes, 11.25%, 06/01/10 (g) B2 694
525 PolyOne Corporation, Senior
Notes, 10.625%, 05/15/10 B3 528
820 Resolution Performance Products,
LLC, Senior Secured Notes,
9.50%, 04/15/10 B3 838
1,500 Rhodia S.A., Senior Subordinated
Notes, 8.875%, 06/01/11 (g) B3 1,380
775 Rockwood Specialities Group, Inc.,
Senior Subordinated Notes,
10.625%, 05/15/11 (g) B3 862
------------
14,158
------------
CONTAINERS, PACKAGING AND GLASS -- 13.07%
700 AEP Industries, Inc., Senior
Subordinated Notes,
9.875%, 11/15/07 B3 703
2,150 Ainsworth Lumber Co. Ltd.,
Senior Secured Notes,
12.50%, 07/15/07 B3 2,505
350 Boise Cascade Corporation,
Senior Notes, 7%, 11/01/13 Ba2 366
1,200 Bway Corporation,
Senior Subordinated Notes,
10%, 10/15/10 B3 1,308
575 Constar International, Inc.
Senior Subordinated Notes,
11%, 12/01/12 Caa1 471
1,250 Crown Cork & Seal Company, Inc.
Euroco, Senior Secured Notes,
9.50%, 03/01/11 B1 1,412
1,725 Crown Cork & Seal Company, Inc.
Euroco, Senior Secured Notes,
10.875%, 03/01/13 B2 2,018
$ 500 Georgia-Pacific Corporation, Senior
Debentures, 9.875%, 11/01/21 Ba3 $ 522
500 Georgia-Pacific Corporation, Senior
Notes, 8.875%, 02/01/10 Ba2 573
1,975 Georgia-Pacific Corporation, Senior
Notes, 9.375%, 02/01/13 Ba2 2,271
450 Graphic Packaging International, Inc.,
Senior Notes, 8.50%, 08/15/11 (g) B2 497
350 Greif Brothers Corporation,
Senior Subordinated Notes,
8.875%, 08/1/12 B2 383
750 Jefferson Smurfit Corporation,
Senior Notes, 7.50%, 06/01/13 B2 784
1,425 Longview Fibre Company,
Senior Subordinated Notes,
10%, 01/15/09 B2 1,568
1,535 MDP Acquisitions PLC, Senior
Notes, 9.625%, 10/01/12 B2 1,719
350 MDP Acquisitions PLC,
Subordinated Notes,
15.50%, 10/01/13 (i) B3 406
550 Owens-Brockway
Glass Container, Inc.,
Senior Notes, 8.25%, 05/15/13 B2 590
350 Owens-Brockway Glass
Container, Inc., Senior Secured
Notes, 7.75%, 05/15/11 B1 375
175 Owens-Brockway
Glass Container, Inc.,
Senior Secured Notes,
8.75%, 11/15/12 B1 195
2,000 Owens-Brockway Glass
Container, Inc., Senior Secured
Notes, 8.875%, 02/15/09 B1 2,185
1,700 Plastipak Holdings, Inc.,
Senior Notes, 10.75%, 09/01/11 B3 1,887
1,600 Potlatch Corporation,
Senior Subordinated Notes,
10%, 07/15/11 Ba1 1,792
375 Silgan Holdings, Inc.,
Senior Subordinated Notes,
6.75%, 11/15/13 (g) B1 375
550 Smurfit Capital, Guaranteed Notes,
6.75%, 11/20/05 Ba3 569
100 Stone Container Corporation,
Senior Notes, 9.75%, 02/01/11 B2 110
The accompanying notes are an integral
part of these financial statements.
6
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 350 Stone Container Finance
Company of Canada, Senior
Notes, 11.50%, 08/15/06 (g) B2 $ 371
775 Tekni-Plex, Inc., Senior Notes,
8.75%, 11/15/13 (g) B2 806
------------
26,761
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 4.02%
875 Actuant Financial Corporation,
Senior Subordinated Notes,
13%, 05/01/09 B2 1,138
275 AGCO Corporation, Senior Notes,
9.50%, 05/01/08 Ba3 300
650 Case New Holland, Inc., Senior
Notes, 9.25%, 08/01/11 (g) Ba3 728
500 Columbus McKinnon Corporation,
Senior Subordinated Notes,
8.50%, 04/01/08 Caa1 468
600 General Cable Corporation,
Senior Notes, 9.50%, 11/15/10 (g) B2 641
550 Manitowoc, Incorporated,
Senior Notes, 7.125%, 11/01/13 B1 567
1,150 National Waterworks, Inc.,
Senior Subordinated Notes,
10.50%, 12/01/12 B3 1,285
1,350 Rexnord Corp., Senior Subordinated
Notes, 10.125%, 12/15/12 B3 1,485
1,550 Trimas Corp., Senior Subordinated
Notes, 9.875%, 06/15/12 B3 1,620
------------
8,232
------------
DIVERSIFIED/CONGLOMERATE SERVICE -- 1.86%
975 Brand Services, Inc., Senior
Subordinated Notes,
12%, 10/15/12 B3 1,126
1,225 Brickman Group LTD, Senior
Subordinated Notes,
11.75%, 12/15/09 B2 1,427
1,150 Coinmach Corporation, Senior
Notes, 9%, 02/01/10 B2 1,248
------------
3,801
------------
ECOLOGICAL -- 2.23%
550 Allied Waste North America, Inc.,
Senior Secured Notes,
7.875%, 04/15/13 Ba3 595
$ 1,225 Casella Waste Systems, Inc.,
Senior Subordinated
Notes, 9.75%, 02/01/13 B3 $ 1,372
825 IESI Corporation, Senior
Subordinated Notes,
10.25%, 06/15/12 B3 916
1,550 Synagro Technologies, Inc.,
Senior Subordinated
Notes, 9.50%, 04/01/09 B3 1,693
------------
4,576
------------
ELECTRONICS -- 3.84%
325 AMI Semiconductor, Inc., Senior
Subordinated Notes,
10.75%, 02/01/13 B3 387
825 Amkor Technology, Inc.,
Senior Notes,
7.75%, 05/15/13 B1 883
825 Avaya Inc., Senior Secured Notes,
11.125%, 04/01/09 B2 957
750 Chippac International Ltd.,
Senior Subordinated Notes,
Series B, 12.75%, 08/01/09 B3 827
875 Fairchild Semiconductor Corp.,
Senior Subordinated Notes,
10.50%, 02/01/09 B2 976
375 Lucent Technologies, Inc.,
Senior Notes, 5.50%, 11/15/08 Caa1 347
1,350 ON Semiconductor Corporation,
Senior Secured Notes,
12%, 03/15/10 B3 1,606
575 ON Semiconductor Corporation,
Senior Secured Notes,
13%, 05/15/08 Caa1 667
600 Sanmina Scientific Corporation,
Senior Secured Notes,
10.375%, 01/15/10 Ba2 702
250 Stratus Technologies, Inc., Senior
Notes, 10.375%, 12/01/08 (g) B3 265
225 Telex Communications, Inc.,
Senior Notes, 11.50%, 10/15/08 (g) B3 239
------------
7,856
------------
FINANCE -- 4.06%
2,500 Ford Motor Credit Company,
Senior Notes, 7.375%, 02/01/11 A3 2,711
The accompanying notes are an integral
part of these financial statements.
