-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KTXZ0BuUL1KpvCsWdQIuxb6rMkLb0SdavZ5wpvZYjVLt0qnQjuGJZk4I/NXnw2Re ZILtXKUmgxgT5SvrgU3Rqg== 0000898432-05-001005.txt : 20051208 0000898432-05-001005.hdr.sgml : 20051208 20051208171442 ACCESSION NUMBER: 0000898432-05-001005 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051208 DATE AS OF CHANGE: 20051208 EFFECTIVENESS DATE: 20051208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RMK STRATEGIC INCOME FUND INC CENTRAL INDEX KEY: 0001275902 IRS NUMBER: 270081847 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-21487 FILM NUMBER: 051253347 BUSINESS ADDRESS: STREET 1: MORGAN KEEGAN TOWER STREET 2: 50 NORTH FRONT ST CITY: MEMPHIS STATE: TN ZIP: 38103 BUSINESS PHONE: 9015244100 MAIL ADDRESS: STREET 1: MORGAN KEEGAN TOWER STREET 2: 50 NORTH FRONT ST CITY: MEMPHIS STATE: TN ZIP: 38103 N-CSRS 1 regionsstrategic_ncsr.txt As filed with the Securities and Exchange Commission on December 8, 2005 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 --------- RMK Strategic Income Fund, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Morgan Keegan Tower Fifty Front Street Memphis, Tennessee 38103 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (901) 524-4100 --------------- Allen B. Morgan, Jr. Morgan Keegan Tower Fifty Front Street Memphis, Tennessee 38103 - -------------------------------------------------------------------------------- (Name and address of agent for service) with copies to Arthur J. Brown, Esq. Kirkpatrick & Lockhart Nicholson Graham LLP 1800 Massachusetts Ave., N.W. Washington, D.C. 20036-1800 Date of fiscal year end: March 31, 2005 -------------- Date of reporting period: September 30, 2005 ------------------ 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, 2005 - -------------------------------------------------------------------------------- RMK Advantage Income Fund, Inc. High Income Fund, Inc. Strategic Income Fund, Inc. - -------------------------------------------------------------------------------- TABLE OF CONTENTS Letter to Stockholders.......................................... 1 RMK Advantage Income Fund, Inc.................................. 3 Portfolio of Investments..................................... 9 RMK High Income Fund, Inc....................................... 19 Portfolio of Investments..................................... 25 RMK Strategic Income Fund, Inc.................................. 35 Portfolio of Investments..................................... 41 Statements of Assets and Liabilities............................ 51 Statements of Operations........................................ 52 Statements of Changes in Net Assets............................. 53 Statements of Cash Flows........................................ 55 Financial Highlights............................................ 56 Notes to Financial Statements................................... 58 Board of Directors and Officers................................. 66 Dividend Reinvestment Plan...................................... 72 Supplemental Information........................................ 74 Regions Morgan Keegan Fund Complex.............................. 79 THERE IS NO ASSURANCE THAT THE FUNDS WILL ACHIEVE THEIR INVESTMENT OBJECTIVES. THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUNDS WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUNDS' SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUNDS. - -------------------------------------------------------------------------------- NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE - -------------------------------------------------------------------------------- 2 LETTER TO STOCKHOLDERS Dear Fellow Stockholders: We are pleased to present the enclosed combined semi-annual report for RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. (each, a "Fund" and collectively, the "Funds"). In this report, you will find information on each Fund's investment objective and strategy and learn how your investment performed during the semi-annual period ended September 30, 2005. The portfolio manager will also provide an overview of the market conditions and discuss some of the factors that affected investment performance during the reporting period. In addition, this report includes each Fund's unaudited financial statements and each Fund's portfolio of investments as of September 30, 2005. As always, we appreciate your continued support of the Regions Morgan Keegan closed-end funds. We remain committed to helping you pursue your financial goals through investments in our fund family. You have our commitment to bring you the highest level of disciplined decision making and personal service to meet your financial needs. If you have any questions about the Funds, please call us at 800-564-2188. Sincerely, /s/ Carter E. Anthony Carter E. Anthony, CFA President and Chief Investment Officer Morgan Asset Management, Inc. 3 [THIS PAGE INTENTIONALLY LEFT BLANK] 4 RMK ADVANTAGE INCOME FUND, INC. OBJECTIVE & STRATEGY ---------------------------------------- RMK Advantage Income Fund, Inc. seeks a high level of current income. The Fund seeks capital growth as a secondary investment objective when consistent with its primary investment objective. The Fund invests a majority of its total assets in below investment grade debt securities (commonly referred to as "junk bonds") that offer attractive yield and capital appreciation potential. The Fund may also invest up to 15% of its total assets in foreign debt and equity securities and up to 25% of its total assets in domestic equity securities, including common and preferred stocks. The Fund invests in a wide range of below investment grade debt securities, including corporate bonds, mortgage- and asset-backed securities and municipal and foreign government obligations, as well as securities of companies in bankruptcy reorganization proceedings or otherwise in the process of debt restructuring. INVESTMENT RISKS: Bond funds tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price. Bond prices and the value of bond funds decline as interest rates rise. Longer-term funds generally are more vulnerable to this interest rate risk than shorter-term funds. Below investment grade bonds involve greater credit risk, which is the risk that the issuer will not make interest or principal payments when due. An economic downturn or period of rising interest rates could adversely affect the ability of issuers, especially issuers of below investment grade debt, to service primary obligations and an unanticipated default could cause the Fund to experience a reduction in value of its shares. 5 RMK ADVANTAGE INCOME FUND, INC. MANAGEMENT DISCUSSION & ANALYSIS During the first half of RMK Advantage Income Fund, Inc.'s (the "Fund") fiscal year 2006, which ended September 30, 2005, the Fund had a total return of 14.83%, based on market price and reinvested dividends. For the six months ended September 30, 2005, the Fund had a total return of 4.97%, based on net asset value and reinvested dividends. For the six months ended September 30, 2005, the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX(1) had a total return of 4.28%. The Fund's strong performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distribution and the relative net asset value stability produced by the Fund's allocation to a wide variety of asset types. The Fund paid monthly dividends of $0.13, $0.13, $0.14, $0.14, $0.14, and $0.15 per share for April, May, June, July, August, and September, respectively. This amounted to a total income distribution of $0.83 per share. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification has allowed us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2005 were commercial-mortgage backed securities, aircraft equipment leases, below investment grade corporate bonds and dividend-paying common stocks. Two categories of particularly strong performance during the summer months were in the asset backed sector, including those deals supported by franchise loans and aircraft leases. The franchise loan deals have benefited directly from an improved business environment and from a substantial increase in real estate values. Although the domestic airlines continue to experience operating problems, the global demand for aircraft has been strong and continues to strengthen. Our holdings of pooled lease deals are mostly floating rate, thereby benefiting from higher short-term rates and have generally experienced higher net cash flows due to increasing lease rates on aircraft. 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 2006, the leverage was beneficial to shareholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested some assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. As we enter the final months of 2005, financial markets will continue to focus on the threat of higher inflation and on how much more the Federal Reserve will increase short-term rates. We have invested with the expectation that we will continue to see economic strength and further rate increases from the Federal Reserve. Generally, high interest rates suppress the values of financial assets thereby creating a different environment for good returns. Our focus will be on those sectors that benefit from the global expansion and are not dependent on lower interest rates to produce good results. /s/ James C. Kelsoe James C. Kelsoe, Jr., CFA Senior Portfolio Manager Morgan Asset Management, Inc. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVES. 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 THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUND. 6 INDEX DESCRIPTION ---------------------------------------- 1 THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 7 RMK ADVANTAGE INCOME FUND, INC.
PORTFOLIO STATISTICS+ ---------------------------------------------- AS OF SEPTEMBER 30, 2005 - -------------------------------------------------------------------------------- Average Credit Quality................................. BB- Current Yield.......................................... 10.59% Yield to Maturity...................................... 12.01% Duration............................................... 3.93 Years Average Effective Maturity............................. 5.23 Years Percentage of Leveraged Assets......................... 27% Total Number of Holdings............................... 248 + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
CREDIT QUALITY+ ---------------------------------------------- AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------------ AAA....................... 1.7% B 11.8% AA 0.7% CCC....................... 22.9% A 1.9% CC 1.5% BBB....................... 21.7% D 1.6% BB 25.6% Not Rated................. 10.6% -------------- Total..................... 100.0% + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
ASSET ALLOCATION+ ---------------------------------------------- AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------------ Corporate Bonds.......................................... 23.9% Equipment Leases......................................... 20.9% Collateralized Mortgage Obligations...................... 11.6% Home Equity Loans........................................ 9.6% Common Stock............................................. 8.1% Manufactured Housing Loans............................... 5.5% Collateralized Debt Obligations.......................... 5.3% Short Term Investments................................... 4.9% Commercial Loans......................................... 3.4% Franchise Loans.......................................... 2.0% Credit Cards............................................. 1.5% Certificate-Backed Obligations........................... 1.3% Preferred Stock.......................................... 1.2% Other.................................................... 0.8% ----------------- Total.................................................... 100.0% + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
8 RMK ADVANTAGE INCOME FUND, INC. NAV & MARKET PRICE HISTORY* ------------------------ The graph below illustrates the net asset value and market price history of RMK Advantage Income Fund, Inc. (NYSE: RMA) from November 8, 2004 (commencement of investment operations) to September 30, 2005. [Graph Representation] DATE NAV PRICE ---- --- ----- 11/08/2004 $14.33 $15.00 11/09/2004 $14.20 $15.25 11/10/2004 $14.20 $15.29 11/11/2004 $14.34 $15.29 11/12/2004 $14.35 $15.35 11/13/2004 $14.35 $15.35 11/14/2004 $14.35 $15.35 11/15/2004 $14.35 $15.70 11/16/2004 $14.34 $15.68 11/17/2004 $14.35 $15.49 11/18/2004 $14.33 $15.45 11/19/2004 $14.32 $15.65 11/20/2004 $14.32 $15.65 11/21/2004 $14.32 $15.65 11/22/2004 $14.33 $15.70 11/23/2004 $14.33 $15.70 11/24/2004 $14.33 $15.70 11/25/2004 $14.33 $15.70 11/26/2004 $14.34 $15.90 11/27/2004 $14.34 $15.90 11/28/2004 $14.34 $15.90 11/29/2004 $14.33 $15.79 11/30/2004 $14.34 $15.90 12/01/2004 $14.36 $15.94 12/02/2004 $14.36 $15.87 12/03/2004 $14.38 $15.90 12/04/2004 $14.38 $15.90 12/05/2004 $14.38 $15.90 12/06/2004 $14.25 $15.82 12/07/2004 $14.24 $15.80 12/08/2004 $14.25 $15.70 12/09/2004 $14.26 $15.75 12/10/2004 $14.25 $15.85 12/11/2004 $14.25 $15.85 12/12/2004 $14.25 $15.85 12/13/2004 $14.27 $15.79 12/14/2004 $14.28 $15.75 12/15/2004 $14.30 $15.74 12/16/2004 $14.36 $15.81 12/17/2004 $14.34 $15.90 12/18/2004 $14.34 $15.90 12/19/2004 $14.34 $15.90 12/20/2004 $14.35 $15.72 12/21/2004 $14.38 $15.82 12/22/2004 $14.38 $15.90 12/23/2004 $14.40 $16.00 12/24/2004 $14.40 $16.00 12/25/2004 $14.40 $16.00 12/26/2004 $14.40 $16.00 12/27/2004 $14.39 $15.88 12/28/2004 $14.40 $16.00 12/29/2004 $14.41 $16.05 12/30/2004 $14.42 $16.06 12/31/2004 $14.43 $16.04 01/01/2005 $14.43 $16.04 01/02/2005 $14.43 $16.04 01/03/2005 $14.42 $16.00 01/04/2005 $14.41 $16.17 01/05/2005 $14.42 $16.14 01/06/2005 $14.43 $16.10 01/07/2005 $14.31 $16.10 01/08/2005 $14.31 $16.10 DATE NAV PRICE ---- --- ----- 01/09/2005 $14.31 $16.10 01/10/2005 $14.31 $16.08 01/11/2005 $14.31 $15.81 01/12/2005 $14.31 $16.03 01/13/2005 $14.31 $16.10 01/14/2005 $14.33 $16.07 01/15/2005 $14.33 $16.07 01/16/2005 $14.33 $16.07 01/17/2005 $14.33 $16.07 01/18/2005 $14.35 $16.10 01/19/2005 $14.35 $16.02 01/20/2005 $14.32 $15.94 01/21/2005 $14.33 $15.95 01/22/2005 $14.33 $15.95 01/23/2005 $14.33 $15.95 01/24/2005 $14.32 $15.81 01/25/2005 $14.33 $15.95 01/26/2005 $14.36 $16.08 01/27/2005 $14.36 $16.10 01/28/2005 $14.38 $16.15 01/29/2005 $14.38 $16.15 01/30/2005 $14.38 $16.15 01/31/2005 $14.38 $16.21 02/01/2005 $14.40 $16.22 02/02/2005 $14.41 $16.18 02/03/2005 $14.41 $16.15 02/04/2005 $14.44 $16.23 02/05/2005 $14.44 $16.23 02/06/2005 $14.44 $16.23 02/07/2005 $14.45 $16.26 02/08/2005 $14.33 $16.07 02/09/2005 $14.33 $16.20 02/10/2005 $14.33 $16.05 02/11/2005 $14.35 $16.20 02/12/2005 $14.35 $16.20 02/13/2005 $14.35 $16.20 02/14/2005 $14.35 $16.05 02/15/2005 $14.36 $16.26 02/16/2005 $14.38 $16.20 02/17/2005 $14.38 $16.15 02/18/2005 $14.39 $16.14 02/19/2005 $14.39 $16.14 02/20/2005 $14.39 $16.14 02/21/2005 $14.39 $16.14 02/22/2005 $14.38 $16.05 02/23/2005 $14.39 $15.92 02/24/2005 $14.41 $16.03 02/25/2005 $14.42 $16.06 02/26/2005 $14.42 $16.06 02/27/2005 $14.42 $16.06 02/28/2005 $14.42 $16.06 03/01/2005 $14.42 $15.97 03/02/2005 $14.43 $16.13 03/03/2005 $14.46 $16.12 03/04/2005 $14.49 $16.05 03/05/2005 $14.49 $16.05 03/06/2005 $14.49 $16.05 03/07/2005 $14.51 $16.09 03/08/2005 $14.38 $16.02 03/09/2005 $14.36 $15.88 03/10/2005 $14.36 $15.76 03/11/2005 $14.39 $15.36 03/12/2005 $14.39 $15.36 DATE NAV PRICE ---- --- ----- 03/13/2005 $14.39 $15.36 03/14/2005 $14.40 $15.51 03/15/2005 $14.39 $15.39 03/16/2005 $14.34 $15.14 03/17/2005 $14.35 $15.25 03/18/2005 $14.35 $15.40 03/19/2005 $14.35 $15.40 03/20/2005 $14.35 $15.40 03/21/2005 $14.32 $15.28 03/22/2005 $14.29 $15.24 03/23/2005 $14.31 $14.75 03/24/2005 $14.34 $14.92 03/25/2005 $14.34 $14.92 03/26/2005 $14.34 $14.92 03/27/2005 $14.34 $14.92 03/28/2005 $14.36 $15.15 03/29/2005 $14.32 $15.25 03/30/2005 $14.39 $15.47 03/31/2005 $14.37 $15.59 04/01/2005 $14.37 $15.54 04/02/2005 $14.37 $15.54 04/03/2005 $14.37 $15.54 04/04/2005 $14.39 $15.60 04/05/2005 $14.38 $15.59 04/06/2005 $14.42 $15.83 04/07/2005 $14.31 $15.65 04/08/2005 $14.31 $15.25 04/09/2005 $14.31 $15.25 04/10/2005 $14.31 $15.25 04/11/2005 $14.30 $15.14 04/12/2005 $14.31 $15.10 04/13/2005 $14.29 $15.14 04/14/2005 $14.27 $15.14 04/15/2005 $14.22 $15.25 04/16/2005 $14.22 $15.25 04/17/2005 $14.22 $15.25 04/18/2005 $14.22 $15.30 04/19/2005 $14.26 $15.20 04/20/2005 $14.25 $15.20 04/21/2005 $14.26 $15.25 04/22/2005 $14.25 $15.27 04/23/2005 $14.25 $15.27 04/24/2005 $14.25 $15.27 04/25/2005 $14.28 $15.24 04/26/2005 $14.29 $15.35 04/27/2005 $14.25 $15.49 04/28/2005 $14.22 $15.40 04/29/2005 $14.21 $15.43 04/30/2005 $14.21 $15.43 05/01/2005 $14.21 $15.43 05/02/2005 $14.21 $15.35 05/03/2005 $14.23 $15.42 05/04/2005 $14.26 $15.48 05/05/2005 $14.24 $15.38 05/06/2005 $14.06 $15.36 05/07/2005 $14.06 $15.36 05/08/2005 $14.06 $15.36 05/09/2005 $14.07 $15.38 05/10/2005 $14.06 $15.20 05/11/2005 $14.05 $15.05 05/12/2005 $14.01 $15.07 05/13/2005 $14.01 $15.03 05/14/2005 $14.01 $15.03 DATE NAV PRICE ---- --- ----- 05/15/2005 $14.01 $15.03 05/16/2005 $13.99 $15.32 05/17/2005 $13.99 $15.40 05/18/2005 $14.04 $15.65 05/19/2005 $14.07 $15.65 05/20/2005 $14.07 $15.79 05/21/2005 $14.07 $15.79 05/22/2005 $14.07 $15.79 05/23/2005 $14.09 $15.78 05/24/2005 $14.09 $15.80 05/25/2005 $14.13 $15.90 05/26/2005 $14.18 $15.96 05/27/2005 $14.23 $15.92 05/28/2005 $14.23 $15.92 05/29/2005 $14.23 $15.92 05/30/2005 $14.23 $15.92 05/31/2005 $14.24 $15.89 06/01/2005 $14.28 $16.00 06/02/2005 $14.32 $15.90 06/03/2005 $14.29 $15.95 06/04/2005 $14.29 $15.95 06/05/2005 $14.29 $15.95 06/06/2005 $14.29 $15.99 06/07/2005 $14.30 $16.02 06/08/2005 $14.13 $16.04 06/09/2005 $14.15 $15.85 06/10/2005 $14.16 $15.98 06/11/2005 $14.16 $15.98 06/12/2005 $14.16 $15.98 06/13/2005 $14.15 $16.06 06/14/2005 $14.17 $16.04 06/15/2005 $14.18 $16.00 06/16/2005 $14.20 $15.98 06/17/2005 $14.20 $16.07 06/18/2005 $14.20 $16.07 06/19/2005 $14.20 $16.07 06/20/2005 $14.20 $16.05 06/21/2005 $14.19 $16.05 06/22/2005 $14.21 $15.98 06/23/2005 $14.19 $16.00 06/24/2005 $14.18 $16.03 06/25/2005 $14.18 $16.03 06/26/2005 $14.18 $16.03 06/27/2005 $14.17 $16.09 06/28/2005 $14.21 $16.02 06/29/2005 $14.22 $15.99 06/30/2005 $14.20 $16.00 07/01/2005 $14.21 $16.06 07/02/2005 $14.21 $16.06 07/03/2005 $14.21 $16.06 07/04/2005 $14.21 $16.06 07/05/2005 $14.23 $16.10 07/06/2005 $14.22 $16.29 07/07/2005 $14.08 $16.23 07/08/2005 $14.11 $16.25 07/09/2005 $14.11 $16.25 07/10/2005 $14.11 $16.25 07/11/2005 $14.13 $16.20 07/12/2005 $14.15 $16.23 07/13/2005 $14.15 $16.20 07/14/2005 $14.16 $16.15 07/15/2005 $14.18 $16.17 07/16/2005 $14.18 $16.17 DATE NAV PRICE ---- --- ----- 07/17/2005 $14.18 $16.17 07/18/2005 $14.19 $16.29 07/19/2005 $14.24 $16.31 07/20/2005 $14.26 $16.44 07/21/2005 $14.28 $16.41 07/22/2005 $14.32 $16.30 07/23/2005 $14.32 $16.30 07/24/2005 $14.32 $16.30 07/25/2005 $14.32 $16.10 07/26/2005 $14.34 $16.30 07/27/2005 $14.35 $16.40 07/28/2005 $14.37 $16.42 07/29/2005 $14.37 $16.40 07/30/2005 $14.37 $16.40 07/31/2005 $14.37 $16.40 08/01/2005 $14.39 $16.40 08/02/2005 $14.42 $16.56 08/03/2005 $14.42 $16.46 08/04/2005 $14.41 $16.39 08/05/2005 $14.40 $16.27 08/06/2005 $14.40 $16.27 08/07/2005 $14.40 $16.27 08/08/2005 $14.26 $16.15 08/09/2005 $14.31 $16.22 08/10/2005 $14.31 $16.23 08/11/2005 $14.32 $16.21 08/12/2005 $14.34 $16.43 08/13/2005 $14.34 $16.43 08/14/2005 $14.34 $16.43 08/15/2005 $14.32 $16.51 08/16/2005 $14.34 $16.40 08/17/2005 $14.35 $16.45 08/18/2005 $14.36 $16.41 08/19/2005 $14.37 $16.58 08/20/2005 $14.37 $16.58 08/21/2005 $14.37 $16.58 08/22/2005 $14.38 $16.50 08/23/2005 $14.39 $16.63 08/24/2005 $14.40 $16.82 08/25/2005 $14.43 $16.75 08/26/2005 $14.42 $16.81 08/27/2005 $14.42 $16.81 08/28/2005 $14.42 $16.81 08/29/2005 $14.44 $16.80 08/30/2005 $14.46 $16.80 08/31/2005 $14.49 $16.85 09/01/2005 $14.49 $16.88 09/02/2005 $14.49 $16.87 09/03/2005 $14.49 $16.87 09/04/2005 $14.49 $16.87 09/05/2005 $14.49 $16.87 09/06/2005 $14.49 $17.08 09/07/2005 $14.49 $16.97 09/08/2005 $14.33 $16.88 09/09/2005 $14.35 $17.00 09/10/2005 $14.35 $17.00 09/11/2005 $14.35 $17.00 09/12/2005 $14.35 $16.93 09/13/2005 $14.36 $17.00 09/14/2005 $14.35 $16.86 09/15/2005 $14.34 $16.79 09/16/2005 $14.34 $16.78 09/17/2005 $14.34 $16.78 DATE NAV PRICE ---- --- ----- 09/18/2005 $14.34 $16.78 09/19/2005 $14.33 $16.98 09/20/2005 $14.30 $17.00 09/21/2005 $14.28 $16.95 09/22/2005 $14.28 $17.00 09/23/2005 $14.26 $17.00 09/24/2005 $14.26 $17.00 09/25/2005 $14.26 $17.00 09/26/2005 $14.27 $17.04 09/27/2005 $14.27 $17.00 09/28/2005 $14.28 $17.02 09/29/2005 $14.29 $16.98 09/30/2005 $14.29 $16.96 * NET ASSET VALUE IS CALCULATED AFTER THE CLOSE OF THE EXCHANGES EACH DAY BY TAKING THE CLOSING MARKET VALUE OF ALL PORTFOLIO SECURITIES OWNED PLUS ALL OTHER ASSETS SUCH AS CASH, SUBTRACTING ALL LIABILITIES, THEN DIVIDING THE RESULT (TOTAL NET ASSETS) BY THE TOTAL NUMBER OF SHARES OUTSTANDING. THE MARKET PRICE IS THE LAST REPORTED PRICE AT WHICH A SECURITY WAS SOLD ON AN EXCHANGE. PERFORMANCE INFORMATION
---------------------------------------------- AGGREGATE TOTAL RETURNS COMMENCEMENT SIX OF INVESTMENT AS OF SEPTEMBER 30, 2005 MONTHS OPERATIONS(1) - ------------------------------------------------------------------------------------------------------ MARKET VALUE 14.83% 23.21% - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE 4.97% 8.67% - ------------------------------------------------------------------------------------------------------ LEHMAN BROTHERS BA HIGH YIELD INDEX(2) 4.28% 4.15% - ------------------------------------------------------------------------------------------------------
9 RMK ADVANTAGE INCOME FUND, INC. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 800-564-2188. TOTAL RETURNS ASSUME AN INVESTMENT AT THE COMMON SHARE MARKET PRICE OR NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS FOR THE PERIOD IN ACCORDANCE WITH THE FUND'S DIVIDEND REINVESTMENT PLAN, AND SALE OF ALL SHARES AT THE CLOSING MARKET PRICE (EXCLUDING ANY COMMISSIONS) OR NET ASSET VALUE AT THE END OF THE PERIOD. RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR ON THE SALE OF FUND SHARES. 1 THE FUND COMMENCED INVESTMENT OPERATIONS ON NOVEMBER 8, 2004. 2 THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-INVESTMENT GRADE-13.4% OF NET ASSETS COLLATERALIZED DEBT OBLIGATIONS-2.6% $ 1,965,237 E-Trade 2004-1A COM1, 2.00% 1/10/40............. $1,984,889 4,200,000 Restructured Asset Backed 2003-3A A3, 4.50% 1/29/22 (a) 3,515,568 5,000,000 Witherspoon 2004-1A COM1, 11.50% 9/15/39........ 5,000,000 ------------ 10,500,457 ------------ CREDIT CARDS-0.7% 3,500,000 North Street 2000-1A B, 4.26% 10/30/11 (a)...... 2,940,000 ------------ EQUIPMENT LEASES-4.5% 20,034,395 Aerco Limited 2A A3, 4.228% 7/15/25 (a)......... 15,626,828 19,000,000 Airplanes Repackaging 2004-1A B, Zero Coupon Bond 6/16/31 (a) 1,187,500 2,000,000 Aviation Capital 2000-1A A1, 4.248% 11/15/25 (a) 1,621,460 ------------ 18,435,788 ------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-3.8% 7,613,000 Ace Securities 2004-HE3 M11, 7.14125% 11/25/34.. 6,927,830 3,000,000 Ace Securities 2004-HE4 M11, 7.14125% 12/25/34.. 2,807,790 2,119,000 Asset Backed Securities 2005-HE1 M10, 6.641% 3/25/35 1,968,678 2,681,000 Bear Stearns 2004-HE9 M7B, 7.641% 11/25/34...... 2,386,090 2,000,000 Soundview 2005-A B1, 6.28% 4/25/35 (a).......... 1,706,240 ------------ 15,796,628 ------------ MANUFACTURED HOUSING LOANS-1.8% 4,500,000 Green Tree Financial 1996-2 M1, 7.60% 4/15/27... 3,525,647 4,500,000 Green Tree Financial 1996-9 M1, 7.63% 8/15/27... 3,882,991 ------------ 7,408,638 ------------ TOTAL ASSET BACKED SECURITIES-INVESTMENT GRADE (COST $54,224,250) 55,081,511 ---------- ASSET BACKED SECURITIES-NON-INVESTMENT GRADE-54.2% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS-1.7% 2,000,000 Preferred Term Securities II, 5/22/33 (a)(f).... 2,060,060 2,900,000 Preferred Term Securities XVI, 11.00% 3/23/35 (a) 2,995,062 2,000,000 Preferred Term Securities XVII, 12.00% 9/23/35 (a) 1,960,000 ------------ 7,015,122 ------------ COLLATERALIZED DEBT OBLIGATIONS-4.7% 2,000,000 EQNOX 1A D, 10.39% 11/15/12 (a)................. 980,000 2,000,000 Halyard CBO 1A B, 4.77% 3/24/10 (a)............. 1,540,000 3,967,049 Hewett's Island 2004-1A COM, 12.00% Bond 12/15/16 3,967,049 3,900,000 MKP 4A CS, 2.00% 7/12/40 (a).................... 3,900,000 5,000,000 MCPA2 1998-PA B1, 4.952% 6/23/10 (a)............ 4,131,250 2,500,000 Stanfield 2A D1, 9.699% 4/15/15 (a)............. 2,456,250 1,000,000 VALEO 3A B1, 6.371% 12/15/13 (a)................ 757,500
