UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act File No. 811-5399 --------------------------------------------------- THE NEW AMERICA HIGH INCOME FUND, INC. --------------------------------------------------- (Exact Name of Registrant as Specified in Charter) 33 Broad Street, Boston, MA 02109 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Richard E. Floor, Secretary The New America High Income Fund, Inc. 33 Broad Street Boston, MA 02109 Registrant's telephone number, including area code: (617) 263-6400 Date of fiscal year end: December 31 Date of reporting period: July 1, 2003 to December 31, 2003 ITEM 1. REPORTS TO STOCKHOLDERS. THE NEW AMERICA HIGH INCOME FUND, INC. [NEW AMERICA HIGH INCOME FUND LOGO] ANNUAL REPORT DECEMBER 31, 2003 February 6, 2003 DEAR FELLOW SHAREHOLDER, What a difference a year makes to the Fund's shareholders: - The Fund's total return, based on net asset value plus dividends, was 28.6% for the year. - The Fund's total return, based upon market price plus dividends, was 19.2% for the year. - The Fund's net asset value per share increased 15.9%, from $1.89 to $2.19, during 2003. The price of the Fund's shares rose from $2.01 to $2.16 over the period. - Shareholders who bought shares in the August 2003 rights offering had a 13.1% total return on the shares purchased in the offering from the date the new shares were issued through year-end. - Dividends of $.0175 were paid each month, which is also the current target for dividends going forward (subject to market conditions and portfolio performance). At year-end, the annualized dividend, based on a market price of $2.16 and the current monthly dividend of $.0175, was 9.7%. These results reflect a series of major changes which occurred during the year, some of which were under the Board of Directors' control and others which were not. We are unable to control the high yield bond market, which for the first year since 1999 had a positive total return. During the period 1998 - 2002, high yield bond investors suffered the longest (four out of five years) bear market in the history of the high yield bond market. The condition of the high yield bond market improved dramatically in 2003, as discussed in detail below. However, the Board does have some control over the Fund's capital structure. We offered shareholders an opportunity to take advantage of the strong high yield market by issuing rights to subscribe for additional shares at an attractive price and raised an additional $41 million in equity. Subsequently, the Fund issued $30 million of additional Auction Term Preferred Stock (the "ATP") with the aim of restoring the Fund's leverage to its approximate level prior to the rights offering. As our shareholders know, the leverage is an important contributor to the Fund's dividend stream. The leverage also exaggerates the impact of the market's price movements on the Fund's net asset value. The Fund benefited from the leverage in 2003, a year in which the high yield market performed very well. This was a welcome change from the negative impact of the leverage on the Fund's shares in recent years when the high yield market performed poorly. The Fund's new portfolio manager, T. Rowe Price Associates (the "Adviser"), completed the restructuring of the Fund's portfolio discussed in prior reports and invested the new funds from the 2003 offerings without reducing the Fund's common dividend. The Adviser has worked to diversify the Fund's portfolio, which we hope will make its performance somewhat more stable throughout the high yield market cycle. We believe that as a result of the rights offering and other measures it has undertaken, the Fund should have a lower expense ratio going forward than it did in 2003. The portfolio is currently earning enough income to maintain the monthly dividend at its recent level of $.0175 per share. While the Board has currently targeted a monthly dividend of $.0175 per share, market conditions and actual portfolio results will determine what is paid. Like you, the Board has read with a sense of shock the news reports about unethical and illegal activities at some mutual fund companies. During this time of scandal in the mutual fund industry it is important to remember that as a closed end fund, our shares are traded on a stock exchange, so the Fund cannot have the problem of shareholders trading after a 4 p.m. pricing deadline. Shareholders who attempt to profit by rapid-fire trading of the Fund's shares have no direct impact on the Fund's portfolio management because their trades are with other market participants, not the Fund. In addition, each member of the Board of Directors is a shareholder of the Fund. The Fund enjoys a degree of independence from the Adviser that is extremely unusual in the industry because the entire Board is completely financially independent of the Fund's Adviser. The Adviser has no representation whatsoever on the Board. The Board's independence from the Fund's investment adviser was demonstrated by the Board's action to change the Fund's investment adviser in December 2002. T. Rowe Price's discussion of the condition of the high yield bond market and its strategy are below. HIGH YIELD MARKET UPDATE The high yield market ended its second best year ever with impressive fourth quarter returns. The intensity of the year-long rally left the asset class with the lowest yield in its history, tempting managers to continue dipping lower in credit quality to preserve their income streams. Cautious optimism has been replaced by a general sense of euphoria, and risk taking is back in vogue again. In spite of valuations that grew increasingly rich, investors continued to bid up the prices of non-investment grade bonds to record levels. As a result, the high yield market in 2003 generated more return from capital appreciation than income. Our increasingly cautious outlook on the market's absolute valuation is tempered by what we believe is an ideal macro environment for high yield companies and the relative appeal of high yield bonds against other fixed income sectors. The credit cycle continues to improve significantly, and defaults should not be a major problem for the asset class in 2004. We see productivity gains, the overall corporate profit outlook, a healthier stock market, low interest rates and fiscal stimulus as all positive factors for highly indebted companies. High yield bond market cycles tend to last longer than one year, implying that the first half of 2004 should remain constructive. We also base this outlook on the assumption that interest rates may remain low in the near term because of the weak employment picture in the United States. STRATEGY REVIEW Our belief that there is a low probability of significant capital appreciation in the high yield market in 2004 necessitated a shift in overall strategy from a year ago. We anticipate that coupon clipping will be the primary driver of total return and that reinvestment risk of callable debt will challenge high yield managers. The overall yield of the high yield bond market at year-end stood at approximately 7.5% as measured by the J.P. Morgan Global High Yield Bond Index, and is lower already because of a strong January effect. Higher quality BB-rated bonds have dropped to a 5.8% average yield and carry significant interest rate risk. Meanwhile, most lower-rated companies in the portfolio have continued to exhibit improving operating fundamentals, and their bonds still offer low double-digit income. These factors lead us to maintain healthy weightings in the lower middle (B) and bottom credit tiers (CCC) of the market, subject to the Fund's portfolio investment restrictions related to maintaining the AAA rating on the Fund's ATP. We also expect meaningful upgrade activity in this lower rated basket of the portfolio throughout the year. Sector themes are currently much harder to discern, with most of our industries trading at yields tightly clustered around the market average. We continued to increase our exposure in utilities in the last three months of the year because we see more balance sheet repair on the horizon. Telecommunications looks attractive for the same reason, but we have reached our maximum targeted exposures in both sectors. Both industries include a number of rising stars which should regain investment grade status during the next two years. For example, Nextel remains one of our largest positions, but its bonds now yield 5.5%. In our last report, we lamented Nextel's 7% yield. 