7
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 2,500 General Motors Acceptance
Corporation, Senior Notes,
6.875%, 09/15/11 A3 $ 2,691
2,500 Sprint Capital Corporation,
Senior Notes, 8.375%, 03/15/12 Baa3 2,912
------------
8,314
------------
FURNISHINGS, HOUSEWARES, DURABLE CONSUMER PRODUCTS -- .32%
625 Sealy Mattress Company,
Senior Subordinated Notes,
9.875%, 12/15/07 B3 648
------------
FARMING AND AGRICULTURE -- .33%
650 United Agri Products, Inc., Senior
Notes, 8.25%, 12/15/11 (g) B3 668
------------
GROCERY STORES -- .83%
500 Couche-Tard, Inc., Senior
Subordinated Notes,
7.50%, 12/15/13 (g) Ba3 526
1,125 The Pantry Inc., Senior
Subordinated Notes,
10.25%, 10/15/07 B3 1,167
------------
1,693
------------
HEALTHCARE, EDUCATION AND CHILDCARE -- 6.27%
825 Alliance Imaging, Inc., Senior
Subordinated Notes,
10.375%, 04/15/11 B3 870
825 Alpharma, Inc., Senior Notes,
8.625%, 05/01/11 (g) B3 837
900 Ameripath, Inc. Senior Subordinated
Notes, 10.50%, 04/01/13 B3 972
200 AmerisourceBergen Corporation,
Senior Notes, 8.125%, 09/01/08 Ba3 226
700 Biovail Corporation, Senior
Subordinated Notes,
7.875%, 04/01/10 B2 711
675 Concentra Operating Corporation,
Senior Subordinated Notes,
9.50%, 08/15/10 B3 731
750 Concentra Operating Corporation,
Senior Subordinated Notes,
9.50%, 08/15/10 (g) B3 812
$ 550 Concentra Operating Corporation,
Senior Subordinated Notes,
13%, 08/15/09 B3 $ 613
391 Fisher Scientific International Inc.,
Senior Subordinated Notes,
8.125%, 05/01/12 B2 419
575 Fresenius Medical Care Capital
Trust IV, 7.875%, 06/15/11 Ba2 615
875 Genesis Healthcare Corporation,
Senior Subordinated Notes,
8%, 10/15/13 (g) B3 906
675 InSight Health Services Corp.,
Senior Subordinated Notes,
9.875%, 11/01/11 B3 722
1,000 Omnicare, Inc., Senior Subordinated
Notes, 8.125%, 03/15/11 Ba2 1,095
750 Quintiles Transnational Corporation,
Senior Subordinated Notes,
10%, 10/01/13 (g) B3 810
400 Tenet Healthcare Corporation,
Senior Notes, 6.50%, 06/01/12 B1 383
1,150 Tenet Healthcare Corporation,
Senior Notes, 7.375%, 02/01/13 B1 1,153
875 Vicar Operating, Inc., Senior
Subordinated Notes,
9.875%, 12/01/09 B3 967
------------
12,842
------------
HOTELS, MOTELS, INNS AND GAMING -- 10.64%
975 Ameristar Casinos, Inc.,
Senior Subordinated Notes,
10.75%, 02/15/09 B2 1,121
1,125 Argosy Gaming Company,
Senior Subordinated Notes,
10.75%, 06/01/09 B2 1,216
800 Chukansi Economic Development,
Senior Notes,
14.50%, 06/15/09 (g) (e) 960
575 Coast Hotels and Casinos, Inc.,
Senior Subordinated Notes,
9.50%, 04/01/09 B2 607
1,675 Courtyard Marriott II Ltd., Senior
Secured Notes, 10.75%, 02/01/08 B2 1,683
50 Extended Stay America, Inc., Senior
Subordinated Notes,
9.875%, 06/15/11 B2 56
The accompanying notes are an integral
part of these financial statements.
8
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 550 Horseshoe Gaming Holding Corp.,
Senior Subordinated Notes,
8.625%, 05/15/09 B2 $ 582
740 Host Marriott LP, Senior Notes,
Series I, 9.50%, 01/15/07 Ba3 827
600 Isle of Capri Casinos, Inc.,
Senior Subordinated Notes,
8.75%, 04/15/09 B2 630
1,475 John Q. Hammons Hotels, LP,
First Mortgage Notes,
8.875%, 05/15/12 B2 1,611
775 La Quinta Properties, Inc., Senior
Notes, 8.875%, 03/15/11 Ba3 854
1,125 Majestic Star Casino, LLC,
Senior Notes, 9.50%, 10/15/10 (g) B2 1,153
1,500 MGM Grand, Inc., Senior Notes,
6.875%, 02/06/08 Ba1 1,590
1,100 Mohegan Tribal Gaming Authority,
Senior Subordinated Notes,
8%, 04/01/12 Ba3 1,188
425 Old Evangeline Downs, LLC,
Senior Secured Notes,
13%, 03/01/10 (e) 455
1,000 Park Place Entertainment
Corp., Senior
Subordinated Notes,
9.375%, 02/15/07 Ba2 1,132
1,225 Penn National Gaming, Inc.,
Senior Subordinated Notes,
11.125%, 03/01/08 B3 1,380
1,350 Pinnacle Entertainment, Inc.,
Senior Subordinated Notes,
9.25%, 02/15/07 Caa1 1,394
75 Resorts International Hotel and
Casino, Inc., Senior Secured Notes,
11.50%, 03/15/09 B2 82
1,200 Station Casinos, Inc.,
Senior Subordinated Notes,
9.875%, 07/01/10 B2 1,320
575 Trump Casino Holdings, LLC,
Senior Notes,
11.625%, 03/15/10 B3 555
1,200 Venetian Casino Resort, LLC, 2nd
Mortgage Notes, 11%, 06/15/10 B3 1,392
------------
21,788
------------
INSURANCE -- .58%
$ 1,125 Willis Corroon Corporation,
Senior Subordinated Notes,
9%, 02/01/09 Ba2 $ 1,181
------------
LEISURE, AMUSEMENT AND ENTERTAINMENT -- 4.20%
750 AMF Bowling Worldwide, Inc.
Senior Subordinated Notes,
13%, 09/01/08 B3 848
650 Bally Total Fitness Holding
Corporation, Senior Notes,
10.50%, 07/15/11 (g) B2 653
675 Equinox Holdings, Inc., Senior
Notes, 9%, 12/15/09 (g) B3 702
975 The Hockey Company, Senior
Secured Note Units,
11.25%, 04/15/09 B2 1,116
100 Six Flags Inc., Senior Notes,
8.875%, 02/01/10 B2 103
1,100 Six Flags Inc., Senior Notes,
9.50%, 02/01/09 B2 1,149
200 Six Flags Inc., Senior Notes,
9.625%, 06/1/14 (g) B2 209
1,400 Six Flags Inc., Senior Notes,
9.75%, 04/15/13 B2 1,470
800 Town Sports International, Inc.,
Senior Notes, 9.625%, 04/15/11 B2 856
550 Universal City Development
Partners, Ltd., Senior Notes,
11.75%, 04/01/10 (g) B2 646
825 Worldspan, L.P., Senior Notes,
9.625%, 06/15/11 (g) B2 847
------------
8,599
------------
MINING, STEEL, IRON AND NON-PRECIOUS METALS -- 10.52%
750 Arch Western Finance LLC,
Senior Notes,
6.75%, 07/01/13 (g) Ba2 769
2,230 Century Aluminum Company,
1st Mortgage Notes,
11.75%, 04/15/08 B1 2,486
850 CSN Islands VIII Corporation,
Senior Notes,
9.75%, 12/16/13 (g) B1 850
2,675 Earle M. Jorgensen Company,
Senior Secured Notes,
9.75%, 06/01/12 B2 2,983
The accompanying notes are an integral
part of these financial statements.
9
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 700 Euramax Internanational, Inc.,
Senior Subordinated Notes,
8.50%, 08/15/11 (g) B2 $ 746
1,750 Gerdau Ameristeel Corporation,
Senior Notes,
10.375%, 07/15/11 (g) B2 1,969
150 Intermet Corporation, Senior Notes,
9.75%, 06/15/09 B2 155
1,175 IPSCO Inc., Senior Notes,
8.75%, 06/01/13 Ba3 1,304
150 Joy Global Inc., Senior Subordinated
Notes, 8.75%, 03/15/12 B2 167
725 Luscar Coal Ltd., Senior Notes,
9.75%, 10/15/11 Ba3 819
500 Neenah Foundry Company,
Senior Notes, 11%, 09/30/10 B2 550
575 Neenah Foundry Company,
Senior Subordinated Notes,
13%, 09/30/13 (g) (e) 586
2,000 Peabody Energy Corporation,
Senior Notes, 6.875%, 03/15/13 Ba3 2,110
2,400 Russell Metals, Inc., Units,
Senior Notes, 10%, 06/01/09 B1 2,556
1,530 Steel Dynamics, Inc., Senior Notes,
9.50%, 03/15/09 B1 1,706
1,200 United States Steel Corporation,
Senior Notes, 9.75%, 05/15/10 B1 1,362
1,100 Weirton Steel Corporation,
Senior Secured Notes,
10%, 04/01/08 (a)(b) (e) 418
------------
21,536
------------
OIL AND GAS -- 9.18%
1,675 AmeriGas Partners, L.P.,
Senior Notes, 8.875%, 05/20/11 B2 1,843
225 ANR Pipeline Company, Senior
Notes, 8.875%, 03/15/10 B1 253
875 Chesapeake Energy Corporation,
Senior Notes, 9%, 08/15/12 Ba3 1,008
1,050 Compagnie Generale de
Geophysique (CGG), Senior
Notes, 10.625%, 11/15/07 Ba3 1,118
650 Dresser, Inc., Senior Notes,
9.375%, 04/15/11 B2 707
2,600 El Paso Corporation, Senior Notes,
7.75%, 01/15/32 Caa1 2,210
$ 575 El Paso Corporation, Senior Notes,
7.80%, 08/1/31 Caa1 $ 489
125 El Paso Corporation, Senior Notes,
8.05%, 10/15/30 Caa1 109
150 Encore Acquisition Company,
Senior Subordinated Notes,
8.375%, 06/15/12 B2 163
1,725 Ferrellgas Partners LP, Senior Notes,
8.75%, 06/15/12 B2 1,897
880 Magnum Hunter Resources, Inc.,
Senior Notes, 9.60%, 03/15/12 B2 999
750 North American Energy Partners,
Senior Notes, 8.75%, 12/1/11 (g) B2 789
200 Northwest Pipeline Corporation,
Senior Notes, 8.125%, 03/01/10 B1 224
925 Petroleum Helicopters, Inc.,
Senior Notes, 9.375%, 05/1/09 B1 980
375 Southern Natural Gas Company,
Senior Notes, 8.875%, 03/15/10 B1 421
825 Stone Energy Corporation,
Senior Subordinated Notes,
8.25%, 12/15/11 B2 897
350 Swift Energy Company, Senior
Subordinated Notes,
10.25%, 08/01/09 B3 380
1,000 Tom Brown, Inc., Units, Senior
Subordinated Notes,
7.25%, 09/15/13 Ba3 1,057
925 Universal Compression, Inc., Senior
Notes, 7.25%, 05/15/10 B1 962
275 Westport Resources Corporation,
Senior Subordinated
Notes, 8.25%, 11/01/11 Ba3 303
350 Williams Companies, Inc.,
Senior Notes, 7.625%, 07/15/19 B3 366
300 Williams Companies, Inc.,
Senior Notes, 7.75%, 06/15/31 B3 311
300 Williams Companies, Inc.,
Senior Notes, 8.125%, 03/15/12 B3 336
850 Williams Companies, Inc.,
Senior Notes, 8.625%, 06/1/10 B3 963
------------
18,785
------------
PERSONAL, FOOD AND MISCELLANEOUS SERVICES -- .54%
850 O'Charleys, Inc., Senior
Subordinated Notes,
9%, 11/1/13 (g) Ba3 854
The accompanying notes are an integral
part of these financial statements.