10 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (CONTINUED) COLLATERALIZED DEBT OBLIGATIONS (CONTINUED) $ 2,000,000 Wibraham CBD Limited 1A, 4.46% 7/13/12 (a)........ $1,525,000 ------------ 19,257,049 ------------ COMMERCIAL LOANS-4.6% 1,782,647 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a).. 1,774,936 5,000,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a).. 3,375,000 17,955,616 Enterprise Mortgage 2000-1 A2, 7.449% 1/15/27 (a). 10,144,923 3,750,000 Lehman Brothers 2002-LLFA L, 5.15% 6/14/17 (a).... 3,703,054 ------------ 18,997,913 ------------ CREDIT CARDS-1.4% 8,277,276 Nextcard 2000-1 A C, 5.418% 12/15/06 (a).......... 5,628,548 ------------ EQUIPMENT LEASES-24.1% 21,250,000 Aircraft Finance Trust 1999-1A A1, 4.248% 5/15/24. 13,334,375 30,000,000 Airplanes Pass Through Trust 2001-1A A9, 4.318% 3/15/19 16,200,000 538,810 DVI Receivables 2000-2 A4, 7.115% 11/12/08........ 510,523 1,876,949 DVI Receivables 2001-2 A3, 3.519% 11/8/31......... 1,557,868 2,713,851 DVI Receivables 2001-2 A4, 4.613% 11/11/09........ 2,279,635 10,880,060 DVI Receivables 2002-1 A3A, 4.09% 6/11/10......... 7,860,843 13,000,000 Lease Investment Flight Trust 1 A1, 4.158% 7/15/31 8,775,000 4,922,320 Pegasus Aviation Lease 1999-1A A1, 6.30% 3/25/29 (a) 2,387,325 15,000,000 Pegasus Aviation Lease 1999-1A A2, 6.30% 3/25/29 (a) 7,312,500 18,000,000 Pegasus Aviation Lease 2001-1A A2, 4.308% 5/10/31 (a) 9,225,000 1,000,000 Pegasus Aviation 2000-1 A2, 8.37% 3/25/30 (a)..... 635,000 22,700,000 Pegasus Aviation 2001-1A A1, 4.208% 5/10/31 (a)... 11,577,000 17,587,596 Pegasus Aviation 2001-1A A3, 4.408% 3/10/14 (a)... 13,740,309 4,171,029 Triton 1A A2, 4.468% 6/15/25 (a).................. 3,976,784 ------------ 99,372,162 ------------ FRANCHISE LOANS-2.8% 2,426,036 Captec Franchise 1999-1 A2, 7.278% 4/25/11 (a).... 2,283,069 1,617,000 Falcon Franchise Loan 2001-1 F, 6.50% 1/5/23...... 1,000,131 9,865,454 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a).... 7,411,758 991,907 FMAC Loan Trust 1998-A A2, 6.50% 9/15/20 (a)...... 664,042 ------------ 11,359,000 ------------ HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-9.2% 2,000,000 Ace Securities 2004-HE4 B, 7.14125% 12/25/34 (a).. 1,680,000 4,463,000 Ace Securities 2005-HE2 B1, 6.891% 4/25/35 (a).... 3,709,646 4,000,000 Ace Securities 2005-HE5 B2, 6.559% 8/25/35 (a).... 2,917,200 4,400,000 Argent Securities 2004-W8 M11, 6.141% 5/25/34 (a). 3,828,000 2,000,000 Equifirst Mortgage 2004-3 B1, 5.708% 12/25/34 (a). 1,820,000 7,038,000 Equifirst Mortgage 2004-3 B2, 5.708% 12/25/34 (a). 6,193,440
11 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (CONTINUED) HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE) (CONTINUED) $ 1,000,000 Equifirst Mortgage 2005-1 B3, 6.891% 4/25/35 (a) $ 835,000 1,757,000 Equifirst Mortgage 2005-1 B4, 7.08% 4/25/35 (a) 1,458,310 3,253,000 GSAMP Trust 2005-S2 B3, 6.50% 11/25/34......... 2,899,952 3,000,000 Greenwich 2005-1A N2, 4.15% 1/20/45 (a)........ 2,250,000 2,000,000 Merrill Lynch Mortgage 2005-SL1 B5, 7.141% 1/25/35 (a) 1,784,400 Terwin Mortgage 2005-3SL B6, 11.50% 3/25/35 interest-only strips 6,750,000 2,300,000 Terwin Mortgage 2005-7SL, 6.50% 7/25/35 (a).... 1,978,690 ------------ 38,104,638 ------------ MANUFACTURED HOUSING LOANS-5.7% 4,961,155 Bombardier Capital 1998-B M2, 7.31% 10/15/28... 198,446 13,693,419 Bombardier Capital 2000-A A2, 7.575% 6/15/30... 9,480,351 500,000 Bombardier Capital 2001-A M2, 8.265% 12/15/30.. 110,000 19,000,000 Green Tree Financial 1998-3 M1, 6.86% 3/1/30... 6,577,610 3,000,000 Green Tree Financial 1996-7 B1, 7.70% 10/15/27. 839,730 5,000,000 Green Tree Financial 1997-3 M1, 7.53% 3/15/28.. 3,075,000 4,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31... 576,412 3,714,132 Oakwood Mortgage 2001-C A4, 7.405% 12/15/30.... 2,503,013 1,300,000 Oakwood Mortgage 2002-C M1, 6.89% 11/15/32..... 384,986 ------------ 23,745,548 ------------ TOTAL ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (COST $232,020,418) 223,479,980 ------------ CORPORATE BONDS-INVESTMENT GRADE-0.2% OF NET ASSETS RETAIL-0.2% 1,100,000 Albertson's, 7.75% 6/15/26..................... 960,619 ------------ TOTAL CORPORATE BONDS-INVESTMENT GRADE (COST $960,683) 960,619 ------------ CORPORATE BONDS-NON-INVESTMENT GRADE-32.4% OF NET ASSETS APPLIANCES-0.6% 2,534,000 Windmere-Durable, 10.00% 7/31/08............... 2,381,960 ------------ AUTOMOTIVES-0.9% 563,000 Ford Motor, 9.215% 9/15/21..................... 508,107 725,000 Ford Motor, 9.98% 2/15/47...................... 654,312 950,000 General Motors, 8.25% 7/15/23.................. 738,625 2,450,000 General Motors, 8.375% 7/15/33................. 1,911,000 ------------ 3,812,044 ------------
12 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) AUTOMOTIVE PARTS & EQUIPMENT-0.8% $ 500,000 Delphi Automotive, 6.55% 6/15/06................. $ 357,510 2,800,000 Dura Operating, 9.00% 5/1/09..................... 1,946,000 1,200,000 Metaldyne Corp., 10.00% 11/1/13 (a).............. 1,044,000 ------------ 3,347,510 ------------ BASIC MATERIALS-1.9% 2,210,000 Edgen Acquisition, 9.875% 2/1/11................. 2,221,050 2,200,000 Millar Western, 7.75% 11/15/13................... 1,855,370 3,650,000 OM Group, 9.25% 12/15/11......................... 3,713,875 ------------ 7,790,295 ------------ BUILDING & CONSTRUCTION-1.1% 4,790,000 MMI Products, 11.25% 4/15/07..................... 4,574,450 ----------- COMMUNICATIONS-1.3% 2,000,000 Charter, 10.00% 5/15/11.......................... 1,450,000 3,375,000 Charter Communication, Zero Coupon Bond 5/15/11.. 2,413,125 1,550,000 Penton Media, 10.375% 6/15/11.................... 1,441,500 ------------ 5,304,625 ------------ CONSULTING SERVICES-1.2% 2,000,000 MSX International, 11.00% 10/15/07............... 1,990,000 4,000,000 MSX International, 11.375% 1/15/08............... 2,800,000 ------------ 4,790,000 ------------ ELECTRONICS-0.9% 3,750,000 Motors and Gears, 10.75% 11/15/06................ 3,562,500 ------------ ENERGY-0.3% 1,000,000 United Refining, 10.50% 8/15/12.................. 1,060,000 ------------ FINANCE-2.6% 2,850,000 Advanta Capital Trust I, 8.99% 12/17/26.......... 2,878,500 1,050,000 Citisteel USA, 10.00% 9/1/10 (a)................. 1,039,500 950,000 Labranche, 11.00% 5/15/12........................ 1,049,750 2,550,000 Rafaella Apparel, 11.25% 6/15/11 (a)............. 2,486,250 1,250,000 Reg Diversified Funding, Zero Coupon Bond 1/25/36 (a) 1,250,000 3,000,000 Triton Aviation 1A A, 4.341% 6/15/25 (a)......... 2,017,500 ------------ 10,721,500 ------------ FOOD-0.5% 600,000 Di Giorgio Corp., 10.00% 6/15/07................. 594,000 2,300,000 Merisant, 9.50% 7/15/13 (a)...................... 1,564,000 ------------ 2,158,000 ------------
13 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) GARDEN PRODUCTS-0.3% $ 1,760,000 Ames True Temper, 10.00% 7/15/12................. $1,394,800 ------------ HUMAN RESOURCES-0.4% 1,650,000 Comforce Operating, 12.00% 12/1/07............... 1,645,875 ------------ INDUSTRIAL-5.6% 4,000,000 Consolidated Container, 10.125% 7/15/09.......... 2,660,000 4,370,000 Constar International, 11.00% 12/1/12............ 2,753,100 3,228,000 Continental Global Group, 9.00% 10/1/08.......... 3,185,681 750,000 Elgin National, 11.00% 11/1/07................... 703,718 2,800,000 GSI Group, 12.00% 5/15/13 (a).................... 2,873,500 2,200,000 Intermet, Zero Coupon Bond 6/15/09 in default.... 737,000 1,370,000 Trimas Corp., 9.875% 6/15/2012................... 1,124,222 2,600,000 US Can, 12.375% 10/1/10.......................... 2,476,500 3,250,000 VITRO S.A., 11.75% 11/1/13 (a)................... 3,022,500 4,050,000 Wolverine Tube, 7.375% 8/1/08 (a)................ 3,483,000 ------------ 23,019,221 ------------ MEDICAL PRODUCTS-0.3% 1,350,000 Hanger Orthopedic Group, 10.375% 2/15/09......... 1,373,625 ------------ PHARMACEUTICALS-0.3% 1,600,000 Curative Health, 10.75% 5/1/11................... 1,024,000 ------------ RETAIL-2.4% 2,925,000 General Nutrition Center, 8.50% 12/1/10.......... 2,493,563 2,000,000 New World Restaurant, 13.00% 7/1/08.............. 2,069,460 2,550,000 Star Gas Partner, 10.25% 2/15/13................. 2,078,250 3,800,000 Uno Restaurant, 10.00% 2/15/11 (a)............... 3,515,000 ------------ 10,156,273 ------------ SPECIAL PURPOSE ENTITY-4.6% 9,861,946 Dow Jones CDX HY T4, 10.50% 12/29/09 (a)......... 9,683,198 2,000,000 Dryden CDO 2001, Zero Coupon Bond 11/9/13 (a).... 1,960,000 5,000,000 INCAPS Funding II, 10.00% 1/15/34 (a)............ 4,850,000 5,000,000 ML CLO 97 PILG-1, 7.614% 3/23/09 (a)............. 2,500,000 ------------ 18,993,198 ------------ TECHNOLOGY-0.1% 350,000 Danka Business, 10.00% 4/1/08.................... 325,500 ------------ TELECOMMUNICATIONS-3.7% 925,000 Alestra SA, 8.00% 6/30/10........................ 841,750 3,400,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (e) 2,618,000 600,000 Exchelon Operating, 8.375% 3/15/10............... 558,000 3,500,000 Level 3 Financing, 10.75% 10/15/11............... 2,926,875 650,000 Millicom International, 10.00% 12/1/13........... 671,125
14 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) TELECOMMUNICATIONS (CONTINUED) $ 4,175,000 Primus Telecommunications, 8.00% 1/15/14........ $2,651,125 1,500,000 Rural Cellular, 9.75% 1/15/10................... 1,515,000 350,000 Securus Technologies, 11.00% 9/1/11............. 311,500 2,750,000 Time Warner, 10.125% 2/1/11..................... 2,832,500 200,000 Time Warner Telecommunications, 9.25% 2/15/14... 202,500 ------------ 15,128,375 ------------ TOBACCO-0.9% 4,715,000 North Atlantic Trading, 9.25% 3/1/12............ 3,536,250 ------------ TRANSPORTATION-0.3% 1,705,000 Evergreen International Aviation, 12.00% 5/15/10 1,346,950 ------------ TRAVEL-0.6% 3,000,000 Worldspan Financial, 10.04% 2/15/11 (a)......... 2,640,000 ------------ UTILITIES-0.8% 1,750,000 Calpine, 8.75% 7/15/13 (a)...................... 1,238,125 3,000,000 Calpine, 9.875% 12/1/11 (a)..................... 2,190,000 ------------ 3,428,125 ------------ TOTAL CORPORATE BONDS-NON-INVESTMENT GRADE ($142,097,214) 133,515,076 ------------ MORTGAGE BACKED SECURITIES-INVESTMENT GRADE-4.6% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATIONS-4.6% 2,000,000 Aames Mortgage 2005-2 B3, 6.83% 7/25/35......... 1,652,600 1,000,000 First Franklin Mortgage 2004-FF5 M8, 6.83% 8/25/34 975,000 2,000,000 First Franklin Mortgage 2004-FF5, 8.594% 8/25/34 (a) 2,000,000 Harborview Mortgage 2004-8 X, 0.65% 11/19/34 interest-only strips 4,297,183 2,751,109 Long Beach Mortgage 2001-1 M2, 4.09% 4/21/31.... 2,586,043 2,573,712 Long Beach Mortgage 2001-4 M2, 4.74% 3/25/32.... 2,493,368 4,000,000 Merrill Lynch 2005-M1, 5.67% 5/25/36............ 3,218,720 2,000,000 Soundview 2005-OPT1 M10, 6.891% 6/25/35......... 1,909,060 ------------ TOTAL MORTGAGE BACKED SECURITIES-INVESTMENT GRADE ($20,122,846) 19,131,974 ------------ MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE-11.2% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATIONS-11.2% 3,073,000 Fremont Home Equity 2005-C B3, 5.63% 7/25/35 (a) 2,143,418 8,000,000 Greenwich 2005-4 N-2, Zero Coupon Bond, 7/27/45 (a) 4,120,000 3,000,000 Greenwich 2005-3 N2, 2.00% 6/27/35 (a).......... 1,858,590 2,000,000 Greenwich 2005-2A N2, 3.10% 2/26/35 (a)......... 1,383,740 2,000,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a)...... 1,620,000 3,252,397 Long Beach Mortgage 2001-3 M3, 5.335% 9/25/31... 1,528,626 4,803,908 Long Beach Mortgage 2001-4 M3, 6.391% 3/25/32... 2,305,876 2,000,000 Long Beach Mortgage 2005-WL1, 6.05% 6/25/35..... 1,747,180
15 PRINCIPAL AMOUNT/ MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE (CONTINUED) COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) 3,000,000 Park Place Securities 2005-WHQ1 M10, 6.141% 3/25/35 (a) $2,675,130 3,800,000 Park Place Securities 2005-WCW1 M11, 5.95% 9/25/35 2,979,922 3,000,000 Park Place Securities 2005-WCW3, 5.981% 8/25/35 (a) 2,430,000 2,000,000 Park Place Securities 2005-WHQ4, 6.088% 9/25/35 (a) 1,370,300 2,026,229 Park Place Securities 2005-WCW1 B, 5.00% 9/25/35 (a) 1,869,197 2,000,000 People's Choice Home Loan 2004-2 B, 5.00% 10/25/34 (a) 1,652,500 2,000,000 Popular 2005-4 B2, 6.05% 9/25/35 (a).............. 1,862,500 5,250,000 Residential 2005-RS4 B2, 6.641% 4/25/35 (a)....... 4,372,252 3,938,000 Residential 2005-RS4 B3, 6.641% 4/25/35 (a)....... 3,103,617 2,310,000 Sasco Net Interest Margin Trust 2004-6XS B, 5.00% 3/28/34 (a) 2,159,850 2,000,000 Soundview 2005-1 B3, 6.891% 4/25/35 (a)........... 1,640,000 1,000,000 Soundview 2005-2 B2, 6.71% 7/25/35 (a)............ 815,000 2,591,000 Soundview 2005-2 B3, 6.46% 7/25/35 (a)............ 2,014,502 1,000,000 Soundview 2005-2 B4, 6.46% 7/25/35 (a)............ 735,000 ------------ TOTAL MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE (COST $47,911,847) 46,387,200 ------------ MUNICIPAL SECURITIES-0.2% OF NET ASSETS 1,250,000 Pima County Arizona IDA Health Care, Zero Coupon Bond 11/15/32 656,937 ------------ TOTAL MUNICIPAL SECURITIES (COST $782,102) 656,937 ------------ COMMON STOCKS-11.1% OF NET ASSETS 6,200 3M Company........................................ 454,832 10,200 Alliance Capital Management Holding L.P........... 488,070 34,400 American Capital Strategies, Ltd.................. 1,261,104 39,710 Andrx Corporation (d)............................. 612,725 67,300 Anthracite Capital, Inc........................... 779,334 16,400 Arthur J. Gallegher & Co.......................... 472,484 37,200 ATI Technologies Inc. (d)......................... 518,568 19,000 Bank of America Corporation....................... 799,900 17,900 Bois d'Arc Energy LLC (d)......................... 308,059 8,600 Burlington Northern Santa Fe Corporation.......... 514,280 7,900 Caterpillar, Inc.................................. 464,125 13,300 CEMEX, S.A. de C.V................................ 695,590 11,000 Cimarex Energy Co. (d)............................ 498,630 49,900 Cisco Systems, Inc. (d)........................... 894,208 33,500 Consolidated Communications Illinois Holdings, Inc. (d) 455,600 5,300 Cooper Cameron Corporation (d).................... 391,829 14,000 Cree, Inc. (d).................................... 350,280 15,800 Cytec Industries Inc.............................. 685,404 3,700 Deere & Company................................... 226,440
16 MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) 22,200 Direct General Corporation.......................... $ 438,006 24,400 Dollar General Corporation.......................... 447,496 2,200 Education Realty Trust, Inc......................... 36,740 11,300 El DuPont de Nemours and Company.................... 442,621 4,400 EnCana Corporation (d).............................. 256,564 11,200 ENSCO International Incorporated.................... 521,808 23,100 Enterprise Partners Products L.P.................... 581,658 7,900 Exxon Mobil Corporation............................. 501,966 11,300 Family Dollar Stores, Inc........................... 224,531 16,900 First Data Corporation.............................. 676,000 28,200 Flextronics International Ltd. (d).................. 362,370 38,300 Fred's Inc.......................................... 479,133 10,100 Frontline Ltd....................................... 445,612 13,600 General Electric Company............................ 457,912 15,800 General Maritime Corporation........................ 581,598 14,300 GlobalSantaFe Corporation........................... 652,366 26,300 Ingram Micro Inc. (d)............................... 487,602 57,200 InPhonic, Inc. (d).................................. 786,500 18,300 Intel Corporation................................... 451,095 49,000 Iowa Telecommunications Services, Inc............... 824,180 9,800 J.C. Penny Company, Inc............................. 464,716 12,100 Kinder Morgan Energy Partners, L.P.................. 639,485 9,200 KKR Financial Corp. (d)............................. 204,608 42,000 Korn/Ferry International (d)........................ 688,380 9,900 L-3 Communications Holdings, Inc.................... 782,793 27,300 Limited Brands, Inc................................. 557,739 24,700 Lincoln Electric Holdings, Inc...................... 973,180 20,200 Lloyds TSB Group plc................................ 671,246 16,800 Macquarie Infrastructure Company Trust.............. 473,760 15,900 Magellan Midstream Partners, L.P.................... 544,893 14,900 Manpower Inc........................................ 661,411 10,300 Marathon Oil Corporation............................ 709,979 22,200 Masco Corporation................................... 681,096 96,800 MCG Capital Corporation............................. 1,633,016 31,500 Microsoft Corporation............................... 810,495 24,100 Nam Tai Electronics, Inc............................ 612,863 19,800 New Century Financial Corporation................... 718,146 31,700 New Skies Satellites Holdings Ltd................... 667,285 26,000 Polycom, Inc. (d)................................... 420,420 41,400 Regal Entertainment Group........................... 829,656 22,390 Ship Finance International Limited.................. 447,800 85,800 Taiwan Semiconductor Manufacturing Company Ltd...... 705,276 113,270 Technology Investment Capital Corporation (d)....... 1,788,533
17 MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) 28,150 Teva Pharmaceutical Industries Limited............ $ 940,773 31,700 The Home Depot, Inc............................... 1,209,038 26,200 Thornburg Mortgage, Inc........................... 656,572 17,100 Tidewater Inc..................................... 832,257 6,500 Trex Company, Inc. (d)............................ 156,000 74,650 Trustreet Properties Inc.......................... 1,168,273 15,100 Tsakos Energy Navigation Limited.................. 543,902 13,600 Universal Compression Holdings, Inc. (d).......... 540,872 6,300 Valero Energy Corporation......................... 712,278 4,000 Valero L.P........................................ 227,920 20,800 Wal-Mart Stores, Inc.............................. 911,456 16,900 Washington Mutual, Inc............................ 662,818 ------------ TOTAL COMMON STOCKS (COST $44,242,165) 45,776,155 ------------ PREFERRED STOCKS-1.7% OF NET ASSETS 3,000 Credit Genesis CLO 2005........................... 3,000,000 2,000,000 Hewett's Island II (a)............................ 1,980,000 2,000 SOLOSO CDO 2005................................... 1,985,412 ------------ TOTAL PREFERRED STOCKS (COST $6,965,412) 6,965,412 ------------ MUTUAL FUNDS-0.6% OF NET ASSETS 29,200 iShares Russell 3000 Value Index Fund............. 2,622,452 ------------ TOTAL MUTUAL FUNDS (COST $2,504,539) 2,622,452 ------------ CORPORATE LOANS-0.3% OF NET ASSETS 1,200,000 ICO North America, 7.50% 8/15/09.................. 1,200,000 ------------ REPURCHASE AGREEMENTS-4.9% OF NET ASSETS Repurchase agreement with Morgan Stanley & Co, 3.27%, dated September 30, 2005 to be repurchased at $20,001,817 on October 1, 2005, collaterized by a U.S. Treasury Obligation with maturity of October 15, 2022. 20,000,000 ------------
18 MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ EURODOLLAR TIME DEPOSITS-1.8% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated September 30, 2005 3.00% maturing at $7,410,618 on October 1, 2005 $ 7,410,000 ------------- TOTAL INVESTMENTS-136.6% OF NET ASSETS (COST $580,441,476) 563,187,316 ------------- OTHER ASSETS AND LIABILITIES, NET-(36.6%) OF NET ASSETS (150,943,181) ------------- NET ASSETS $412,244,135 ============== (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 2 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. (f) Trust preferred security with no stated interest rate.
19 RMK HIGH INCOME FUND, INC. OBJECTIVE & STRATEGY ------------------------- RMK High Income Fund, Inc. seeks a high level of current income. The Fund seeks capital growth as a secondary investment objective when consistent with its primary investment objective. The Fund invests a majority of its total assets in below investment grade debt securities (commonly referred to as "junk bonds") that offer attractive yield and capital appreciation potential. The Fund may also invest up to 15% of its total assets in foreign debt and equity securities and up to 25% of its total assets in domestic equity securities, including common and preferred stocks. The Fund invests in a wide range of below investment grade debt securities, including corporate bonds, mortgage- and asset-backed securities and municipal and foreign government obligations, as well as securities of companies in bankruptcy reorganization proceedings or otherwise in the process of debt restructuring. INVESTMENT RISKS: Bond funds tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price. Bond prices and the value of bond funds decline as interest rates rise. Longer-term funds generally are more vulnerable to this interest rate risk than shorter-term funds. Below investment grade bonds involve greater credit risk, which is the risk that the issuer will not make interest or principal payments when due. An economic downturn or period of rising interest rates could adversely affect the ability of issuers, especially issuers of below investment grade debt, to service primary obligations and an unanticipated default could cause the Fund to experience a reduction in value of its shares. 20 RMK HIGH INCOME FUND, INC. MANAGEMENT DISCUSSION & ANALYSIS During the first half of RMK High Income Fund, Inc.'s (the "Fund") fiscal year 2006, which ended September 30, 2005, the Fund had a total return of 14.87%, based on market price and reinvested dividends. For the six months ended September 30, 2005, the Fund had a total return of 3.75%, based on net asset value and reinvested dividends. For the six months ended September 30, 2005, the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX(1) had a total return of 4.28%. While the Fund reported positive returns based on market price and net asset value, its net asset value return slightly underperformed the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX. The Fund's net asset value return trailed the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX slightly due to the stronger rebound in the price of corporate credits during the summer months. The Fund's performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distribution and the relative net asset value stability produced by the Fund's allocation to a wide variety of asset types. Dividend distributions for the period were $0.15 cents per share per month; the Fund paid a total income distribution of $0.90 per share. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification has allowed us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2005 were franchise loans, commercial-mortgage backed securities, aircraft equipment leases, below investment grade corporate bonds and dividend-paying common stocks. Two categories of particularly strong performance during the summer months were in the asset backed sector, including those deals supported by franchise loans and aircraft leases. The franchise loan deals have benefited directly from an improved business environment and from a substantial increase in real estate values. Although the domestic airlines continue to experience operating problems, the global demand for aircraft has been strong and continues to strengthen. Our holdings of pooled lease deals are mostly floating rate, thereby benefiting from higher short-term rates and have generally experienced higher net cash flows due to increasing lease rates on aircraft. 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 2006, the leverage was beneficial to shareholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested some assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. As we enter the final months of 2005, financial markets will continue to focus on the threat of higher inflation and on how much more the Federal Reserve will increase short-term rates. We have invested with the expectation that we will continue to see economic strength and further rate increases from the Federal Reserve. Generally, high interest rates suppress the values of financial assets thereby creating a different environment for good returns. Our focus will be on those sectors that benefit from the global expansion and are not dependent on lower interest rates to produce good results. /s/ James Kelsoe James C. Kelsoe, Jr., CFA Senior Portfolio Manager Morgan Asset Management, Inc. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVES. 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 THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUND. 21 INDEX DESCRIPTION ---------------------------------------- 1 THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 22 RMK HIGH INCOME FUND, INC.