2 We also note that with the high yield bond market yielding approximately 7.3%, as measured by the J.P. Morgan Global High Yield Bond Index, and prices at record levels, credit mistakes will hurt performance much more than in 2003. Traditional credit disciplines mattered less last year than in the bear market of 1998 to 2002. This trend will not continue indefinitely, because the market already is witnessing the underwriting of speculative transactions at a disturbing pace. We are gratified by the performance achieved last year, but we remain committed to preserving those gains when the high yield market eventually turns south. Thank you for your continued interest in the Fund. Sincerely, /s/ Robert F. Birch /s/ Mark Vaselkiv Robert F. Birch Mark Vaselkiv President Vice President The New America High Income Fund, Inc. T. Rowe Price Associates, Inc. THE VIEWS EXPRESSED IN THIS UPDATE ARE AS OF THE DATE OF THIS LETTER. THESE VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET OR OTHER CONDITIONS. THE FUND AND THE ADVISER DISCLAIM ANY DUTY TO UPDATE THESE VIEWS, WHICH MAY NOT BE RELIED UPON AS INVESTMENT ADVICE. IN ADDITION, REFERENCES TO SPECIFIC COMPANY SECURITIES SHOULD NOT BE REGARDED AS INVESTMENT RECOMMENDATIONS. 3 The New America High Income Fund, Inc. SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2003 (Dollar Amounts in Thousands) MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- 155.26% (d) AEROSPACE AND DEFENSE -- 3.67% $ 850 Aviall, Inc., Senior Notes, 7.625%, 07/01/11 B1 $ 884 2,500 GenCorp, Inc., Senior Subordinated Notes, 9.50%, 08/15/13 (g) B2 2,600 600 Sequa Corporation, Senior Notes, 9%, 08/01/09 B1 660 650 Transdigm, Inc., Senior Subordinated Notes, 8.375%, 07/15/11 B3 657 2,650 Vought Aircraft Industries, Inc., Senior Notes, 8%, 07/15/11 (g) B2 2,703 ------------ 7,504 ------------ AUTOMOBILE -- 3.06% 125 Accuride Corporation, Senior Subordinated Notes, 9.25%, 02/01/08 Caa1 129 700 Ashbury Automotive Group, Inc., Senior Subordinated Notes, 8%, 03/15/14 (g) B3 704 365 Cummins, Inc., Senior Notes, 10.25%, 12/01/10 (g) Ba2 421 50 Dana Corporation, Notes, 7%, 03/15/28 Ba3 50 420 Dana Corporation, Notes, 7%, 03/01/29 Ba3 416 50 Dana Corporation, Senior Notes, 9%, 08/15/11 Ba3 60 175 Dura Operating Corporation, Senior Subordinated Notes, 9%, 05/01/09 B2 175 850 HLI Operating Company Inc., Senior Notes, 10.50%, 06/15/10 B1 977 1,325 TRW Automotive Inc., Senior Notes, 9.375%, 02/15/13 B1 1,517 1,525 TRW Automotive Inc., Senior Subordinated Notes, 11%, 02/15/13 B2 1,807 ------------ 6,256 ------------ BEVERAGE, FOOD AND TOBACCO -- 4.23% 281 Agrilink Foods, Inc., Senior Subordinated Notes, 11.875%, 11/01/08 B3 296 1,200 B&G Foods, Inc., Senior Subordinated Notes, 9.625%, 08/01/07 B3 1,242 $ 1,125 DIMON Incorporated, Senior Notes, 9.625%, 10/15/11 Ba3 $ 1,257 400 Dole Food Company, Inc., Senior Notes, 8.625%, 05/01/09 B2 439 1,175 Dole Food Company, Inc., Senior Notes, 8.875%, 03/15/11 B2 1,284 150 Domino's, Inc., Senior Subordinated Notes, 8.25%, 07/01/11 (g) B3 162 1,975 Le-Nature's, Inc., Senior Subordinated Notes, 9.50%, 06/15/13 (g) B3 2,064 575 Luigino's Inc., Senior Subordinated Notes, 10%, 02/01/06 B3 594 775 Pinnacle Foods Holding Corporation, Senior Subordinated Notes, 8.25%, 12/01/13 (g) B3 790 525 Premium Standard Farms, Inc., Senior Notes, 9.25%, 06/15/11 B1 530 ------------ 8,658 ------------ BROADCASTING AND ENTERTAINMENT -- 11.62% 1,450 CCO Holdings, LLC, Senior Notes, 8.75%, 11/15/13 (g) B3 1,475 1,675 Charter Communications Holdings II, 10.25%, 09/15/10 (g) Caa1 1,755 100 Charter Communications Holdings, LLC, Senior Notes, 10%, 04/01/09 Ca 89 100 Charter Communications Holdings, LLC, Senior Notes, 10.75%, 10/01/09 Ca 92 1,875 Charter Communications Holdings, LLC, Senior Notes, 11.125%, 01/15/11 Ca 1,716 2,500 Comcast Cable Communications, Inc., Notes, 6.75%, 01/30/11 Baa3 2,779 2,550 CSC Holdings, Inc., Senior Notes, 7.625%, 04/01/11 B1 2,677 50 CSC Holdings, Inc., Senior Notes, 7.875%, 12/15/07 B1 53 750 DIRECTV Holdings LLC, Senior Notes, 8.375%, 03/15/13 B1 870 644 Echostar DBS Corporation, Senior Notes, 9.125%, 01/15/09 Ba3 720 The accompanying notes are an integral part of these financial statements. 4 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 375 Echostar DBS Corporation, Senior Notes, 10.375%, 10/01/07 Ba3 $ 412 350 Granite Broadcasting Corporation, Senior Secured Notes, 9.75%, 12/01/10 (g) B3 347 375 Insight Midwest, L.P., Senior Notes, 9.75%, 10/01/09 B2 396 750 Insight Midwest, L.P., Senior Notes, 10.50%, 11/01/10 B2 814 1,025 Mediacom Broadband LLC, Senior Notes, 11%, 07/15/13 B2 1,148 475 Paxson Communications Corp. Senior Subordinated Notes, 10.75%, 07/15/08 Caa1 513 2,350 Quebecor Media Inc., Senior Notes, 11.125%, 07/15/11 B2 2,720 500 Spanish Broadcasting System, Inc., Senior Subordinated Notes, 9.625%, 11/01/09 Caa1 534 1,915 Vivendi Universal, S.A., Senior Notes, 9.25%, 04/15/10 (g) B1 2,260 800 XM Satellite Radio Inc., Senior Secured Notes, 12%, 06/15/10 Caa1 906 1,400 Young Broadcasting, Inc., Senior Subordinated Notes, 10%, 03/01/11 Caa1 1,505 ------------ 23,781 ------------ BUILDING AND REAL ESTATE -- 7.03% 1,550 Associated Materials, Inc., Senior Subordinated Notes, 9.75%, 04/15/12 B3 1,697 1,050 Collins & Aikman Floorcoverings, Inc., Senior Subordinated Notes, 9.75%, 02/15/10 B2 1,124 50 D.R. Horton, Inc., Senior Notes, 8.50%, 04/15/12 Ba1 57 775 Interface, Incorporated, Senior Notes, 7.30%, 04/01/08 Caa1 740 750 LNR Property Corporation, Senior Notes, 7.25%, 10/15/13 (g) Ba3 763 425 LNR Property Corporation, Senior Subordinated Notes, 7.625%, 07/15/13 Ba3 446 $ 775 Mobile Mini, Inc., Senior Notes, 9.50%, 07/01/13 B2 $ 854 850 Norcroft Companies, L.P., Senior Subordinated Notes, 9%, 11/01/11 (g) B3 910 1,600 Shaw Group, Inc., Senior Notes, 10.75%, 03/15/10 (g) Ba2 1,696 2,000 Standard Pacific Corp., Senior Notes, 8%, 02/15/08 Ba2 2,055 725 Texas Industries, Inc., Senior Notes, 10.25%, 06/15/11 B1 814 400 Wackenhut Corrections Corporation, Senior Notes, 8.25%, 07/15/13 B1 426 675 WCI Communities, Inc., Senior Subordinated Notes, 9.125%, 05/01/12 Ba3 744 975 WCI Communities, Inc., Senior Subordinated Notes, 10.625%, 02/15/11 Ba3 1,099 250 Williams Scotsman, Inc., Senior Notes, 9.875%, 06/01/07 B3 252 650 Williams Scotsman, Inc., Senior Secured Notes, 10%, 08/15/08 B2 718 ------------ 14,395 ------------ CHEMICALS, PLASTICS AND RUBBER -- 6.92% 975 ARCO Chemical Company, Debentures, 9.80%, 02/01/20 B1 980 1,850 Avecia Group plc, Senior Notes, 11%, 07/01/09 Caa1 1,665 1,650 Compass Minerals Group, Inc., Senior Subordinated Notes, 10%, 08/15/11 B3 1,848 300 Equistar Chemicals, LP, Senior Notes, 10.625%, 05/01/11 B2 330 1,125 Ethyl Corporation, Senior Notes, 8.875%, 05/01/10 B2 1,204 625 Huntsman Advanced Materials LLC, Senior Secured Notes, 11%, 07/15/10 (g) B2 691 600 Huntsman International LLC, Senior Notes, 9.875%, 03/01/09 B3 657 The accompanying notes are an integral part of these financial statements. 5 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 250 Huntsman International LLC, Senior Subordinated Notes, 10.125%, 07/01/09 Caa1 $ 259 1,050 Koppers Inc., Senior Secured Notes, 9.875%, 10/15/13 (g) B2 1,160 500 Lyondell Chemical Company, Senior Notes, 9.50%, 12/15/08 B1 527 500 Nalco Company, Senior Notes, 7.75%, 11/15/11 (g) B2 535 625 Omnova Solutions, Inc., Senior Notes, 11.25%, 06/01/10 (g) B2 694 525 PolyOne Corporation, Senior Notes, 10.625%, 05/15/10 B3 528 820 Resolution Performance Products, LLC, Senior Secured Notes, 9.50%, 04/15/10 B3 838 1,500 Rhodia S.A., Senior Subordinated Notes, 8.875%, 06/01/11 (g) B3 1,380 775 Rockwood Specialities Group, Inc., Senior Subordinated Notes, 10.625%, 05/15/11 (g) B3 862 ------------ 14,158 ------------ CONTAINERS, PACKAGING AND GLASS -- 13.07% 700 AEP Industries, Inc., Senior Subordinated Notes, 9.875%, 11/15/07 B3 703 2,150 Ainsworth Lumber Co. Ltd., Senior Secured Notes, 12.50%, 07/15/07 B3 2,505 350 Boise Cascade Corporation, Senior Notes, 7%, 11/01/13 Ba2 366 1,200 Bway Corporation, Senior Subordinated Notes, 10%, 10/15/10 B3 1,308 575 Constar International, Inc. Senior Subordinated Notes, 11%, 12/01/12 Caa1 471 1,250 Crown Cork & Seal Company, Inc. Euroco, Senior Secured Notes, 9.50%, 03/01/11 B1 1,412 1,725 Crown Cork & Seal Company, Inc. Euroco, Senior Secured Notes, 10.875%, 03/01/13 B2 2,018 $ 500 Georgia-Pacific Corporation, Senior Debentures, 9.875%, 11/01/21 Ba3 $ 522 500 Georgia-Pacific Corporation, Senior Notes, 8.875%, 02/01/10 Ba2 