10
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 250 Perkins Family Restaurants, L.P.,
Senior Notes, 10.125%, 12/15/07 B1 $ 254
------------
1,108
------------
PERSONAL NON-DURABLE CONSUMER PRODUCTS -- 3.82%
675 American Achievement Corporation,
Senior Notes, 11.625%, 01/01/07 B1 756
1,250 American Safety Razor Company,
Senior Notes, 9.875%, 08/01/05 B3 1,238
650 Chattem, Inc., Senior Subordinated
Notes, 8.875%, 04/1/08 B2 668
575 Commemorative Brands, Inc.,
Senior Subordinated Notes,
11%, 01/15/07 Caa1 586
2,125 Jostens, Inc., Senior Subordinated
Notes, 12.75%, 05/01/10 B3 2,444
1,675 Rayovac Corporation, Senior
Subordinated Notes,
8.50%, 10/01/13 B3 1,746
350 Salton, Inc., Senior Subordinated
Notes, 12.25%, 04/15/08 B3 382
------------
7,820
------------
PERSONAL TRANSPORTATION -- 1.56%
1,075 Laidlaw International, Incorporated,
Senior Notes,10.75%, 06/15/11 (g) B2 1,209
950 Northwest Airlines, Inc., Senior
Notes, 8.875%, 06/01/06 Caa1 865
975 TravelCenters of America, Inc.,
Senior Subordinated Notes,
12.75%, 05/01/09 B3 1,126
------------
3,200
------------
PRINTING AND PUBLISHING -- 11.66%
100 Advanstar Communications, Inc.,
Senior Notes, 10.75%,
08/15/10 (g) B3 108
325 Advanstar Communications, Inc.,
Senior Subordinated Notes,
12%, 02/15/11 Caa2 342
500 American Media Operations, Inc.,
Senior Subordinated Notes,
10.25%, 05/01/09 B2 535
925 CanWest Media, Inc.,
Senior Subordinated Notes,
10.625%, 05/15/11 B2 1,055
$ 150 CBD Media LLC, Senior
Subordinated Notes,
8.625%, 06/01/11 (g) B3 $ 164
575 Dex Media East LLC,
Senior Notes, 9.875%, 11/15/09 B2 656
1,750 Dex Media East, LLC, Senior
Subordinated Notes,
12.125%, 11/15/12 B3 2,161
300 Dex Media, Inc., Senior Notes,
8%, 11/15/13 (g) Caa1 317
950 Dex Media, Inc., Senior Discount
Notes, 9%, 11/15/13 (g)(h) Caa1 667
800 Dex Media West LLC, Senior Notes,
8.50%, 08/15/10 (g) B2 890
1,475 Dex Media West LLC, Senior Notes,
9.875%, 08/15/13 (g) B3 1,715
2,245 R.H. Donnelley Inc.,
Senior Subordinated Notes,
10.875%, 12/15/12 (g) B2 2,666
525 Hollinger International Publishing,
Inc., Senior Notes, 9%, 12/15/10 B2 557
950 Hollinger Participation Trust,
Senior Notes, 12.125%,
11/15/10 (g)(i) B3 1,135
1,050 Houghton Mifflin Company,
Senior Subordinated Notes,
9.875%, 02/01/13 B3 1,155
925 Liberty Group Operating, Inc.,
Senior Subordinated Notes,
9.375%, 02/01/08 Caa1 934
1,610 Mail-Well I Corp., Senior Notes,
9.625%, 03/15/12 B1 1,787
625 Primedia, Inc., Senior Notes,
7.625%, 04/1/08 B3 633
1,525 Transwestern Publishing
Company, L.C.C.,
Senior Subordinated Notes,
9.625%, 11/15/07 B2 1,578
2,050 Vertis, Inc., Senior Secured Notes,
9.75%, 04/01/09 B2 2224
325 Vertis, Inc., Senior Secured Notes,
13.50%, 12/7/09 (g) Caa1 319
2,150 Von Hoffman Corp., Senior Notes,
10.25%, 03/15/09 B2 2,279
------------
23,877
------------
The accompanying notes are an integral
part of these financial statements.
11
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
RETAIL STORES -- 1.12%
$ 950 Barneys, Incorporated,
Senior Notes, 9%, 04/01/08 B3 $ 912
575 Dillard's Inc., Senior Notes,
6.875%, 06/01/05 B2 592
275 Dollar Financial Group, Inc.,
Senior Notes,
9.75%, 11/15/11 (g) B3 285
225 J.Crew Intermediate, LLC,
Senior Discount Notes,
16%, 05/15/08 (h) (e) 181
325 J. Crew Operating Corporation,
Senior Subordinated Notes,
10.375%, 10/15/07 Caa3 335
------------
2,305
------------
TELECOMMUNICATIONS -- 13.79%
1,225 ACC Escrow Corp.,
Senior Notes, 10%, 08/01/11 (g) B2 1,360
1,247 Alamosa (Delaware) Inc.,
Senior Notes, 11%, 07/31/10 Caa2 1,347
1,050 Alaska Communications System
Holdings, Inc.,Senior Notes,
9.875%, 08/15/11 (g) B2 1,103
350 Centennial Cellular Operating
Company, L.L.C., Senior Notes,
10.125%, 06/15/13 Caa1 385
800 Cincinnati Bell, Inc.,
Senior Subordinated Notes,
8.375%, 01/15/14 (g) B3 864
1,050 Dobson Communications
Corporation, Senior Notes,
10.875%, 07/01/10 B3 1,142
1,675 Eircom Funding, plc,
Senior Subordinated Notes,
8.25%, 08/15/13 B1 1,834
875 IPC Acquisition Corporation,
Senior Subordinated Notes,
11.50%, 12/15/09 B3 958
900 LCI International, Inc., Senior Notes,
7.25%, 06/15/07 Caa1 882
625 Level 3 Communications, Inc.,
Senior Notes, 9.125%, 05/01/08 Caa2 572
1,400 Nextel Communications, Inc.,
Senior Notes, 6.875%, 10/31/13 B2 1,470
$ 2,600 NEXTEL Communications, Inc.,
Senior Notes, 7.375%, 08/1/15 B2 $ 2,795
1,750 NEXTEL Communications, Inc.,
Senior Serial Notes,
9.50%, 02/01/11 B2 1,982
1,975 Pegasus Satellite
Communications, Inc.,
Senior Notes,
11.25%, 01/15/10 (g) Ca 1,817
900 Pegasus Satellite
Communications, Inc., Senior
Notes, 12.375%, 08/01/06 Ca 841
150 Pegasus Satellite
Communications, Inc., Senior
Notes, 12.50%, 08/01/07 Ca 140
175 Pegasus Satellite
Communications, Inc., Senior
Subordinated Discount Notes,
13.50%, 03/01/07 (h) C 149
975 Qwest Corporation, Senior Notes,
9.125%, 03/15/12 (g) Ba3 1,116
1,872 Qwest Services Corp., Senior
Subordinated Notes,
13.50%, 12/15/10 (g) (e) 2,274
775 Rogers Wireless Inc., Senior
Secured Notes, 9.375%, 06/01/08 Ba3 810
525 Rogers Wireless Inc.,
Senior Secured Notes,
9.625%, 05/01/11 Ba3 623
450 Rogers Wireless Inc.,
Senior Subordinated Notes,
8.80%, 10/01/07 B2 462
200 TSI Telecommunications Services,
Inc., Senior Subordinated Notes,
12.75%, 02/01/09 B3 220
1,275 US Unwired, Inc., Senior
Subordinated Discount Notes,
13.375%, 11/01/09 (h) Caa2 924
390 US West Capital Funding Inc.,
Notes, 6.375%, 07/15/08 Caa2 387
1,675 Western Wireless Corporation,
Senior Notes, 9.25%, 07/15/13 Caa1 1,767
------------
28,224
------------
TEXTILES AND LEATHER -- .44%
475 Anvil Knitwear, Incorporated,
Senior Notes, 10.875%, 03/15/07 (e) 309
The accompanying notes are an integral
part of these financial statements.