PORTFOLIO STATISTICS+ ---------------------------------------- AS OF SEPTEMBER 30, 2005 - --------------------------------------------------------------------------------------------------- Average Credit Quality................................. BB Current Yield.......................................... 10.03% Yield to Maturity...................................... 12.31% Duration............................................... 3.99 Years Average Effective Maturity............................. 5.32 Years Percentage of Leveraged Assets......................... 27% Total Number of Holdings............................... 257 + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
CREDIT QUALITY+ ---------------------------------------- AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------------ AAA....................... 5.4% B 8.4% AA........................ 2.0% CCC....................... 22.3% A......................... 2.2% CC ....................... 1.9% BBB....................... 19.9% D . ...................... 2.9% BB........................ 26.8% Not Rated ................ 8.2% ------------- Total..................... 100.0% + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
ASSET ALLOCATION+ ---------------------------------------- AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------------ Corporate Bonds.......................................... 23.9% Equipment Leases......................................... 19.1% Collateralized Mortgage Obligations...................... 13.4% Home Equity Loans........................................ 8.9% Common Stock............................................. 8.7% Manufactured Housing Loans............................... 5.8% Collateralized Debt Obligations.......................... 5.8% Franchise Loans.......................................... 4.7% Commercial Loans......................................... 3.6% Certificate-Backed Obligations........................... 1.9% Small Business Loans..................................... 1.4% Government Agency Securities............................. 0.9% Preferred Stock.......................................... 0.7% Short Term Investments................................... 0.6% Other.................................................... 0.6% ---------------- Total.................................................... 100.0% + THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
23 RMK HIGH INCOME FUND, INC. NAV & MARKET PRICE HISTORY* ---------------------- The graph below illustrates the net asset value and market price history of RMK High Income Fund, Inc. (NYSE: RMH) from June 24, 2003 (commencement of investment operations) to September 30, 2005. [Graph Representation] DATE NAV PRICE - ---- --- ----- 06/24/03 $14.30 $15.00 06/25/03 $14.30 $15.10 06/26/03 $14.30 $15.10 06/27/03 $14.30 $15.22 06/28/03 $14.30 $15.22 06/29/03 $14.30 $15.22 06/30/03 $14.30 $15.18 07/01/03 $14.30 $15.10 07/02/03 $14.30 $15.05 07/03/03 $14.30 $15.01 07/04/03 $14.30 $15.01 07/05/03 $14.30 $15.01 07/06/03 $14.30 $15.01 07/07/03 $14.30 $15.01 07/08/03 $14.30 $15.10 07/09/03 $14.29 $15.03 07/10/03 $14.30 $15.00 07/11/03 $14.29 $15.05 07/12/03 $14.29 $15.05 07/13/03 $14.29 $15.05 07/14/03 $14.27 $15.01 07/15/03 $14.25 $15.03 07/16/03 $14.26 $15.11 07/17/03 $14.26 $15.10 07/18/03 $14.27 $15.10 07/19/03 $14.27 $15.10 07/20/03 $14.27 $15.10 07/21/03 $14.22 $15.08 07/22/03 $14.24 $15.30 07/23/03 $14.25 $15.35 07/24/03 $14.25 $15.17 07/25/03 $14.27 $15.16 07/26/03 $14.27 $15.16 07/27/03 $14.27 $15.16 07/28/03 $14.23 $15.01 07/29/03 $14.22 $14.99 07/30/03 $14.24 $14.90 07/31/03 $14.23 $14.90 08/01/03 $14.21 $14.95 08/02/03 $14.21 $14.95 08/03/03 $14.21 $14.95 08/04/03 $14.21 $14.95 08/05/03 $14.19 $14.85 08/06/03 $14.22 $14.84 08/07/03 $14.22 $14.83 08/08/03 $14.22 $14.90 08/09/03 $14.22 $14.90 08/10/03 $14.22 $14.90 08/11/03 $14.21 $14.85 08/12/03 $14.20 $14.98 08/13/03 $14.16 $14.98 08/14/03 $14.15 $14.95 08/15/03 $14.15 $14.95 08/16/03 $14.15 $14.95 08/17/03 $14.15 $14.95 08/18/03 $14.17 $14.95 08/19/03 $14.20 $14.91 08/20/03 $14.19 $14.82 08/21/03 $14.19 $14.82 08/22/03 $14.22 $14.86 08/23/03 $14.22 $14.86 08/24/03 $14.22 $14.86 08/25/03 $14.21 $14.80 08/26/03 $14.24 $14.92 08/27/03 $14.23 $15.00 08/28/03 $14.27 $15.00 08/29/03 $14.27 $14.91 08/30/03 $14.27 $14.91 08/31/03 $14.27 $14.91 09/02/03 $14.25 $15.05 09/03/03 $14.27 $15.04 09/04/03 $14.31 $15.00 09/05/03 $14.37 $15.10 09/06/03 $14.37 $15.10 09/07/03 $14.37 $15.10 09/08/03 $14.34 $15.10 09/09/03 $14.34 $15.08 09/10/03 $14.38 $15.14 09/11/03 $14.37 $15.25 09/12/03 $14.40 $15.29 09/13/03 $14.40 $15.29 09/14/03 $14.40 $15.29 09/15/03 $14.39 $15.29 09/16/03 $14.39 $15.20 09/17/03 $14.41 $15.15 09/18/03 $14.43 $15.15 09/19/03 $14.45 $15.30 09/20/03 $14.45 $15.30 NAV PRICE --- ----- 09/21/03 $14.45 $15.30 09/22/03 $14.43 $15.15 09/23/03 $14.43 $15.13 09/24/03 $14.45 $15.10 09/25/03 $14.47 $15.05 09/26/03 $14.46 $15.02 09/27/03 $14.46 $15.02 09/28/03 $14.46 $15.02 09/29/03 $14.47 $15.05 09/30/03 $14.49 $15.15 10/01/03 $14.52 $15.15 10/02/03 $14.52 $15.30 10/03/03 $14.46 $15.35 10/04/03 $14.46 $15.35 10/05/03 $14.46 $15.35 10/06/03 $14.47 $15.25 10/07/03 $14.45 $15.25 10/08/03 $14.47 $15.31 10/09/03 $14.46 $15.34 10/10/03 $14.49 $15.35 10/11/03 $14.49 $15.35 10/12/03 $14.49 $15.35 10/13/03 $14.49 $15.35 10/14/03 $14.48 $15.35 10/15/03 $14.46 $15.30 10/16/03 $14.45 $15.35 10/17/03 $14.46 $15.12 10/18/03 $14.46 $15.12 10/19/03 $14.46 $15.12 10/20/03 $14.46 $15.15 10/21/03 $14.48 $15.25 10/22/03 $14.49 $15.30 10/23/03 $14.47 $15.30 10/24/03 $14.51 $15.35 10/25/03 $14.51 $15.35 10/24/03 $14.51 $15.35 10/27/03 $14.47 $15.21 10/28/03 $14.47 $15.41 10/29/03 $14.48 $15.59 10/30/03 $14.50 $15.47 10/31/03 $14.53 $15.53 11/01/03 $14.53 $15.53 11/02/03 $14.53 $15.53 11/03/03 $14.52 $15.59 11/04/03 $14.53 $15.61 11/05/03 $14.53 $15.56 11/06/03 $14.53 $15.35 11/07/03 $14.52 $15.45 11/08/03 $14.52 $15.45 11/09/03 $14.52 $15.45 11/10/03 $14.53 $15.50 11/11/03 $14.53 $15.55 11/12/03 $14.58 $15.50 11/13/03 $14.64 $15.50 11/14/03 $14.67 $15.52 11/15/03 $14.67 $15.52 11/16/03 $14.67 $15.52 11/17/03 $14.68 $15.60 11/18/03 $14.69 $15.81 11/19/03 $14.67 $15.81 11/20/03 $14.72 $15.80 11/21/03 $14.74 $15.80 11/22/03 $14.74 $15.80 11/23/03 $14.74 $15.80 11/24/03 $14.73 $15.71 11/25/03 $14.76 $15.70 11/26/03 $14.75 $16.00 11/28/03 $14.73 $16.05 11/29/03 $14.73 $16.05 11/30/03 $14.73 $16.05 12/01/03 $14.73 $16.20 12/02/03 $14.74 $16.16 12/03/03 $14.75 $16.24 12/04/03 $14.78 $16.05 12/05/03 $14.85 $16.21 12/06/03 $14.85 $16.21 12/07/03 $14.85 $16.21 12/08/03 $14.85 $16.33 12/09/03 $14.82 $16.38 12/10/03 $14.82 $16.15 12/11/03 $14.89 $16.15 12/12/03 $14.92 $16.09 12/13/03 $14.92 $16.09 12/14/03 $14.92 $16.09 12/15/03 $14.91 $16.14 12/16/03 $14.92 $16.20 12/17/03 $14.96 $16.20 12/18/03 $14.97 $16.38 12/19/03 $14.97 $16.75 NAV PRICE --- ----- 12/20/03 $14.97 $16.75 12/21/03 $14.97 $16.75 12/22/03 $14.97 $16.25 12/23/03 $14.78 $16.15 12/24/03 $14.81 $16.25 12/26/03 $14.83 $16.14 12/27/03 $14.83 $16.14 12/28/03 $14.83 $16.14 12/29/03 $14.82 $16.14 12/30/03 $14.82 $16.03 12/31/03 $14.82 $16.00 01/02/04 $14.79 $16.07 01/03/04 $14.79 $16.07 01/04/04 $14.79 $16.07 01/05/04 $14.81 $16.10 01/06/04 $14.86 $16.24 01/07/04 $14.89 $16.45 01/08/04 $14.90 $16.45 01/09/04 $14.96 $16.45 01/10/04 $14.96 $16.45 01/11/04 $14.96 $16.45 01/12/04 $14.97 $16.76 01/13/04 $14.98 $16.75 01/14/04 $14.99 $16.87 01/15/04 $14.99 $16.66 01/16/04 $14.94 $16.90 01/17/04 $14.94 $16.90 01/18/04 $14.94 $16.90 01/20/04 $14.94 $16.73 01/21/04 $14.95 $16.63 01/22/04 $14.98 $16.50 01/23/04 $14.95 $16.50 01/24/04 $14.95 $16.50 01/25/04 $14.95 $16.50 01/26/04 $14.94 $16.55 01/27/04 $14.96 $16.50 01/28/04 $14.94 $16.54 01/29/04 $14.96 $16.31 01/30/04 $14.97 $16.40 01/31/04 $14.97 $16.40 02/01/04 $14.97 $16.40 02/02/04 $14.97 $16.45 02/03/04 $14.98 $16.44 02/04/04 $14.95 $16.45 02/05/04 $14.94 $16.30 02/06/04 $14.99 $16.26 02/07/04 $14.99 $16.26 02/08/04 $14.99 $16.26 02/09/04 $15.00 $16.24 02/10/04 $15.01 $16.39 02/11/04 $15.07 $16.30 02/12/04 $15.06 $16.23 02/13/04 $15.06 $16.48 02/14/04 $15.06 $16.48 02/15/04 $15.06 $16.48 02/16/04 $15.06 $16.48 02/17/04 $15.10 $16.51 02/18/04 $15.09 $16.36 02/19/04 $15.09 $16.25 02/20/04 $15.10 $16.35 02/21/04 $15.10 $16.35 02/22/04 $15.10 $16.35 02/23/04 $15.10 $16.31 02/24/04 $15.10 $16.02 02/25/04 $15.11 $16.05 02/26/04 $15.11 $16.10 02/27/04 $15.13 $16.19 02/28/04 $15.13 $16.19 02/29/04 $15.13 $16.19 03/01/04 $15.14 $16.20 03/02/04 $15.10 $16.14 03/03/04 $15.08 $16.05 03/04/04 $15.10 $16.02 03/05/04 $15.19 $16.15 03/06/04 $15.19 $16.15 03/07/04 $15.19 $16.15 03/08/04 $15.22 $16.15 03/09/04 $15.26 $16.21 03/10/04 $15.23 $16.47 03/11/04 $15.21 $16.30 03/12/04 $15.25 $16.32 03/13/04 $15.25 $16.32 03/14/04 $15.25 $16.32 03/15/04 $15.22 $16.32 03/16/04 $15.24 $16.33 03/17/04 $15.27 $16.35 03/18/04 $15.24 $16.49 03/19/04 $15.22 $16.52 03/20/04 $15.22 $16.52 NAV PRICE --- ----- 03/21/04 $15.22 $16.52 03/22/04 $15.22 $16.50 03/23/04 $15.23 $16.35 03/24/04 $15.24 $16.50 03/25/04 $15.24 $16.55 03/26/04 $15.23 $16.40 03/27/04 $15.23 $16.40 03/28/04 $15.23 $16.40 03/29/04 $15.20 $16.51 03/30/04 $15.21 $16.59 03/31/04 $15.27 $16.67 04/01/04 $15.27 $16.72 04/02/04 $15.18 $16.56 04/03/04 $15.18 $16.56 04/04/04 $15.18 $16.56 04/05/04 $15.14 $16.50 04/06/04 $15.17 $16.40 04/07/04 $15.18 $16.40 04/08/04 $15.16 $16.45 04/09/04 $15.16 $16.45 04/10/04 $15.16 $16.45 04/11/04 $15.16 $16.45 04/12/04 $15.15 $16.52 04/13/04 $15.08 $16.26 04/14/04 $15.08 $15.75 04/15/04 $15.07 $15.64 04/16/04 $15.11 $15.99 04/17/04 $15.11 $15.99 04/18/04 $15.11 $15.99 04/19/04 $15.10 $16.00 04/20/04 $15.07 $15.89 04/21/04 $15.09 $15.45 04/22/04 $15.15 $15.65 04/23/04 $15.13 $15.60 04/24/04 $15.13 $15.60 04/25/04 $15.13 $15.60 04/26/04 $15.11 $15.21 04/27/04 $15.14 $15.41 04/28/04 $15.10 $15.45 04/29/04 $15.05 $15.55 04/30/04 $15.08 $15.70 05/01/04 $15.08 $15.70 05/02/04 $15.08 $15.70 05/03/04 $15.08 $15.90 05/04/04 $15.07 $15.85 05/05/04 $15.08 $15.85 05/06/04 $15.06 $15.50 05/07/04 $14.96 $15.23 05/08/04 $14.96 $15.23 05/09/04 $14.96 $15.23 05/10/04 $14.94 $14.95 05/11/04 $14.95 $15.02 05/12/04 $14.94 $15.07 05/13/04 $14.95 $15.40 05/14/04 $14.98 $15.50 05/15/04 $14.98 $15.50 05/16/04 $14.98 $15.50 05/17/04 $15.02 $15.41 05/18/04 $15.04 $15.60 05/19/04 $15.04 $15.70 05/20/04 $15.05 $15.72 05/21/04 $15.05 $15.76 05/22/04 $15.05 $15.76 05/23/04 $15.05 $15.76 05/24/04 $15.09 $15.58 05/25/04 $15.12 $15.60 05/26/04 $15.17 $15.64 05/27/04 $15.20 $15.80 05/28/04 $15.22 $15.84 05/29/04 $15.22 $15.84 05/30/04 $15.22 $15.84 05/31/04 $15.22 $15.84 06/01/04 $15.21 $15.84 06/02/04 $15.21 $15.96 06/03/04 $15.21 $15.95 06/04/04 $15.23 $16.08 06/05/04 $15.23 $16.08 06/06/04 $15.23 $16.08 06/07/04 $15.12 $15.86 06/08/04 $15.13 $15.81 06/09/04 $15.11 $15.89 06/10/04 $15.12 $15.95 06/11/04 $15.12 $15.95 06/12/04 $15.12 $15.95 06/13/04 $15.12 $15.95 06/14/04 $15.09 $16.05 06/15/04 $15.15 $16.16 06/16/04 $15.16 $16.08 06/17/04 $15.17 $16.15 NAV PRICE --- ----- 06/18/04 $15.18 $16.18 06/19/04 $15.18 $16.18 06/20/04 $15.18 $16.18 06/21/04 $15.18 $16.10 06/22/04 $15.18 $16.24 06/23/04 $15.23 $16.23 06/24/04 $15.24 $16.28 06/25/04 $15.29 $16.21 06/26/04 $15.29 $16.21 06/27/04 $15.29 $16.21 06/28/04 $15.24 $16.09 06/29/04 $15.26 $16.17 06/30/04 $15.30 $16.20 07/01/04 $15.29 $16.27 07/02/04 $15.33 $16.21 07/03/04 $15.33 $16.21 07/04/04 $15.33 $16.21 07/05/04 $15.33 $16.21 07/06/04 $15.34 $16.35 07/07/04 $15.31 $16.40 07/08/04 $15.29 $16.45 07/09/04 $15.31 $16.50 07/10/04 $15.31 $16.50 07/11/04 $15.31 $16.50 07/12/04 $15.31 $16.42 07/13/04 $15.18 $16.55 07/14/04 $15.21 $16.59 07/15/04 $15.20 $16.50 07/16/04 $15.26 $16.40 07/17/04 $15.26 $16.40 07/18/04 $15.26 $16.40 07/19/04 $15.27 $16.58 07/20/04 $15.27 $16.34 07/21/04 $15.23 $16.45 07/22/04 $15.24 $16.40 07/23/04 $15.24 $16.49 07/24/04 $15.24 $16.49 07/25/04 $15.24 $16.49 07/26/04 $15.22 $16.45 07/27/04 $15.23 $16.47 07/28/04 $15.21 $16.41 07/29/04 $15.23 $16.66 07/30/04 $15.27 $16.75 07/31/04 $15.27 $16.75 08/01/04 $15.27 $16.75 08/02/04 $15.28 $16.83 08/03/04 $15.29 $16.75 08/04/04 $15.30 $16.72 08/05/04 $15.29 $16.68 08/06/04 $15.18 $16.68 08/07/04 $15.18 $16.68 08/08/04 $15.18 $16.68 08/09/04 $15.20 $16.72 08/10/04 $15.23 $16.75 08/11/04 $15.22 $16.80 08/12/04 $15.23 $16.66 08/13/04 $15.27 $16.56 08/14/04 $15.27 $16.56 08/15/04 $15.27 $16.56 08/16/04 $15.28 $16.60 08/17/04 $15.33 $16.55 08/18/04 $15.37 $16.57 08/19/04 $15.37 $16.63 08/20/04 $15.39 $16.55 08/21/04 $15.39 $16.55 08/22/04 $15.39 $16.55 08/23/04 $15.37 $16.63 08/24/04 $15.35 $16.98 08/25/04 $15.39 $16.94 08/26/04 $15.42 $16.85 08/27/04 $15.46 $17.00 08/28/04 $15.46 $17.00 08/29/04 $15.46 $17.00 08/30/04 $15.50 $17.00 08/31/04 $15.54 $17.00 09/01/04 $15.57 $17.13 09/02/04 $15.57 $17.08 09/03/04 $15.54 $17.20 09/04/04 $15.54 $17.20 09/05/04 $15.54 $17.20 09/06/04 $15.54 $17.20 09/07/04 $15.56 $17.20 09/08/04 $15.43 $16.99 09/09/04 $15.46 $16.99 09/10/04 $15.50 $16.97 09/11/04 $15.50 $16.97 09/12/04 $15.50 $16.97 09/13/04 $15.65 $17.05 09/14/04 $15.66 $17.26 NAV PRICE --- ----- 09/15/04 $15.66 $17.42 09/16/04 $15.70 $17.43 09/17/04 $15.72 $17.45 09/18/04 $15.72 $17.45 09/19/04 $15.72 $17.45 09/20/04 $15.73 $17.26 09/21/04 $15.70 $17.60 09/22/04 $15.71 $17.43 09/23/04 $15.74 $17.41 09/24/04 $15.75 $17.25 09/25/04 $15.75 $17.25 09/26/04 $15.75 $17.25 09/27/04 $15.76 $17.32 09/28/04 $15.76 $17.11 09/29/04 $15.74 $17.12 09/30/04 $15.72 $17.30 10/01/04 $15.75 $17.28 10/02/04 $15.75 $17.28 10/03/04 $15.75 $17.28 10/04/04 $15.78 $17.35 10/05/04 $15.72 $17.39 10/06/04 $15.74 $17.48 10/07/04 $15.58 $17.43 10/08/04 $15.62 $17.54 10/09/04 $15.62 $17.54 10/10/04 $15.62 $17.54 10/11/04 $15.62 $17.51 10/12/04 $15.63 $17.50 10/13/04 $15.63 $17.45 10/14/04 $15.60 $17.44 10/15/04 $15.60 $17.43 10/16/04 $15.60 $17.43 10/17/04 $15.60 $17.43 10/18/04 $15.61 $17.52 10/19/04 $15.61 $17.48 10/20/04 $15.65 $17.55 10/21/04 $15.66 $17.52 10/22/04 $15.66 $17.35 10/23/04 $15.66 $17.35 10/24/04 $15.66 $17.35 10/25/04 $15.64 $17.49 10/26/04 $15.67 $17.49 10/27/04 $15.70 $17.52 10/28/04 $15.71 $17.56 10/29/04 $15.74 $17.60 10/30/04 $15.74 $17.60 10/31/04 $15.74 $17.60 11/01/04 $15.73 $17.59 11/02/04 $15.75 $17.66 11/03/04 $15.79 $17.92 11/04/04 $15.81 $17.83 11/05/04 $15.80 $17.66 11/06/04 $15.80 $17.66 11/07/04 $15.80 $17.66 11/08/04 $15.67 $17.49 11/09/04 $15.68 $17.35 11/10/04 $15.67 $17.33 11/11/04 $15.70 $17.34 11/12/04 $15.70 $17.36 11/13/04 $15.70 $17.36 11/14/04 $15.70 $17.36 11/15/04 $15.75 $17.40 11/16/04 $15.75 $17.49 11/17/04 $15.78 $17.47 11/18/04 $15.77 $17.40 11/19/04 $15.75 $17.99 11/20/04 $15.75 $17.99 11/21/04 $15.75 $17.99 11/22/04 $15.77 $18.17 11/23/04 $15.77 $18.20 11/24/04 $15.77 $18.20 11/25/04 $15.77 $18.20 11/26/04 $15.85 $18.24 11/27/04 $15.85 $18.24 11/28/04 $15.85 $18.24 11/29/04 $15.83 $18.26 11/30/04 $15.84 $18.21 12/01/04 $15.89 $18.43 12/02/04 $15.86 $18.40 12/03/04 $15.91 $18.60 12/04/04 $15.91 $18.60 12/05/04 $15.91 $18.60 12/06/04 $15.37 $18.20 12/07/04 $15.36 $18.18 12/08/04 $15.23 $17.70 12/09/04 $15.24 $17.49 12/10/04 $15.26 $17.61 12/11/04 $15.26 $17.61 12/12/04 $15.26 $17.61 NAV PRICE --- ----- 12/13/04 $15.28 $17.52 12/14/04 $15.28 $17.55 12/15/04 $15.32 $17.53 12/16/04 $15.39 $18.10 12/17/04 $15.39 $18.26 12/18/04 $15.39 $18.26 12/19/04 $15.39 $18.26 12/20/04 $15.40 $18.32 12/21/04 $15.43 $18.22 12/22/04 $15.09 $17.85 12/23/04 $15.11 $17.86 12/24/04 $15.11 $17.86 12/25/04 $15.11 $17.86 12/26/04 $15.11 $17.86 12/27/04 $15.09 $17.80 12/28/04 $15.11 $17.80 12/29/04 $15.06 $17.97 12/30/04 $15.07 $18.02 12/31/04 $15.07 $18.11 01/01/05 $15.07 $18.11 01/02/05 $15.07 $18.11 01/03/05 $15.08 $18.02 01/04/05 $15.05 $17.97 01/05/05 $15.05 $17.66 01/06/05 $15.07 $17.74 01/07/05 $14.95 $17.57 01/08/05 $14.95 $17.57 01/09/05 $14.95 $17.57 01/10/05 $14.96 $17.33 01/11/05 $14.96 $17.23 01/12/05 $14.97 $17.13 01/13/05 $15.00 $17.13 01/14/05 $15.02 $17.26 01/15/05 $15.02 $17.26 01/16/05 $15.02 $17.26 01/17/05 $15.02 $17.26 01/18/05 $15.10 $17.50 01/19/05 $15.11 $17.60 01/20/05 $15.13 $17.63 01/21/05 $15.13 $17.59 01/22/05 $15.13 $17.59 01/23/05 $15.13 $17.59 01/24/05 $15.11 $17.65 01/25/05 $15.12 $17.55 01/26/05 $15.14 $17.68 01/27/05 $15.14 $17.49 01/28/05 $15.18 $17.53 01/29/05 $15.18 $17.53 01/30/05 $15.18 $17.53 01/31/05 $15.18 $17.65 02/01/05 $15.19 $17.71 02/02/05 $15.20 $17.86 02/03/05 $15.20 $17.99 02/04/05 $15.26 $17.92 02/05/05 $15.26 $17.92 02/06/05 $15.26 $17.92 02/07/05 $15.27 $17.95 02/08/05 $15.13 $17.60 02/09/05 $15.12 $17.75 02/10/05 $15.11 $17.48 02/11/05 $15.12 $17.60 02/12/05 $15.12 $17.60 02/13/05 $15.12 $17.60 02/14/05 $15.12 $17.61 02/15/05 $15.14 $17.67 02/16/05 $15.15 $17.61 02/17/05 $15.14 $17.52 02/18/05 $15.14 $17.41 02/19/05 $15.14 $17.41 02/20/05 $15.14 $17.41 02/21/05 $15.14 $17.41 02/22/05 $15.14 $17.37 02/23/05 $15.15 $17.18 02/24/05 $15.17 $17.33 02/25/05 $15.21 $17.34 02/26/05 $15.21 $17.34 02/27/05 $15.21 $17.34 02/28/05 $15.20 $17.27 03/01/05 $15.20 $17.24 03/02/05 $15.21 $17.21 03/03/05 $15.23 $17.16 03/04/05 $15.28 $17.17 03/05/05 $15.28 $17.17 03/06/05 $15.28 $17.17 03/07/05 $15.30 $17.21 03/08/05 $15.31 $17.28 03/09/05 $15.13 $17.07 03/10/05 $15.13 $16.80 03/11/05 $15.13 $16.65 NAV PRICE --- ----- 03/12/05 $15.13 $16.65 03/13/05 $15.13 $16.65 03/14/05 $15.15 $16.30 03/15/05 $15.13 $16.21 03/16/05 $15.10 $15.95 03/17/05 $15.10 $16.10 03/18/05 $15.10 $16.11 03/19/05 $15.10 $16.11 03/20/05 $15.10 $16.11 03/21/05 $15.08 $15.91 03/22/05 $15.05 $15.91 03/23/05 $15.05 $15.85 03/24/05 $15.07 $15.76 03/25/05 $15.07 $15.76 03/26/05 $15.07 $15.76 03/27/05 $15.07 $15.76 03/28/05 $15.08 $16.20 03/29/05 $15.04 $16.24 03/30/05 $15.02 $16.44 03/31/05 $15.04 $16.50 04/01/05 $15.05 $16.71 04/02/05 $15.05 $16.71 04/03/05 $15.05 $16.71 04/04/05 $15.05 $16.87 04/05/05 $15.04 $16.85 04/06/05 $15.06 $17.00 04/07/05 $15.08 $17.00 04/08/05 $14.93 $16.67 04/09/05 $14.93 $16.67 04/10/05 $14.93 $16.67 04/11/05 $14.93 $16.42 04/12/05 $14.94 $16.10 04/13/05 $14.92 $15.94 04/14/05 $14.90 $15.73 04/15/05 $14.87 $15.99 04/16/05 $14.87 $15.99 04/17/05 $14.87 $15.99 04/18/05 $14.89 $16.03 04/19/05 $14.92 $16.19 04/20/05 $14.90 $16.30 04/21/05 $14.92 $16.19 04/22/05 $14.92 $16.09 04/23/05 $14.92 $16.09 04/24/05 $14.92 $16.09 04/25/05 $14.91 $16.25 04/26/05 $14.89 $16.32 04/27/05 $14.86 $16.44 04/28/05 $14.83 $16.32 04/29/05 $14.83 $16.50 04/30/05 $14.83 $16.50 05/01/05 $14.83 $16.50 05/02/05 $14.83 $16.35 05/03/05 $14.84 $16.19 05/04/05 $14.87 $16.50 05/05/05 $14.87 $16.86 05/06/05 $14.81 $16.70 05/07/05 $14.81 $16.70 05/08/05 $14.81 $16.70 05/09/05 $14.68 $16.57 05/10/05 $14.67 $16.38 05/11/05 $14.65 $16.37 05/12/05 $14.61 $16.34 05/13/05 $14.67 $16.19 05/14/05 $14.67 $16.19 05/15/05 $14.67 $16.19 05/16/05 $14.66 $16.29 05/17/05 $14.67 $16.23 05/18/05 $14.72 $16.25 05/19/05 $14.73 $16.44 05/20/05 $14.74 $16.44 05/21/05 $14.74 $16.44 05/22/05 $14.74 $16.44 05/23/05 $14.71 $16.60 05/24/05 $14.68 $16.64 05/25/05 $14.72 $16.62 05/26/05 $14.77 $16.72 05/27/05 $14.77 $16.90 05/28/05 $14.77 $16.90 05/29/05 $14.77 $16.90 05/30/05 $14.77 $16.90 05/31/05 $14.80 $17.00 06/01/05 $14.84 $16.98 06/02/05 $14.87 $16.99 06/03/05 $14.85 $16.98 06/04/05 $14.85 $16.98 06/05/05 $14.85 $16.98 06/06/05 $14.85 $17.08 06/07/05 $14.84 $17.33 06/08/05 $14.82 $17.62 NAV PRICE --- ----- 06/09/05 $14.69 $17.35 06/10/05 $14.70 $17.15 06/11/05 $14.70 $17.15 06/12/05 $14.70 $17.15 06/13/05 $14.68 $17.20 06/14/05 $14.70 $17.20 06/15/05 $14.72 $17.24 06/16/05 $14.75 $17.09 06/17/05 $14.76 $17.40 06/18/05 $14.76 $17.40 06/19/05 $14.76 $17.40 06/20/05 $14.77 $17.49 06/21/05 $14.74 $17.45 06/22/05 $14.77 $17.35 06/23/05 $14.75 $17.45 06/24/05 $14.75 $17.50 06/25/05 $14.75 $17.50 06/26/05 $14.75 $17.50 06/27/05 $14.75 $17.70 06/28/05 $14.77 $17.63 06/29/05 $14.77 $17.50 06/30/05 $14.73 $17.50 07/01/05 $14.75 $17.53 07/02/05 $14.75 $17.53 07/03/05 $14.75 $17.53 07/04/05 $14.75 $17.53 07/05/05 $14.76 $17.55 07/06/05 $14.76 $17.65 07/07/05 $14.77 $17.71 07/08/05 $14.65 $17.56 07/09/05 $14.65 $17.56 07/10/05 $14.65 $17.56 07/11/05 $14.67 $17.55 07/12/05 $14.70 $17.63 07/13/05 $14.70 $17.52 07/14/05 $14.70 $17.53 07/15/05 $14.72 $17.49 07/16/05 $14.72 $17.49 07/17/05 $14.72 $17.49 07/18/05 $14.74 $17.52 07/19/05 $14.78 $17.69 07/20/05 $14.81 $17.65 07/21/05 $14.82 $17.59 07/22/05 $14.85 $17.70 07/23/05 $14.85 $17.70 07/24/05 $14.85 $17.70 07/25/05 $14.85 $17.70 07/26/05 $14.87 $17.74 07/27/05 $14.89 $17.67 07/28/05 $14.93 $17.85 07/29/05 $14.93 $17.94 07/30/05 $14.93 $17.94 07/31/05 $14.93 $17.94 08/01/05 $14.95 $17.90 08/02/05 $14.98 $18.15 08/03/05 $14.97 $17.99 08/04/05 $14.97 $17.85 08/05/05 $14.96 $17.78 08/06/05 $14.96 $17.78 08/07/05 $14.96 $17.78 08/08/05 $14.95 $17.50 08/09/05 $14.82 $17.33 08/10/05 $14.83 $17.49 08/11/05 $14.85 $17.53 08/12/05 $14.87 $17.65 08/13/05 $14.87 $17.65 08/14/05 $14.87 $17.65 08/15/05 $14.84 $17.64 08/16/05 $14.87 $17.63 08/17/05 $14.87 $17.61 08/18/05 $14.90 $17.57 08/19/05 $14.89 $17.70 08/20/05 $14.89 $17.70 08/21/05 $14.89 $17.70 08/22/05 $14.90 $17.61 08/23/05 $14.91 $17.79 08/24/05 $14.93 $17.79 08/25/05 $14.94 $17.75 08/26/05 $14.93 $18.05 08/27/05 $14.93 $18.05 08/28/05 $14.93 $18.05 08/29/05 $14.95 $17.91 08/30/05 $14.95 $17.85 08/31/05 $14.98 $17.84 09/01/05 $14.99 $18.02 09/02/05 $14.96 $18.08 09/03/05 $14.96 $18.08 09/04/05 $14.96 $18.08 09/05/05 $14.96 $18.08 NAV PRICE --- ----- 09/06/05 $14.97 $18.03 09/07/05 $14.96 $18.00 09/08/05 $14.94 $18.03 09/09/05 $14.82 $18.05 09/10/05 $14.82 $18.05 09/11/05 $14.82 $18.05 09/12/05 $14.82 $17.95 09/13/05 $14.83 $17.85 09/14/05 $14.83 $17.95 09/15/05 $14.82 $17.84 09/16/05 $14.84 $17.82 09/17/05 $14.84 $17.82 09/18/05 $14.84 $17.82 09/19/05 $14.82 $17.90 09/20/05 $14.78 $17.88 09/21/05 $14.76 $17.90 09/22/05 $14.76 $17.91 09/23/05 $14.76 $17.90 09/24/05 $14.76 $17.90 09/25/05 $14.76 $17.90 09/26/05 $14.76 $18.01 09/27/05 $14.76 $18.01 09/28/05 $14.76 $17.93 09/29/05 $14.76 $17.95 09/30/05 $14.76 $17.94 * NET ASSET VALUE IS CALCULATED AFTER THE CLOSE OF THE EXCHANGES EACH DAY BY TAKING THE CLOSING MARKET VALUE OF ALL PORTFOLIO SECURITIES OWNED PLUS ALL OTHER ASSETS SUCH AS CASH, SUBTRACTING ALL LIABILITIES, THEN DIVIDING THE RESULT (TOTAL NET ASSETS) BY THE TOTAL NUMBER OF SHARES OUTSTANDING. THE MARKET PRICE IS THE LAST REPORTED PRICE AT WHICH A SECURITY WAS SOLD ON AN EXCHANGE. PERFORMANCE INFORMATION ----------------------------------------
AVERAGE ANNUAL TOTAL RETURNS COMMENCEMENT SIX 1 OF INVESTMENT AS OF SEPTEMBER 30, 2005 MONTHS* YEAR OPERATIONS(1) - ------------------------------------------------------------------------------------------------------ MARKET VALUE 14.87% 22.28% 23.18% - ------------------------------------------------------------------------------------------------------ NET ASSET VALUE 3.75% 10.72% 15.35% - ------------------------------------------------------------------------------------------------------ LEHMAN BROTHERS BA HIGH YIELD INDEX(2) 4.28% 5.50% 8.21% - ------------------------------------------------------------------------------------------------------ * AGGREGATE.