573 1,975 Georgia-Pacific Corporation, Senior Notes, 9.375%, 02/01/13 Ba2 2,271 450 Graphic Packaging International, Inc., Senior Notes, 8.50%, 08/15/11 (g) B2 497 350 Greif Brothers Corporation, Senior Subordinated Notes, 8.875%, 08/1/12 B2 383 750 Jefferson Smurfit Corporation, Senior Notes, 7.50%, 06/01/13 B2 784 1,425 Longview Fibre Company, Senior Subordinated Notes, 10%, 01/15/09 B2 1,568 1,535 MDP Acquisitions PLC, Senior Notes, 9.625%, 10/01/12 B2 1,719 350 MDP Acquisitions PLC, Subordinated Notes, 15.50%, 10/01/13 (i) B3 406 550 Owens-Brockway Glass Container, Inc., Senior Notes, 8.25%, 05/15/13 B2 590 350 Owens-Brockway Glass Container, Inc., Senior Secured Notes, 7.75%, 05/15/11 B1 375 175 Owens-Brockway Glass Container, Inc., Senior Secured Notes, 8.75%, 11/15/12 B1 195 2,000 Owens-Brockway Glass Container, Inc., Senior Secured Notes, 8.875%, 02/15/09 B1 2,185 1,700 Plastipak Holdings, Inc., Senior Notes, 10.75%, 09/01/11 B3 1,887 1,600 Potlatch Corporation, Senior Subordinated Notes, 10%, 07/15/11 Ba1 1,792 375 Silgan Holdings, Inc., Senior Subordinated Notes, 6.75%, 11/15/13 (g) B1 375 550 Smurfit Capital, Guaranteed Notes, 6.75%, 11/20/05 Ba3 569 100 Stone Container Corporation, Senior Notes, 9.75%, 02/01/11 B2 110 The accompanying notes are an integral part of these financial statements. 6 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 350 Stone Container Finance Company of Canada, Senior Notes, 11.50%, 08/15/06 (g) B2 $ 371 775 Tekni-Plex, Inc., Senior Notes, 8.75%, 11/15/13 (g) B2 806 ------------ 26,761 ------------ DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 4.02% 875 Actuant Financial Corporation, Senior Subordinated Notes, 13%, 05/01/09 B2 1,138 275 AGCO Corporation, Senior Notes, 9.50%, 05/01/08 Ba3 300 650 Case New Holland, Inc., Senior Notes, 9.25%, 08/01/11 (g) Ba3 728 500 Columbus McKinnon Corporation, Senior Subordinated Notes, 8.50%, 04/01/08 Caa1 468 600 General Cable Corporation, Senior Notes, 9.50%, 11/15/10 (g) B2 641 550 Manitowoc, Incorporated, Senior Notes, 7.125%, 11/01/13 B1 567 1,150 National Waterworks, Inc., Senior Subordinated Notes, 10.50%, 12/01/12 B3 1,285 1,350 Rexnord Corp., Senior Subordinated Notes, 10.125%, 12/15/12 B3 1,485 1,550 Trimas Corp., Senior Subordinated Notes, 9.875%, 06/15/12 B3 1,620 ------------ 8,232 ------------ DIVERSIFIED/CONGLOMERATE SERVICE -- 1.86% 975 Brand Services, Inc., Senior Subordinated Notes, 12%, 10/15/12 B3 1,126 1,225 Brickman Group LTD, Senior Subordinated Notes, 11.75%, 12/15/09 B2 1,427 1,150 Coinmach Corporation, Senior Notes, 9%, 02/01/10 B2 1,248 ------------ 3,801 ------------ ECOLOGICAL -- 2.23% 550 Allied Waste North America, Inc., Senior Secured Notes, 7.875%, 04/15/13 Ba3 595 $ 1,225 Casella Waste Systems, Inc., Senior Subordinated Notes, 9.75%, 02/01/13 B3 $ 1,372 825 IESI Corporation, Senior Subordinated Notes, 10.25%, 06/15/12 B3 916 1,550 Synagro Technologies, Inc., Senior Subordinated Notes, 9.50%, 04/01/09 B3 1,693 ------------ 4,576 ------------ ELECTRONICS -- 3.84% 325 AMI Semiconductor, Inc., Senior Subordinated Notes, 10.75%, 02/01/13 B3 387 825 Amkor Technology, Inc., Senior Notes, 7.75%, 05/15/13 B1 883 825 Avaya Inc., Senior Secured Notes, 11.125%, 04/01/09 B2 957 750 Chippac International Ltd., Senior Subordinated Notes, Series B, 12.75%, 08/01/09 B3 827 875 Fairchild Semiconductor Corp., Senior Subordinated Notes, 10.50%, 02/01/09 B2 976 375 Lucent Technologies, Inc., Senior Notes, 5.50%, 11/15/08 Caa1 347 1,350 ON Semiconductor Corporation, Senior Secured Notes, 12%, 03/15/10 B3 1,606 575 ON Semiconductor Corporation, Senior Secured Notes, 13%, 05/15/08 Caa1 667 600 Sanmina Scientific Corporation, Senior Secured Notes, 10.375%, 01/15/10 Ba2 702 250 Stratus Technologies, Inc., Senior Notes, 10.375%, 12/01/08 (g) B3 265 225 Telex Communications, Inc., Senior Notes, 11.50%, 10/15/08 (g) B3 239 ------------ 7,856 ------------ FINANCE -- 4.06% 2,500 Ford Motor Credit Company, Senior Notes, 7.375%, 02/01/11 A3 2,711 The accompanying notes are an integral part of these financial statements. 7 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 2,500 General Motors Acceptance Corporation, Senior Notes, 6.875%, 09/15/11 A3 $ 2,691 2,500 Sprint Capital Corporation, Senior Notes, 8.375%, 03/15/12 Baa3 2,912 ------------ 8,314 ------------ FURNISHINGS, HOUSEWARES, DURABLE CONSUMER PRODUCTS -- .32% 625 Sealy Mattress Company, Senior Subordinated Notes, 9.875%, 12/15/07 B3 648 ------------ FARMING AND AGRICULTURE -- .33% 650 United Agri Products, Inc., Senior Notes, 8.25%, 12/15/11 (g) B3 668 ------------ GROCERY STORES -- .83% 500 Couche-Tard, Inc., Senior Subordinated Notes, 7.50%, 12/15/13 (g) Ba3 526 1,125 The Pantry Inc., Senior Subordinated Notes, 10.25%, 10/15/07 B3 1,167 ------------ 1,693 ------------ HEALTHCARE, EDUCATION AND CHILDCARE -- 6.27% 825 Alliance Imaging, Inc., Senior Subordinated Notes, 10.375%, 04/15/11 B3 870 825 Alpharma, Inc., Senior Notes, 8.625%, 05/01/11 (g) B3 837 900 Ameripath, Inc. Senior Subordinated Notes, 10.50%, 04/01/13 B3 972 200 AmerisourceBergen Corporation, Senior Notes, 8.125%, 09/01/08 Ba3 226 700 Biovail Corporation, Senior Subordinated Notes, 7.875%, 04/01/10 B2 711 675 Concentra Operating Corporation, Senior Subordinated Notes, 9.50%, 08/15/10 B3 731 750 Concentra Operating Corporation, Senior Subordinated Notes, 9.50%, 08/15/10 (g) B3 812 $ 550 Concentra Operating Corporation, Senior Subordinated Notes, 13%, 08/15/09 B3 $ 613 391 Fisher Scientific International Inc., Senior Subordinated Notes, 8.125%, 05/01/12 B2 419 575 Fresenius Medical Care Capital Trust IV, 7.875%, 06/15/11 Ba2 615 875 Genesis Healthcare Corporation, Senior Subordinated Notes, 8%, 10/15/13 (g) B3 906 675 InSight Health Services Corp., Senior Subordinated Notes, 9.875%, 11/01/11 B3 722 1,000 Omnicare, Inc., Senior Subordinated Notes, 8.125%, 03/15/11 Ba2 1,095 750 Quintiles Transnational Corporation, Senior Subordinated Notes, 10%, 10/01/13 (g) B3 810 400 Tenet Healthcare Corporation, Senior Notes, 6.50%, 06/01/12 B1 383 1,150 Tenet Healthcare Corporation, Senior Notes, 7.375%, 02/01/13 B1 1,153 875 Vicar Operating, Inc., Senior Subordinated Notes, 9.875%, 12/01/09 B3 967 ------------ 12,842 ------------ HOTELS, MOTELS, INNS AND GAMING -- 10.64% 975 Ameristar Casinos, Inc., Senior Subordinated Notes, 10.75%, 02/15/09 B2 1,121 1,125 Argosy Gaming Company, Senior Subordinated Notes, 10.75%, 06/01/09 B2 1,216 800 Chukansi Economic Development, Senior Notes, 14.50%, 06/15/09 (g) (e) 960 575 Coast Hotels and Casinos, Inc., Senior Subordinated Notes, 9.50%, 04/01/09 B2 607 1,675 Courtyard Marriott II Ltd., Senior Secured Notes, 10.75%, 02/01/08 B2 1,683 50 Extended Stay America, Inc., Senior Subordinated Notes, 9.875%, 06/15/11 B2 56 The accompanying notes are an integral part of these financial statements. 8 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 550 Horseshoe Gaming Holding Corp., Senior Subordinated Notes, 8.625%, 05/15/09 B2 $ 582 740 Host Marriott LP, Senior Notes, Series I, 9.50%, 01/15/07 Ba3 827 600 Isle of Capri Casinos, Inc., Senior Subordinated Notes, 8.75%, 04/15/09 B2 630 1,475 John Q. Hammons Hotels, LP, First Mortgage Notes, 8.875%, 05/15/12 B2 1,611 775 La Quinta Properties, Inc., Senior Notes, 8.875%, 03/15/11 Ba3 854 1,125 Majestic Star Casino, LLC, Senior Notes, 9.50%, 10/15/10 (g) B2 1,153 1,500 MGM Grand, Inc., Senior Notes, 6.875%, 02/06/08 Ba1 1,590 1,100 Mohegan Tribal Gaming Authority, Senior Subordinated Notes, 8%, 04/01/12 Ba3 1,188 425 Old Evangeline Downs, LLC, Senior Secured Notes, 13%, 03/01/10 (e) 455 1,000 Park Place Entertainment Corp., Senior Subordinated Notes, 9.375%, 02/15/07 Ba2 1,132 1,225 Penn National Gaming, Inc., Senior Subordinated Notes, 11.125%, 03/01/08 B3 1,380 1,350 Pinnacle Entertainment, Inc., Senior Subordinated Notes, 9.25%, 02/15/07 Caa1 1,394 75 Resorts International Hotel and Casino, Inc., Senior Secured Notes, 11.50%, 03/15/09 B2 82 1,200 Station Casinos, Inc., Senior Subordinated Notes, 9.875%, 07/01/10 B2 1,320 575 Trump Casino Holdings, LLC, Senior Notes, 11.625%, 03/15/10 B3 555 1,200 Venetian Casino Resort, LLC, 2nd Mortgage Notes, 11%, 06/15/10 B3 1,392 ------------ 21,788 ------------ INSURANCE -- .58% $ 1,125 Willis Corroon Corporation, Senior Subordinated Notes, 9%, 02/01/09 Ba2 $ 1,181 ------------ LEISURE, AMUSEMENT AND ENTERTAINMENT -- 4.20% 750 AMF Bowling Worldwide, Inc. Senior Subordinated Notes, 13%, 09/01/08 B3 848 650 Bally Total Fitness Holding Corporation, Senior Notes, 10.50%, 07/15/11 (g) B2 653 675 Equinox Holdings, Inc., Senior Notes, 9%, 12/15/09 (g) B3 702 975 The Hockey Company, Senior Secured Note Units, 11.25%, 04/15/09 B2 1,116 100 Six Flags Inc., Senior Notes, 8.875%, 02/01/10 B2 103 1,100 Six Flags Inc., Senior Notes, 9.50%, 02/01/09 B2 1,149 200 Six Flags Inc., Senior Notes, 9.625%, 06/1/14 (g) B2 209 1,400 Six Flags Inc., Senior Notes, 9.75%, 04/15/13 B2 1,470 800 Town Sports International, Inc., Senior Notes, 9.625%, 04/15/11 B2 856 550 Universal City Development Partners, Ltd., Senior Notes, 11.75%, 04/01/10 (g) B2 646 825 Worldspan, L.P., Senior Notes, 9.625%, 06/15/11 (g) B2 847 ------------ 8,599 ------------ MINING, STEEL, IRON AND NON-PRECIOUS METALS -- 10.52% 750 Arch Western Finance LLC, Senior Notes, 6.75%, 07/01/13 (g) Ba2 769 2,230 Century Aluminum Company, 1st Mortgage Notes, 11.75%, 04/15/08 B1 2,486 850 CSN Islands VIII Corporation, Senior Notes, 9.75%, 12/16/13 (g) B1 850 2,675 Earle M. Jorgensen Company, Senior Secured Notes, 9.75%, 06/01/12 B2 2,983 The accompanying notes are an integral part of these financial statements. 