12
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
$ 900 Avondale Mills, Inc.,
Senior Subordinated
Notes, 10.25%, 07/01/13 B3 $ 594
------------
903
------------
UTILITIES -- 13.85%
700 The AES Corporation,
Senior Notes,
8.875%, 02/15/11 B3 763
725 The AES Corporation,
Senior Notes,
9.375%, 09/15/10 B3 804
1,550 The AES Corporation,
Senior Secured,
9%, 05/15/15 (g) B2 1,752
1,600 Allegeny Energy Supply
Company, LLC,
Senior Notes, 7.80%, 03/15/11 B3 1,506
1,200 Allegeny Energy Supply
Company, LLC, Senior Notes,
8.75%, 04/15/12 (g) B3 1,151
25 Aquila, Inc., Senior Notes,
14.875%, 07/01/12 Caa1 34
1,125 Calpine Corporation, Senior Notes,
8.50%, 02/15/11 Caa1 886
925 Calpine Corporation, Senior Notes,
8.50% 07/15/10 (g) (e) 897
875 Calpine Corporation, Senior Notes,
9.875%, 12/01/11 (g) (e) 895
125 CMS Energy Corporation, Senior
Notes, 8.50%, 04/15/11 B3 135
250 Dynegy Holdings, Inc., Senior
Notes, 7.625%, 10/15/26 Caa2 214
425 Dynegy Holdings, Inc., Senior
Notes, 8.75%, 02/15/12 Caa2 427
2,500 Dynegy Holdings, Inc., Senior
Notes, 10.125%, 07/15/13 (g) B3 2,881
950 Edison Mission Energy, Senior
Notes, 9.875%, 04/15/11 B2 992
125 Edison Mission Energy, Senior
Notes, 10%, 08/15/08 B2 131
2,500 FirstEnergy Corporation, Senior
Notes, 6.45%, 11/15/11 Baa2 2,584
1,225 Illinois Power Company, Senior
Secured 1st Mortgage Bonds,
11.50%, 12/15/10 B3 1,482
$ 675 Massey Energy Company, Senior
Notes, 6.625%, 11/15/10 (g) Ba3 $ 695
200 NGC Corporation, Senior Notes,
7.125%, 05/15/18 Caa2 171
1,075 NRG Energy, Inc., Senior Notes,
8%, 12/15/13 B2 1,130
1,650 Orion Power Holdings, Inc.,
Senior Notes, 12%, 05/01/10 B2 2,030
1,075 PSEG Energy Holdings, L.L.C.,
Senior Notes, 8.50%, 06/15/11 Ba3 1,192
175 PSEG Energy Holdings, L.L.C.,
Senior Notes, 10%, 10/01/09 Ba3 205
50 Reliant Resources, Inc., Senior
Secured Notes,
9.25%, 07/15/10 (g) B1 54
1,575 Reliant Resources, Inc., Senior
Secured Notes,
9.50%, 07/15/13 (g) B1 1,685
414 South Point Energy Center, LLC,
Senior Secured,
8.40%, 05/30/12 (g) B2 396
1,450 South Point Energy Center, LLC,
Senior Secured,
9.825%, 05/30/19 (g) B2 1,334
1,375 TNP Enterprises, Inc., Senior
Subordinated Notes,
10.25%, 04/01/10 Ba3 1,499
75 Utilicorp Canada Financial
Corp., Senior Notes,
7.625%, 11/15/09 Caa1 74
375 Utilicorp Canada Financial
Corp., Senior Notes,
7.75%, 6/15/11 Caa1 362
------------
28,361
------------
TOTAL CORPORATE DEBT SECURITIES
(Total cost of $304,417) 317,830
------------
SHARES
-----------------------------------------------------------------------------------
PREFERRED STOCK -- 3.73% (d)
BANKING -- 0.00%
57,935 WestFed Holdings, Inc.,
Cumulative, Series A, Preferred
Stock, 15.50% (a)(c)(f) (e) --
------------
The accompanying notes are an integral
part of these financial statements.
13
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1(a))
-----------------------------------------------------------------------------------
PREFERRED STOCK -- CONTINUED
BROADCASTING AND ENTERTAINMENT -- 2.36%
2,825 CSC Holdings, Inc., Series H,
Preferred Stock, 11.75% (f) B2 $ 297
43,300 CSC Holdings, Inc., Series M,
Preferred Stock, 11.125% (f) B2 4,546
------------
4,843
------------
CHEMICALS, PLASTICS AND RUBBER -- .91%
2,725 Hercules Trust II, Preferred Stock
Unit, 6.50%. Ba3 1,857
------------
MINING, STEEL, IRON, NON-PRECIOUS METALS -- .01%
18,000 Weirton Steel Corp., Series C
Preferred Stock (a)(f) (e) 16
------------
TELECOMMUNICATIONS -- .45%
1,150 Alamosa Holdings, Inc.,
Cumulative Preferred Stock,
Series B, 7.50% (e) 368
200 Dobson Communications
Corporation, Senior Exchangeable
Preferred Stock, 12.25% (e) 213
325 Dobson Communications
Corporation, Senior Exchangeable
Preferred Stock, 12.25% Caa2 345
------------
926
------------
TOTAL PREFERRED STOCK
(Total cost of $11,405) 7,642
------------
COMMON STOCK AND WARRANTS -- 0.00% (d)
950 Barneys, Inc., warrants
exp. 2/1/08 (f)(g) --
4,780 Mediq Inc.
Common Stock (a)(c)(f) --
27,474 WestFed Holdings, Inc.,
Common Stock (a)(c)(f) --
10,052 WKI Holdings Common Stock
Common Stock (c)(f) --
------------
TOTAL COMMON STOCK
(Total cost of $4,890) --
------------
SHORT-TERM INVESTMENTS -- 5.13% (d)
$ 5,000 Alpine Securitization Corp.,
Commercial Paper, Due 01/12/04,
Discount of 1.09% P-1 $ 4,998
500 Atlantic Asset Securitization Corp.,
Commercial Paper, Due 01/05/04,
Discount of 1.09% P-1 500
5,000 Preferred Receivables Funding Corp.,
Commercial Paper, Due 01/09/04,
Discount of 1.08% P-1 4,999
------------
TOTAL SHORT-TERM INVESTMENTS
(Total cost of $10,497) 10,497
------------
TOTAL INVESTMENTS
(Total cost of $331,209) $ 335,969
============
(a) Denotes issuer is in bankruptcy proceedings.
(b) Non-income producing security which is on non-accrual and/or has defaulted
on interest payments.
(c) Security is valued at fair value using methods determined by the Board of
Directors. The total value of these securities at December 31, 2003 was $0.
(d) Percentages indicated are based on total net assets to common shareholders
of $204,705.
(e) Not rated.
(f) Non-income producing.
(g) Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. Such securities may be resold, normally to qualified
institutional buyers in transactions exempt from registration. See Note 1(a)
of the Notes to Financial Statements for vaulation policy. Total market
value of Rule 144A securities amounted to $73,935 as of December 31, 2003.
(h) Securities are step interest bonds. Interest on these bonds accrue based on
the effective interest rate.
(i) Security is a Pay-in-Kind bond. Income on this bond accrues based upon the
effective interest rate.
The accompanying notes are an integral
part of these financial statements.
14
The New America High Income Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
ASSETS: (Dollars in thousands, except per share amounts)
INVESTMENTS IN SECURITIES, at value (Identified
cost of $331,209 see Schedule of Investments
and Notes 1 and 2) $ 335,969
RECEIVABLES:
Investment securities sold 356
Interest and dividends 7,559
PREPAID EXPENSES 29
------------
Total assets $ 343,913
------------
LIABILITIES:
PAYABLES:
Investment securities purchased $ 1,375
Dividend on common stock 1,826
Dividend on preferred stock 55
Swap settlement payable 287
INTEREST RATE SWAP, at fair value (Note 6) 5,340
ACCRUED EXPENSES (Note 3) 261
OTHER PAYABLE 64
------------
Total liabilities $ 9,208
------------
AUCTION TERM PREFERRED STOCK:
$1.00 par value, 1,000,000 shares authorized,
5,200 shares issued and outstanding,
liquidation preference of $25,000 per share
(Notes 4 and 5) $ 130,000
------------
NET ASSETS $ 204,705
============
REPRESENTED BY:
COMMON STOCK:
$0.01 par value, 200,000,000 shares authorized,
93,528,394 shares issued and outstanding $ 935
CAPITAL IN EXCESS OF PAR VALUE 380,989
UNDISTRIBUTED NET INVESTMENT INCOME
(Note 2) 570
ACCUMULATED NET REALIZED LOSS FROM
SECURITIES TRANSACTIONS (Note 2) (177,209)
NET UNREALIZED DEPRECIATION ON
INVESTMENTS AND INTEREST RATE SWAPS (580)
------------
NET ASSETS APPLICABLE TO COMMON STOCK
(Equivalent to $2.19 per share, based on
93,528,394 shares outstanding) $ 204,705
============
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED
DECEMBER 31, 2003
INVESTMENT INCOME: (Note 1) (Dollars in thousands)
Interest income $ 23,593
Other income 178
Dividend income 163
------------
Total investment income $ 23,934
------------
EXPENSES:
Cost of leverage:
Preferred and auction fees (Note 5) $ 268
------------
Total cost of leverage $ 268
------------
Professional services expenses:
Management fees (Note 3) $ 935
Legal fees (Note 8) 355
Custodian and transfer agent fees 282
Audit fees 84
------------
Total professional services expenses $ 1,656
------------
Administrative expenses:
General administrative fees $ 440
Directors' fees 192
Shareholder meeting expenses 147
NYSE fees 64
Shareholder communications expense 51
Miscellaneous expenses 22
------------
Total administrative expenses $ 916
------------
Total expenses $ 2,840
------------
Net investment income $ 21,094
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT ACTIVITIES:
Realized loss on investments $ (122)
------------
Net swap settlement disbursements (Note 6) $ (3,316)
------------
Change in net unrealized depreciation
on investments $ 31,146
Change in unrealized depreciation
on interest rate swap agreement 1,428
------------
Total change in net unrealized depreciation
on investments and interest rate swap $ 32,574
------------
Net gain on investments and interest rate swap $ 29,136
------------
COST OF PREFERRED LEVERAGE
Distributions to preferred stockholders $ (1,330)
------------
Net increase in net assets resulting
from operations $ 48,900
============
The accompanying notes are an integral
part of these financial statements.