24 RMK HIGH INCOME FUND, INC. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 800-564-2188. TOTAL RETURNS ASSUME AN INVESTMENT AT THE COMMON SHARE MARKET PRICE OR NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS FOR THE PERIOD IN ACCORDANCE WITH THE FUND'S DIVIDEND REINVESTMENT PLAN, AND SALE OF ALL SHARES AT THE CLOSING MARKET PRICE (EXCLUDING ANY COMMISSIONS) OR NET ASSET VALUE AT THE END OF THE PERIOD. RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR ON THE SALE OF FUND SHARES. 1 THE FUND COMMENCED INVESTMENT OPERATIONS ON JUNE 24, 2003. 2 THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-INVESTMENT GRADE-18.1% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS-1.7% $ 5,000,000 Silver Leaf IA D1FX, 11.54% 5/15/13 (a)......... $5,225,000 ----------- COLLATERALIZED DEBT OBLIGATIONS-5.1% 5,000,000 Commodore 1A C, 6.07% 2/28/37 (a)............... 3,337,500 6,553,340 Diversified Asset Securitization 1A A1, 7.875% 9/15/35 6,913,774 3,440,000 E-Trade 2003-1A PSC, 11.50% 2/10/37 (a)......... 3,784,000 1,965,237 E-Trade 2004-1A COM1, 2.00% 1/10/40............. 1,984,889 ----------- 16,020,163 ----------- EQUIPMENT LEASES-4.1% 15,264,301 Aerco Limited 2A A3, 4.031% 7/15/25 (a)......... 11,906,155 16,000,000 Airplanes Repackaging 2004-1A B, Zero Coupon Bond 6/16/31 (a) 1,000,000 ----------- 12,906,155 ----------- FRANCHISE LOANS-2.7% 5,847,551 Atherton Franchisee 1999-A A2, 7.23% 4/15/12 (a) 6,079,593 Atherton Franchisee 1999-A AX, 1.254% 3/15/19 interest-only strips (a) 539,503 CNL Funding 1998-1, 1.935% 9/18/12 interest-only strips (a) 1,921,639 ----------- 8,540,735 ----------- HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-1.8% 2,000,000 Ameriquest Mortgage 2003-8 MV6, 7.58% 10/25/33.. 2,051,444 960,927 Amresco Residential Securities 1999-1 B, 7.641% 11/25/29 963,293 1,000,000 Asset Backed Securities 2005-HE1 M10, 6.641% 3/25/35 929,060 2,000,000 Soundview 2005-A B1, 6.28% 4/25/35 (a).......... 1,706,240 ----------- 5,650,037 ----------- MANUFACTURED HOUSING LOANS-1.7% 3,000,000 Green Tree Financial 1996-2 M1, 7.60% 4/15/27... 2,350,431 3,500,000 Green Tree Financial 1996-9 M1, 7.63% 8/15/27... 3,020,105 ----------- 5,370,536 ----------- SMALL BUSINESS LOANS-1.0% 1,645,853 ACLC Business Trust 1998-2 A3, 6.686% 4/15/20 (a) 1,622,827 United Capital Markets 2003-A NOTE, 2.30% 11/8/27 interest only strips (a) 1,513,509 ----------- 3,136,336 ----------- TOTAL ASSET BACKED SECURITIES-INVESTMENT GRADE (COST $56,675,061) 56,848,962 -----------
25 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-NON-INVESTMENT GRADE-50.6% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS-0.8% $ 1,000,000 Preferred Term Securities II, 5/22/33 (a)(f).... $1,030,030 1,700,000 US Capital Funding I, 10.00% 5/1/34 (a)......... 1,632,000 ----------- 2,662,030 ----------- COLLATERALIZED DEBT OBLIGATIONS-2.6% 1,000,000 Halyard CBO 1A B, 4.77% 3/24/10 (a)............. 770,000 2,975,286 Hewett's Island 2004-1A COM, 12.00% 12/15/16.... 2,975,286 1,950,000 MKP 4A CS, 2.00% 7/12/40 (a).................... 1,950,000 1,000,000 Stanfield 2A D1, 9.699% 4/15/15 (a)............. 982,500 1,000,000 VALEO 3A B1, 6.371% 12/15/13 (a)................ 757,500 1,000,000 Wibraham CBD Limited 1A, 4.46% 7/13/12 (a)...... 762,500 ----------- 8,197,786 ----------- COMMERCIAL LOANS-4.8% 762,032 CS First Boston Mortgage 1995-WF1 G, 9.00% 12/21/27 734,027 3,565,295 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a) 3,549,872 4,000,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a) 2,700,000 12,078,107 Enterprise Mortgage 2000-1 A2, 7.449% 1/15/27 (a) 6,824,130 2,000,000 Merrill Lynch Mortgage 1998-C1 F, 6.25% 11/15/26 1,189,580 ----------- 14,997,609 ----------- EQUIPMENT LEASES-21.5% 18,000,000 Aircraft Finance Trust 1999-1A A1, 4.248% 5/15/24 11,295,000 20,000,000 Airplanes Pass Through Trust 2001-1A A9, 4.318% 3/15/19 10,800,000 449,009 DVI Receivables 2000-2 A4, 7.115% 11/12/08...... 425,436 1,668,399 DVI Receivables 2001-2 A3, 3.519% 11/8/31....... 1,384,772 1,489,957 DVI Receivables 2001-2 A4, 4.613% 11/11/09...... 1,251,564 9,206,204 DVI Receivables 2002-1 A3A, 4.09% 6/11/10....... 6,651,483 9,000,000 Lease Investment Flight Trust 1 A1, 4.158% 7/15/31 6,075,000 1,000,000 Pegasus Aviation 2000-1 A2, 8.37% 3/25/30 (a)... 635,000 20,000,000 Pegasus Aviation 2001-1A A1, 4.208% 5/10/31 (a). 10,200,000 14,205,366 Pegasus Aviation 2001-1A A3, 4.408% 3/10/14 (a). 11,097,942 1,845,870 Pegasus Aviation Lease 1999-1A A1, 6.30% 3/25/29 (a) 895,247 12,000,000 Pegasus Aviation Lease 1999-1A A2, 6.30% 3/25/29 (a) 5,850,000 3,517,584 Pegasus Aviation Lease 2001-1A B1, 4.59% 5/10/31 (a) 633,165 1,758,792 Pegasus Aviation Lease 2001-1A B2, 7.27% 5/10/31 (a) 386,934 ----------- 67,581,543 ----------- FRANCHISE LOANS-3.6% 1,000,000 Falcon Franchise Loan 2001-1 F, 6.50% 1/5/23.... 618,510 3,548,000 Falcon Franchise Loan 2003-1 D, 7.836% 1/5/25 (a) 3,125,540 4,295,665 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a).. 3,227,264 3,772,672 FMAC Loan Trust 1996-B A2, 4.09% 11/15/18 (a)... 2,584,281
26 PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (CONTINUED) FRANCHISE LOANS (CONTINUED) $ 2,283,227 FMAC Loan Trust 1998-A A3, 6.69% 9/15/20 (a)... $1,735,252 ----------- 11,290,847 ----------- HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-10.2% 2,500,000 Ace Securities 2004-FM1 B1A, 7.141% 9/25/33.... 2,300,000 2,000,000 Ace Securities 2004-HE4 B, 7.141% 12/25/34 (a). 1,680,000 6,000,000 Ace Securities 2004-OP1 B, 7.141% 4/25/34...... 5,400,000 2,000,000 Ace Securities 2005-HE5 B2, 6.559% 8/25/35 (a). 1,458,600 1,003,876 Conseco Finance 2001-A IB2, 10.30% 3/15/32..... 975,040 1,950,656 Delta Funding Home Equity 1997-2 B3, 7.80% 6/25/27 840,967 1,215,772 Delta Funding Home Equity 1999-3 B, 7.60% 1/15/30 1,056,251 3,000,000 Delta Funding Home Equity 2000-1 B, 8.09% 5/15/30 2,819,550 2,000,000 Equifirst Mortgage 2004-2 B1, 7.041% 7/25/34 (a) 1,800,000 1,000,000 Equifirst Mortgage 2005-1 B3, 6.891% 4/25/35 (a) 835,000 1,000,000 Equifirst Mortgage 2005-1 B4, 7.08% 4/25/35 (a) 830,000 2,000,000 Greenwich 2005-1A N2, 4.15% 1/20/45 (a)........ 1,500,000 1,471,830 IMC Home Equity 1997-3 B, 7.87% 8/20/28........ 824,225 2,899,012 IMC Home Equity 1997-5 B, 7.59% 11/20/28....... 1,910,032 2,000,000 Merrill Lynch Mortgage 2005-SL1 B5, 7.141% 6/25/35 (a) 1,784,400 1,830,000 Terwin Mortgage 2004-16SL B3, 7.96% 10/25/34 (a) 1,555,500 Terwin Mortgage 2005-3SL B6, 11.50% 3/25/35 interest-only strips 2,700,000 2,000,000 Terwin Mortgage 2005-7SL, 6.50% 7/25/35 (a).... 1,720,600 ----------- 31,990,165 ----------- MANUFACTURED HOUSING LOANS-6.1% 5,000,000 Conseco Finance 2000-6 M1, 7.72% 9/1/32........ 1,600,000 4,000,000 Conseco Finance 2001-1 M1, 7.535% 7/1/32....... 868,948 3,576,357 Green Tree Financial 1996-4 M1, 7.75% 6/15/27.. 2,899,818 2,000,000 Green Tree Financial 1997-3 M1, 7.53% 3/15/28.. 1,230,000 3,000,000 Green Tree Financial 1997-8 M1, 7.02% 10/15/27. 2,079,186 3,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31... 432,309 12,000,000 Green Tree Financial 1999-5 M1, 8.05% 3/1/30... 1,620,000 21,505,000 Madison Avenue Manufactured Housing 2002-A B2, 6.891% 3/25/32.............................. 7,150,412 2,000,000 Merit Securities 12-1 1M2, 8.35% 7/28/33....... 1,201,610 ----------- 19,082,283 ----------- RECREATIONAL EQUIPMENT-0.2% 819,706 Green Tree Recreational Equipment 1996-B CTFS, 7.70% 7/15/18 754,130 ----------- SMALL BUSINESS LOANS-0.8% FMAC Loan Trust 1998-CA AX, 1.796% 9/15/18 interest-only strips (a) 2,692,743 ----------- TOTAL ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (COST $166,827,205) 159,249,136 -----------
27
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - --------------------------------------------------------------------------------------------------- CORPORATE BONDS-INVESTMENT GRADE-0.3% OF NET ASSETS RETAIL-0.3% $ 900,000 Albertson's, 7.75% 6/15/26........................ $ 785,961 ---------- TOTAL CORPORATE BONDS-INVESTMENT GRADE (COST $786,014) 785,961 ---------- CORPORATE BONDS-NON-INVESTMENT GRADE-31.7% OF NET ASSETS APPLIANCES-0.6% 2,050,000 Windmere-Durable, 10.00% 7/31/08................. 1,927,000 ---------- AUTOMOTIVES-0.9% 375,000 Ford Motor, 9.215% 9/15/21........................ 338,437 625,000 Ford Motor, 9.98% 2/15/47......................... 564,062 1,075,000 General Motors, 8.25% 7/15/23..................... 835,812 1,550,000 General Motors, 8.375% 7/15/33.................... 1,209,000 ---------- 2,947,311 ---------- AUTOMOTIVE PARTS & EQUIPMENT-0.9% 400,000 Delphi Automotive, 6.55% 6/15/06.................. 286,008 2,650,000 Dura Operating, 9.00% 5/1/09...................... 1,841,750 800,000 Metaldyne Corp., 10.00% 11/1/13 (a)............... 696,000 ---------- 2,823,758 ---------- BASIC MATERIALS-2.3% 2,050,000 Edgen Acquisition, 9.875% 2/1/11.................. 2,060,250 1,800,000 Millar Western, 7.75% 11/15/13.................... 1,518,030 3,650,000 OM Group, 9.25% 12/15/11.......................... 3,713,875 ---------- 7,292,155 ---------- BUILDING & CONSTRUCTION-1.3% 4,200,000 MMI Products, 11.25% 4/15/07...................... 4,011,000 ---------- COMMUNICATIONS-1.4% 1,000,000 Charter, 10.00% 5/15/11........................... 725,000 3,375,000 Charter Communication, Zero Coupon Bond 5/15/11... 2,413,125 1,200,000 Penton Media, 10.375% 6/15/11..................... 1,116,000 ---------- 4,254,125 ---------- CONSULTING SERVICES-1.1% 2,300,000 MSX International, 11.375% 1/15/08................ 1,610,000 2,000,000 MSX International, 11.00% 10/15/07................ 1,990,000 ---------- 3,600,000 ---------- ELECTRONICS-1.2% 4,000,000 Motors and Gears, 10.75% 11/15/06................. 3,800,000 ---------- ENERGY-0.4% 1,200,000 United Refining, 10.50% 8/15/12................... 1,272,000 ----------
28
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) FINANCE-2.1% $1,752,000 Advanta Capital Trust I, 8.99% 12/17/26.......... $1,769,520 850,000 Citisteel USA, 10.00% 9/1/10 (a)................. 841,500 813,000 Labranche, 11.00% 5/15/12........................ 898,365 1,850,000 Rafaella Apparel, 11.25% 6/15/11 (a)............. 1,803,750 2,000,000 Triton Aviation 1A A, 4.341% 6/15/25 (a)......... 1,345,000 ----------- 6,658,135 ----------- FOOD-0.5% 1,800,000 Merisant, 9.50% 7/15/13 (a)...................... 1,224,000 400,000 Di Giorgio Corp., 10.00% 6/15/07................. 396,000 ----------- 1,620,000 ----------- GARDEN PRODUCTS-0.3% 1,190,000 Ames True Temper, 10.00% 7/15/12................. 943,075 ----------- HUMAN RESOURCES-0.4% 1,350,000 Comforce Operating, 12.00% 12/1/07............... 1,346,625 ----------- INDUSTRIAL-6.3% 3,000,000 Consolidated Container, 10.125% 7/15/09.......... 1,995,000 3,550,000 Constar International, 11.00% 12/1/12............ 2,236,500 2,500,000 Continental Global Group, 9.00% 10/1/08.......... 2,467,225 750,000 Elgin National, 11.00% 11/1/07................... 703,717 2,300,000 GSI Group, 12.00% 5/15/13 (a).................... 2,360,375 1,800,000 Intermet, Zero Coupon Bond 6/15/09 in default.... 603,000 900,000 Trimas Corp., 9.875% 6/15/2012................... 738,540 3,200,000 US Can, 12.375% 10/1/10.......................... 3,048,000 3,500,000 VITRO S.A., 11.75% 11/1/13 (a)................... 3,255,000 2,925,000 Wolverine Tube, 7.375% 8/1/08 (a)................ 2,515,500 ----------- 19,922,857 ----------- MEDICAL PRODUCTS-0.3% 800,000 Hanger Orthopedic Group, 10.375% 2/15/09......... 814,000 ----------- PHARMACEUTICALS-0.3% 1,550,000 Curative Health, 10.75% 5/1/11................... 992,000 ----------- RETAIL-2.7% 2,600,000 General Nutrition Center, 8.50% 12/1/10.......... 2,216,500 1,500,000 New World Restaurant, 13.00% 7/1/08.............. 1,552,095 2,150,000 Star Gas Partner, 10.25% 2/15/13................. 1,752,250 3,100,000 Uno Restaurant, 10.00% 2/15/11 (a)............... 2,867,500 ----------- 8,388,345 ----------- SPECIAL PURPOSE ENTITY-2.4% 2,500,000 INCAPS Funding II, 10.00% 1/15/34 (a)............ 2,425,000 2,000,000 ML CLO 97 PILG-1, 7.614% 3/23/09 (a)............. 1,000,000
29
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) SPECIAL PURPOSE ENTITY (CONTINUED) $3,000,000 MM Community Funding IX, 10.00% 5/1/33 (a)....... $2,730,000 1,316,750 TPREF Funding III, 11.00% 1/15/33 (a)............ 1,264,080 ---------- 7,419,080 ---------- TECHNOLOGY-0.1% 350,000 Danka Business, 10.00% 4/1/08.................... 325,500 ---------- TELECOMMUNICATIONS-3.9% 775,000 Alestra SA, 8.00% 6/30/10........................ 705,250 2,400,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (e) 1,848,000 375,000 Eschelon Operating, 8.375% 3/15/10............... 348,750 4,600,000 Level 3 Financing, 10.75% 10/15/11............... 3,846,750 225,000 Millicom International Cellular, 10.00% 12/1/13.. 232,312 2,925,000 Primus Telecommunications, 8.00% 1/15/14......... 1,857,375 1,200,000 Rural Cellular, 9.75% 1/15/10.................... 1,212,000 250,000 Securus Technologies, 11.00% 9/1/11.............. 222,500 1,805,000 Time Warner, 10.125% 2/1/11...................... 1,859,150 200,000 Time Warner Telecommunications, 9.25% 2/15/14.... 202,500 ---------- 12,334,587 ---------- TOBACCO-0.7% 2,800,000 North Atlantic Trading, 9.25% 3/1/12............. 2,100,000 ---------- TRANSPORTATION-0.3% 1,350,000 Evergreen International Aviation, 12.00% 5/15/10. 1,066,500 ---------- TRAVEL-0.3% 1,000,000 Worldspan Financial, 10.01% 2/15/11 (a).......... 880,000 ---------- UTILITIES-1.0% 2,250,000 Calpine, 8.75% 7/15/13 (a)....................... 1,591,875 1,925,000 Calpine, 9.875% 12/1/11 (a)...................... 1,405,250 ---------- 2,997,125 ---------- TOTAL CORPORATE BONDS-NON-INVESTMENT GRADE (COST $106,666,569) 99,735,178 ---------- MORTGAGE BACKED SECURITIES-INVESTMENT GRADE-4.8% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATIONS-4.8% Harborview Mortgage 2003-2 1X, 1.58% 10/19/33 interest-only strips 923,485 Harborview Mortgage 2004-8 x, 0.65% 11/19/34 interest-only strips 2,148,592 4,000,000 Long Beach Mortgage 2004-4 M10, 6.641% 10/25/34.. 4,100,000 Mellon Residential 2002-TBC2 X, 1.101% 8/15/32 interest-only strips 1,496,560 2,000,000 Merrill Lynch 2005-M1, 5.67% 5/25/36............. 1,609,360 1,168,483 Sail Net Interest Margin Notes 2004-5A B, 6.75% 6/27/34 (a) 1,171,404 2,167,000 Structured Asset 2003-BC1 B2, 9.00% 5/25/32...... 2,222,146
30
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ MORTGAGE BACKED SECURITIES-INVESTMENT GRADE (CONTINUED) COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) $1,414,396 Structured Asset 2003-S A, 7.50% 12/28/33 (a).... $1,416,164 ---------- TOTAL MORTGAGE BACKED SECURITIES-INVESTMENT GRADE (COST $15,914,322) 15,087,711 ---------- MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE- 13.1% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATIONS-13.1% 2,500,000 First Franklin Mortgage 2004-FFH2 B2, 7.141% 10/25/34 (a) 2,325,000 3,000,000 First Franklin Mortgage 2004-FFH3 B1, 7.141% 6/25/34 (a) 2,670,000 3,000,000 Fremont Home Equity 2005-C B3, 5.63% 7/25/35 (a). 2,092,500 2,000,000 Greenwich 2005-2A N2, 3.10% 2/26/35 (a).......... 1,383,740 3,000,000 Greenwich 2005-3 N2, 2.00% 6/27/35 (a)........... 1,858,590 6,000,000 Greenwich 2005-4 N-2, Zero Coupon Bond, 7/28/45 (a) 3,090,000 2,568,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a)....... 2,080,080 3,325,783 Long Beach Mortgage 2001-4 M3, 6.391% 3/25/32.... 1,596,376 4,190,000 Long Beach Mortgage 2004-2 B, 7.141% 6/25/34 (a). 3,854,800 3,000,000 Long Beach Mortgage 2005-WL1, 6.05% 6/25/35...... 2,620,770 3,000,000 Meritage Mortgage 2004-2 B1, 6.891% 1/25/35 (a).. 2,610,000 2,000,000 Meritage Mortgage 2004-2 B2, 6.891% 1/25/35 (a).. 1,690,000 1,013,115 Park Place Securities 2005-WCW1 B, 5.00% 9/25/35 (a) 934,598 3,000,000 Park Place Securities 2005-WCW1 M11, 5.96% 9/25/35 2,352,570 2,000,000 Park Place Securities 2005-WCW3, 5.981% 8/25/35 (a) 1,620,000 2,000,000 Park Place Securities 2005-WHQ1 M10, 6.141% 3/25/35 (a) 1,783,420 2,000,000 Park Place Securities 2005-WHQ4, 6.088% 9/25/35 (a) 1,370,300 2,000,000 People's Choice Home Loan 2004-2 B, 5.00% 10/25/34 1,652,500 1,500,000 Popular 2005-4 B2, 6.05% 9/25/35 (a)............. 1,396,875 1,000,000 Soundview 2005-1 B3, 6.891% 4/25/35 (a).......... 820,000 1,000,000 Soundview 2005-2 B2, 6.71% 7/25/35 (a)........... 815,000 1,000,000 Soundview 2005-2 B4, 6.46% 7/25/35 (a)........... 735,000 ---------- TOTAL MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE (COST $40,709,428) 41,352,119 ---------- GOVERNMENT AGENCY SECURITIES-1.2% OF NET ASSETS GNMA 2003-59 XA, 0.304% 6/16/34 interest-only strips (c) 2,343,792 GNMA 2003-64 XA, 0.517% 8/16/43 interest-only strips (c) 1,484,114 ---------- TOTAL GOVERNMENT AGENCY SECURITIES (COST $5,574,538) 3,827,906 ---------- MUNICIPAL SECURITIES-0.2% OF NET ASSETS 1,000,000 Pima County Arizona IDA Health Care, Zero Coupon Bond 11/15/32 525,550 ---------- TOTAL MORTGAGE BACKED SECURITIES (COST $625,681) 525,550 ----------
31
DESCRIPTION MARKET SHARES VALUE (b) - ---------------------------------------------------------------------------------------------------- COMMON STOCKS-11.7% OF NET ASSETS 4,800 3M Company.......................................... $352,128 7,800 Alliance Capital Management Holding L.P............. 373,230 26,300 American Capital Strategies, Ltd.................... 964,158 30,400 Andrx Corporation (d)............................... 469,072 57,700 Anthracite Capital, Inc............................. 668,166 12,600 Arthur J. Gallegher & Co............................ 363,006 28,500 ATI Technologies Inc. (d)........................... 397,290 15,300 Bank of America Corporation......................... 644,130 13,800 Bois d'Arc Energy LLC (d)........................... 237,498 6,500 Burlington Northern Santa Fe Corporation............ 388,700 6,100 Caterpillar, Inc.................................... 358,375 10,200 CEMEX, S.A. de C.V.................................. 533,460 8,500 Cimarex Energy Co. (d).............................. 385,305 38,500 Cisco Systems, Inc. (d)............................. 689,920 25,800 Consolidated Communications Illinois Holdings, Inc. (d) 350,880 4,700 Cooper Cameron Corporation (d)...................... 347,471 15,100 Cree, Inc. (d)...................................... 377,802 11,900 Cytec Industries Inc................................ 516,222 2,800 Deere & Company..................................... 171,360 17,900 Direct General Corporation.......................... 353,167 18,700 Dollar General Corporation.......................... 342,958 1,600 Education Realty Trust.............................. 26,720 8,600 El DuPont de Nemours and Company.................... 336,862 3,400 EnCana Corporation (d).............................. 198,254 8,600 ENSCO International Incorporated.................... 400,674 17,700 Enterprise Partners Products L.P.................... 445,686 6,100 Exxon Mobil Corporation............................. 387,594 8,700 Family Dollar Stores, Inc........................... 172,869 16,900 First Data Corporation.............................. 676,000 27,400 Flextronics International Ltd. (d).................. 352,090 29,500 Fred's Inc.......................................... 369,045 7,800 Frontline Ltd....................................... 344,136 10,400 General Electric Company............................ 350,168 12,100 General Maritime Corporation........................ 445,401 11,000 GlobalSantaFe Corporation........................... 501,820 21,200 Ingram Micro Inc. (d)............................... 393,048 44,000 InPhonic, Inc. (d).................................. 605,000 14,100 Intel Corporation................................... 347,565 37,700 Iowa Telecommunications Services, Inc............... 634,114 7,600 J.C. Penny Company, Inc............................. 360,392 10,550 Kinder Morgan Energy Partners, L.P.................. 557,568 7,000 KKR Financial Corp. (d)............................. 155,680 32,400 Korn/Ferry International (d)........................ 531,036 8,500 L-3 Communications Holdings, Inc.................... 672,095
32
MARKET SHARES DESCRIPTION VALUE (b) - --------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) 26,800 Limited Brands, Inc............................... $ 547,524 21,400 Lincoln Electric Holdings, Inc.................... 843,160 15,500 Lloyds TSB Group plc.............................. 515,065 12,700 Macquarie Infrastructure Company Trust............ 358,140 12,200 Magellan Midstream Partners, L.P.................. 418,094 12,000 Manpower Inc...................................... 532,680 10,200 Marathon Oil Corporation.......................... 703,086 17,100 Masco Corporation................................. 524,628 74,250 MCG Capital Corporation........................... 1,252,597 31,000 Microsoft Corporation............................. 797,630 18,500 Nam Tai Electronics, Inc.......................... 470,455 15,200 New Century Financial Corporation................. 551,304 24,400 New Skies Satellites Holdings Ltd................. 513,620 19,800 Polycom, Inc. (d)................................. 320,166 34,200 Regal Entertainment Group......................... 685,368 17,190 Ship Finance International Limited................ 343,800 65,700 Taiwan Semiconductor Manufacturing Company Ltd.... 540,054 89,833 Technology Investment Capital Corporation......... 1,418,463 22,650 Teva Pharmaceutical Industries Limited............ 756,963 27,200 The Home Depot, Inc............................... 1,037,408 20,100 Thornburg Mortgage, Inc........................... 503,706 13,100 Tidewater Inc..................................... 637,577 5,000 Trex Company, Inc. (d)............................ 120,000 62,600 Trustreet Properties Inc.......................... 979,690 13,200 Tsakos Energy Navigation Limited.................. 475,464 9,500 Universal Compression Holdings, Inc. (d).......... 377,815 4,900 Valero Energy Corporation......................... 553,994 3,100 Valero L.P........................................ 176,638 16,000 Wal-Mart Stores, Inc.............................. 701,120 12,900 Washington Mutual, Inc............................ 505,938 ----------- TOTAL COMMON STOCKS (COST $34,725,329) 36,710,262 ----------- PREFERRED STOCKS-0.9% OF NET ASSETS 1,000 Credit Genesis CLO 2005........................... 1,000,000 1,000,000 Hewett's Island II (a)............................ 990,000 1,000 SOLOSO CDO 2005................................... 992,706 ----------- TOTAL PREFERRED STOCKS (COST $2,982,706) 2,982,706 -----------