9 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 700 Euramax Internanational, Inc., Senior Subordinated Notes, 8.50%, 08/15/11 (g) B2 $ 746 1,750 Gerdau Ameristeel Corporation, Senior Notes, 10.375%, 07/15/11 (g) B2 1,969 150 Intermet Corporation, Senior Notes, 9.75%, 06/15/09 B2 155 1,175 IPSCO Inc., Senior Notes, 8.75%, 06/01/13 Ba3 1,304 150 Joy Global Inc., Senior Subordinated Notes, 8.75%, 03/15/12 B2 167 725 Luscar Coal Ltd., Senior Notes, 9.75%, 10/15/11 Ba3 819 500 Neenah Foundry Company, Senior Notes, 11%, 09/30/10 B2 550 575 Neenah Foundry Company, Senior Subordinated Notes, 13%, 09/30/13 (g) (e) 586 2,000 Peabody Energy Corporation, Senior Notes, 6.875%, 03/15/13 Ba3 2,110 2,400 Russell Metals, Inc., Units, Senior Notes, 10%, 06/01/09 B1 2,556 1,530 Steel Dynamics, Inc., Senior Notes, 9.50%, 03/15/09 B1 1,706 1,200 United States Steel Corporation, Senior Notes, 9.75%, 05/15/10 B1 1,362 1,100 Weirton Steel Corporation, Senior Secured Notes, 10%, 04/01/08 (a)(b) (e) 418 ------------ 21,536 ------------ OIL AND GAS -- 9.18% 1,675 AmeriGas Partners, L.P., Senior Notes, 8.875%, 05/20/11 B2 1,843 225 ANR Pipeline Company, Senior Notes, 8.875%, 03/15/10 B1 253 875 Chesapeake Energy Corporation, Senior Notes, 9%, 08/15/12 Ba3 1,008 1,050 Compagnie Generale de Geophysique (CGG), Senior Notes, 10.625%, 11/15/07 Ba3 1,118 650 Dresser, Inc., Senior Notes, 9.375%, 04/15/11 B2 707 2,600 El Paso Corporation, Senior Notes, 7.75%, 01/15/32 Caa1 2,210 $ 575 El Paso Corporation, Senior Notes, 7.80%, 08/1/31 Caa1 $ 489 125 El Paso Corporation, Senior Notes, 8.05%, 10/15/30 Caa1 109 150 Encore Acquisition Company, Senior Subordinated Notes, 8.375%, 06/15/12 B2 163 1,725 Ferrellgas Partners LP, Senior Notes, 8.75%, 06/15/12 B2 1,897 880 Magnum Hunter Resources, Inc., Senior Notes, 9.60%, 03/15/12 B2 999 750 North American Energy Partners, Senior Notes, 8.75%, 12/1/11 (g) B2 789 200 Northwest Pipeline Corporation, Senior Notes, 8.125%, 03/01/10 B1 224 925 Petroleum Helicopters, Inc., Senior Notes, 9.375%, 05/1/09 B1 980 375 Southern Natural Gas Company, Senior Notes, 8.875%, 03/15/10 B1 421 825 Stone Energy Corporation, Senior Subordinated Notes, 8.25%, 12/15/11 B2 897 350 Swift Energy Company, Senior Subordinated Notes, 10.25%, 08/01/09 B3 380 1,000 Tom Brown, Inc., Units, Senior Subordinated Notes, 7.25%, 09/15/13 Ba3 1,057 925 Universal Compression, Inc., Senior Notes, 7.25%, 05/15/10 B1 962 275 Westport Resources Corporation, Senior Subordinated Notes, 8.25%, 11/01/11 Ba3 303 350 Williams Companies, Inc., Senior Notes, 7.625%, 07/15/19 B3 366 300 Williams Companies, Inc., Senior Notes, 7.75%, 06/15/31 B3 311 300 Williams Companies, Inc., Senior Notes, 8.125%, 03/15/12 B3 336 850 Williams Companies, Inc., Senior Notes, 8.625%, 06/1/10 B3 963 ------------ 18,785 ------------ PERSONAL, FOOD AND MISCELLANEOUS SERVICES -- .54% 850 O'Charleys, Inc., Senior Subordinated Notes, 9%, 11/1/13 (g) Ba3 854 The accompanying notes are an integral part of these financial statements. 10 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED $ 250 Perkins Family Restaurants, L.P., Senior Notes, 10.125%, 12/15/07 B1 $ 254 ------------ 1,108 ------------ PERSONAL NON-DURABLE CONSUMER PRODUCTS -- 3.82% 675 American Achievement Corporation, Senior Notes, 11.625%, 01/01/07 B1 756 1,250 American Safety Razor Company, Senior Notes, 9.875%, 08/01/05 B3 1,238 650 Chattem, Inc., Senior Subordinated Notes, 8.875%, 04/1/08 B2 668 575 Commemorative Brands, Inc., Senior Subordinated Notes, 11%, 01/15/07 Caa1 586 2,125 Jostens, Inc., Senior Subordinated Notes, 12.75%, 05/01/10 B3 2,444 1,675 Rayovac Corporation, Senior Subordinated Notes, 8.50%, 10/01/13 B3 1,746 350 Salton, Inc., Senior Subordinated Notes, 12.25%, 04/15/08 B3 382 ------------ 7,820 ------------ PERSONAL TRANSPORTATION -- 1.56% 1,075 Laidlaw International, Incorporated, Senior Notes,10.75%, 06/15/11 (g) B2 1,209 950 Northwest Airlines, Inc., Senior Notes, 8.875%, 06/01/06 Caa1 865 975 TravelCenters of America, Inc., Senior Subordinated Notes, 12.75%, 05/01/09 B3 1,126 ------------ 3,200 ------------ PRINTING AND PUBLISHING -- 11.66% 100 Advanstar Communications, Inc., Senior Notes, 10.75%, 08/15/10 (g) B3 108 325 Advanstar Communications, Inc., Senior Subordinated Notes, 12%, 02/15/11 Caa2 342 500 American Media Operations, Inc., Senior Subordinated Notes, 10.25%, 05/01/09 B2 535 925 CanWest Media, Inc., Senior Subordinated Notes, 10.625%, 05/15/11 B2 1,055 $ 150 CBD Media LLC, Senior Subordinated Notes, 8.625%, 06/01/11 (g) B3 $ 164 575 Dex Media East LLC, Senior Notes, 9.875%, 11/15/09 B2 656 1,750 Dex Media East, LLC, Senior Subordinated Notes, 12.125%, 11/15/12 B3 2,161 300 Dex Media, Inc., Senior Notes, 8%, 11/15/13 (g) Caa1 317 950 Dex Media, Inc., Senior Discount Notes, 9%, 11/15/13 (g)(h) Caa1 667 800 Dex Media West LLC, Senior Notes, 8.50%, 08/15/10 (g) B2 890 1,475 Dex Media West LLC, Senior Notes, 9.875%, 08/15/13 (g) B3 1,715 2,245 R.H. Donnelley Inc., Senior Subordinated Notes, 10.875%, 12/15/12 (g) B2 2,666 525 Hollinger International Publishing, Inc., Senior Notes, 9%, 12/15/10 B2 557 950 Hollinger Participation Trust, Senior Notes, 12.125%, 11/15/10 (g)(i) B3 1,135 1,050 Houghton Mifflin Company, Senior Subordinated Notes, 9.875%, 02/01/13 B3 1,155 925 Liberty Group Operating, Inc., Senior Subordinated Notes, 9.375%, 02/01/08 Caa1 934 1,610 Mail-Well I Corp., Senior Notes, 9.625%, 03/15/12 B1 1,787 625 Primedia, Inc., Senior Notes, 7.625%, 04/1/08 B3 633 1,525 Transwestern Publishing Company, L.C.C., Senior Subordinated Notes, 9.625%, 11/15/07 B2 1,578 2,050 Vertis, Inc., Senior Secured Notes, 9.75%, 04/01/09 B2 2224 325 Vertis, Inc., Senior Secured Notes, 13.50%, 12/7/09 (g) Caa1 319 2,150 Von Hoffman Corp., Senior Notes, 10.25%, 03/15/09 B2 2,279 ------------ 23,877 ------------ The accompanying notes are an integral part of these financial statements. 11 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- CORPORATE DEBT SECURITIES -- CONTINUED RETAIL STORES -- 1.12% $ 950 Barneys, Incorporated, Senior Notes, 9%, 04/01/08 B3 $ 912 575 Dillard's Inc., Senior Notes, 6.875%, 06/01/05 B2 592 275 Dollar Financial Group, Inc., Senior Notes, 9.75%, 11/15/11 (g) B3 285 225 J.Crew Intermediate, LLC, Senior Discount Notes, 16%, 05/15/08 (h) (e) 181 325 J. Crew Operating Corporation, Senior Subordinated Notes, 10.375%, 10/15/07 Caa3 335 ------------ 2,305 ------------ TELECOMMUNICATIONS -- 13.79% 1,225 ACC Escrow Corp., Senior Notes, 10%, 08/01/11 (g) B2 1,360 1,247 Alamosa (Delaware) Inc., Senior Notes, 11%, 07/31/10 Caa2 1,347 1,050 Alaska Communications System Holdings, Inc.,Senior Notes, 9.875%, 08/15/11 (g) B2 1,103 350 Centennial Cellular Operating Company, L.L.C., Senior Notes, 10.125%, 06/15/13 Caa1 385 800 Cincinnati Bell, Inc., Senior Subordinated Notes, 8.375%, 01/15/14 (g) B3 864 1,050 Dobson Communications Corporation, Senior Notes, 10.875%, 07/01/10 B3 1,142 1,675 Eircom Funding, plc, Senior Subordinated Notes, 8.25%, 08/15/13 B1 1,834 875 IPC Acquisition Corporation, Senior Subordinated Notes, 11.50%, 12/15/09 B3 958 900 LCI International, Inc., Senior Notes, 7.25%, 06/15/07 Caa1 882 625 Level 3 Communications, Inc., Senior Notes, 9.125%, 05/01/08 Caa2 572 1,400 Nextel Communications, Inc., Senior Notes, 6.875%, 10/31/13 B2 1,470 $ 2,600 NEXTEL Communications, Inc., Senior Notes, 7.375%, 08/1/15 B2 $ 2,795 1,750 NEXTEL Communications, Inc., Senior