15
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
2003 2002
--------------- -------------
FROM OPERATIONS: (Dollars in thousands, except per share amounts)
Net investment income $ 21,094 $ 25,177
Realized loss on investments, net (122) (45,362)
Net swap settlement disbursements (3,316) (2,851)
Change in net unrealized depreciation on investments and other
financial instruments 32,574 (4,364)
Distributions from net investment income related to preferred stock
Dividends to preferred stockholders ($313 and $488 per preferred share in 2003 and
2002, respectively) (1,330) (2,530)
---------- ----------
Net increase (decrease) in net assets resulting from operations $ 48,900 $ (29,930)
---------- ----------
FROM FUND SHARE AND AUCTION TERM PREFERRED STOCK TRANSACTIONS:
Proceeds from rights offering (23,397,095 shares), net of $817 of offering costs (Note 9) $ 41,532 $ --
Offering costs and sales load from sale of Auction Term Preferred Stock Series C (Note 4) (658) --
Net asset value of 583,146 shares and 1,215,044 shares issued to common
stockholders for reinvestment of dividends in 2003 and 2002, respectively 1,213 2,710
---------- ----------
Increase in net assets resulting from fund share transactions $ 42,087 $ 2,710
---------- ----------
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
From net investment income ($.22 and $.29 per share in 2003 and 2002,
respectively) $ (17,452) $ (19,841)
---------- ----------
Total net increase (decrease) in net assets $ 73,535 $ (47,061)
---------- ----------
NET ASSETS APPLICABLE TO COMMON STOCK:
Beginning of period $ 131,170 $ 178,231
---------- ----------
End of period (Including $570 and $351 of undistributed net investment
income at December 31, 2003 and December 31, 2002, respectively) $ 204,705 $ 131,170
========== ==========
The accompanying notes are an integral
part of these financial statements.
16
The New America High Income Fund, Inc.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA AND RATIOS
FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD
FOR THE YEARS ENDED DECEMBER 31,
2003 (b) 2002 2001 (c) 2000 1999 1998 (b)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
Beginning of period $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03
-------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME .26# .37 .48 .60 .66 .71#
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
OTHER FINANCIAL INSTRUMENTS .34 (.72) (.24) (1.00) (.30) (.81)#
DISTRIBUTIONS FROM NET INVESTMENT INCOME
RELATEDTOPREFERRED STOCK: (.06) (.08) (.12) (.18) (.18) (.17)
-------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS .54 (.43) .12 (.58) .18 (.27)
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income (.22) (.29) (.36) (.43) (.48) (.54)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.22) (.29) (.36) (.43) (.48) (.54)
-------- -------- -------- -------- -------- --------
Effect of rights offering and related expenses;
and Auction Term Preferred Stock offering
costs and sales load (.02) -- -- -- -- (.06)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
End of period $ 2.19 $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16
======== ======== ======== ======== ======== ========
PER SHARE MARKET VALUE:
End of period $ 2.16 $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+ 19.23% (12.97)% 13.97% (3.84)% (16.92)% (15.15)%
======== ======== ======== ======== ======== ========
The accompanying notes are an integral
part of these financial statements.
17
FOR THE YEARS ENDED DECEMBER 31,
2003 (b) 2002 2001(c) 2000 1999 1998 (b)
--------- --------- --------- --------- --------- ---------
NET ASSETS, END OF PERIOD, APPLICABLE
TO COMMON STOCK (a) $ 204,705 $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518
========= ========= ========= ========= ========= =========
NET ASSETS, END OF PERIOD, APPLICABLE
TO PREFERRED STOCK (a) $ 130,000 $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000
========= ========= ========= ========= ========= =========
TOTAL NET ASSETS APPLICABLE
TO COMMON AND PREFERRED STOCK,
END OF PERIOD (a) $ 334,705 $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518
========= ========= ========= ========= ========= =========
EXPENSE RATIOS:
Ratio of preferred and other leverage
expenses to average net assets* .16% .18% .17% .19% .18% .14%
Ratio of operating expenses to average
net assets* 1.56% 1.46% 1.11% .99% .89% .82%
--------- --------- --------- --------- --------- ---------
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS* 1.72% 1.64% 1.28% 1.18% 1.07% .96%
========= ========= ========= ========= ========= =========
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS* 12.81% 16.48% 16.70% 17.46% 16.36% 15.22%
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS APPLICABLE TO COMMON
AND PREFERRED STOCK 1.05% .89% .71% .64% .60% .58%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS APPLICABLE TO
COMMON AND PREFERRED STOCK 7.79% 8.91% 9.23% 9.41% 9.16% 9.26%
PORTFOLIO TURNOVER RATE 120.47% 82.47% 38.89% 45.58% 66.74% 124.67%
(a) Dollars in thousands.
(b) The Fund issued Series D ATP on May 20, 1998 and additional shares of
Series C ATP on October 17, 2003. The per share data and ratios for the
years ended December 31, 1998 and December 31, 2003 reflect these
transactions.
(c) As required, effective January 1, 2001, the Fund has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing discount and premium on debt securities. This had no effect on
net investment income per share and a $.01 increase to net realized and
unrealized loss per share for the year ended December 31, 2001. The effect
of this change increased the ratio of net investment income to average net
assets from 16.29% to 16.70%. Per share, ratios and supplemental data for
periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
* Ratios calculated on the basis of expenses and net investment income
applicable to the common shares relative to the average net assets of the
common stockholders only. The expense ratio and net investment income ratio
do not reflect the effect of dividend payments (including net swap
settlement receipts/payments) to preferred stockholders.
# Calculation is based on average shares outstanding during the indicated
period due to the per share effect of the Fund's March 1998 and August,
2003 rights offerings.
+ Total investment return is calculated assuming a purchase of common stock
at the current market value on the first day and a sale at the current
market value on the last day of each year reported. Dividends and
distributions are assumed for purposes of this calculation to be reinvested
at prices obtained under the dividend reinvestment plan. This calculation
does not reflect brokerage commissions.
The accompanying notes are an integral
part of these financial statements.
18
INFORMATION REGARDING
SENIOR SECURITIES
AS OF DECEMBER 31,
2003 2002 2001 2000 1999 1998
-------------- -------------- -------------- -------------- -------------- --------------
TOTAL AMOUNT OUTSTANDING:
Preferred Stock $ 130,000,000 $ 100,000,000 $ 150,000,000 $ 160,000,000 $ 210,000,000 $ 210,000,000
ASSET COVERAGE:
Per Preferred Stock Share (1) $ 64,366 $ 57,793 $ 54,705 $ 54,989 $ 55,740 $ 57,562
INVOLUNTARY LIQUIDATION PREFERENCE:
Preferred Stock Share (2) $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000
APPROXIMATE MARKET VALUE:
Per Preferred Stock Share (2) $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000
(1) Calculated by subtracting the Fund's total liabilities (not including the
Preferred Stock) from the Fund's total assets and dividing such amount by
the number of Preferred Shares outstanding.
(2) Plus accumulated and unpaid dividends.
The accompanying notes are an integral
part of these financial statements.
19
The New America High Income Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
(1) SIGNIFICANT ACCOUNTING AND OTHER POLICIES
The New America High Income Fund, Inc. (the Fund) was organized as a
corporation in the state of Maryland on November 19, 1987 and is registered with
the Securities and Exchange Commission as a diversified, closed-end investment
company under the Investment Company Act of 1940. The Fund commenced operations
on February 26, 1988. The investment objective of the Fund is to provide high
current income while seeking to preserve stockholders' capital through
investment in a professionally managed, diversified portfolio of "high yield"
fixed-income securities.
The Fund invests primarily in fixed maturity corporate debt securities that
are rated less than investment grade. Risk of loss upon default by the issuer is
significantly greater with respect to such securities compared to investment
grade securities because these securities are generally unsecured and are often
subordinated to other creditors of the issuer and because these issuers usually
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as a recession, than are investment grade issuers. In some
cases, the collection of principal and timely receipt of interest is dependent
upon the issuer attaining improved operating results, selling assets or
obtaining additional financing.