33
MARKET SHARES DESCRIPTION VALUE (b) - --------------------------------------------------------------------------------------------------- MUTUAL FUNDS-0.1% OF NET ASSETS 3,500 iShares Russell 3000 Value Index Fund............. $ 314,335 ------------ TOTAL MUTUAL FUNDS (COST $307,829) 314,335 ------------ CORPORATE LOANS-0.3% OF NET ASSETS 1,000,000 ICO North America, 7.50% 8/15/09.................. 1,000,000 ------------ EURODOLLAR TIME DEPOSITS-0.8% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated September, 2005, 1.95%, maturing at $ 2,395,130 on October 1, 2005. 2,395,000 ------------ TOTAL INVESTMENTS-133.8% OF NET ASSETS (COST $435,189,683) 420,814,826 ------------ OTHER ASSETS AND LIABILITIES, NET-(33.8%) OF NET ASSETS (106,306,937) ------------ NET ASSETS $314,507,889 ============
(a) These securities are 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 2 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. (f) Trust preferred security with no stated interest rate. 34 RMK STRATEGIC INCOME FUND, INC. OBJECTIVE & STRATEGY ---------------------------------------- RMK Strategic Income Fund, Inc. seeks a high level of current income. The Fund seeks capital growth as a secondary investment objective when consistent with its primary investment objective. The Fund invests 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 Adviser 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 (commonly referred to as "junk bonds") to pursue its investment objectives. As a result, a majority of the Fund's total assets may be invested in investment grade securities at some times and in below investment grade securities at other times. The Fund invests in a wide range of debt securities, including corporate bonds, mortgage- and asset-backed securities, and municipal and foreign government obligations, as well as securities of companies in bankruptcy reorganization proceedings or otherwise in the process of debt restructuring. The Fund also invests in other securities providing the potential for high income or a combination of high income and capital growth. INVESTMENT RISKS: Bond funds tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price. Bond prices and the value of bond funds decline as interest rates rise. Longer-term funds generally are more vulnerable to this interest rate risk than shorter-term funds. Below investment grade bonds involve greater credit risk, which is the risk that the issuer will not make interest or principal payments when due. An economic downturn or period of rising interest rates could adversely affect the ability of issuers, especially issuers of below investment grade debt, to service primary obligations and an unanticipated default could cause the Fund to experience a reduction in value of its shares. 35 RMK STRATEGIC INCOME FUND, INC. MANAGEMENT DISCUSSION & ANALYSIS During the first half of RMK High Income Fund, Inc.'s (the "Fund") fiscal year 2006, which ended September 30, 2005, the Fund had a total return of 14.46%, based on market price and reinvested dividends. For the six months ended September 30, 2005, the Fund had a total return of 5.46%, based on net asset value and reinvested dividends. For the six months ended September 30, 2005, the LEHMAN BROTHERS BA U.S. HIGH YIELD INDEX(1) had a total return of 4.28%. The Fund's strong performance was primarily attributable to the Fund's relative yield advantage as evidenced by the monthly dividend distribution and the relative net asset value stability produced by the Fund's allocation to a wide variety of asset types. Dividend distributions for the period were $0.15 cents per share per month; the Fund paid a total income distribution of $0.90 per share. Our high income strategy emphasizes very broad diversification utilizing asset categories beyond the well recognized below investment grade corporate and convertible bonds. This diversification has allowed us to find better risk/reward opportunities than would be possible if we were restricted to a single asset sector. Key drivers of performance in 2005 were franchise loans, commercial-mortgage backed securities, aircraft equipment leases, below investment grade corporate bonds and dividend-paying common stocks. Two categories of particularly strong performance during the summer months were in the asset backed sector, including those deals supported by franchise loans and aircraft leases. The franchise loan deals have benefited directly from an improved business environment and from a substantial increase in real estate values. Although the domestic airlines continue to experience operating problems, the global demand for aircraft has been strong and continues to strengthen. Our holdings of pooled lease deals are mostly floating rate, thereby benefiting from higher short-term rates and have generally experienced higher net cash flows due to increasing lease rates on aircraft. 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 2006, the leverage was beneficial to shareholders. Although increasing short-term interest rates will increase the cost of borrowed money, the Fund has invested some assets in adjustable rate securities that will similarly benefit from increasing short-term rates. This allocation to floating rate assets should provide the Fund a level of protection from rising rates and allow the Fund to continue to benefit from the use of leverage. As we enter the final months of 2005, financial markets will continue to focus on the threat of higher inflation and on how much more the Federal Reserve will increase short-term rates. We have invested with the expectation that we will continue to see economic strength and further rate increases from the Federal Reserve. Generally, high interest rates suppress the values of financial assets thereby creating a different environment for good returns. Our focus will be on those sectors that benefit from the global expansion and are not dependent on lower interest rates to produce good results. /s/ James C. Kelsoe - ----------------------------- James C. Kelsoe, Jr., CFA Senior Portfolio Manager Morgan Asset Management, Inc. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVES. 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 THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THE FUND. 36 INDEX DESCRIPTION ---------------------------------------- 1 THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. 37
RMK STRATEGIC INCOME FUND, INC. PORTFOLIO STATISTICS(+) AS OF SEPTEMBER 30, 2005 ------------------------------ - ------------------------------------------------------------------------------------------------- Average Credit Quality................................. BB Current Yield.......................................... 10.59% Yield to Maturity...................................... 11.95% Duration............................................... 4.04 Years Average Effective Maturity............................. 5.39 Years Percentage of Leveraged Assets......................... 28% Total Number of Holdings............................... 262 (+) THE FUND'S COMPOSITION IS SUBJECT TO CHANGE. CREDIT QUALITY(+) ------------------------------ AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------- AAA....................... 2.5% CCC....................... 21.3% AA........................ 2.9% CC 1.5% A 3.3% C 0.2% BBB....................... 23.9% D 1.5% BB........................ 24.3% Not Rated................. 9.5% ------------- B 9.1% Total..................... 100.0% (+) THE FUND'S COMPOSITION IS SUBJECT TO CHANGE. ASSET ALLOCATION+ ------------------------------ AS OF SEPTEMBER 30, 2005 % OF TOTAL INVESTMENTS - ------------------------------------------------------------------------------------------------- Corporate Bonds.......................................... 21.0% Equipment Leases......................................... 16.1% Collateralized Mortgage Obligations...................... 14.6% Common Stock............................................. 12.5% Home Equity Loans........................................ 11.2% Manufactured Housing Loans............................... 7.0% Collateralized Debt Obligations.......................... 5.2% Franchise Loans.......................................... 4.2% Commercial Loans......................................... 3.0% Certificate-Backed Obligations........................... 1.2% Short Term Investments................................... 1.1% Government Agency Securities............................. 0.9% Credit Cards............................................. 0.8% Preferred Stock.......................................... 0.6% Other.................................................... 0.6% ---------------- Total.................................................... 100.0% (+) THE FUND'S COMPOSITION IS SUBJECT TO CHANGE.
38 RMK STRATEGIC INCOME FUND, INC. NAV & MARKET PRICE HISTORY* ------------ The graph below illustrates the net asset value and market price history of RMK Strategic Income Fund, Inc. (NYSE: RSF) from March 18, 2004 (commencement of investment operations) to September 30, 2005. [Graph Representation] DATE NAV PRICE - ---- --- ----- 03/18/2004 $14.30 $15.00 03/19/2004 $14.29 $15.75 03/20/2004 $14.29 $15.75 03/21/2004 $14.29 $15.75 03/22/2004 $14.29 $15.51 03/23/2004 $14.28 $15.51 03/24/2004 $14.28 $15.56 03/25/2004 $14.28 $15.55 03/26/2004 $14.28 $15.44 03/27/2004 $14.28 $15.44 03/28/2004 $14.28 $15.44 03/29/2004 $14.26 $15.70 03/30/2004 $14.27 $15.85 03/31/2004 $14.29 $16.00 04/01/2004 $14.29 $16.00 04/02/2004 $14.24 $15.55 04/03/2004 $14.24 $15.55 04/04/2004 $14.24 $15.55 04/05/2004 $14.24 $15.65 04/06/2004 $14.24 $15.45 04/07/2004 $14.24 $15.40 04/08/2004 $14.23 $15.40 04/09/2004 $14.23 $15.40 04/10/2004 $14.23 $15.40 04/11/2004 $14.23 $15.40 04/12/2004 $14.24 $15.34 04/13/2004 $14.18 $15.00 04/14/2004 $14.18 $15.00 04/15/2004 $14.16 $15.02 04/16/2004 $14.18 $15.05 04/17/2004 $14.18 $15.05 04/18/2004 $14.18 $15.05 04/19/2004 $14.19 $15.11 04/20/2004 $14.17 $15.09 04/21/2004 $14.18 $15.00 04/22/2004 $14.22 $14.96 04/23/2004 $14.19 $14.81 04/24/2004 $14.19 $14.81 04/25/2004 $14.19 $14.81 04/26/2004 $14.17 $14.80 04/27/2004 $14.17 $14.62 04/28/2004 $14.14 $14.47 04/29/2004 $14.12 $14.31 04/30/2004 $14.13 $14.65 05/01/2004 $14.13 $14.65 05/02/2004 $14.13 $14.65 05/03/2004 $14.14 $14.70 05/04/2004 $14.13 $14.68 05/05/2004 $14.14 $14.78 05/06/2004 $14.28 $14.70 05/07/2004 $14.19 $14.30 05/08/2004 $14.19 $14.30 05/09/2004 $14.19 $14.30 05/10/2004 $14.16 $14.25 05/11/2004 $14.20 $14.35 05/12/2004 $14.17 $14.49 05/13/2004 $14.18 $14.74 05/14/2004 $14.19 $14.73 05/15/2004 $14.19 $14.73 05/16/2004 $14.19 $14.73 05/17/2004 $14.20 $14.75 05/18/2004 $14.22 $14.77 05/19/2004 $14.21 $14.75 05/20/2004 $14.22 $14.92 05/21/2004 $14.21 $14.83 05/22/2004 $14.21 $14.83 05/23/2004 $14.21 $14.83 05/24/2004 $14.24 $14.80 05/25/2004 $14.26 $14.95 05/26/2004 $14.29 $14.94 05/27/2004 $14.29 $14.85 05/28/2004 $14.31 $14.80 05/29/2004 $14.31 $14.80 05/30/2004 $14.31 $14.80 05/31/2004 $14.31 $14.80 06/01/2004 $14.31 $14.95 06/02/2004 $14.30 $14.95 06/03/2004 $14.28 $14.95 06/04/2004 $14.30 $14.95 06/05/2004 $14.30 $14.95 06/06/2004 $14.30 $14.95 06/07/2004 $14.20 $14.95 06/08/2004 $14.20 $14.80 06/09/2004 $14.18 $14.85 06/10/2004 $14.19 $14.80 06/11/2004 $14.19 $14.80 06/12/2004 $14.19 $14.80 06/13/2004 $14.19 $14.80 06/14/2004 $14.16 $14.85 06/15/2004 $14.21 $15.00 06/16/2004 $14.20 $14.95 06/17/2004 $14.21 $14.99 06/18/2004 $14.23 $14.94 06/19/2004 $14.23 $14.94 06/20/2004 $14.23 $14.94 06/21/2004 $14.22 $14.95 06/22/2004 $14.22 $14.98 06/23/2004 $14.25 $14.90 06/24/2004 $14.25 $14.88 06/25/2004 $14.29 $14.80 06/26/2004 $14.29 $14.80 06/27/2004 $14.29 $14.80 06/28/2004 $14.27 $14.69 06/29/2004 $14.28 $14.94 06/30/2004 $14.31 $14.90 07/01/2004 $14.29 $14.99 07/02/2004 $14.28 $14.95 07/03/2004 $14.28 $14.95 07/04/2004 $14.28 $14.95 07/05/2004 $14.28 $14.95 07/06/2004 $14.26 $14.95 07/07/2004 $14.24 $14.99 07/08/2004 $14.21 $14.91 07/09/2004 $14.22 $15.03 07/10/2004 $14.22 $15.03 07/11/2004 $14.22 $15.03 07/12/2004 $14.23 $14.94 07/13/2004 $14.11 $15.05 07/14/2004 $14.13 $15.15 07/15/2004 $14.10 $15.23 07/16/2004 $14.14 $15.24 07/17/2004 $14.14 $15.24 07/18/2004 $14.14 $15.24 07/19/2004 $14.16 $15.26 07/20/2004 $14.16 $15.35 07/21/2004 $14.14 $15.34 07/22/2004 $14.16 $15.26 07/23/2004 $14.16 $15.39 07/24/2004 $14.16 $15.39 07/25/2004 $14.16 $15.39 07/26/2004 $14.16 $15.32 07/27/2004 $14.17 $15.20 07/28/2004 $14.16 $15.20 07/29/2004 $14.18 $15.23 07/30/2004 $14.20 $15.25 07/31/2004 $14.20 $15.25 08/01/2004 $14.20 $15.25 08/02/2004 $14.21 $15.34 08/03/2004 $14.21 $15.40 08/04/2004 $14.22 $15.45 08/05/2004 $14.18 $15.53 08/06/2004 $14.05 $15.42 08/07/2004 $14.05 $15.42 08/08/2004 $14.05 $15.42 08/09/2004 $14.05 $15.50 08/10/2004 $14.07 $15.42 08/11/2004 $14.05 $15.50 08/12/2004 $14.05 $15.55 08/13/2004 $14.08 $15.53 08/14/2004 $14.08 $15.53 08/15/2004 $14.08 $15.53 08/16/2004 $14.10 $15.65 08/17/2004 $14.13 $15.57 08/18/2004 $14.18 $15.55 08/19/2004 $14.18 $15.50 08/20/2004 $14.19 $15.65 08/21/2004 $14.19 $15.65 08/22/2004 $14.19 $15.65 08/23/2004 $14.18 $15.55 08/24/2004 $14.18 $15.83 08/25/2004 $14.23 $15.99 08/26/2004 $14.27 $15.77 08/27/2004 $14.31 $15.77 08/28/2004 $14.31 $15.77 08/29/2004 $14.31 $15.77 08/30/2004 $14.35 $15.76 08/31/2004 $14.38 $16.00 09/01/2004 $14.40 $16.20 09/02/2004 $14.42 $16.05 09/03/2004 $14.39 $16.00 09/04/2004 $14.39 $16.00 09/05/2004 $14.39 $16.00 09/06/2004 $14.39 $16.00 09/07/2004 $14.41 $16.25 09/08/2004 $14.28 $16.05 09/09/2004 $14.32 $15.92 09/10/2004 $14.36 $16.10 09/11/2004 $14.36 $16.10 09/12/2004 $14.36 $16.10 09/13/2004 $14.48 $16.12 09/14/2004 $14.48 $16.15 09/15/2004 $14.46 $16.02 09/16/2004 $14.50 $16.00 09/17/2004 $14.52 $16.10 09/18/2004 $14.52 $16.10 09/19/2004 $14.52 $16.10 09/20/2004 $14.52 $16.00 09/21/2004 $14.51 $16.10 09/22/2004 $14.51 $16.00 09/23/2004 $14.58 $15.92 09/24/2004 $14.59 $16.00 09/25/2004 $14.59 $16.00 09/26/2004 $14.59 $16.00 09/27/2004 $14.60 $16.05 09/28/2004 $14.62 $15.85 09/29/2004 $14.57 $15.99 09/30/2004 $14.47 $15.95 10/01/2004 $14.51 $15.95 10/02/2004 $14.51 $15.95 10/03/2004 $14.51 $15.95 10/04/2004 $14.53 $15.95 10/05/2004 $14.49 $16.00 10/06/2004 $14.49 $15.92 10/07/2004 $14.99 $15.96 10/08/2004 $14.35 $16.10 10/09/2004 $14.35 $16.10 10/10/2004 $14.35 $16.10 10/11/2004 $14.35 $16.05 10/12/2004 $14.35 $16.00 10/13/2004 $14.36 $16.10 10/14/2004 $14.35 $16.15 10/15/2004 $14.35 $16.15 10/16/2004 $14.35 $16.15 10/17/2004 $14.35 $16.15 10/18/2004 $14.36 $16.12 10/19/2004 $14.36 $16.10 10/20/2004 $14.40 $15.90 10/21/2004 $14.41 $15.89 10/22/2004 $14.41 $15.71 10/23/2004 $14.41 $15.71 10/24/2004 $14.41 $15.71 10/25/2004 $14.41 $15.76 10/26/2004 $14.44 $15.85 10/27/2004 $14.46 $15.80 10/28/2004 $14.47 $15.75 10/29/2004 $14.51 $15.82 10/30/2004 $14.51 $15.82 10/31/2004 $14.51 $15.82 11/01/2004 $14.50 $16.10 11/02/2004 $14.47 $16.09 11/03/2004 $14.52 $15.99 11/04/2004 $14.54 $16.07 11/05/2004 $14.55 $15.86 11/06/2004 $14.55 $15.86 11/07/2004 $14.55 $15.86 11/08/2004 $14.41 $15.95 11/09/2004 $14.42 $15.85 11/10/2004 $14.39 $16.00 11/11/2004 $14.43 $15.95 11/12/2004 $14.43 $15.87 11/13/2004 $14.43 $15.87 11/14/2004 $14.43 $15.87 11/15/2004 $14.49 $16.03 11/16/2004 $14.48 $15.99 11/17/2004 $14.51 $16.05 11/18/2004 $14.49 $16.05 11/19/2004 $14.47 $16.60 11/20/2004 $14.47 $16.60 11/21/2004 $14.47 $16.60 11/22/2004 $14.49 $16.60 11/23/2004 $14.47 $16.91 11/24/2004 $14.48 $16.97 11/25/2004 $14.48 $16.97 11/26/2004 $14.49 $17.20 11/27/2004 $14.49 $17.20 11/28/2004 $14.49 $17.20 11/29/2004 $14.48 $17.05 11/30/2004 $14.47 $17.04 12/01/2004 $14.50 $16.95 12/02/2004 $14.48 $16.99 12/03/2004 $14.53 $16.97 12/04/2004 $14.53 $16.97 12/05/2004 $14.53 $16.97 12/06/2004 $14.29 $16.60 12/07/2004 $14.27 $16.72 12/08/2004 $14.14 $16.51 12/09/2004 $14.14 $16.70 12/10/2004 $14.17 $16.98 12/11/2004 $14.17 $16.98 12/12/2004 $14.17 $16.98 12/13/2004 $14.19 $16.94 12/14/2004 $14.20 $16.90 12/15/2004 $14.23 $16.95 12/16/2004 $14.32 $17.00 12/17/2004 $14.31 $17.08 12/18/2004 $14.31 $17.08 12/19/2004 $14.31 $17.08 12/20/2004 $14.32 $17.09 12/21/2004 $14.37 $17.05 12/22/2004 $14.37 $16.95 12/23/2004 $14.40 $17.09 12/24/2004 $14.40 $17.09 12/25/2004 $14.40 $17.09 12/26/2004 $14.40 $17.09 12/27/2004 $14.38 $17.05 12/28/2004 $14.39 $17.02 12/29/2004 $14.30 $17.05 12/30/2004 $14.30 $17.09 12/31/2004 $14.29 $17.40 01/01/2005 $14.29 $17.40 01/02/2005 $14.29 $17.40 01/03/2005 $14.27 $17.28 01/04/2005 $14.25 $17.20 01/05/2005 $14.25 $17.15 01/06/2005 $14.27 $17.20 01/07/2005 $14.11 $17.03 01/08/2005 $14.11 $17.03 01/09/2005 $14.11 $17.03 01/10/2005 $14.11 $16.94 01/11/2005 $14.11 $16.95 01/12/2005 $14.12 $16.87 01/13/2005 $14.13 $16.75 01/14/2005 $14.16 $16.68 01/15/2005 $14.16 $16.68 01/16/2005 $14.16 $16.68 01/17/2005 $14.16 $16.68 01/18/2005 $14.24 $16.76 01/19/2005 $14.24 $16.70 01/20/2005 $14.24 $16.75 01/21/2005 $14.23 $16.74 01/22/2005 $14.23 $16.74 01/23/2005 $14.23 $16.74 01/24/2005 $14.21 $16.62 01/25/2005 $14.22 $16.59 01/26/2005 $14.25 $16.45 01/27/2005 $14.24 $16.50 01/28/2005 $14.29 $16.48 01/29/2005 $14.29 $16.48 01/30/2005 $14.29 $16.48 01/31/2005 $14.31 $16.70 02/01/2005 $14.33 $16.79 02/02/2005 $14.33 $16.84 02/03/2005 $14.34 $16.83 02/04/2005 $14.40 $16.82 02/05/2005 $14.40 $16.82 02/06/2005 $14.40 $16.82 02/07/2005 $14.41 $16.95 02/08/2005 $14.27 $16.84 02/09/2005 $14.27 $16.74 02/10/2005 $14.26 $16.81 02/11/2005 $14.28 $16.80 02/12/2005 $14.28 $16.80 02/13/2005 $14.28 $16.80 02/14/2005 $14.28 $16.75 02/15/2005 $14.29 $16.72 02/16/2005 $14.31 $16.84 02/17/2005 $14.30 $16.70 02/18/2005 $14.31 $16.76 02/19/2005 $14.31 $16.76 02/20/2005 $14.31 $16.76 02/21/2005 $14.31 $16.76 02/22/2005 $14.30 $16.58 02/23/2005 $14.32 $16.39 02/24/2005 $14.34 $16.63 02/25/2005 $14.35 $16.55 02/26/2005 $14.35 $16.55 02/27/2005 $14.35 $16.55 02/28/2005 $14.34 $16.48 03/01/2005 $14.33 $16.50 03/02/2005 $14.34 $16.55 03/03/2005 $14.35 $16.55 03/04/2005 $14.40 $16.59 03/05/2005 $14.40 $16.59 03/06/2005 $14.40 $16.59 03/07/2005 $14.43 $16.69 03/08/2005 $14.44 $16.60 03/09/2005 $14.41 $16.55 03/10/2005 $14.25 $16.27 03/11/2005 $14.26 $16.11 03/12/2005 $14.26 $16.11 03/13/2005 $14.26 $16.11 03/14/2005 $14.29 $15.81 03/15/2005 $14.27 $15.71 03/16/2005 $14.23 $15.60 03/17/2005 $14.24 $15.50 03/18/2005 $14.23 $15.72 03/19/2005 $14.23 $15.72 03/20/2005 $14.23 $15.72 03/21/2005 $14.20 $15.20 03/22/2005 $14.16 $15.06 03/23/2005 $14.19 $15.00 03/24/2005 $14.21 $14.99 03/25/2005 $14.21 $14.99 03/26/2005 $14.21 $14.99 03/27/2005 $14.21 $14.99 03/28/2005 $14.23 $15.32 03/29/2005 $14.17 $15.49 03/30/2005 $14.20 $15.73 03/31/2005 $14.23 $15.74 04/01/2005 $14.24 $15.78 04/02/2005 $14.24 $15.78 04/03/2005 $14.24 $15.78 04/04/2005 $14.24 $15.64 04/05/2005 $14.24 $15.74 04/06/2005 $14.27 $15.75 04/07/2005 $14.28 $15.75 04/08/2005 $14.28 $15.76 04/09/2005 $14.28 $15.76 04/10/2005 $14.28 $15.76 04/11/2005 $14.14 $15.61 04/12/2005 $14.15 $15.35 04/13/2005 $14.12 $15.20 04/14/2005 $14.10 $15.26 04/15/2005 $14.05 $15.40 04/16/2005 $14.05 $15.40 04/17/2005 $14.05 $15.40 04/18/2005 $14.06 $15.45 04/19/2005 $14.10 $15.50 04/20/2005 $14.11 $15.61 04/21/2005 $14.10 $15.60 04/22/2005 $14.10 $15.66 04/23/2005 $14.10 $15.66 04/24/2005 $14.10 $15.66 04/25/2005 $14.11 $15.69 04/26/2005 $14.10 $15.70 04/27/2005 $14.06 $15.70 04/28/2005 $14.04 $15.60 04/29/2005 $14.02 $15.60 04/30/2005 $14.02 $15.60 05/01/2005 $14.02 $15.60 05/02/2005 $14.02 $15.50 05/03/2005 $14.04 $15.73 05/04/2005 $14.07 $15.85 05/05/2005 $14.07 $15.85 05/06/2005 $14.03 $15.84 05/07/2005 $14.03 $15.84 05/08/2005 $14.03 $15.84 05/09/2005 $14.04 $15.80 05/10/2005 $13.88 $15.50 05/11/2005 $13.86 $15.51 05/12/2005 $13.82 $15.55 05/13/2005 $13.85 $15.54 05/14/2005 $13.85 $15.54 05/15/2005 $13.85 $15.54 05/16/2005 $13.85 $15.73 05/17/2005 $13.86 $15.80 05/18/2005 $13.91 $15.99 05/19/2005 $13.93 $15.95 05/20/2005 $13.94 $15.83 05/21/2005 $13.94 $15.83 05/22/2005 $13.94 $15.83 05/23/2005 $13.95 $15.96 05/24/2005 $13.93 $16.00 05/25/2005 $13.98 $16.30 05/26/2005 $14.03 $16.27 05/27/2005 $14.03 $16.35 05/28/2005 $14.03 $16.35 05/29/2005 $14.03 $16.35 05/30/2005 $14.03 $16.35 05/31/2005 $14.06 $16.42 06/01/2005 $14.10 $16.44 06/02/2005 $14.13 $16.41 06/03/2005 $14.14 $16.40 06/04/2005 $14.14 $16.40 06/05/2005 $14.14 $16.40 06/06/2005 $14.14 $16.45 06/07/2005 $14.13 $16.48 06/08/2005 $14.10 $16.60 06/09/2005 $14.13 $16.49 06/10/2005 $13.98 $16.22 06/11/2005 $13.98 $16.22 06/12/2005 $13.98 $16.22 06/13/2005 $13.98 $16.36 06/14/2005 $14.00 $16.36 