Serial Notes, 9.50%, 02/01/11 B2 1,982 1,975 Pegasus Satellite Communications, Inc., Senior Notes, 11.25%, 01/15/10 (g) Ca 1,817 900 Pegasus Satellite Communications, Inc., Senior Notes, 12.375%, 08/01/06 Ca 841 150 Pegasus Satellite Communications, Inc., Senior Notes, 12.50%, 08/01/07 Ca 140 175 Pegasus Satellite Communications, Inc., Senior Subordinated Discount Notes, 13.50%, 03/01/07 (h) C 149 975 Qwest Corporation, Senior Notes, 9.125%, 03/15/12 (g) Ba3 1,116 1,872 Qwest Services Corp., Senior Subordinated Notes, 13.50%, 12/15/10 (g) (e) 2,274 775 Rogers Wireless Inc., Senior Secured Notes, 9.375%, 06/01/08 Ba3 810 525 Rogers Wireless Inc., Senior Secured Notes, 9.625%, 05/01/11 Ba3 623 450 Rogers Wireless Inc., Senior Subordinated Notes, 8.80%, 10/01/07 B2 462 200 TSI Telecommunications Services, Inc., Senior Subordinated Notes, 12.75%, 02/01/09 B3 220 1,275 US Unwired, Inc., Senior Subordinated Discount Notes, 13.375%, 11/01/09 (h) Caa2 924 390 US West Capital Funding Inc., Notes, 6.375%, 07/15/08 Caa2 387 1,675 Western Wireless Corporation, Senior Notes, 9.25%, 07/15/13 Caa1 1,767 ------------ 28,224 ------------ TEXTILES AND LEATHER -- .44% 475 Anvil Knitwear, Incorporated, Senior Notes, 10.875%, 03/15/07 (e) 309 The accompanying notes are an integral part of these financial statements. 12 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- $ 900 Avondale Mills, Inc., Senior Subordinated Notes, 10.25%, 07/01/13 B3 $ 594 ------------ 903 ------------ UTILITIES -- 13.85% 700 The AES Corporation, Senior Notes, 8.875%, 02/15/11 B3 763 725 The AES Corporation, Senior Notes, 9.375%, 09/15/10 B3 804 1,550 The AES Corporation, Senior Secured, 9%, 05/15/15 (g) B2 1,752 1,600 Allegeny Energy Supply Company, LLC, Senior Notes, 7.80%, 03/15/11 B3 1,506 1,200 Allegeny Energy Supply Company, LLC, Senior Notes, 8.75%, 04/15/12 (g) B3 1,151 25 Aquila, Inc., Senior Notes, 14.875%, 07/01/12 Caa1 34 1,125 Calpine Corporation, Senior Notes, 8.50%, 02/15/11 Caa1 886 925 Calpine Corporation, Senior Notes, 8.50% 07/15/10 (g) (e) 897 875 Calpine Corporation, Senior Notes, 9.875%, 12/01/11 (g) (e) 895 125 CMS Energy Corporation, Senior Notes, 8.50%, 04/15/11 B3 135 250 Dynegy Holdings, Inc., Senior Notes, 7.625%, 10/15/26 Caa2 214 425 Dynegy Holdings, Inc., Senior Notes, 8.75%, 02/15/12 Caa2 427 2,500 Dynegy Holdings, Inc., Senior Notes, 10.125%, 07/15/13 (g) B3 2,881 950 Edison Mission Energy, Senior Notes, 9.875%, 04/15/11 B2 992 125 Edison Mission Energy, Senior Notes, 10%, 08/15/08 B2 131 2,500 FirstEnergy Corporation, Senior Notes, 6.45%, 11/15/11 Baa2 2,584 1,225 Illinois Power Company, Senior Secured 1st Mortgage Bonds, 11.50%, 12/15/10 B3 1,482 $ 675 Massey Energy Company, Senior Notes, 6.625%, 11/15/10 (g) Ba3 $ 695 200 NGC Corporation, Senior Notes, 7.125%, 05/15/18 Caa2 171 1,075 NRG Energy, Inc., Senior Notes, 8%, 12/15/13 B2 1,130 1,650 Orion Power Holdings, Inc., Senior Notes, 12%, 05/01/10 B2 2,030 1,075 PSEG Energy Holdings, L.L.C., Senior Notes, 8.50%, 06/15/11 Ba3 1,192 175 PSEG Energy Holdings, L.L.C., Senior Notes, 10%, 10/01/09 Ba3 205 50 Reliant Resources, Inc., Senior Secured Notes, 9.25%, 07/15/10 (g) B1 54 1,575 Reliant Resources, Inc., Senior Secured Notes, 9.50%, 07/15/13 (g) B1 1,685 414 South Point Energy Center, LLC, Senior Secured, 8.40%, 05/30/12 (g) B2 396 1,450 South Point Energy Center, LLC, Senior Secured, 9.825%, 05/30/19 (g) B2 1,334 1,375 TNP Enterprises, Inc., Senior Subordinated Notes, 10.25%, 04/01/10 Ba3 1,499 75 Utilicorp Canada Financial Corp., Senior Notes, 7.625%, 11/15/09 Caa1 74 375 Utilicorp Canada Financial Corp., Senior Notes, 7.75%, 6/15/11 Caa1 362 ------------ 28,361 ------------ TOTAL CORPORATE DEBT SECURITIES (Total cost of $304,417) 317,830 ------------ SHARES ----------------------------------------------------------------------------------- PREFERRED STOCK -- 3.73% (d) BANKING -- 0.00% 57,935 WestFed Holdings, Inc., Cumulative, Series A, Preferred Stock, 15.50% (a)(c)(f) (e) -- ------------ The accompanying notes are an integral part of these financial statements. 13 MOODY'S PRINCIPAL RATING VALUE AMOUNT/UNITS (UNAUDITED) (NOTE 1(a)) ----------------------------------------------------------------------------------- PREFERRED STOCK -- CONTINUED BROADCASTING AND ENTERTAINMENT -- 2.36% 2,825 CSC Holdings, Inc., Series H, Preferred Stock, 11.75% (f) B2 $ 297 43,300 CSC Holdings, Inc., Series M, Preferred Stock, 11.125% (f) B2 4,546 ------------ 4,843 ------------ CHEMICALS, PLASTICS AND RUBBER -- .91% 2,725 Hercules Trust II, Preferred Stock Unit, 6.50%. Ba3 1,857 ------------ MINING, STEEL, IRON, NON-PRECIOUS METALS -- .01% 18,000 Weirton Steel Corp., Series C Preferred Stock (a)(f) (e) 16 ------------ TELECOMMUNICATIONS -- .45% 1,150 Alamosa Holdings, Inc., Cumulative Preferred Stock, Series B, 7.50% (e) 368 200 Dobson Communications Corporation, Senior Exchangeable Preferred Stock, 12.25% (e) 213 325 Dobson Communications Corporation, Senior Exchangeable Preferred Stock, 12.25% Caa2 345 ------------ 926 ------------ TOTAL PREFERRED STOCK (Total cost of $11,405) 7,642 ------------ COMMON STOCK AND WARRANTS -- 0.00% (d) 950 Barneys, Inc., warrants exp. 2/1/08 (f)(g) -- 4,780 Mediq Inc. Common Stock (a)(c)(f) -- 27,474 WestFed Holdings, Inc., Common Stock (a)(c)(f) -- 10,052 WKI Holdings Common Stock Common Stock (c)(f) -- ------------ TOTAL COMMON STOCK (Total cost of $4,890) -- ------------ SHORT-TERM INVESTMENTS -- 5.13% (d) $ 5,000 Alpine Securitization Corp., Commercial Paper, Due 01/12/04, Discount of 1.09% P-1 $ 4,998 500 Atlantic Asset Securitization Corp., Commercial Paper, Due 01/05/04, Discount of 1.09% P-1 500 5,000 Preferred Receivables Funding Corp., Commercial Paper, Due 01/09/04, Discount of 1.08% P-1 4,999 ------------ TOTAL SHORT-TERM INVESTMENTS (Total cost of $10,497) 10,497 ------------ TOTAL INVESTMENTS (Total cost of $331,209) $ 335,969 ============ (a) Denotes issuer is in bankruptcy proceedings. (b) Non-income producing security which is on non-accrual and/or has defaulted on interest payments. (c) Security is valued at fair value using methods determined by the Board of Directors. The total value of these securities at December 31, 2003 was $0. (d) Percentages indicated are based on total net assets to common shareholders of $204,705. (e) Not rated. (f) Non-income producing. (g) Securities are exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold, normally to qualified institutional buyers in transactions exempt from registration. See Note 1(a) of the Notes to Financial Statements for vaulation policy. Total market value of Rule 144A securities amounted to $73,935 as of December 31, 2003. (h) Securities are step interest bonds. Interest on these bonds accrue based on the effective interest rate. (i) Security is a Pay-in-Kind bond. Income on this bond accrues based upon the effective interest rate. The accompanying notes are an integral part of these financial statements. 14 The New America High Income Fund, Inc. STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS: (Dollars in thousands, except per share amounts) INVESTMENTS IN SECURITIES, at value (Identified cost of $331,209 see Schedule of Investments and Notes 1 and 2) $ 335,969 RECEIVABLES: Investment securities sold 356 Interest and dividends 7,559 PREPAID EXPENSES 29 ------------ Total assets $ 343,913 ------------ LIABILITIES: PAYABLES: Investment securities purchased $ 1,375 Dividend on common stock 1,826 Dividend on preferred stock 55 Swap settlement payable 287 INTEREST RATE SWAP, at fair value (Note 6) 5,340 ACCRUED EXPENSES (Note 3) 261 OTHER PAYABLE 64 ------------ Total liabilities $ 9,208 ------------ AUCTION TERM PREFERRED STOCK: $1.00 par value, 1,000,000 shares authorized, 5,200 shares issued and outstanding, liquidation preference of $25,000 per share (Notes 4 and 5) $ 130,000 ------------ NET ASSETS $ 204,705 ============ REPRESENTED BY: COMMON STOCK: $0.01 par value, 200,000,000 shares authorized, 93,528,394 shares issued and outstanding $ 935 CAPITAL IN EXCESS OF PAR VALUE 380,989 UNDISTRIBUTED NET INVESTMENT INCOME (Note 2) 570 ACCUMULATED NET REALIZED LOSS FROM SECURITIES TRANSACTIONS (Note 2) (177,209) NET UNREALIZED DEPRECIATION ON INVESTMENTS AND INTEREST RATE SWAPS (580) ------------ NET ASSETS APPLICABLE TO COMMON STOCK (Equivalent to $2.19 per share, based on 93,528,394 shares outstanding) $ 204,705 ============ STATEMENT OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 2003 INVESTMENT INCOME: (Note 1) (Dollars