See the schedule of investments for information on individual securities as
well as industry diversification and credit quality ratings.
The Fund's financial statements have been prepared in conformity with
accounting principles generally accepted in the United States that require the
management of the Fund to, among other things, make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted in
the investment company industry.
(a) VALUATION OF INVESTMENTS--Investments for which market quotations are
readily available are stated at market value, which is determined by using the
most recently quoted bid price provided by an independent pricing service or
principal market maker. Independent pricing services provide market quotations
based primarily on quotations from dealers and brokers, market transactions,
accessing data from quotations services, offering sheets obtained from dealers
and various relationships between securities. Short-term investments with
original maturities of 60 days or less are stated at amortized cost, which
approximates market value. Following procedures approved by the Board of
Directors, investments for which market quotations are not readily available
(primarily fixed-income corporate bonds and notes) are stated at fair value on
the basis of subjective valuations furnished by securities dealers and brokers.
Other investments, with a cost of approximately $9,809,000 and a value of $0,
are valued in good faith at fair market value using methods determined by the
Board of Directors.
(b) INTEREST AND DIVIDEND INCOME--Interest income is accrued on a daily
basis. Discount on short-term investments is amortized to investment income.
Premiums or discounts on corporate debt securities are amortized based on the
interest method for financial reporting purposes. All income on original issue
discount and step interest bonds is accrued based on the effective interest
method for tax reporting purposes as required by federal income tax regulations.
The Fund does not amortize market premiums or discounts for tax purposes.
Dividend payments received in the
20
form of additional securities are recorded on the ex-dividend date in an amount
equal to the value of the security on such date.
(c) FEDERAL INCOME TAXES--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code of 1986, as amended, applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders each year. Accordingly, no federal income tax
provision is required.
(2) TAX MATTERS AND DISTRIBUTIONS
At December 31, 2003, the total cost of securities (including temporary cash
investments) for federal income tax purposes was approximately $331,320,000.
Aggregate gross unrealized gain on securities in which there was an excess of
value over tax cost was approximately $17,018,000. Aggregate unrealized loss on
securities in which there was an excess of tax cost over value was approximately
$12,369,000. Net unrealized gain on investments for tax purposes at December 31,
2003 was approximately $4,649,000.
At December 31, 2003, the Fund had approximate capital loss carryovers
available to offset future capital gains, if any, to the extent provided by
regulations:
CARRYOVER AVAILABLE EXPIRATION DATE
--------------------- -----------------
$ 35,581,000 December 31, 2007
21,821,000 December 31, 2008
67,043,000 December 31, 2009
45,239,000 December 31, 2010
7,387,000 December 31, 2011
-------------
$ 177,071,000
=============
It is the policy of the Fund to reduce future distributions of realized gains
to shareholders to the extent of the unexpired capital loss carry forward.
The tax character of distributions paid to common and preferred shareholders
of approximately $18,782,000 in 2003 was from ordinary income.
As of December 31, 2003, the components of distributable earnings on a tax
basis were approximately:
Undistributed Net Investment Income $ 542,000
Undistributed Long-Term Gain --
Unrealized Gain $ 4,649,000
Capital Losses Carry Forward
and Post October Losses Deferred $ (177,071,000)
The difference between components of distributable earnings on a tax basis
and the amounts reflected in the Statement of Assets and Liabilities are
primarily due to wash sales, accrued interest on defaulted bonds and
amortization of swap termination payments.
Distributions on common stock are declared based upon annual projections of
the Fund's investment company taxable income. The Fund records all dividends and
distributions payable to shareholders on the ex-dividend date and declares and
distributes income dividends monthly.
The Fund was required to amortize market discounts and premiums for financial
reporting purposes beginning January 1, 2001. This new accounting policy results
in additional interest income in some years and decreased interest income in
others for financial reporting purposes only. The Fund does not amortize market
discounts or premiums for tax purposes. Therefore, the additional or decreased
interest income for financial reporting purposes does not result in additional
or decreased common stock dividend income.
The Fund has recorded several reclassifications in the capital accounts to
present undistributed net investment income or accumulated net realized gains
and losses on a tax basis, which is considered to be more informative to the
shareholder. These reclassifications have no impact on the net asset value of
the Fund.
21
(3) INVESTMENT ADVISORY AGREEMENT
T. Rowe Price Associates, Inc. (T. Rowe Price), the Fund's Investment
Advisor, earned approximately $935,000 in management fees during the year ended
December 31, 2003. Management fees paid by the Fund to T. Rowe Price were
calculated at 0.50% on the first $50,000,000 of the Fund's average weekly net
assets, 0.40% on the next $50 million and 0.30% on average weekly net assets in
excess of $100 million. T. Rowe Price's fee is calculated based on assets
attributable to the Fund's common and auction term preferred stock. At December
31, 2003, the fee payable to T. Rowe Price was approximately $98,000, which was
included in accrued expenses on the accompanying statement of assets and
liabilities.
(4) AUCTION TERM PREFERRED STOCK (ATP)
On October 17, 2003, the Fund issued 1,200 shares of Series C ATP. The
underwriting discount of $300,000 and offering expenses of $358,000 were
recorded as a reduction of the capital in excess of par value on common stock.
The Fund had 5,200 shares of ATP issued and outstanding at December 31, 2003.
The ATP's dividends are cumulative at a rate determined at an auction, and
dividend periods will typically be 28 days unless notice is given for periods to
be longer or shorter than 28 days. Dividend rates ranged from 1.06% to 1.60% for
the year ended December 31, 2003. The average dividend rate as of December 31,
2003 was 1.18%.
The ATP is redeemable, at the option of the Fund, or subject to mandatory
redemption (if the Fund is in default of certain coverage requirements) at a
redemption price equal to $25,000 per share plus accumulated and unpaid
dividends. The ATP has a liquidation preference of $25,000 per share plus
accumulated and unpaid dividends. The Fund is required to maintain certain asset
coverages with respect to the ATP under the Fund's Charter and the 1940 Act in
order to maintain the Fund's Aaa/AAA ratings by Moody's Investors Service, Inc.
and Fitch, Inc., respectively.
(5) ATP AUCTION-RELATED MATTERS
Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to an
agreement entered into on January 4, 1994. The term of the agreement is
unlimited and may be terminated by either party. BTC may resign upon notice to
the Fund, such resignation to be effective on the earlier of the 90th day after
the delivery of such notice and the date on which a successor auction agent is
appointed by the Fund. The Fund may also replace BTC as auction agent at any
time.
After each auction, BTC as auction agent will pay to each broker-dealer, from
funds provided by the Fund, a maximum service charge at the annual rate of 0.25
of 1% or such other percentage subsequently agreed to by the Fund and the
broker-dealers, of the purchase price of shares placed by such broker-dealers at
such auction. In the event an auction scheduled to occur on an auction date
fails to occur for any reason, the broker-dealers will be entitled to service
charges as if the auction had occurred and all holders of shares placed by them
had submitted valid hold orders. The Fund incurred approximately $242,000 for
service charges through December 31, 2003. This amount is included under the
caption preferred and auction fees in the accompanying statement of operations.
(6) INTEREST RATE SWAPS
The Fund entered into an interest payment swap arrangement with Fleet Bank
(Fleet) for the purpose of partially hedging its dividend payment obligations
with respect to the ATP. Pursuant to the Swap Arrangement the Fund makes
payments to Fleet on a monthly basis at a fixed annual rate. In exchange for
such payment Fleet makes payments to the Fund on a monthly basis
22
at a variable rate determined with reference to one month LIBOR. The variable
rates ranged from 1.10% to 1.44% for the year ended December 31, 2003. The
effective date, notional amount, maturity and fixed rate of the swap is as
follows:
NOTIONAL FIXED
EFFECTIVE CONTRACT ANNUAL
DATE AMOUNT MATURITY RATE
10/1/01 $100 million 10/1/06 4.50%
Swap transactions, which involve future settlement, give rise to credit risk.
Credit risk is the amount of loss the Fund would incur in the event
counterparties failed to perform according to the terms of the contractual
commitments. In the event of nonperformance by the counterparty, the Fund's
dividend payment obligation with respect to the ATP would no longer be partially
hedged. Therefore, the ATP dividend would no longer be partially fixed. In an
unfavorable interest rate environment, the Fund would be subject to higher net
ATP dividend payments, resulting in less income available for the common share
dividend. The Fund does not anticipate nonperformance by any counterparty. While
notional contract amounts are used to express the volume of interest rate swap
agreements, the amounts potentially subject to credit risk, in the event of
nonperformance by counterparties, are substantially smaller.
The Fund recognizes all freestanding derivative instruments in the balance
sheet as either assets or liabilities and measures them at fair value. Any
change in the unrealized gain or loss is recorded in current earnings. For the
year ended December 31, 2003, the Fund's obligations under the swap agreements
were more than the amount received from Fleet by approximately $3,316,000 and
such amount is included in the accompanying statement of operations.
The estimated fair value of the interest rate swap agreement at December 31,
2003 amounted to approximately $5,340,000 of unrealized loss and is presented in
the accompanying balance sheet.