06/15/2005 $14.01 $16.45 06/16/2005 $14.03 $16.32 06/17/2005 $14.03 $16.38 06/18/2005 $14.03 $16.38 06/19/2005 $14.03 $16.38 06/20/2005 $14.03 $16.30 06/21/2005 $14.02 $16.24 06/22/2005 $14.05 $16.28 06/23/2005 $14.03 $16.14 06/24/2005 $14.03 $16.14 06/25/2005 $14.03 $16.14 06/26/2005 $14.03 $16.14 06/27/2005 $14.03 $16.30 06/28/2005 $14.06 $16.19 06/29/2005 $14.06 $16.17 06/30/2005 $14.04 $16.15 07/01/2005 $14.08 $16.27 07/02/2005 $14.08 $16.27 07/03/2005 $14.08 $16.27 07/04/2005 $14.08 $16.27 07/05/2005 $14.09 $16.45 07/06/2005 $14.08 $16.37 07/07/2005 $14.09 $16.40 07/08/2005 $14.12 $16.44 07/09/2005 $14.12 $16.44 07/10/2005 $14.12 $16.44 07/11/2005 $14.00 $16.20 07/12/2005 $14.02 $16.20 07/13/2005 $14.02 $16.22 07/14/2005 $14.02 $16.20 07/15/2005 $14.03 $16.29 07/16/2005 $14.03 $16.29 07/17/2005 $14.03 $16.29 07/18/2005 $14.03 $16.28 07/19/2005 $14.08 $16.28 07/20/2005 $14.11 $16.29 07/21/2005 $14.09 $16.27 07/22/2005 $14.13 $16.33 07/23/2005 $14.13 $16.33 07/24/2005 $14.13 $16.33 07/25/2005 $14.13 $16.25 07/26/2005 $14.15 $16.29 07/27/2005 $14.17 $16.29 07/28/2005 $14.24 $16.30 07/29/2005 $14.23 $16.37 07/30/2005 $14.23 $16.37 07/31/2005 $14.23 $16.37 08/01/2005 $14.25 $16.31 08/02/2005 $14.28 $16.35 08/03/2005 $14.29 $16.38 08/04/2005 $14.27 $16.40 08/05/2005 $14.25 $16.30 08/06/2005 $14.25 $16.30 08/07/2005 $14.25 $16.30 08/08/2005 $14.24 $16.26 08/09/2005 $14.26 $16.20 08/10/2005 $14.12 $16.25 08/11/2005 $14.14 $16.24 08/12/2005 $14.15 $16.25 08/13/2005 $14.15 $16.25 08/14/2005 $14.15 $16.25 08/15/2005 $14.15 $16.25 08/16/2005 $14.16 $16.30 08/17/2005 $14.18 $16.19 08/18/2005 $14.20 $16.22 08/19/2005 $14.24 $16.37 08/20/2005 $14.24 $16.37 08/21/2005 $14.24 $16.37 08/22/2005 $14.25 $16.31 08/23/2005 $14.28 $16.38 08/24/2005 $14.30 $16.43 08/25/2005 $14.31 $16.41 08/26/2005 $14.31 $16.63 08/27/2005 $14.31 $16.63 08/28/2005 $14.31 $16.63 08/29/2005 $14.32 $16.56 08/30/2005 $14.34 $16.52 08/31/2005 $14.39 $16.57 09/01/2005 $14.40 $16.66 09/02/2005 $14.40 $16.70 09/03/2005 $14.40 $16.70 09/04/2005 $14.40 $16.70 09/05/2005 $14.40 $16.70 09/06/2005 $14.41 $16.88 09/07/2005 $14.40 $16.99 09/08/2005 $14.39 $17.03 09/09/2005 $14.40 $17.23 09/10/2005 $14.40 $17.23 09/11/2005 $14.40 $17.23 09/12/2005 $14.25 $16.98 09/13/2005 $14.26 $16.85 09/14/2005 $14.25 $16.90 09/15/2005 $14.23 $16.81 09/16/2005 $14.24 $16.80 09/17/2005 $14.24 $16.80 09/18/2005 $14.24 $16.80 09/19/2005 $14.23 $16.98 09/20/2005 $14.19 $17.08 09/21/2005 $14.16 $17.00 09/22/2005 $14.17 $17.06 09/23/2005 $14.16 $17.20 09/24/2005 $14.16 $17.20 09/25/2005 $14.16 $17.20 09/26/2005 $14.18 $17.20 09/27/2005 $14.17 $17.00 09/28/2005 $14.17 $17.10 09/29/2005 $14.17 $16.97 09/30/2005 $14.16 $17.00 * NET ASSET VALUE IS CALCULATED AFTER THE CLOSE OF THE EXCHANGES EACH DAY BY TAKING THE CLOSING MARKET VALUE OF ALL PORTFOLIO SECURITIES OWNED PLUS ALL OTHER ASSETS SUCH AS CASH, SUBTRACTING ALL LIABILITIES, THEN DIVIDING THE RESULT (TOTAL NET ASSETS) BY THE TOTAL NUMBER OF SHARES OUTSTANDING. THE MARKET PRICE IS THE LAST REPORTED PRICE AT WHICH A SECURITY WAS SOLD ON AN EXCHANGE. PERFORMANCE INFORMATION ------------ AVERAGE ANNUAL TOTAL RETURNS COMMENCEMENT SIX 1 OF INVESTMENT AS OF SEPTEMBER 30, 2005 MONTHS* YEAR OPERATIONS(1) - -------------------------------------------------------------------------------- MARKET VALUE 14.46% 21.76% 20.89% - -------------------------------------------------------------------------------- NET ASSET VALUE 5.46% 11.79% 10.59% - -------------------------------------------------------------------------------- LEHMAN BROTHERS BA HIGH YIELD INDEX(2) 4.28% 5.50% 5.52% - -------------------------------------------------------------------------------- * AGGREGATE. 39 RMK STRATEGIC INCOME FUND, INC. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FUND PERFORMANCE CHANGES OVER TIME AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN WHAT IS STATED. FOR THE MOST RECENT PERFORMANCE, CALL 800-564-2188. TOTAL RETURNS ASSUME AN INVESTMENT AT THE COMMON SHARE MARKET PRICE OR NET ASSET VALUE AT THE BEGINNING OF THE PERIOD, REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS FOR THE PERIOD IN ACCORDANCE WITH THE FUND'S DIVIDEND REINVESTMENT PLAN, AND SALE OF ALL SHARES AT THE CLOSING MARKET PRICE (EXCLUDING ANY COMMISSIONS) OR NET ASSET VALUE AT THE END OF THE PERIOD. RETURNS SHOWN DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR ON THE SALE OF FUND SHARES. (1) THE FUND COMMENCED INVESTMENT OPERATIONS ON MARCH 18, 2004. (2) THE LEHMAN BROTHERS BA U. S. HIGH YIELD INDEX COVERS THE UNIVERSE OF FIXED RATE, NON-INVESTMENT GRADE DEBT. PAY-IN-KIND (PIK) BONDS, EUROBONDS, AND DEBT ISSUES FROM COUNTRIES DESIGNATED AS EMERGING MARKETS (E.G., ARGENTINA, BRAZIL, VENEZUELA, ETC.) ARE EXCLUDED, BUT CANADIAN AND GLOBAL BONDS (SEC REGISTERED) OF ISSUERS IN NON-EMG COUNTRIES ARE INCLUDED. ORIGINAL ISSUE ZEROES, STEP-UP COUPON STRUCTURES, AND 144-AS ARE ALSO INCLUDED. THE INDEX IS UNMANAGED, AND UNLIKE THE FUND, IS NOT AFFECTED BY CASHFLOWS OR TRADING AND OTHER EXPENSES. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX.
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------ ASSET BACKED SECURITIES-INVESTMENT GRADE-19.2% OF NET ASSETS COLLATERIZED DEBT OBLIGATIONS-4.6% 10,298,106 Diversified Asset Securitization 1A A1, 7.873% 9/15/35 $10,864,502 3,930,474 E-Trade 2004-1A COM1, 2.00% 1/10/40.............. 3,969,779 2,400,000 Restructured Asset Backed 2003-3A A3, 4.50% 1/29/22 (a)............................. 2,008,896 ---------- 16,843,177 ---------- CREDIT CARDS-1.2% 5,000,000 North Street 2000-1A B, 4.26% 10/30/11 (a)....... 4,200,000 ---------- EQUIPMENT LEASES-3.8% 15,264,301 Aerco Limited 2A A3, 4.228% 7/15/25.............. 11,906,155 18,000,000 Airplanes Repackaging 2004-1A B, Zero Coupon Bond 6/16/31 (a) 1,125,000 1,000,000 Aviation Capital 2000-1A A1, 4.051% 11/15/25 (a). 810,730 ---------- 13,841,885 ---------- FRANCHISE LOANS-2.8% 7,973,933 Atherton Franchisee 1999-A A2, 7.23% 4/15/12 (a). 8,290,355 FMAC Loan Trust 1997-C AX, 2.355% 12/15/19 interest-only strips (a)...................... 2,153,957 ---------- 10,444,312 ---------- HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-5.0% 1,336,869 Aames Mortgage Trust 2001-3 B, 7.13% 11/25/31.... 1,296,763 4,114,000 Ace Securities 2004-RM1 B2, 7.33% 7/25/34 (a).... 3,743,740 3,450,000 Ace Securities 2004-HE2 B1, 7.33% 10/25/34....... 3,312,000 2,000,000 Ace Securities 2004-HE4 M11, 7.33% 12/25/34...... 1,871,860 1,487,000 Ace Securities 2004-HS1 M6, 7.33% 2/25/34........ 1,486,958 1,798,535 Amresco Residential Securities 1999-1 B, 7.641% 11/25/29 1,802,963 2,325,700 Asset Backed Securities 2002-HE3 M4, 6.22% 10/15/32 2,296,628 1,000,000 Asset Backed Securities 2005-HE1 M10, 6.641% 3/25/35 929,060 1,700,000 NovaStar Home Equity 2004-3 B4, 5.238% 12/25/34.. 1,649,000 ---------- 18,388,972 ---------- MANUFACTURED HOUSING LOANS-1.8% 3,000,000 Green Tree Financial 1996-2 M1, 7.60% 4/15/27.... 2,350,431 4,995,000 Green Tree Financial 1996-9 M1, 7.63% 8/15/27.... 4,310,121 ---------- 6,660,552 ---------- TOTAL ASSET BACKED SECURITIES-INVESTMENT GRADE (COST $68,901,406) 70,378,898 ----------
40
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ----------------------------------------------------------------------------------------------- ASSET BACKED SECURITIES-NON-INVESTMENT GRADE-47.9% OF NET ASSETS CERTIFICATE-BACKED OBLIGATIONS-1.7% 1,000,000 Preferred Term Securities II, 5/22/33 (a)(f)..... $1,030,030 5,000,000 Preferred Term Securities XIX, 6.07% 12/22/35 (a) 4,983,300 ---------- 6,013,330 ---------- COLLATERIZED DEBT OBLIGATIONS-2.4% 1,000,000 Halyard CBO 1A B, 4.77% 3/24/10 (a).............. 770,000 2,975,286 Hewett's Island 2004-1A COM, 9.00% 12/15/16...... 2,975,286 1,950,000 MKP 4A CS, 2.00% 7/12/40 (a)..................... 1,950,000 1,000,000 Stanfield 2A D1, 9.699% 4/15/15 (a).............. 982,500 1,000,000 VALEO 3A B1, 6.371% 12/15/13..................... 757,500 2,000,000 Wibraham CBD Limited 1A, 4.46% 7/13/12 (a)....... 1,525,000 ---------- 8,960,286 ---------- COMMERCIAL LOANS-4.1% 1,016,042 CS First Boston Mortgage 1995-WF1 G, 9.00% 12/21/27 978,703 1,723,226 Enterprise Mortgage 1998-1 A2, 6.38% 1/15/25 (a). 1,715,771 4,170,000 Enterprise Mortgage 1998-1 A3, 6.63% 1/15/25 (a). 2,814,750 13,685,198 Enterprise Mortgage 2000-1 A2, 7.445% 1/15/27 (a) 7,732,137 3,000,000 Merrill Lynch Mortgage 1998-C1 F, 6.25% 11/15/26. 1,784,370 ---------- 15,025,731 ---------- EQUIPMENT LEASES-18.3% 17,000,000 Aircraft Finance Trust 1999-1A A1, 4.248% 5/15/24 10,667,500 22,000,000 Airplanes Pass Through Trust 2001-1A A9, 4.318% 3/15/19 11,880,000 449,009 DVI Receivables 2000-2 A4, 7.115% 11/12/08....... 425,436 1,668,400 DVI Receivables 2001-2 A3, 3.519% 11/8/31........ 1,384,772 1,489,957 DVI Receivables 2001-2 A4, 4.613% 11/11/09....... 1,251,564 9,101,588 DVI Receivables 2002-1 A3A, 4.09% 6/11/10........ 6,575,897 9,000,000 Lease Investment Flight Trust 1 A1, 4.158% 7/15/31 6,075,000 1,845,870 Pegasus Aviation Lease 1999-1A A1, 6.30% 3/25/29 (a) 895,247 12,000,000 Pegasus Aviation Lease 1999-1A A2, 6.30% 3/25/29 (a) 5,850,000 1,000,000 Pegasus Aviation 2000-1 A2, 8.37% 3/25/30 (a).... 635,000 20,000,000 Pegasus Aviation 2001-1A A1, 4.208% 5/10/31 (a).. 10,200,000 14,205,366 Pegasus Aviation 2001-1A A3, 4.408% 3/10/14 (a).. 11,097,942 ---------- 66,938,358 ---------- FRANCHISE LOANS-2.9% 1,000,000 Falcon Franchise Loan 2001-1 F, 6.50% 1/5/23..... 618,510 3,489,903 FMAC Loan Trust 1996-B A1, 7.629% 11/15/18 (a)... 2,621,909 5,069,808 FMAC Loan Trust 1996-B A2, 4.09% 11/15/18 (a).... 3,472,818 4,881,074 FMAC Loan Trust 1998-A A3, 6.69% 9/15/20 (a)..... 3,709,616 FMAC Loan Trust 1998-BA AX, 1.34% 11/15/20 interest-only strips (a)...................... 365,293 ---------- 10,788,146 ----------
41
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ----------------------------------------------------------------------------------------------- ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (CONTINUED) HOME EQUITY LOANS (NON-HIGH LOAN-TO-VALUE)-10.3% 8,892,000 Ace Securities 2004-HE1 B, 7.33% 2/25/34........ $ 8,180,640 10,855,000 Ace Securities 2004-OP1 B, 7.33% 4/25/34........ 9,769,500 2,057,000 Ace Securities 2004-RM1 B3, 7.33% 7/25/34 (a)... 1,789,590 2,000,000 Ace Securities 2004-HE4 B, 7.33% 12/25/34 (a)... 1,680,000 2,000,000 Ace Securities 2005-HE5 B2, 7.33% 8/25/35 (a)... 1,458,600 979,793 Delta Funding Home Equity 2000-4 B, 7.15% 2/15/31 323,332 2,100,000 Equifirst Mortgage 2004-2 B1, 7.041% 7/25/34 (a) 1,890,000 2,732,000 Equifirst Mortgage 2004-2 B2, 7.041% 7/25/34 (a) 2,308,540 1,000,000 Equifirst Mortgage 2005-1 B3, 6.891% 4/25/35 (a) 835,000 1,000,000 Equifirst Mortgage 2005-1 B4, 7.08% 4/25/35 (a). 830,000 2,000,000 Merrill Lynch Mortgage 2005-SL1 B5, 7.141% 6/25/35 (a) 1,784,400 1,830,000 Terwin Mortgage 2004-16SL B3, 7.96% 10/25/34 (a) 1,555,500 Terwin Mortgage 2005-3SL B6, 5.50% 3/25/35 interest-only strips 3,600,000 2,000,000 Terwin Mortgage 2005-7SL, 6.50% 7/25/35 (a)..... 1,720,600 ----------- 37,725,702 ----------- MANUFACTURED HOUSING LOANS-7.7% 2,832,777 Bombardier Capital 1999-B M1, 8.12% 12/15/29.... 28,328 4,693,541 Conseco Finance 2000-5 M2, 9.03% 2/1/32......... -- 2,000,000 Conseco Finance 2001-1 M1, 7.535% 7/1/32........ 434,474 3,576,357 Green Tree Financial 1996-4 M1, 7.75% 6/15/27... 2,899,818 1,479,336 Green Tree Financial 1996-5 B1, 8.10% 7/15/26... 236,694 2,500,000 Green Tree Financial 1997-3 M1, 7.53% 3/15/28... 1,537,500 8,000,000 Green Tree Financial 1997-8 M1, 7.02% 10/15/27.. 5,544,496 4,000,000 Green Tree Financial 1999-4 M1, 7.60% 5/1/31.... 576,412 12,000,000 Green Tree Financial 1999-5 M1, 8.05% 3/1/30.... 1,620,000 4,037,597 Greenpoint Manufactured Housing 2000-1 M2, 8.78% 3/20/30 323,008 10,000,000 Greenpoint Manufactured Housing 2000-3 IM1, 9.01% 6/20/31 2,767,230 10,000,000 Madison Avenue Manufactured Housing 2002-A B2, 6.891% 3/25/32............................... 3,325,000 5,389,000 Merit Securities 12-1 1M2, 7.35% 7/28/33........ 3,237,738 5,886,000 Merit Securities 13 M2, 8.653% 12/28/33......... 2,255,692 1,500,000 Oakwood Mortgage 2002-A M1, 7.76% 3/15/32....... 313,122 10,000,000 Oakwood Mortgage 2002-B M1, 7.62% 6/15/32....... 2,766,200 5,000,000 UCFC Manufactured Housing 1997-2 B1, Zero Coupon Bond 2/15/18..................... 300,000 ----------- 28,165,712 ----------- RECREATIONAL EQUIPMENT-0.5% 1,992,658 Green Tree Recreational Equipment 1996-B CTFS, 7.70% 7/15/18 1,833,246 ------------ TOTAL ASSET BACKED SECURITIES-NON-INVESTMENT GRADE (COST $185,585,044) 175,450,511 ------------
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PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ----------------------------------------------------------------------------------------------- CORPORATE BONDS-INVESTMENT GRADE-0.2% OF NET ASSETS RETAIL-0.2% 1,000,000 Albertson's, 7.75% 6/15/26........................ $ 873,290 ---------- TOTAL CORPORATE BONDS-INVESTMENT GRADE (COST $873,348) 873,290 ---------- CORPORATE BONDS-NON-INVESTMENT GRADE-28.5% OF NET ASSETS APPLIANCES-0.6% 2,275,000 Windmere-Durable, 10.00% 7/31/08.................. 2,138,500 ---------- AUTOMOTIVES-0.9% 375,000 Ford Motor, 9.215% 9/15/21........................ 338,437 625,000 Ford Motor, 9.98% 2/15/47......................... 564,062 2,000,000 General Motors, 8.375% 7/15/33.................... 1,560,000 1,050,000 General Motors, 8.25% 7/15/23..................... 816,375 ---------- 3,278,874 ---------- AUTOMOTIVE PARTS & EQUIPMENT-0.8% 500,000 Delphi Automotive, 6.55% 6/15/06.................. 357,510 2,650,000 Dura Operating, 9.00% 5/1/09...................... 1,841,750 1,000,000 Metaldyne Corp., 10.00% 11/1/13 (a)............... 870,000 ---------- 3,069,260 ---------- BASIC MATERIALS-2.0% 2,050,000 Edgen Acquisition, 9.875% 2/1/11.................. 2,060,250 2,000,000 Millar Western, 7.75% 11/15/13.................... 1,686,700 3,650,000 OM Group, 9.25% 12/15/11.......................... 3,713,875 ---------- 7,460,825 ---------- BUILDING & CONSTRUCTION-1.2% 4,600,000 MMI Products, 11.25% 4/15/07...................... 4,393,000 ---------- COMMUNICATIONS-1.4% 2,000,000 Charter, 10.00% 5/15/11........................... 1,450,000 3,374,000 Charter Communication, Zero Coupon Bond 5/15/11... 2,412,410 1,350,000 Penton Media, 10.375% 6/15/11..................... 1,255,500 ---------- 5,117,910 ---------- CONSULTING SERVICES-1.1% 2,000,000 MSX International, 11.375% 1/15/08................ 1,400,000 2,750,000 MSX International, 11.00% 10/15/07................ 2,736,250 ---------- 4,136,250 ---------- ELECTRONICS-1.0% 4,000,000 Motors and Gears, 10.75% 11/15/06................. 3,800,000 ---------- ENERGY-0.3% 1,200,000 United Refining, 10.50% 8/15/12 (a)............... 1,272,000 ----------
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PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) FINANCE-2.2% 1,600,000 Advanta Capital Trust I, 8.99% 12/17/26........... $1,616,000 950,000 Citisteel USA, 10.00% 9/1/10 (a).................. 940,500 850,000 Labranche, 11.00% 5/15/12......................... 939,250 2,200,000 Rafaella Apparel, 11.25% 6/15/11 (a).............. 2,145,000 1,000,000 Reg Diversified Funding, Zero Coupon Bond 1/25/36 (a) 1,000,000 2,000,000 Triton Aviation 1A A, 4.341% 6/15/25 (a).......... 1,345,000 ---------- 7,985,750 ---------- FOOD-0.5% 500,000 Di Giorgio Corp., 10.00% 6/15/07.................. 495,000 1,850,000 Merisant, 9.50% 7/15/13 (a)....................... 1,258,000 ---------- 1,753,000 ---------- GARDEN PRODUCTS-0.3% 1,350,000 Ames True Temper, 10.00% 7/15/12.................. 1,069,875 --------- HUMAN RESOURCES-0.4% 1,500,000 Comforce Operating, 12.00% 12/1/07................ 1,496,250 --------- INDUSTRIAL-6.1% 4,000,000 Consolidated Container, 10.125% 7/15/09........... 2,660,000 3,903,000 Constar International, 11.00% 12/1/12............. 2,458,890 2,750,000 Continental Global Group, 9.00% 10/1/08........... 2,713,948 750,000 Elgin National, 11.00% 11/1/07.................... 703,717 2,500,000 GSI Group, 12.00% 5/15/13 (a)..................... 2,565,625 1,800,000 Intermet, Zero Coupon Bond 6/15/09 in default..... 603,000 1,150,000 Trimas Corp., 9.875% 6/15/2012.................... 943,690 3,450,000 US Can, 12.375% 10/1/10........................... 3,286,125 4,000,000 VITRO S.A., 11.75% 11/1/13 (a).................... 3,720,000 3,125,000 Wolverine Tube, 7.375% 8/1/08 (a)................. 2,687,500 --------- 22,342,495 ---------- MEDICAL PRODUCTS-0.2% 800,000 Hanger Orthopedic Group, 10.375% 2/15/09.......... 814,000 ---------- PHARMACEUTICALS-0.3% 1,500,000 Curative Health, 10.75% 5/1/11.................... 960,000 ---------- RETAIL-2.5% 2,775,000 General Nutrition Center, 8.50% 12/1/10........... 2,365,687 1,600,000 New World Restaurant, 13.00% 7/1/08............... 1,655,568 2,400,000 Star Gas Partner, 10.25% 2/15/13.................. 1,956,000 3,350,000 Uno Restaurant, 10.00% 2/15/11 (a)................ 3,098,750 ---------- 9,076,005 ----------
44
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ CORPORATE BONDS-NON-INVESTMENT GRADE (CONTINUED) SPECIAL PURPOSE ENTITY-0.8% 2,000,000 ML CLO 97 PILG-1, 7.614% 3/23/09 (a)............. $ 1,000,000 2,000,000 MM Community Funding IX, 10.00% 5/1/33 (a)....... 1,820,000 ---------- 2,820,000 ---------- TECHNOLOGY-0.1% 350,000 Danka Business, 10.00% 4/1/08.................... 325,500 ---------- TELECOMMUNICATIONS-4.0% 825,000 Alestra SA, 8.00% 6/30/10........................ 750,750 3,480,000 BARAK I.T.C., Zero Coupon Bond 11/15/07 in default (e) 2,679,600 490,000 Eschelon Operating, 8.375% 3/15/10............... 455,700 3,400,000 Level 3 Financing, 10.75% 10/15/11............... 2,843,250 100,000 Millicom International Cellular, 10.00% 12/1/13.. 103,250 3,975,000 Primus Telecommunications, 8.00% 1/15/14......... 2,524,125 2,200,000 Rural Cellular, 9.75% 1/15/10.................... 2,222,000 300,000 Securus Technologies, 11.00% 9/1/11.............. 267,000 2,500,000 Time Warner, 10.125% 2/1/11...................... 2,575,000 200,000 Time Warner Telecommunications, 9.25% 2/15/14.... 202,500 ---------- 14,623,175 ---------- TOBACCO-0.7% 3,300,000 North Atlantic Trading, 9.25% 3/1/12............. 2,475,000 ---------- TRANSPORTATION-0.3% 1,475,000 Evergreen International Aviation, 12.00% 5/15/10. 1,165,250 ---------- TRAVEL-0.5% 2,000,000 Worldspan Financial, 10.04% 2/15/11 (a).......... 1,760,000 ---------- UTILITIES-0.3% 750,000 Calpine, 8.75% 7/15/13 (a)....................... 530,625 925,000 Calpine, 9.875% 12/1/11 (a)...................... 675,250 ---------- 1,205,875 ---------- TOTAL CORPORATE BONDS-NON-INVESTMENT GRADE (COST $111,924,148) 104,538,794 ----------- MORTGAGE BACKED SECURITIES-INVESTMENT GRADE-8.9% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATION-8.9% 2,700,000 First Franklin Mortgage 2004-FF2 N3, 8.835% 4/25/34 (a) 2,713,500 2,750,000 First Franklin Mortgage 2004-FF5 M9, 4.47% 8/25/34 2,557,500 Harborview Mortgage 2004-1 X, 1.90% 4/19/34 interest-only strips 981,406 Harborview Mortgage 2004-8 X, 0.65% 11/19/34 interest-only strips 2,401,822 4,999,934 Harborview Mortgage 2005-9 B10, 5.30% 6/20/35.... 4,112,446 5,000,000 Long Beach Mortgage 2004-4 M10, 6.641% 10/25/34.. 5,125,000 Mellon Residential 2004-TBC1 X, 0.716% 2/26/34 interest-only strips (a)...................... 1,082,299 3,125,000 Meritage Mortgage 2005-2 M11, 6.17% 11/25/35..... 2,584,469
45
PRINCIPAL MARKET AMOUNT DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ MORTGAGE BACKED SECURITIES-INVESTMENT GRADE (CONTINUED) COLLATERALIZED MORTGAGE OBLIGATION (CONTINUED) 2,000,000 Merrill Lynch 2005-M1, 5.67% 5/25/36.............. $ 1,609,360 1,168,483 Sail Net Interst Margin Notes 2004-5A B, 6.75% 6/27/34 (a) 1,171,404 2,500,000 Soundview 2005-OPT1 M10, 6.891% 6/25/35........... 2,386,325 2,507,455 Structured Asset 1999-SP1, 9.00% 5/25/29.......... 2,500,491 3,651,000 Structured Asset 2004-8 B2, 5.00% 9/25/34......... 3,249,390 ----------- TOTAL MORTGAGE BACKED SECURITIES-INVESTMENT GRADE (COST $33,816,208) 32,475,412 ----------- MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE-11.1% OF NET ASSETS COLLATERALIZED MORTGAGE OBLIGATIONS-11.1% 3,000,000 First Franklin Mortgage 2004-FFH2 B2, 7.141% 6/25/34 (a) 2,670,000 2,750,000 First Franklin Mortgage 2004-FF5 B, 6.641% 8/25/34 (a) 2,447,500 2,500,000 First Franklin Mortgage 2004-FFH3 B1, 7.141% 10/25/34 (a) 2,325,000 3,000,000 Fremont Home Equity 2005-C B3, 5.63% 7/25/35 (a).. 2,092,500 6,000,000 Greenwich 2005-4 N-2, Zero Coupon Bond, 7/27/45 (a) 3,090,000 3,000,000 Greenwich 2005-3 N2, 2.00% 6/27/35 (a)............ 1,858,590 1,000,000 Greenwich 2005-2A N2, 3.10% 2/26/35 (a)........... 691,870 2,000,000 GSAMP Trust 2004-AR1 B5, 5.00% 6/25/34 (a)........ 1,620,000 2,217,189 Long Beach Mortgage 2001-4 M3, 6.391% 3/25/32..... 1,064,250 3,000,000 Long Beach Mortgage 2004-2 B, 7.141% 6/25/34 (a).. 2,760,000 3,485,000 Long Beach Mortgage 2005-WL1, 6.05% 6/25/35....... 3,044,461 3,000,000 Meritage Mortgage 2004-2 B1, 6.891% 1/25/35 (a)... 2,610,000 2,000,000 Meritage Mortgage 2004-2 B2, 6.891% 1/25/35 (a)... 1,690,000 3,000,000 Park Place Securities 2005-WHQ1 M10, 6.141% 3/25/35 (a) 2,675,130 2,000,000 Park Place Securities 2005-WCW3, 5.981% 8/25/35 (a) 1,620,000 2,000,000 Park Place Securities 2005-WHQ4, 6.088% 9/25/35 (a) 1,370,300 1,013,115 Park Place Securities 2005-WCW1 B, 5.00% 9/25/35 (a) 934,598 2,000,000 People's Choice Home Loan 2004-2 B, 5.00% 10/25/34 1,652,500 1,530,000 Popular 2005-4 B2, 6.05% 9/25/35.................. 1,424,812 2,000,000 Soundview 2005-1 B3, 6.891% 4/25/35 (a)........... 1,640,000 1,000,000 Soundview 2005-2 B2, 6.71% 7/25/35 (a)............ 815,000 1,000,000 Soundview 2005-2 B4, 6.46% 7/25/35 (a)............ 735,000 ----------- TOTAL MORTGAGE BACKED SECURITIES-NON-INVESTMENT GRADE (COST $40,398,181) 40,831,511 ----------- GOVERNMENT AGENCY SECURITIES-1.2% OF NET ASSETS Fannie Mae 1998-M7 N, 1.057% 5/25/36 interest-only strips (c) 1,691,251 GNMA 2003-64 XA, 0.517% 8/16/43 interest-only strips (c) 2,748,359 ----------- TOTAL GOVERNMENT AGENCY SECURITIES (COST $9,509,595) 4,439,610 -----------