in thousands) Interest income $ 23,593 Other income 178 Dividend income 163 ------------ Total investment income $ 23,934 ------------ EXPENSES: Cost of leverage: Preferred and auction fees (Note 5) $ 268 ------------ Total cost of leverage $ 268 ------------ Professional services expenses: Management fees (Note 3) $ 935 Legal fees (Note 8) 355 Custodian and transfer agent fees 282 Audit fees 84 ------------ Total professional services expenses $ 1,656 ------------ Administrative expenses: General administrative fees $ 440 Directors' fees 192 Shareholder meeting expenses 147 NYSE fees 64 Shareholder communications expense 51 Miscellaneous expenses 22 ------------ Total administrative expenses $ 916 ------------ Total expenses $ 2,840 ------------ Net investment income $ 21,094 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT ACTIVITIES: Realized loss on investments $ (122) ------------ Net swap settlement disbursements (Note 6) $ (3,316) ------------ Change in net unrealized depreciation on investments $ 31,146 Change in unrealized depreciation on interest rate swap agreement 1,428 ------------ Total change in net unrealized depreciation on investments and interest rate swap $ 32,574 ------------ Net gain on investments and interest rate swap $ 29,136 ------------ COST OF PREFERRED LEVERAGE Distributions to preferred stockholders $ (1,330) ------------ Net increase in net assets resulting from operations $ 48,900 ============ The accompanying notes are an integral part of these financial statements. 15 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED DECEMBER 31, 2003 2002 --------------- ------------- FROM OPERATIONS: (Dollars in thousands, except per share amounts) Net investment income $ 21,094 $ 25,177 Realized loss on investments, net (122) (45,362) Net swap settlement disbursements (3,316) (2,851) Change in net unrealized depreciation on investments and other financial instruments 32,574 (4,364) Distributions from net investment income related to preferred stock Dividends to preferred stockholders ($313 and $488 per preferred share in 2003 and 2002, respectively) (1,330) (2,530) ---------- ---------- Net increase (decrease) in net assets resulting from operations $ 48,900 $ (29,930) ---------- ---------- FROM FUND SHARE AND AUCTION TERM PREFERRED STOCK TRANSACTIONS: Proceeds from rights offering (23,397,095 shares), net of $817 of offering costs (Note 9) $ 41,532 $ -- Offering costs and sales load from sale of Auction Term Preferred Stock Series C (Note 4) (658) -- Net asset value of 583,146 shares and 1,215,044 shares issued to common stockholders for reinvestment of dividends in 2003 and 2002, respectively 1,213 2,710 ---------- ---------- Increase in net assets resulting from fund share transactions $ 42,087 $ 2,710 ---------- ---------- DISTRIBUTIONS TO COMMON STOCKHOLDERS: From net investment income ($.22 and $.29 per share in 2003 and 2002, respectively) $ (17,452) $ (19,841) ---------- ---------- Total net increase (decrease) in net assets $ 73,535 $ (47,061) ---------- ---------- NET ASSETS APPLICABLE TO COMMON STOCK: Beginning of period $ 131,170 $ 178,231 ---------- ---------- End of period (Including $570 and $351 of undistributed net investment income at December 31, 2003 and December 31, 2002, respectively) $ 204,705 $ 131,170 ========== ========== The accompanying notes are an integral part of these financial statements. 16 The New America High Income Fund, Inc. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS FOR EACH SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD FOR THE YEARS ENDED DECEMBER 31, 2003 (b) 2002 2001 (c) 2000 1999 1998 (b) -------- -------- -------- -------- -------- -------- NET ASSET VALUE: Beginning of period $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03 -------- -------- -------- -------- -------- -------- NET INVESTMENT INCOME .26# .37 .48 .60 .66 .71# NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS .34 (.72) (.24) (1.00) (.30) (.81)# DISTRIBUTIONS FROM NET INVESTMENT INCOME RELATEDTOPREFERRED STOCK: (.06) (.08) (.12) (.18) (.18) (.17) -------- -------- -------- -------- -------- -------- TOTAL FROM INVESTMENT OPERATIONS .54 (.43) .12 (.58) .18 (.27) -------- -------- -------- -------- -------- -------- DISTRIBUTIONS TO COMMON SHAREHOLDERS: From net investment income (.22) (.29) (.36) (.43) (.48) (.54) -------- -------- -------- -------- -------- -------- TOTAL DISTRIBUTIONS (.22) (.29) (.36) (.43) (.48) (.54) -------- -------- -------- -------- -------- -------- Effect of rights offering and related expenses; and Auction Term Preferred Stock offering costs and sales load (.02) -- -- -- -- (.06) -------- -------- -------- -------- -------- -------- NET ASSET VALUE: End of period $ 2.19 $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 ======== ======== ======== ======== ======== ======== PER SHARE MARKET VALUE: End of period $ 2.16 $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25 ======== ======== ======== ======== ======== ======== TOTAL INVESTMENT RETURN+ 19.23% (12.97)% 13.97% (3.84)% (16.92)% (15.15)% ======== ======== ======== ======== ======== ======== The accompanying notes are an integral part of these financial statements. 17 FOR THE YEARS ENDED DECEMBER 31, 2003 (b) 2002 2001(c) 2000 1999 1998 (b) --------- --------- --------- --------- --------- --------- NET ASSETS, END OF PERIOD, APPLICABLE TO COMMON STOCK (a) $ 204,705 $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518 ========= ========= ========= ========= ========= ========= NET ASSETS, END OF PERIOD, APPLICABLE TO PREFERRED STOCK (a) $ 130,000 $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000 ========= ========= ========= ========= ========= ========= TOTAL NET ASSETS APPLICABLE TO COMMON AND PREFERRED STOCK, END OF PERIOD (a) $ 334,705 $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518 ========= ========= ========= ========= ========= ========= EXPENSE RATIOS: Ratio of preferred and other leverage expenses to average net assets* .16% .18% .17% .19% .18% .14% Ratio of operating expenses to average net assets* 1.56% 1.46% 1.11% .99% .89% .82% --------- --------- --------- --------- --------- --------- RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS* 1.72% 1.64% 1.28% 1.18% 1.07% .96% ========= ========= ========= ========= ========= ========= RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS* 12.81% 16.48% 16.70% 17.46% 16.36% 15.22% RATIO OF TOTAL EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO COMMON AND PREFERRED STOCK 1.05% .89% .71% .64% .60% .58% RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS APPLICABLE TO COMMON AND PREFERRED STOCK 7.79% 8.91% 9.23% 9.41% 9.16% 9.26% PORTFOLIO TURNOVER RATE 120.47% 82.47% 38.89% 45.58% 66.74% 124.67% (a) Dollars in thousands. (b) The Fund issued Series D ATP on May 20, 1998 and additional shares of Series C ATP on October 17, 2003. The per share data and ratios for the years ended December 31, 1998 and December 31, 2003 reflect these transactions. (c) As required, effective January 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began amortizing discount and premium on debt securities. This had no effect on net investment income per share and a $.01 increase to net realized and unrealized loss per share for the year ended December 31, 2001. The effect of this change increased the ratio of net investment income to average net assets from 16.29% to 16.70%. Per share, ratios and supplemental data for periods prior to January 1, 2001 have not been restated to reflect this change in presentation. * Ratios calculated on the basis of expenses and net investment income applicable to the common shares relative to the average net assets of the common stockholders only. The expense ratio and net investment income ratio do not reflect the effect of dividend payments (including net swap settlement receipts/payments) to preferred stockholders. # Calculation is based on average shares outstanding during the indicated period due to the per share effect of the Fund's March 1998 and August, 2003 rights offerings. + Total investment return is calculated assuming a purchase of common stock at the current market value on the first day and a sale at the current market value on the last day of each year reported. Dividends and distributions are assumed for purposes of this calculation to be reinvested at prices obtained under the dividend reinvestment plan. This calculation does not reflect brokerage commissions. The accompanying notes are an integral part of these financial statements. 