(7) PURCHASES AND SALES OF SECURITIES
Purchases and proceeds of sales or maturities of long-term securities during
the year ended December 31, 2003 were approximately:
Purchases of securities $ 374,439,000
Sales of securities $ 309,130,000
(8) RELATED PARTY TRANSACTIONS
A partner of Goodwin Procter LLP, counsel to the Fund, serves as a Director
of the Fund. Fees earned by Goodwin Procter LLP amounted to approximately
$916,000 for the year ended December 31, 2003. This total is broken out as
follows:
Operations (Including change in
investment advisor) $ 253,000
Rights offering 399,000
ATP Series C offering 264,000
----------
$ 916,000
==========
The Fund paid approximately $272,000 during the year ended December 31, 2003
to two officers of the Fund for the provision of certain administrative
services.
(9) RIGHTS OFFERING
The Fund issued to stockholders of record as of the close of business on July
21, 2003, rights to subscribe for an aggregate of 23,397,095 shares of common
stock, $.01 par value per share, of the Fund. One right was issued for each
three full shares of common stock beneficially held on the record date. The
rights entitled a stockholder to acquire at the subscription price of $1.81 per
share one share for each right held. The subscription price was 94% of the
average of the last reported sales price of the Fund's Common Stock on the New
York Stock Exchange on August 18, 2003, the expiration date
23
and the nine preceding business days. On August 22, 2003 the Fund completed its
rights offering. Proceeds of approximately $42,349,000 and shares of 23,397,095
were recorded. In addition the deferred offering expense of approximately
$817,000 was netted against the rights offering proceeds.
COMMON AND AUCTION TERM PREFERRED STOCK TRANSACTIONS
From time to time in the future, the Fund may effect redemptions and/or
repurchases of its ATP as provided in the applicable constituent instruments or
as agreed upon by the Fund and sellers. The Fund intends to effect such
redemptions and/or repurchases to the extent necessary to maintain applicable
asset coverage requirements.
The Fund may purchase shares of its Common Stock in the open market when the
Common Stock trades at a discount to net asset value or at other times if the
Fund determines such purchases are in the best interest of its stockholders.
There can be no assurance that the Fund will take such action in the event of a
market discount to net asset value or that Fund purchases will reduce a
discount.
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The New America High Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of The
New America High Income Fund, Inc., including the schedule of investments, as of
December 31, 2003, the statement of operations for the year then ended and the
statement of changes in net assets and financial highlights for the two years
ended December 31, 2003. These financial statements are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial highlights for each of
the years in the four-year period ended December 31, 2001 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial highlights in their report dated February 1, 2002.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 2003 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The New America High Income
Fund, Inc. as of December 31, 2003, the results of its operations, changes in
its net assets and financial highlights for the periods indicated above, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
Boston, Massachusetts
February 2, 2004
25
DIRECTORS
Robert F. Birch
Joseph L. Bower
Richard E. Floor
Bernard J. Korman
Ernest E. Monrad
OFFICERS
Robert F. Birch - President
Ellen E. Terry - Vice President, Treasurer
Richard E. Floor - Secretary
INVESTMENT ADVISOR
T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202
ADMINISTRATOR
The New America High Income Fund, Inc.
33 Broad Street
Boston, MA 02109
(617) 263-6400
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
TRANSFER AGENT
EquiServe Trust Company N.A.
P.O. Box 43011
Providence, RI 02940-3011
(617) 328-5000 ext. 6406
(800) 426-5523
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG LLP
99 High Street
Boston, MA 02110
Listed: NYSE
Symbol: HYB
Web site: www.newamerica-hyb.com
26
INFORMATION ABOUT THE FUND'S DIRECTORS AND OFFICERS
INDEPENDENT DIRECTORS
NUMBER OF
PORTFOLIOS
PRINCIPAL IN FUND OTHER
NAME, POSITION(S) TERM OF OFFICE(2) OCCUPATION(S) COMPLEX(3) DIRECTORSHIPS
ADDRESS(1), AND HELD WITH AND LENGTH OF DURING OVERSEEN HELD BY
DATE OF BIRTH FUND TIME SERVED PAST 5 YEARS BY DIRECTOR DIRECTOR
--------------------------------------------------------------------------------------------------------------------
Joseph L. Bower Director Director Professor, Harvard Business 1 Director of Anika
DOB: 09/21/38 since 1988 School since 1963 - as Therapeutics, Inc.,
Donald K. David Professor Sonesta International
of Business Administration Hotels Corporation,
since 1986, Senior Loews, Corporation
Associate Dean, Chair of the (a conglomerate),
Doctoral Programs, Chair of and Brown Shoe
the General Management Company, Inc.,
Area, and currently, Chair Independent
of the General Manager General Partner of
Program. ML-Lee
Acquisition Funds,
L.P., and Trustee of
TH Lee-Putnam
Emerging
Opportunities
Portfolio.
Bernard J. Korman Director Director Chairman of the Board of 1 Director of
DOB: 10/13/31 since 1987 Directors of Philadelphia Kramont Realty
Health Care Trust. Trust, Omega
Healthcare
Investors, Inc. (real
estate investment
trust), The
Pep Boys, Inc.
(automotive
supplies) and
Nutramax
Products, Inc. (a
consumer healthcare
products company).
(1) The address for each Director is c/o The New America High Income Fund,
Inc., 33 Broad Street, Boston, MA 02109.
(2) Each Director serves as such until the next annual meeting of the Fund's
stockholders and until the Director's successor shall have been duly
elected and qualified.
(3) The New America High Income Fund, Inc. is not part of any fund complex.
27
NUMBEROF
PORTFOLIOS
PRINCIPAL IN FUND OTHER
NAME, POSITION(S) TERM OF OFFICE(2) OCCUPATION(S) COMPLEX(3) DIRECTORSHIPS
ADDRESS(1), AND HELD WITH AND LENGTH OF DURING OVERSEEN HELD BY
DATE OF BIRTH FUND TIME SERVED PAST 5 YEARS BY DIRECTOR DIRECTOR
--------------------------------------------------------------------------------------------------------------------
Ernest E. Monrad Director Director Trustee since 1960 and 1 Trustee Century
DOB: 5/30/30 since 1988 Chairman of the Trustees Shares Trust and
from 1969 to May 2001 of Century Small
Northeast Investors Trust; Cap Select
Chairman, Assistant
Treasurer and a Director
since 1981 of Northeast
Investors Growth Fund;
Director of Northeast
Investment Management, Inc.,
Northeast Management &
Research Co., Inc.
INTERESTED DIRECTORS AND OFFICERS
Robert F. Birch(4) Director Director Mutual Fund Director 1 Director of
DOB: 3/12/36 and since 1992 Hyperion Funds and
President the Brandywine
Funds
Richard E. Floor(5) Director Director Partner through his 1 Director of
DOB: 8/3/40 and since 1987 professional corporation Affiliated Managers
Secretary with the law firm of Group, Inc.
Goodwin Procter LLP,
Boston, Massachusetts
(1) The address for each Director is c/o The New America High Income Fund,
Inc., 33 Broad Street, Boston, MA 02109.
(2) Each Director serves as such until the next annual meeting of the Fund's
stockholders and until the Director's successor shall have been duly
elected and qualified.
(3) The New America High Income Fund, Inc. is not part of any fund complex.
(4) As the Fund's President, Mr. Birch is an interested person of the Fund
within the meaning of the Investment Company Act of 1940, as amended (the
"1940 Act").
(5) Mr. Floor is an interested person of the Fund within the meaning of the
1940 Act because, through his professional corporation, Mr. Floor is a
partner of Goodwin Procter LLP, counsel to the Fund.
Ellen E. Terry (D.O.B. 4/9/59), Vice President and Treasurer of the Fund
since February 18, 1992, is the only executive officer of the Fund not named in
the above table of interested Directors. Ms. Terry served as Acting President
and Treasurer of the Fund from October 1991 through February 18, 1992, and as
Vice President of the Fund prior to such time. Ms. Terry's address is: c/o The
New America High Income Fund, 33 Broad Street, Boston, MA 02109. A Fund officer
holds office until the officer's successor is duly elected and qualified, until
the officer's death or until the officer resigns or has been removed.
28
EquiServe Trust Company N.A.
P.O. Box 43011
Providence, RI 02940-3011
NEHCM-SA-03
ITEM 2. CODE OF ETHICS.
As of December 31, 2003, the Fund has adopted a code of ethics, as defined
in Item 2 of Form N-CSR, that applies to its Principal Executive Officer,
Principal Financial Officer/Chief Financial Officer, Principal Accounting
Officer, Vice President, Treasurer and Manager of Accounting and Finance.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Fund's Board of Directors has determined that none of the members of
the Fund's Audit and Nominating Committee is an "audit committee financial
expert" as that term is defined in the instructions to this Item. The Fund's
Board of Directors has also determined that there is no need to appoint a
Director to the Audit and Nominating Committee who qualifies as an "audit
committee financial expert" at this time because the Board of Directors (a) has
determined that each member of the Audit and Nominating Committee is
"financially literate" and has "accounting or related financial management
experience" as these terms are used in the corporate governance standards of the
New York Stock Exchange and (b) believes that each has substantial experience
relating to the review of financial statements and the operations of audit
committees. Accordingly, the Board believes that the Audit and Nominating
Committee members are qualified to evaluate the Fund's financial statements,
supervise the Fund's preparation of its financial statements, and oversee the
work of the Fund's independent auditors.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES. For fiscal 2003 and 2002, the aggregate fees billed by KPMG LLP
("KPMG"), the Fund's independent public accountants, for audit of the Fund's
annual financial statements, review of the semi-annual financial statements and
assistance in connection with the Fund's filing of the registration statements
totaled $96,000 and $48,500, respectively.