46
PRINCIPAL AMOUNT/ MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ MUNICIPAL SECURITIES-0.2% OF NET ASSETS 1,000,000 Pima County Arizona IDA Health Care, Zero Coupon Bond 11/15/32 $ 525,550 ----------- TOTAL MUNICIPAL AGENCY SECURITIES (COST $625,681) 525,550 ----------- COMMON STOCKS-17.0% OF NET ASSETS 8,400 3M Company........................................ 616,224 13,800 Alliance Capital Management Holding L.P........... 660,330 46,462 American Capital Strategies, Ltd.................. 1,703,297 53,700 Andrx Corporation (d)............................. 828,591 90,400 Anthracite Capital, Inc........................... 1,046,832 21,500 Arthur J. Gallagher & Co.......................... 619,415 50,200 ATI Technologies Inc. (d)......................... 699,788 26,100 Bank of America Corporation....................... 1,098,810 24,400 Bois d'Arc Energy LLC (d)......................... 419,924 11,600 Burlington Northern Santa Fe Corporation.......... 693,680 10,700 Caterpillar, Inc.................................. 628,625 18,000 CEMEX, S.A. de C.V................................ 941,400 14,900 Cimarex Energy Co. (d)............................ 675,417 68,200 Cisco Systems, Inc. (d)........................... 1,222,144 45,800 Consolidated Communications Illinois Holdings, Inc. (d) 622,880 7,200 Cooper Cameron Corporation (d).................... 532,296 21,800 Cree, Inc. (d).................................... 545,436 21,400 Cytec Industries Inc.............................. 928,332 5,000 Deere & Company................................... 306,000 30,500 Direct General Corporation........................ 601,765 33,000 Dollar General Corporation........................ 605,220 2,900 Education Realty Trust, Inc....................... 48,430 15,200 El DuPont de Nemours and Company.................. 595,384 6,000 EnCana Corporation (d)............................ 349,860 14,700 ENSCO International Incorporated.................. 684,873 31,200 Enterprise Partners Products L.P.................. 785,616 10,700 Exxon Mobil Corporation........................... 679,878 15,300 Family Dollar Stores, Inc......................... 304,011 25,100 First Data Corporation............................ 1,004,000 41,400 Flextronics International Ltd. (d)................ 531,990 52,300 Fred's Inc........................................ 654,273 13,600 Frontline Ltd..................................... 600,032 18,300 General Electric Company.......................... 616,161 21,300 General Maritime Corporation...................... 784,053 19,600 GlobalSantaFe Corporation......................... 894,152 35,300 Ingram Micro Inc. (d)............................. 654,462 78,100 InPhonic, Inc. (d)................................ 1,073,875 25,000 Intel Corporation................................. 616,250
47
MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) 66,900 Iowa Telecommunications Services, Inc.............. $ 1,125,258 13,400 J.C. Penny Company, Inc............................ 635,428 16,150 Kinder Morgan Energy Partners, L.P................. 853,528 12,500 KKR Financial Corp. (d)............................ 278,000 57,400 Korn/Ferry International (d)....................... 940,786 14,000 L-3 Communications Holdings, Inc................... 1,106,980 39,800 Limited Brands, Inc................................ 813,114 34,000 Lincoln Electric Holdings, Inc..................... 1,339,600 27,300 Lloyds TSB Group plc............................... 907,179 22,600 Macquarie Infrastructure Company Trust............. 637,320 21,500 Magellan Midstream Partners, L.P................... 736,805 19,900 Manpower Inc....................................... 883,361 15,400 Marathon Oil Corporation........................... 1,061,522 30,300 Masco Corporation.................................. 929,604 126,650 MCG Capital Corporation............................ 2,136,585 48,500 Microsoft Corporation.............................. 1,247,905 32,500 Nam Tai Electronics, Inc........................... 826,475 26,850 New Century Financial Corporation.................. 973,850 42,800 New Skies Satellites Holdings Ltd.................. 900,940 37,000 Polycom, Inc. (d).................................. 598,290 55,700 Regal Entertainment Group.......................... 1,116,228 30,310 Ship Finance International Limited................. 606,200 116,200 Taiwan Semiconductor Manufacturing Company Ltd..... 955,164 152,647 Technology Investment Capital Corporation.......... 2,410,296 38,600 Teva Pharmaceutical Industries Limited............. 1,290,012 43,100 The Home Depot, Inc................................ 1,643,834 35,400 Thornburg Mortgage, Inc............................ 887,124 23,000 Tidewater Inc...................................... 1,119,410 8,500 Trex Company, Inc. (d)............................. 204,000 94,750 Trustreet Properties Inc........................... 1,482,837 21,000 Tsakos Energy Navigation Limited................... 756,420 18,300 Universal Compression Holdings, Inc. (d)........... 727,791 8,600 Valero Energy Corporation.......................... 972,316 5,400 Valero L.P......................................... 307,692 28,400 Wal-Mart Stores, Inc............................... 1,244,488 22,900 Washington Mutual, Inc............................. 898,138 ----------- TOTAL COMMON STOCKS (COST $59,531,804) 62,428,186 -----------
48
MARKET SHARES DESCRIPTION VALUE (b) - ------------------------------------------------------------------------------------------------------ PREFERRED STOCKS-0.8% OF NET ASSETS 1,000 Credit Genesis CLO 2005......................... $ 1,000,000 1,000,000 Hewett's Island II (a).......................... 990,000 1,000 SOLOSO CDO 2005................................. 992,706 ------------ TOTAL PREFERRED STOCKS (COST $2,982,706) 2,982,706 ------------ CORPORATE LOANS-0.3% OF NET ASSETS 1,100,000 ICO North America, 7.50% 8/15/09................ 1,100,000 ------------ EURODOLLAR TIME DEPOSITS-1.5% OF NET ASSETS State Street Bank & Trust Company Eurodollar time deposits dated September 30, 2005, 3.00% maturing at $5,385,449 on October 1, 2005. 5,385,000 ------------ TOTAL INVESTMENTS-136.8% OF NET ASSETS (COST $520,633,121) 501,409,468 ------------ OTHER ASSETS AND LIABILITIES, NET-(36.8%) OF NET ASSETS (134,934,447) ------------ NET ASSETS $366,475,021 ============ (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 2 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. (f) Trust preferred security with no stated interest rate.
49
REGIONS MORGAN KEEGAN FUNDS STATEMENTS OF ASSETS AND LIABILITIES - ----------------------------------------------------------------------------------------------------- SEPTEMBER 30, 2005 (UNAUDITED) RMK RMK ADVANTAGE RMK HIGH STRATEGIC INCOME FUND INCOME FUND INCOME FUND - ------------------------------------------------------------------------------------------------------ ASSETS Investments, in securities as detailed in the accompanying schedules at market (cost $580,441,476, $435,189,683, and $520,633,121 respectively).............................. $ 563,187,316 $ 420,814,826 $ 501,409,468 Cash on deposit with custodian............... 7,427 15,314 42,603 Dividends and interest receivable 6,541,022 5,858,471 5,751,651 Receivable for securities sold............... 8,014,062 11,014,345 11,126,706 Other assets................................. -- 13,524 -- Debt issue costs............................. 122,329 23,484 52,254 -------------- -------------- -------------- Total Assets............................... 577,872,156 437,739,964 518,382,682 LIABILITIES Demand loan payable to bank (Note 6) 150,000,000 115,000,000 140,000,000 Interest payable............................. 456,575 393,389 1,200,036 Accrued expenses............................. 43,985 65,894 56,243 Due to affiliates............................ 370,164 283,347 334,459 Payable for securities purchased............. 14,757,297 7,483,099 10,316,923 Deferred Interest Income..................... -- 6,346 -- -------------- -------------- -------------- Total Liabilities.......................... 165,628,021 123,232,075 151,907,661 -------------- -------------- -------------- Net Assets................................. 412,244,135 314,507,889 366,475,021 ============== ============== ============== NET ASSETS CONSIST OF Net unrealized appreciation (depreciation) of investments................................ (17,254,160) (14,374,857) (19,223,653) Common stock, $.0001 par value (1,000,000,000 shares authorized for each fund).................. 2,884 2,131 2,589 Paid-in capital.............................. 413,793,376 308,709,850 372,229,477 Undistributed net investment income (loss) 3,786,705 2,334,680 4,432,185 Accumulated net realized gain (loss) on investments 11,915,330 17,836,085 9,034,423 -------------- -------------- -------------- Net Assets................................. $ 412,244,135 $ 314,507,889 $ 366,475,021 ============== ============== ============== SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE Common shares outstanding.................. 28,844,066 21,313,167 25,889,184 Net asset value per share.................. $ 14.29 $ 14.76 $ 14.16 - -------------------------------------------------------------------------------------------------------- See accompanying Notes to Financial Statements.
50
REGIONS MORGAN KEEGAN FUNDS STATEMENTS OF OPERATIONS ------------------------------ FOR THE SIX-MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) RMK RMK ADVANTAGE RMK HIGH STRATEGIC INCOME FUND INCOME FUND INCOME FUND - ------------------------------------------------------------------------------------------------------ INVESTMENT INCOME Interest................................. $ 32,917,818 $ 26,490,986 $ 30,340,192 Dividends................................ 850,944 725,315 1,143,582 ------------- ------------- ------------- Total Investment Income........ 33,768,762 27,216,301 31,483,774 EXPENSES Management fees 1,715,674 1,394,128 1,600,468 Accounting and Administrative fees 395,925 321,722 369,339 Interest expense...................... 2,030,408 2,238,460 2,601,237 Debt issue expense.................... 318,118 139,141 166,596 Legal fees............................ 70,263 49,097 19,451 Audit fees............................ 8,419 16,420 15,341 Transfer agent fees................... 18,530 17,529 22,987 Custodian fees........................ 14,601 15,641 15,723 Registration fees..................... 4,000 4,174 10,131 Directors fees........................ 26,583 24,084 26,583 Other................................. 41,090 45,480 49,608 ------------- ------------- ------------- Total Expenses............ 4,643,611 4,265,876 4,897,464 ------------- ------------- ------------- Net Investment Income (Loss) 29,125,151 22,950,425 26,586,310 ------------- ------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Change in unrealized appreciation (depreciation) (13,889,021) (12,536,542) (4,905,215) Net realized gain (loss) on securities 5,360,788 2,131,059 (1,259,175) ------------- ------------- ------------- Increase (Decrease) in Net Assets Resulting From Operations.............. $ 20,596,918 $ 12,544,942 $ $20,421,920 ============= ============= ============= - -------------------------------------------------------------------------------------------------------- See accompanying Notes to Financial Statements.
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REGIONS MORGAN KEEGAN FUNDS STATEMENTS OF CHANGES IN NET ASSETS - ----------------------------------------------------------------------------------------------------- (UNAUDITED) RMK ADVANTAGE INCOME FUND ----------------------------- PERIOD ENDED PERIOD ENDED SEPTEMBER 30, MARCH 31, 2005 2005(a) - ------------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss).................. $ 29,125,151 $ 15,787,353 Unrealized appreciation (depreciation), net... (13,889,021) (3,365,139) Net realized gain (loss) from investment transactions 5,360,788 2,351,807 -------------- ------------- Increase (Decrease) in Net Assets Resulting From Operations 20,596,918 14,774,021 -------------- ------------- Distributions to shareholders from net investment income (23,583,242) (13,339,822) -------------- ------------- Total Distribution to Shareholders....... (23,583,242) (13,339,822) -------------- ------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold (27,600,000 shares) -- 394,930,648 Proceeds from sales of shares as a result of reinvested dividends (757,246 and 479,839 shares)............. 11,567,317 7,198,292 -------------- ------------- Increase (Decrease) in Net Assets From Share Transactions 11,567,317 402,128,940 -------------- ------------- Total Increase (decrease) in Net Assets.. 8,580,993 403,563,139 ============== ============= NET ASSETS Beginning of period........................ 403,663,142 100,003 -------------- ------------- End of period.............................. $412,244,135 $403,663,142 ============== ============= - ----------------------------------------------------------------------------------------------------- (a) For the period from November 8, 2004 (commencement of operations) to March 31, 2005. See accompanying Notes to Financial Statements.
52
REGIONS MORGAN KEEGAN FUNDS STATEMENTS OF CHANGES IN NET ASSETS - ----------------------------------------------------------------------------------------------------- (UNAUDITED) RMK HIGH INCOME FUND RMK STRATEGIC INCOME FUND ------------------------- --------------------------------- PERIOD ENDED YEAR ENDED PERIOD ENDED YEAR ENDED SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31, 2005 2005 2005 2005 - ----------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Net investment income (loss) $ 22,950,425 $ 43,454,200 $ 26,586,310 $ 43,543,684 Unrealized appreciation (depreciation), net (12,536,542) (11,718,935) (4,905,215) (13,962,527) Net realized gain (loss) from investment transactions........... 2,131,059 14,869,629 (1,259,175) 8,604,501 --------------- -------------- -------------- --------------- Increase (Decrease) in Net Assets Resulting From Operations 12,544,942 46,604,894 20,421,920 38,185,658 --------------- -------------- -------------- --------------- Distributions to shareholders from net investment income...... (18,954,774) (41,663,366) (22,988,818) (41,437,874) --------------- -------------- -------------- --------------- Distributions to shareholders from net realized gain on investments -- (12,333,973) -- -- --------------- -------------- -------------- --------------- Total Distribution to Shareholders (18,954,774) (53,997,339) (22,988,818) (41,437,874) --------------- -------------- -------------- --------------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold (3,150,000 shares).............. -- -- -- 45,123,750 Proceeds from sales of shares as a result of reinvested dividends (441,172 and 1,308,189 shares).... 7,186,775 21,351,697 -- -- Proceeds from sales of shares as a result of reinvested dividends (600,520 and 1,131,683 shares).... -- -- 9,260,423 17,362,226 --------------- -------------- -------------- --------------- Increase (Decrease) in Net Assets From Share Transactions 7,186,775 21,351,697 9,260,423 62,485,976 --------------- -------------- -------------- --------------- Total Increase (decrease) in Net Assets 776,943 13,959,252 6,693,525 59,233,760 =============== ============== ============== =============== NET ASSETS Beginning of period.... 313,730,946 299,771,694 359,781,496 300,547,736 --------------- -------------- -------------- --------------- End of period.......... $ 314,507,889 $ 313,730,946 $ 366,475,021 $ 359,781,496 =============== ============== ============== =============== - --------------------------------------------------------------------------------------------------------------------- See accompanying Notes to Financial Statements.
53
REGIONS MORGAN KEEGAN FUNDS STATEMENTS OF CASH FLOWS FOR THE SIX-MONTHS ENDED SEPTEMBER 30, 2005 (UNAUDITED) ----------------------------------------------------- RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND - ------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH -- CASH FLOWS FROM OPERATING ACTIVITIES NET INCREASE IN NET ASSETS FROM OPERATIONS.............. $ 20,596,918 $ 12,544,942 $ 20,421,920 ADJUSTMENTS TO RECONCILE NET INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH USED IN OPERATING ACTIVITIES Purchase of investment securities..................... (368,892,804) (224,487,232) (274,831,992) Proceeds from disposition of investment securities.... 250,385,500 204,117,731 237,342,130 Purchase of short-term investment securities, net..... (1,008,255) 2,000,650 1,287,253 Proceeds from principal payments...................... 17,937,302 16,299,219 15,329,937 Change in unrealized appreciation on securities....... 13,889,021 12,536,542 4,905,215 Amortization/accretion of premiums/discount on securities......................................... (4,954,279) (2,206,283) (3,419,996) Net realized gain on investments...................... (5,360,788) (2,131,059) 1,259,175 Net realized gain on principal payments............... (1,859,988) (1,952,429) (762,742) Amortization of debt issue costs...................... 318,118 139,141 166,596 Increase (decrease) in dividends and interest receivable......................................... (989,938) 1,027,775 1,248,412 Increase (decrease) in receivables for securities purchased.......................................... (5,405,876) (8,358,120) (7,509,216) Increase (decrease) in payables for securities purchased.......................................... (2,811,672) 2,272,692 2,772,249 Increase (decrease) in interest payable............... 424,540 43,352 693,773 Increase (decrease) in accrued expenses............... 37 10,789 (5,356) Increase (decrease) in due to affiliates.............. 87,326 (8,880) 5,029 Increase (decrease) in deferred interest income....... -- 6,346 -- --------------- --------------- --------------- NET CASH USED IN OPERATING ACTIVITIES (87,644,838) 11,855,176 (1,097,613) --------------- --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in loan payable...... 100,000,000 -- 15,000,000 Cash paid for debt issue costs (343,461) (82,753) (131,389) Cash distributions paid....... (12,015,925) (11,767,999) (13,728,395) --------------- --------------- --------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 87,640,614 (11,850,752) 1,140,216 --------------- --------------- --------------- NET DECREASE IN CASH............... (4,224) 4,424 42,603 =============== =============== =============== CASH Beginning balance............... 11,651 10,890 -- --------------- --------------- --------------- Ending balance.................. $ 7,427 $ 15,314 $ 42,603 =============== =============== =============== - ------------------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Noncash financing activities not included herein consist of reinvestment of dividends and distributions of $11,567,317, $7,186,775, and $9,260,423 respectively. Total cash paid for interest was $1,605,868, $2,195,108, and $1,891,977 respectively. See accompanying Notes to Financial Statements.
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REGIONS MORGAN KEEGAN FUNDS FINANCIAL HIGHLIGHTS ------------------------------------------ SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED: (UNAUDITED) NET ASSET NET GAINS TOTAL DIVIDENDS VALUE NET ON SECURITIES FROM FROM NET DISTRIBUTIONS BEGINNING INVESTMENT REALIZED AND INVESTMENT INVESTMENT FROM CAPITAL TOTAL OF PERIOD INCOME UNREALIZED OPERATIONS INCOME GAINS DISTRIBUTION - ------------------------------------------------------------------------------------------------------------------------------------ RMK ADVANTAGE INCOME FUND Period ended September 30, 2005 $14.37 $ 1.02 $ (0.27) $ 0.75 $ (0.83) $ -- $ (0.83) Period ended March 31, 2005 (a) 14.33(d) 0.57 (0.03) 0.54 (0.48) -- (0.48) RMK HIGH INCOME FUND Period ended September 30, 2005 15.03 1.09 (0.46) 0.63 (0.90) -- (0.90) Year ended March 31, 2005 15.32 2.15 0.24 2.39 (2.07) (0.61) (2.68) Period ended March 31, 2004 (b) 14.33(d) 1.11 1.09 2.20 (1.01) (0.17) (1.18) RMK STRATEGIC INCOME FUND Period ended September 30, 2005 14.23 1.04 (0.21) 0.83 (0.90) -- (0.90) Year ended March 31, 2005 14.31 1.76 (0.16) 1.60 (1.68) -- (1.68) Period ended March 31, 2004 (c) 14.33(d) 0.02 (0.02) -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ (a) For the period from November 8, 2004 (commencement of operations) to March 31, 2005. (b) For the period from June 24, 2003 (commencement of operations) to March 31, 2004. (c) For the period from March 18, 2004 (commencement of operations) to March 31, 2004. (d) Net of sales load of $0.675 on initial shares issued. (e) 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. (f) Ratio annualized for the periods less than one year.