18 INFORMATION REGARDING SENIOR SECURITIES AS OF DECEMBER 31, 2003 2002 2001 2000 1999 1998 -------------- -------------- -------------- -------------- -------------- -------------- TOTAL AMOUNT OUTSTANDING: Preferred Stock $ 130,000,000 $ 100,000,000 $ 150,000,000 $ 160,000,000 $ 210,000,000 $ 210,000,000 ASSET COVERAGE: Per Preferred Stock Share (1) $ 64,366 $ 57,793 $ 54,705 $ 54,989 $ 55,740 $ 57,562 INVOLUNTARY LIQUIDATION PREFERENCE: Preferred Stock Share (2) $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 APPROXIMATE MARKET VALUE: Per Preferred Stock Share (2) $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 $ 25,000 (1) Calculated by subtracting the Fund's total liabilities (not including the Preferred Stock) from the Fund's total assets and dividing such amount by the number of Preferred Shares outstanding. (2) Plus accumulated and unpaid dividends. The accompanying notes are an integral part of these financial statements. 19 The New America High Income Fund, Inc. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 (1) SIGNIFICANT ACCOUNTING AND OTHER POLICIES The New America High Income Fund, Inc. (the Fund) was organized as a corporation in the state of Maryland on November 19, 1987 and is registered with the Securities and Exchange Commission as a diversified, closed-end investment company under the Investment Company Act of 1940. The Fund commenced operations on February 26, 1988. The investment objective of the Fund is to provide high current income while seeking to preserve stockholders' capital through investment in a professionally managed, diversified portfolio of "high yield" fixed-income securities. The Fund invests primarily in fixed maturity corporate debt securities that are rated less than investment grade. Risk of loss upon default by the issuer is significantly greater with respect to such securities compared to investment grade securities because these securities are generally unsecured and are often subordinated to other creditors of the issuer and because these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as a recession, than are investment grade issuers. In some cases, the collection of principal and timely receipt of interest is dependent upon the issuer attaining improved operating results, selling assets or obtaining additional financing. See the schedule of investments for information on individual securities as well as industry diversification and credit quality ratings. The Fund's financial statements have been prepared in conformity with accounting principles generally accepted in the United States that require the management of the Fund to, among other things, make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund, which are in conformity with those generally accepted in the investment company industry. (a) VALUATION OF INVESTMENTS--Investments for which market quotations are readily available are stated at market value, which is determined by using the most recently quoted bid price provided by an independent pricing service or principal market maker. Independent pricing services provide market quotations based primarily on quotations from dealers and brokers, market transactions, accessing data from quotations services, offering sheets obtained from dealers and various relationships between securities. Short-term investments with original maturities of 60 days or less are stated at amortized cost, which approximates market value. Following procedures approved by the Board of Directors, investments for which market quotations are not readily available (primarily fixed-income corporate bonds and notes) are stated at fair value on the basis of subjective valuations furnished by securities dealers and brokers. Other investments, with a cost of approximately $9,809,000 and a value of $0, are valued in good faith at fair market value using methods determined by the Board of Directors. (b) INTEREST AND DIVIDEND INCOME--Interest income is accrued on a daily basis. Discount on short-term investments is amortized to investment income. Premiums or discounts on corporate debt securities are amortized based on the interest method for financial reporting purposes. All income on original issue discount and step interest bonds is accrued based on the effective interest method for tax reporting purposes as required by federal income tax regulations. The Fund does not amortize market premiums or discounts for tax purposes. Dividend payments received in the 20 form of additional securities are recorded on the ex-dividend date in an amount equal to the value of the security on such date. (c) FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders each year. Accordingly, no federal income tax provision is required. (2) TAX MATTERS AND DISTRIBUTIONS At December 31, 2003, the total cost of securities (including temporary cash investments) for federal income tax purposes was approximately $331,320,000. Aggregate gross unrealized gain on securities in which there was an excess of value over tax cost was approximately $17,018,000. Aggregate unrealized loss on securities in which there was an excess of tax cost over value was approximately $12,369,000. Net unrealized gain on investments for tax purposes at December 31, 2003 was approximately $4,649,000. At December 31, 2003, the Fund had approximate capital loss carryovers available to offset future capital gains, if any, to the extent provided by regulations: CARRYOVER AVAILABLE EXPIRATION DATE --------------------- ----------------- $ 35,581,000 December 31, 2007 21,821,000 December 31, 2008 67,043,000 December 31, 2009 45,239,000 December 31, 2010 7,387,000 December 31, 2011 ------------- $ 177,071,000 ============= It is the policy of the Fund to reduce future distributions of realized gains to shareholders to the extent of the unexpired capital loss carry forward. The tax character of distributions paid to common and preferred shareholders of approximately $18,782,000 in 2003 was from ordinary income. As of December 31, 2003, the components of distributable earnings on a tax basis were approximately: Undistributed Net Investment Income $ 542,000 Undistributed Long-Term Gain -- Unrealized Gain $ 4,649,000 Capital Losses Carry Forward and Post October Losses Deferred $ (177,071,000) The difference between components of distributable earnings on a tax basis and the amounts reflected in the Statement of Assets and Liabilities are primarily due to wash sales, accrued interest on defaulted bonds and amortization of swap termination payments. Distributions on common stock are declared based upon annual projections of the Fund's investment company taxable income. The Fund records all dividends and distributions payable to shareholders on the ex-dividend date and declares and distributes income dividends monthly. The Fund was required to amortize market discounts and premiums for financial reporting purposes beginning January 1, 2001. This new accounting policy results in additional interest income in some years and decreased interest income in others for financial reporting purposes only. The Fund does not amortize market discounts or premiums for tax purposes. Therefore, the additional or decreased interest income for financial reporting purposes does not result in additional or decreased common stock dividend income. The Fund has recorded several reclassifications in the capital accounts to present undistributed net investment income or accumulated net realized gains and losses on a tax basis, which is considered to be more informative to the shareholder. These reclassifications have no impact on the net asset value of the Fund. 21 (3) INVESTMENT ADVISORY AGREEMENT T. Rowe Price Associates, Inc. (T. Rowe Price), the Fund's Investment Advisor, earned approximately $935,000 in management fees during the year ended December 31, 2003. Management fees paid by the Fund to T. Rowe Price were calculated at 0.50% on the first $50,000,000 of the Fund's average weekly net assets, 0.40% on the next $50 million and 0.30% on average weekly net assets in excess of $100 million. T. Rowe Price's fee is calculated based on assets attributable to the Fund's common and auction term preferred stock. At December 31, 2003, the fee payable to T. Rowe Price was approximately $98,000, which was included in accrued expenses on the accompanying statement of assets and liabilities. (4) AUCTION TERM PREFERRED STOCK (ATP) On October 17, 2003, the Fund issued 1,200 shares of