AUDIT-RELATED FEES. KPMG billed $31,500 and $26,000 for fiscal 2003 and
2002, respectively, for assurance and related services that are reasonably
related to the performance of the audit and review of the Fund's financial
statements, including quarterly agreed upon procedures related to requirements
of the Fund's articles supplementary.
TAX FEES. During fiscal 2003, KPMG's fees for its professional services
related to preparation of the Fund's federal and state tax returns, review of
excise distributions, and testing of quarterly asset diversification totaled
$7,000. During fiscal 2002, KPMG's fees for its professional services related to
preparation of the Fund's federal and state tax returns, review of excise
distributions, and testing of quarterly asset diversification totaled $6,000.
ALL OTHER FEES. KPMG did not provide any other services to the Fund in 2003
or 2002 other than those listed above.
The services described in the three preceding paragraphs, representing
engagements entered into prior to the effective date of the SEC's pre-approval
requirements, although not formally pre-approved, were reviewed by the Audit and
Nominating Committee.
NON-AUDIT FEES. KPMG did not provide any other services to the Fund in 2003
or 2002 other than those listed above. KPMG's fees for non-audit services in
fiscal 2003 billed to T. Rowe Price Group, Inc. ("Price Group") and its
subsidiaries totaled $852,200. KPMG's fees for non-audit services in fiscal 2002
billed to Price Group totaled $372,490, other than fees billed for professional
services rendered for the audit of the annual financial statements and the
reviews of the financial statements included in Forms 10-Q. The Committee has
considered and determined that the performance by KPMG of non-audit services to
Price Group and its subsidiaries is compatible with maintaining that firm's
independence in connection with serving as the Fund's independent public
accountants.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Fund has a separately-designated standing audit committee, the Audit
and Nominating Committee, established by and amongst the Fund's Board of
Directors for the purpose of overseeing the accounting and financial reporting
processes of the Fund and audits of the Fund's financial statements. The Audit
and Nominating Committee consists of the Fund's Directors who are not
"interested persons" of the Fund within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act") - Joseph L. Bower, Bernard J. Korman
and Ernest E. Monrad.
ITEM 6.
[Reserved.]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
PROXY VOTING POLICIES AND PROCEDURES
At its June 26, 2003 meeting, the Fund's Board of Directors authorized and
directed T. Rowe Price, the Fund's investment adviser, to vote proxies relating
to the Fund's portfolio securities in accordance with T. Rowe Price's proxy
voting policies and procedures. T. Rowe Price, as an investment adviser with a
fiduciary responsibility to the Fund, analyzes the proxy statements of issuers
whose stock is owned by the Fund, if any.
PROXY ADMINISTRATION. The T. Rowe Price Proxy Committee develops T. Rowe
Price's positions on all major corporate issues, creates guidelines, and
oversees the voting process. The Proxy Committee, composed of portfolio
managers, investment operations managers, and internal legal counsel, analyzes
proxy policies based on whether they would adversely affect stockholders'
interests and make a company less attractive to own. In evaluating proxy
policies each year, the Proxy Committee relies upon its own fundamental
research, independent research provided by third parties, and information
presented by company managements and stockholder groups.
Once the Proxy Committee establishes its recommendations, they are
distributed to the firm's portfolio managers as voting guidelines. Ultimately,
the portfolio manager votes on the proxy proposals of companies in his or her
portfolio. When portfolio managers cast votes that are counter to the Proxy
Committee's guidelines, they are required to document their reasons in
2
writing to the Proxy Committee. Annually, the Proxy Committee reviews T. Rowe
Price's proxy voting process, policies, and voting records.
T. Rowe Price has retained Institutional Shareholder Services ("ISS"), an
expert in the proxy voting and corporate governance area, to provide proxy
advisory and voting services. These services include in-depth research,
analysis, and voting recommendations as well as vote execution, reporting,
auditing and consulting assistance for the handling of proxy voting
responsibility and corporate governance-related efforts. While the Proxy
Committee relies upon ISS research in establishing T. Rowe Price's voting
guidelines--many of which are consistent with ISS positions--T. Rowe Price may
deviate from ISS recommendations on general policy issues or specific proxy
proposals.
FIDUCIARY CONSIDERATIONS. T. Rowe Price's decisions with respect to proxy
issues are made in light of the anticipated impact of the issue on the
desirability of investing in the portfolio company. Proxies are voted solely in
the interests of the Fund or Fund stockholders. Practicalities involved with
international investing may make it impossible at times, and at other times
disadvantageous, to vote proxies in every instance.
CONSIDERATION GIVEN MANAGEMENT RECOMMENDATIONS. When determining whether to
invest in a particular company, one of the key factors T. Rowe Price considers
is the quality and depth of its management. As a result, T. Rowe Price believes
that recommendations of management on most issues should be given weight in
determining how proxy issues should be voted.
T. ROWE PRICE VOTING POLICIES. Specific voting guidelines have been
established by the Proxy Committee for recurring issues that appear on proxies.
The following is a summary of the more significant T. Rowe Price policies:
- ELECTION OF DIRECTORS. T. Rowe Price generally supports slates with a
majority of independent directors and nominating committees chaired by
an independent board member. T. Rowe Price withholds votes for inside
directors serving on compensation and audit committees and for
directors who miss more than one-fourth of the scheduled board
meetings.
- EXECUTIVE COMPENSATION. T. Rowe Price's goal is to assure that a
company's equity-based compensation plan is aligned with stockholders'
long-term interests. While it evaluates most plans on a case-by-case
basis, T. Rowe Price generally opposes compensation packages that
provide what it views as excessive awards to a few senior executives
or that contain excessively dilutive stock option plans. T. Rowe Price
bases its review on criteria such as the costs associated with the
plan, plan features, dilution to stockholders and comparability to
plans in the company's peer group. T. Rowe Price generally opposes
plans that give a company the ability to reprice options.
- ANTI-TAKEOVER AND CORPORATE GOVERNANCE ISSUES. T. Rowe Price generally
opposes anti-takeover measures and other proposals designed to limit
the ability of stockholders to act on possible transactions. When
voting on
3
corporate governance proposals, T. Rowe Price will consider the
dilutive impact to stockholders and the effect on stockholder rights.
- SOCIAL AND CORPORATE RESPONSIBILITY ISSUES. T. Rowe Price generally
votes with a company's management on social issues unless they have
substantial economic implications for the company's business and
operations that have not been adequately addressed by management.
MONITORING AND RESOLVING CONFLICTS OF INTEREST. The Proxy Committee is also
responsible for monitoring and resolving possible material conflicts between the
interests of T. Rowe Price and those of its clients with respect to proxy
voting. Because T. Rowe Price's voting guidelines are pre-determined by the
Proxy Committee using recommendations from ISS, an independent third party,
application of the T. Rowe Price guidelines to vote clients' proxies should in
most instances adequately address any possible conflicts of interest. However,
for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy Committee
reviews all such proxy votes in order to determine whether the portfolio
manager's voting rationale appears reasonable. The Proxy Committee also assesses
whether any business or other relationships between T. Rowe Price and a
portfolio company could have influenced an inconsistent vote on that company's
proxy. Issues raising possible conflicts of interest are referred to designated
members of the Proxy Committee for immediate resolution.
ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Fund's principal executive officer and principal financial officer
concluded that the Fund disclosure controls and procedures (as defined in Rule
30a-3(c) under the 1940 Act) provide reasonable assurances that information
required to be disclosed by the Fund on Form N-CSR is recorded, processed,
summarized and reported within the required time periods and that information
required to be disclosed by the Fund in the reports that it files or submits on
Form N-CSR is accumulated and communicated to the Fund's management, including
its principal executive and principal financial officers, as appropriate to
allow timely decisions regarding required disclosure, based on their evaluation
of the disclosure controls and procedures as of a date within 90 days of the
filing date of this report.
(b) There was no change in the Fund's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during
the Fund's second fiscal half-year that has materially affected, or is
reasonably likely to materially affect, the Fund's internal control over
financial reporting.
ITEM 11. EXHIBITS.
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(a)(1) The code of ethics referenced in Item 2.
(a)(2) The certifications required by Rule 30a-2(a) under the 1940 Act.
(a)(3) Not applicable.
(b) The certifications required by Rule 30a-2(b) under the 1940 Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The New America High Income Fund, Inc.
By: /s/ Robert F. Birch
------------------------------------
Name: Robert F. Birch
Title: President and Director
Date: March 8, 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 registrant and in the capacities and on the
dates indicated.
By: /s/ Robert F. Birch
------------------------------------
Name: Robert F. Birch
Title: President
Date: March 8, 2004
By: /s/ Ellen E. Terry
------------------------------------
Name: Ellen E. Terry
Title: Treasurer
Date: March 8, 2004
5