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REGIONS MORGAN KEEGAN FUNDS - -------------------------------------------------------------------------------------------------------------------------------- OFFERING COSTS NET ASSET TOTAL COMMON TOTAL NET ASETS RATIO OF RATIO OF NET CHARGED TO VALUE RETURN SHARE PRICE, RETURN END OF EXPENSES TO INCOME TO PORTFOLIO PAID-IN END OF NET ASSET END OF MARKET PERIOD AVERAGE NET AVERAGE NET TURNOVER CAPITAL PERIOD VALUE(e) PERIOD VALUE(e) (000'S) ASSETS(f) ASSETS(f) RATE - -------------------------------------------------------------------------------------------------------------------------------- $ -- $ 14.29 4.97% $ 16.96 14.83% $ 412,244 2.28% 14.30% 54% (0.02) 14.37 3.53% 15.59 7.30% 403,663 0.94% 10.52% 57% -- 14.76 3.75% 17.94 14.87% 314,508 2.72% 14.64% 53% -- 15.03 15.46% 16.50 16.49% 313,731 2.12% 14.08% 73% (0.03) 15.32 15.50% 16.67 20.06% 299,772 1.11% 10.15% 76% -- 14.16 5.46% 17.00 14.46% 366,475 2.70% 14.67% 52% -- 14.23 10.87% 15.74 9.68% 359,781 1.70% 12.47% 69% (0.02) 14.31 (0.14)% 16.00 6.67% 300,547 0.87% 3.87% 0% - --------------------------------------------------------------------------------------------------------------------------------
1 ORGANIZATION RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. (individually referred to as the "Fund," or collectively as the "Funds") were organized as separate Maryland corporations on September 7, 2004, April 16, 2003 and January 16, 2004, respectively. The Funds are registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as diversified, closed-end management investment companies, each with its own investment objective. Each Fund is authorized to issue 1,000,000,000 shares of capital stock with a par value of $0.0001. The Funds' Boards are authorized to classify and reclassify any unissued shares of capital stock from time to time by setting or changing the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or terms and conditions of redemption of such shares by the Funds. The common shares have no preemptive, conversion, exchange or redemption rights. All common shares have equal voting, dividend, distribution and liquidation rights. The common shares, when issued, will be fully paid and non-assessable. Common stockholders are entitled to one vote per share and all voting rights for the election of directors are non-cumulative. The Funds have no present intentions of offering additional shares, except as described in the Dividend Reinvestment Plan. 2 SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies followed by the Funds in the preparation of their financial statements. These policies are in conformity with the accounting principles generally accepted in the United States of America. INVESTMENT VALUATIONS--Investments in securities listed or traded on a securities exchange are valued at the last quoted sales price on the exchange where the security is primarily traded as of close of business on the New York Stock Exchange, usually 4:00 p.m. Eastern Time, on the valuation date. Equity securities traded on the NASDAQ National Market System are valued at the NASDAQ Official Closing Price, usually 4:00 p.m., Eastern Time, on the valuation date. Securities for which no sales were reported for that day are valued at the last available bid quotation on the exchange or system where the security is principally traded. Long-term debt securities, including U.S. government securities, listed corporate bonds, other fixed income and asset-backed securities, and unlisted securities and private placement securities, are generally valued at the mean of the latest bid and asked price as furnished by an independent pricing service. Short-term debt securities having a maturity of sixty days or less from the valuation date may be valued at amortized cost, which approximates market value. Investments in open-end registered investment companies are valued at net asset value as reported by those investment companies. Investments for which market quotations are not readily available, or available quotations which appear to not accurately reflect the current value of an investment, are valued at fair value as determined in good faith by the Valuation Committee using procedures established by and under the direction of 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 56 of valuation, those 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. INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Securities transactions are recorded on the trade date for financial reporting purposes. Realized gains and losses from securities transactions are recorded using the identified cost basis. Dividend income is recorded on the ex-dividend date, net of applicable taxes withheld by foreign countries. Interest income, including amortization of premiums and accretion of discounts, is accrued on a daily basis. Gains or losses realized on sales of securities are determined by comparing the identified cost of the security lot sold with the net sales proceeds. EXPENSES--Expenses directly attributable to a Fund are charged directly to that Fund. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS--Each Fund pays dividends to its stockholders from the Fund's net investment income. Income dividends for the Funds are declared and paid monthly. Each Fund also distributes all of its net realized capital gains, if any, on an annual basis. All common shares have equal dividend rights. Dividends and distributions to shareholders are recorded on the ex-dividend date. The amounts of dividends from net investment income and distributions from net realized gains are determined in accordance with federal income tax regulations which may differ from Accounting Principles Generally Accepted in the United States of America. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature (i.e. reclass of market discounts, net operating gain/loss, paydowns, and distributions), such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences do not require reclassification. To the extent distributions from net investment income and net realized gains exceed net investment income and net realized gains for tax purposes, they are reported as distributions of capital. REPURCHASE AGREEMENTS--The Funds may purchase instruments from financial institutions, such as banks and broker-dealers, subject to the seller's agreement to repurchase them at an agreed upon time and price ("repurchase agreement"). The Funds may invest in repurchase agreements with institutions that are deemed by Morgan Asset Management, Inc., the Adviser, to be of good standing and creditworthy pursuant to the guidelines established by the Directors. A third party custodian bank takes possession of the underlying securities ("collateral") of a repurchase agreement, the value of which is at all times at least equal to the principal amount of the repurchase transaction, including accrued interest. In the event of counterparty default on the obligation to repurchase, each Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. However, there could be potential losses to the Funds in the event of default or bankruptcy by the counterparty to the agreement and the Funds are delayed or prevented from exercising their rights to dispose of the collateral, including the risk of possible decline in the value of the collateral during the period while the Funds seek to assert their rights. 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. 57 REGIONS MORGAN KEEGAN FUNDS Transactions in options written during the period ended September 30, 2005 were as follows:
RMK ADVANTAGE RMK HIGH INCOME RMK STRATEGIC INCOME FUND FUND INCOME FUND ----------------------- ----------------------- ------------------------- NUMBER OF PREMIUMS NUMBER OF PREMIUMS NUMBER OF PREMIUMS CONTRACTS RECEIVED CONTRACTS RECEIVED CONTRACTS RECEIVED --------- -------- --------- -------- --------- -------- Options outstanding at March 31, 2005 -- $ -- -- $ -- -- $ -- Options written....... 14,302 144,245 2,667 141,650 3,410 209,753 Options expired....... (13,082) (52,275) (1,409) (52,203) (1,631) (45,487) Options exercised (1,220) (91,970) (1,258) (89,447) (1,779) (164,266) -------- --------- ------- --------- ------- ---------- Options outstanding at September 30, 2005 -- $ -- -- $ -- -- $ -- -------- --------- ------- --------- ------- ----------
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS--The Funds may engage in when-issued or delayed delivery transactions. The Funds record when-issued securities on the trade date and maintain security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked to market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract. USE OF ESTIMATES--The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. CASH AND CASH EQUIVALENTS--All highly liquid investments with maturities of three months or less when purchased are considered to be cash equivalents. 3 AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISER--The Funds have entered into Investment Advisory Agreements with Morgan Asset Management, Inc. (the "Adviser"), a wholly owned subsidiary of MK Holding, Inc., which is a wholly owned subsidiary of Regions Financial Corporation ("Regions"). Under the terms of the agreements, the Funds are charged an annual management fee of 0.65% based on a percentage of each Fund's average daily total assets minus the sum of accrued liabilities other than debt entered into for purposes of leverage. 58 REGIONS MORGAN KEEGAN FUNDS ACCOUNTING AND ADMINISTRATIVE SERVICES--The Funds have entered into Accounting and Administrative Services Agreements with Morgan Keegan & Company, Inc. ("Morgan Keegan"), a wholly owned subsidiary of Regions. Under the terms of the agreements, Morgan Keegan provides portfolio accounting services and certain administrative personnel and services to the Funds for an annual fee of 0.15% based on a percentage of each Fund's average daily total assets minus the sum of accrued liabilities other than debt entered into for purposes of leverage. Morgan Keegan also provides an employee to serve as the Funds' Chief Compliance Officer for which Morgan Keegan receives no additional compensation from the Funds. DIRECTORS AND OFFICERS--Certain of the Officers and Directors of the Funds are also Officers and Directors of the Adviser, Morgan Keegan, and Regions. Such Officers and Directors of the Company who are "Interested Persons" as defined in the 1940 Act receive no salary or fees from the Funds. 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 attended from each Fund. Each chairperson of the Independent Directors Committee and Audit Committee receives annual compensation of $500 from each Fund. 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 Funds. OTHER TRANSACTIONS--For the period ended September 30, 2005, Morgan Keegan earned no underwriting discounts, direct commissions, or dealer incentives on the sales and purchases of investment securities. 4 INVESTMENT TRANSACTIONS During the period ended September 30, 2005, cost of purchases and proceeds from sales and maturities of investment securities, including long-term U.S. government securities, but excluding short-term securities, for each Fund were as follows:
RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND - ------------------------------------------------------------------------------------------------------ Cost of Investments....... $ 368,892,804 $ 224,487,232 $ 274,831,992 Proceeds from Sales....... 268,322,802 220,416,950 252,672,067
59 REGIONS MORGAN KEEGAN FUNDS 5 BANK LOANS The Funds are permitted to borrow up to one-third of the value of their net assets, before such borrowings, for investment purposes. Such borrowing is referred to as leveraging and the Funds have collateralized bank lines of credit for this purpose. As of September 30, 2005, the Funds' borrowing arrangements were as follows: RMK ADVANTAGE INCOME FUND has a collateralized $160,000,000 bank line of credit, which matures in March of 2006. All of the Fund's investment securities, except for common stocks, are pledged as collateral under the borrowing arrangement and the collateral may be sold. As of September 30, 2005, the outstanding balance on the line of credit was $150,000,000. Borrowings under this agreement bear interest at a variable rate determined by the bank's conduit program, which has historically been slightly below LIBOR. Fees of 0.13% per annum are paid on the total line of credit, regardless of usage, and of 0.23% per annum on the outstanding amount of borrowings. The average balance during the period ended September 30, 2005 was $114,285,714 or $4.01 per share, based on average shares outstanding of 28,466,576. The average interest rate during the period ended September 30, 2005 was 3.186%. The maximum amount of borrowings outstanding at any month-end during the period was $150,000,000. RMK HIGH INCOME FUND has a collateralized $125,000,000 bank line of credit, which matures in December 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, 2005, the outstanding balance on the line of credit was $115,000,000. Borrowings under this agreement bear interest at a fixed rate on the date of borrowing at LIBOR plus 0.75% per annum. Fees of 0.10% per annum are paid on the total line of credit, regardless of usage. The average balance during the period ended September 30, 2005 was $115,000,000 or $5.45 per share, based on average shares outstanding of 21,096,904. The average interest rate during the period ended September 30, 2005 was 3.975%. The maximum amount of borrowings outstanding at any month-end during the period was $115,000,000. RMK STRATEGIC INCOME FUND has a collateralized $125,000,000 bank line of credit, which matures in July of 2006. 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, 2005, the outstanding balance on the line of credit was $140,000,000. 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 total line of credit, regardless of usage. The average balance during the period ended September 30, 2005 was $129,285,714 or $5.05 per share, based on average shares outstanding of 25,592,570. The average interest rate during the period ended September 30, 2005 was 3.866%. The maximum amount of borrowings outstanding at any month-end during the period was $140,000,000. 6 FEDERAL TAX INFORMATION Each Fund is treated as a separate entity for federal tax purposes. No provision for federal income or excise taxes is required since the Funds intend to qualify each year as regulated investment companies under Subchapter M of the Internal Revenue Code (the "Code") and distribute substantially all their taxable net investment income and capital gains to their shareholders. Because federal income tax regulations differ from accounting principles generally accepted in the United States of America, income and capital gains distributions determined in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. These differences are primarily due to differing treatments for gains/losses on principal payments of mortgage- and asset-backed securities, REIT adjustments, and distribution reclasses. Permanent book and tax basis differences, if any, relating to shareholder distributions will result in reclassifications to paid-in-capital. These reclassifications have no effect on net assets or net asset values per share. Any taxable gain remaining at fiscal year end is distributed in the following year. For the period ended September 30, 2005, permanent differences identified and reclassified among the components of net assets were as follows: 60
RMK ADVANTAGE RMK HIGH RMK STRATEGIC INCOME FUND INCOME FUND INCOME FUND - ------------------------------------------------------------------------------------------------------ Undistributed Net Investment Income..... (1,859,988) (1,952,429) (762,742) Accumulated Net Realized Gain (Loss) on Investments........................ 1,859,988 1,952,429 762,742
POST-OCTOBER LOSSES DEFERRED--Pursuant to federal income tax regulations applicable to investment companies, the Funds have elected to treat net capital losses realized between November 1 and March 31 of each year as occurring on the first day of the following tax year. For the period ended September 30, 2005, there were no realized losses of the Funds reflected in the accompanying financial statements which will not be recognized for federal income tax purposes until next year. 7 CONCENTRATION OF CREDIT RISK The Funds invest primarily in debt instruments. The ability of the issuers of the securities held by the Funds to meet their obligations might be affected by economic developments in a specific industry, state, or region. 61 BOARD OF DIRECTORS AND OFFICERS The following tables set forth information concerning the Directors and Officers of the Funds. 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 twenty-three portfolios. The Regions Morgan Keegan Fund complex includes Morgan Keegan Select Fund, Inc., Regions Morgan Keegan Select Funds, RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. An asterisk (*) indicates Directors and/or Officers who are interested persons of the Funds as defined by the Investment Company Act of 1940. The Statement of Additional Information for the Funds includes additional information about the Fund's Directors and is available upon request, without charge, by calling Morgan Keegan at 800-564-2188. INFORMATION ABOUT THE FUNDS' DIRECTORS
NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------ ALLEN B. MORGAN, JR.* Mr. Morgan has served as a Director and Vice-Chairman of Regions Age 63, Director, Financial Corporation since 2001 and 2003, respectively. He has also Since 2003 / 2004(1) served as a Director of Morgan Asset Management, Inc. since 1993. He also has been Chairman of Morgan Keegan & Company, Inc. since 1969 and Executive Managing Director of Morgan Keegan & Company, Inc. since 1969. J. KENNETH ALDERMAN* Mr. Alderman has been President of Regions Morgan Keegan Trust Age 53, Director, Company and Chief Executive Officer of Morgan Asset Management, Inc. Since 2003 / 2004(1) 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. 62
BOARD OF DIRECTORS AND OFFICERS NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------ JACK R. BLAIR Mr. Blair serves as non-executive Chairman of dj Orthopedics, Inc. in Age 63, Director, Vista, CA. He also serves as a director of NuVasive, Inc. in San Since 2005 Diego, CA, Buckman Laboratories, Inc. and Active Implants Corporation, both located in Memphis, TN. Mr. Blair served as non-executive Chairman of SCB Computer Technology, Inc. from September 2000 until March 2004 when the company was acquired by CIBER, Inc. ALBERT C. JOHNSON Mr. Johnson has been an independent financial consultant since 1998. Age 60, Director, He also has served as Director of Books-A-Million, Inc. since 2005. Since 2005 He was Senior Vice President and Chief Financial Officer of Dunn Investment Company (construction) from 1994 to 1998. He was also with Arthur Andersen LLP from 1965 to 1994, retiring as the Managing Partner of the firm's Birmingham Office. WILLIAM JEFFERIES MANN Mr. Mann has been Chairman and President of Mann Investments, Inc. Age 72, Director, (real estate investments/private investing) since 1985. Since 2003 / 2004(1) JAMES STILLMAN R. MCFADDEN Mr. McFadden has been Chief Manager of McFadden Communications, LLC Age 48, Director, (commercial printing) since 2002 and President and Director of 1703, Since 2003 / 2004(1) Inc. (restaurant management) since 1998. He also has served as a Director for several private companies since 1997. 63
BOARD OF DIRECTORS AND OFFICERS NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------ W. RANDALL PITTMAN Mr. Pittman has been Chief Financial Officer of Emageon Inc. Age 52, Director, (healthcare information systems) since 2002. From 1999 to 2002, he Since 2003 / 2004(1) 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 Endowed Chair of Accountancy Age 55, Director, at the University of Alabama, Culverhouse School of Accountancy since Since 2003 / 2004(1) 1981. She is also a member of Financial Accounting Standards Advisory Council, AICPA, Accounting Standards Executive Committee and AACSB International Accounting Accreditation Committee. ARCHIE W. WILLIS III Mr. Willis has been President of Community Capital (financial Age 48, Director, advisory and real estate development consulting) since 1999 and Vice Since 2003 / 2004(1) 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. - ------------------------------------------------------------------------------------------------------ 1 RMK HIGH INCOME FUND, RMK STRATEGIC INCOME FUND AND RMK ADVANTAGE INCOME FUND COMMENCED INVESTMENT OPERATIONS ON JUNE 24, 2003, MARCH 18, 2004 AND NOVEMBER 8, 2004, RESPECTIVELY. THE ADDRESS OF EACH DIRECTOR IS C/O THE FUND, FIFTY NORTH FRONT STREET, 21ST FLOOR, MEMPHIS, TN 38103. 64
BOARD OF DIRECTORS AND OFFICERS INFORMATION ABOUT THE FUNDS' OFFICERS NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------ CARTER E. ANTHONY* From 2002 to present, Mr. Anthony has served as President and Chief Age 61, President, Investment Officer of Morgan Asset Management, Inc. From 2000 to Since 2003 / 2004(1) 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 Financial Corporation Age 63, Vice-President, since 1981. He was a Corporate IRA Manager from 2000 to 2001 and a Since 2003 / 2004(1) 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 and Chief Financial Age 66, Treasurer, Officer of Morgan Keegan & Company, Inc. since 1969, Treasurer and Since 2003 / 2004(1) 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 Morgan Keegan & Company, Age 51, Secretary and Assistant Inc. since 1998 and Assistant Treasurer and Assistant Secretary of Treasurer, Morgan Keegan & Company, Inc. since 1994. He has been Secretary and Since 2003 / 2004(1) 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. 65
BOARD OF DIRECTORS AND OFFICERS NAME, AGE, POSITION, LENGTH OF SERVICE PRINCIPAL OCCUPATION DURING PAST FIVE YEARS - ------------------------------------------------------------------------------------------------------ J. THOMPSON WELLER, SR.* Age 40, Mr. Weller has been a Managing Director and Controller of Morgan Assistant Secretary, Keegan & Company, Inc. since October 2001. He was Senior Vice Since 2003 / 2004(1) 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 Officer of Morgan Asset Age 53, Chief Compliance Management, Inc. and a Senior Vice President of Morgan Keegan & Officer, Company, Inc. since August 2004. He was an Assistant Director of Since 2004 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. - ------------------------------------------------------------------------------------------------------ 1 RMK HIGH INCOME FUND, RMK STRATEGIC INCOME FUND AND RMK ADVANTAGE INCOME FUND COMMENCED INVESTMENT OPERATIONS ON JUNE 24, 2003, MARCH 18, 2004 AND NOVEMBER 8, 2004, RESPECTIVELY. OFFICERS OF THE FUNDS 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 20TH STREET, 15TH FLOOR, BIRMINGHAM, ALABAMA 35203. 66
[THIS PAGE INTENTIONALLY LEFT BLANK] 67 DIVIDEND REINVESTMENT PLAN The Funds offer 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 funds declare a dividend or determine 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: o 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. o 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 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 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. 68 SUPPLEMENTAL INFORMATION BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENTS ------------------------------ At a Board meeting for RMK Advantage Income Fund Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc., (each, a "Fund" and collectively, the "Funds") in August 2005, the Board of Directors of each Fund ("Board") approved the renewal of the investment advisory agreement ("Agreement") between each Fund and Morgan Asset Management, Inc. (the "Adviser"). In this connection, each Board considered factors it deemed relevant with respect to each Fund, including: (1) the services provided to the Fund by the Adviser, including the Adviser's investment process, personnel and operations; (2) the performance of the Fund as compared to an appropriate benchmark and/or peer group; and (3) the Fund's investment advisory fee, including other benefits to the Adviser and its affiliates and the Adviser's costs. In this connection, in addition to information reported to the Board over the course of the year, the Adviser provided the Board with information addressing key factors that the Board customarily considers in evaluating the approval of investment advisory agreements. The Independent Directors were assisted by independent legal counsel during their deliberations. The Board noted the extensive responsibilities that the Adviser has as investment adviser to the Funds, including that the Adviser is responsible for making investment decisions on behalf of the Funds and placing all orders for the purchase and sale of investments for the Funds with brokers or dealers. The Board also reviewed information regarding the Adviser's investment process and the qualifications and experience of the portfolio management team for the Funds. The Board reviewed the performance of each Fund relative to its benchmark and peer group. In this connection, the Board noted that the performance of the Funds had exceeded the performance of the Funds' primary benchmarks and selected peer groups over their limited histories. The Board examined the fees paid by each Fund in light of fees paid by other funds managed by the Adviser and fees charged to comparable funds by other investment advisers. As part of its evaluation of the Adviser's compensation, the Board also considered other benefits that may be realized by the Adviser from its relationship with each Fund. In this regard, the Board considered the Adviser's procedures for the selection of brokers and dealers and for obtaining research from those brokers and dealers. 69 SUPPLEMENTAL INFORMATION Further, the Board reviewed the profitability of the Adviser, including the costs incurred by the Adviser associated with its research and investment processes, personnel, systems and equipment necessary to perform its functions. Based on these considerations, among others, the Board concluded, with respect to each Fund, that: (1) the Fund was likely to continue to benefit from the nature, quality and extent of the Adviser's services and its investment process; and (2) the Adviser continues to have the resources to provide the services and to carry out its responsibilities under the Agreement. The Board also concluded that the Adviser's compensation is fair and reasonable with respect to each Fund and that the performance of each Fund has been favorable under the Adviser's management in relation to the performance of their peer groups and benchmarks. Based on the foregoing, the Board, including all of the Independent Directors, approved renewal of the Agreements with respect to the Funds. BOARD ACTIONS ON INVESTMENT POLICIES ------------------------------ At a Board meeting in November 2005, the Board approved the following definitions of investment grade and below investment grade securities with respect to each Fund: o Investment grade securities are those securities rated Baa3 or higher by Moody's, BBB- or higher S&P, BBB- or higher by Fitch Ratings, comparably rated by another NRSRO or not rated by any NRSRO but determined by the Adviser to be of comparable quality. o Below investment grade securities are those securities rated Ba1 or lower by Moody's, BB+ or lower by S&P, BB+ or lower by Fitch Ratings, comparably rated by another NRSRO or not rated by any NRSRO but determined by the Adviser to be of comparable quality. 70 SUPPLEMENTAL INFORMATION ANNUAL MEETINGS OF STOCKHOLDERS At the annual meetings of stockholders of RMK Advantage Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc. held on Friday, July 15, 2005, stockholders of each Fund elected W. Randall Pittman, Mary S. Stone and Allen B. Morgan, Jr. to continue to serve as Class II Directors of the Funds until the annual meeting of stockholders in 2008, or until their successors are elected and qualified. The results of the tabulation of the votes cast at the annual meetings of stockholders are as follows: RMK ADVANTAGE INCOME FUND NOMINEES: FOR WITHHELD - -------------------------------------------------------------------------------- W. Randall Pittman....................... 27,516,429 231,523 Mary S. Stone............................ 27,521,907 226,045 Allen B. Morgan, Jr...................... 27,677,189 70,763 RMK HIGH INCOME FUND NOMINEES: FOR WITHHELD - -------------------------------------------------------------------------------- W. Randall Pittman....................... 20,346,066 56,991 Mary S. Stone............................ 20,340,559 62,498 Allen B. Morgan, Jr...................... 20,336,938 66,119 RMK STRATEGIC INCOME FUND NOMINEES: FOR WITHHELD - -------------------------------------------------------------------------------- W. Randall Pittman....................... 23,170,385 65,139 Mary S. Stone............................ 23,175,481 60,043 Allen B. Morgan, Jr...................... 23,183,560 51,964 71 SUPPLEMENTAL INFORMATION PROXY VOTING POLICIES AND PROCEDURES AND RECORD OF VOTING ACTIVITY ------------------------------ The Funds vote proxies related to their portfolios' securities according to a set of policies and procedures approved by the Funds' board. A description of the policies and procedures may be obtained, without charge, by calling 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 the Funds' website at www.rmkfunds.com. QUARTERLY REPORTS ON PORTFOLIO HOLDINGS ------------------------------ The Funds file a Form N-Q with the SEC no more than sixty days after the close of the Fund's first and third quarters of their fiscal year. Form N-Q includes a schedule of each Fund's portfolio holdings as of the end of those fiscal quarters. The Funds' Form N-Q filings may be found on the SEC's website at www.sec.gov. The Funds' N-Q filings may also be reviewed and copies at the SEC's Public Reference Room in Washington, D.C. Call 800-SEC-0330 for information on the operation of the Public Reference Room. FEDERAL TAX INFORMATION (UNAUDITED) Of the ordinary income distributions paid during the calendar year ended December 31, 2004, 0.9%, 0% and 0% was attributable to Federal tax obligations for RMK Advantage Income Fund, RMK High Income Fund and RMK Strategic Income Fund, respectively. In calculating the percentages, Fund expenses were allocated on a pro rata basis. The law varies in each state as to whether and what percentage of dividend income attributable to Federal obligations is exempt from state income tax. Please consult your tax adviser to determine if any portion of the dividends you received is exempt from state income tax. 72
SUPPLEMENTAL INFORMATION 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 Nicholson Graham LLP 108 Myrtle Street 1800 Massachusetts Avenue, N.W. Quincy, MA 02171 Washington, D.C. 20036 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TRANSFER AGENT PricewaterhouseCoopers LLP Computershare Investor Services Morgan Keegan Tower P. O. Box 43010 50 North Front Street, Suite 1000 Providence, RI 02940-3011 Memphis, TN 38103 - ----------------------------------------------------------------------------------------- THIS REPORT IS FOR SHAREHOLDER INFORMATION. THIS IS NOT A PROSPECTUS INTENDED FOR USE IN THE PURCHASE OR SALE OF FUND SHARES. STATEMENTS AND OTHER INFORMATION CONTAINED IN THIS REPORT ARE AS DATED AND ARE SUBJECT TO CHANGE. 73
REGIONS MORGAN KEEGAN FUND COMPLEX The Regions Morgan Keegan Fund complex offers mutual funds with a broad variety of investment objectives to meet the financial needs of all types of investors. With more than $5.9 billion in assets, the Fund complex includes five equity funds, one balanced fund, five bond funds, one tax-exempt bond fund, two money market funds and three closed-end funds. You may see an overview of each Fund by visiting the Funds' website at www.rmkfunds.com. You may also download each Fund's most recent marketing flyer, prospectus, and annual and semi-annual reports to shareholders. REGIONS MORGAN KEEGAN SELECT FAMILY OF FUNDS o EQUITY FUNDS - -------------------------------------------------------------------------------- Regions Morgan Keegan Select Mid Cap Growth Fund Regions Morgan Keegan Select Growth Fund Regions Morgan Keegan Select LEADER Growth & Income Fund Regions Morgan Keegan Select Mid Cap Value Fund Regions Morgan Keegan Select Value Fund o BALANCED FUND - -------------------------------------------------------------------------------- Regions Morgan Keegan Select Balanced Fund o BOND FUNDS - -------------------------------------------------------------------------------- Regions Morgan Keegan Select High Income Fund* Regions Morgan Keegan Select Intermediate Bond Fund* Regions Morgan Keegan Select Fixed Income Fund Regions Morgan Keegan Select Limited Maturity Government Fund Regions Morgan Keegan Select Short Term Bond Fund* o TAX-EXEMPT BOND FUND - -------------------------------------------------------------------------------- Regions Morgan Keegan Select Intermediate Tax Exempt Bond Fund o MONEY MARKET FUNDS - -------------------------------------------------------------------------------- Regions Morgan Keegan Select Treasury Money Market Fund Regions Morgan Keegan Select LEADER Money Market Fund REGIONS MORGAN KEEGAN CLOSED-END FUNDS - -------------------------------------------------------------------------------- o RMK Advantage Income Fund, Inc. (NYSE: RMA)* o RMK High Income Fund, Inc. (NYSE: RMH)* o RMK Strategic Income Fund, Inc. (NYSE: RSF)* - -------------------------------------------------------------------------------- * Bond funds managed by James C. Kelsoe, Jr., CFA 74 [THIS PAGE INTENTIONALLY LEFT BLANK] 75 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. Form N-CSR disclosure requirement not applicable to filing for period covered by this report. 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. This schedule is included as part of the Report to Shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Form N-CSR disclosure requirement not applicable to filing for period covered by this report. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END INVESTMENT COMPANIES. Form N-CSR disclosure requirements not applicable to filing for period covered by this report. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. No reportable purchases for the period covered by this report. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant's Board of Directors. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on an evaluation of the disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940, as amended ("the Act")), the President and Treasurer of the registrant have concluded that such disclosure controls and procedures provide reasonable assurances that information required to be disclosed by the registrant is accumulated and communicated to the registrant's officers to allow timely decisions regarding required disclosure. (b) There has been no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. 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(a) under the Investment Company Act of 1940, as amended, and Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) RMK Strategic Income Fund, Inc. ---------------------------------------------------- By (Signature and Title) /s/ Carter E. Anthony ----------------------------------------- Carter E. Anthony, President Date December 7, 2005 ----------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /s/ Carter E. Anthony ----------------------------------------- Carter E. Anthony, President Date December 7, 2005 ----------------------------------------------------------- By (Signature and Title) /s/ Joseph C. Weller ---------------------------------------- Joseph C. Weller, Treasurer Date December 7, 2005 ----------------------------------------------------------- EX-99.CERT 2 anthonycert.txt EX.99.CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Carter E. Anthony, President and Principal Executive Officer, certify that: 1. I have reviewed this report on Form N-CSR of RMK Strategic Income Fund, Inc. (the "Fund"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Fund as of, and for, the periods presented in this report; 4. The Fund's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the Fund and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Fund, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Fund's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the Fund's internal control over financial reporting that occurred during the Fund's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting; and 5. The Fund's other certifying officer(s) and I have disclosed to the Fund's auditors and the audit committee of the Fund's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Fund's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Fund's internal control over financial reporting. Date: December 7, 2005 /s/ Carter E. Anthony ----------------------------------------------- Carter E. Anthony, President and Principal Executive Officer EX.99.CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Joseph C. Weller, Treasurer and Principal Financial Officer, certify that: 1. I have reviewed this report on Form N-CSR of RMK Strategic Income Fund, Inc. (the "Fund"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the Fund as of, and for, the periods presented in this report; 4. The Fund's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the Fund and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Fund, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Fund's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the Fund's internal control over financial reporting that occurred during the Fund's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting; and 5. The Fund's other certifying officer(s) and I have disclosed to the Fund's auditors and the audit committee of the Fund's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Fund's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Fund's internal control over financial reporting. Date: December 7, 2005 /s/ Joseph C. Weller ----------------------------------------------- Joseph C. Weller, Treasurer and Principal Financial Officer EX-99.906CERT 3 cert99_906.txt EX-99.906CERT CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Carter E. Anthony, President and Principal Executive Officer of RMK Strategic Income Fund, Inc. (the "Fund"), certify that: 1. The Form N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Date: December 7, 2005 /s/ Carter E. Anthony ------------------------ ------------------------------------------ Carter E. Anthony, President and Principal Executive Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Joseph C. Weller, Treasurer and Principal Financial Officer of RMK Strategic Income Fund, Inc. (the "Fund"), certify that: 1. The Form N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Date: December 7, 2005 /s/ Joseph C. Weller ------------------------- ------------------------------------------ Joseph C. Weller, Treasurer and Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----