Series C ATP. The underwriting discount of $300,000 and offering expenses of $358,000 were recorded as a reduction of the capital in excess of par value on common stock. The Fund had 5,200 shares of ATP issued and outstanding at December 31, 2003. The ATP's dividends are cumulative at a rate determined at an auction, and dividend periods will typically be 28 days unless notice is given for periods to be longer or shorter than 28 days. Dividend rates ranged from 1.06% to 1.60% for the year ended December 31, 2003. The average dividend rate as of December 31, 2003 was 1.18%. The ATP is redeemable, at the option of the Fund, or subject to mandatory redemption (if the Fund is in default of certain coverage requirements) at a redemption price equal to $25,000 per share plus accumulated and unpaid dividends. The ATP has a liquidation preference of $25,000 per share plus accumulated and unpaid dividends. The Fund is required to maintain certain asset coverages with respect to the ATP under the Fund's Charter and the 1940 Act in order to maintain the Fund's Aaa/AAA ratings by Moody's Investors Service, Inc. and Fitch, Inc., respectively. (5) ATP AUCTION-RELATED MATTERS Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to an agreement entered into on January 4, 1994. The term of the agreement is unlimited and may be terminated by either party. BTC may resign upon notice to the Fund, such resignation to be effective on the earlier of the 90th day after the delivery of such notice and the date on which a successor auction agent is appointed by the Fund. The Fund may also replace BTC as auction agent at any time. After each auction, BTC as auction agent will pay to each broker-dealer, from funds provided by the Fund, a maximum service charge at the annual rate of 0.25 of 1% or such other percentage subsequently agreed to by the Fund and the broker-dealers, of the purchase price of shares placed by such broker-dealers at such auction. In the event an auction scheduled to occur on an auction date fails to occur for any reason, the broker-dealers will be entitled to service charges as if the auction had occurred and all holders of shares placed by them had submitted valid hold orders. The Fund incurred approximately $242,000 for service charges through December 31, 2003. This amount is included under the caption preferred and auction fees in the accompanying statement of operations. (6) INTEREST RATE SWAPS The Fund entered into an interest payment swap arrangement with Fleet Bank (Fleet) for the purpose of partially hedging its dividend payment obligations with respect to the ATP. Pursuant to the Swap Arrangement the Fund makes payments to Fleet on a monthly basis at a fixed annual rate. In exchange for such payment Fleet makes payments to the Fund on a monthly basis 22 at a variable rate determined with reference to one month LIBOR. The variable rates ranged from 1.10% to 1.44% for the year ended December 31, 2003. The effective date, notional amount, maturity and fixed rate of the swap is as follows: NOTIONAL FIXED EFFECTIVE CONTRACT ANNUAL DATE AMOUNT MATURITY RATE 10/1/01 $100 million 10/1/06 4.50% Swap transactions, which involve future settlement, give rise to credit risk. Credit risk is the amount of loss the Fund would incur in the event counterparties failed to perform according to the terms of the contractual commitments. In the event of nonperformance by the counterparty, the Fund's dividend payment obligation with respect to the ATP would no longer be partially hedged. Therefore, the ATP dividend would no longer be partially fixed. In an unfavorable interest rate environment, the Fund would be subject to higher net ATP dividend payments, resulting in less income available for the common share dividend. The Fund does not anticipate nonperformance by any counterparty. While notional contract amounts are used to express the volume of interest rate swap agreements, the amounts potentially subject to credit risk, in the event of nonperformance by counterparties, are substantially smaller. The Fund recognizes all freestanding derivative instruments in the balance sheet as either assets or liabilities and measures them at fair value. Any change in the unrealized gain or loss is recorded in current earnings. For the year ended December 31, 2003, the Fund's obligations under the swap agreements were more than the amount received from Fleet by approximately $3,316,000 and such amount is included in the accompanying statement of operations. The estimated fair value of the interest rate swap agreement at December 31, 2003 amounted to approximately $5,340,000 of unrealized loss and is presented in the accompanying balance sheet. (7) PURCHASES AND SALES OF SECURITIES Purchases and proceeds of sales or maturities of long-term securities during the year ended December 31, 2003 were approximately: Purchases of securities $ 374,439,000 Sales of securities $ 309,130,000 (8) RELATED PARTY TRANSACTIONS A partner of Goodwin Procter LLP, counsel to the Fund, serves as a Director of the Fund. Fees earned by Goodwin Procter LLP amounted to approximately $916,000 for the year ended December 31, 2003. This total is broken out as follows: Operations (Including change in investment advisor) $ 253,000 Rights offering 399,000 ATP Series C offering 264,000 ---------- $ 916,000 ========== The Fund paid approximately $272,000 during the year ended December 31, 2003 to two officers of the Fund for the provision of certain administrative services. (9) RIGHTS OFFERING The Fund issued to stockholders of record as of the close of business on July 21, 2003, rights to subscribe for an aggregate of 23,397,095 shares of common stock, $.01 par value per share, of the Fund. One right was issued for each three full shares of common stock beneficially held on the record date. The rights entitled a stockholder to acquire at the subscription price of $1.81 per share one share for each right held. The subscription price was 94% of the average of the last reported sales price of the Fund's Common Stock on the New York Stock Exchange on August 18, 2003, the expiration date 23 and the nine preceding business days. On August 22, 2003 the Fund completed its rights offering. Proceeds of approximately $42,349,000 and shares of 23,397,095 were recorded. In addition the deferred offering expense of approximately $817,000 was netted against the rights offering proceeds. COMMON AND AUCTION TERM PREFERRED STOCK TRANSACTIONS From time to time in the future, the Fund may effect redemptions and/or repurchases of its ATP as provided in the applicable constituent instruments or as agreed upon by the Fund and sellers. The Fund intends to effect such redemptions and/or repurchases to the extent necessary to maintain applicable asset coverage requirements. The Fund may purchase shares of its Common Stock in the open market when the Common Stock trades at a discount to net asset value or at other times if the Fund determines such purchases are in the best interest of its stockholders. There can be no assurance that the Fund will take such action in the event of a market discount to net asset value or that Fund purchases will reduce a discount. 24 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders The New America High Income Fund, Inc. We have audited the accompanying statement of assets and liabilities of The New America High Income Fund, Inc., including the schedule of investments, as of December 31, 2003, the statement of operations for the year then ended and the statement of changes in net assets and financial highlights for the two years ended December 31, 2003. These financial statements are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial highlights for each of the years in the four-year period ended December 31, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial highlights in their report dated February 1, 2002. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2003 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The New America High Income Fund, Inc. as of December 31, 2003, the results of its operations, changes in its net assets and financial highlights for the periods indicated above, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts February 2, 2004 25 DIRECTORS Robert F. Birch Joseph L. Bower Richard E. Floor Bernard J. Korman Ernest E. Monrad OFFICERS Robert F. Birch - President Ellen E. Terry - Vice President, Treasurer Richard E. Floor - Secretary INVESTMENT ADVISOR T. Rowe Price Associates, Inc. 100 E. Pratt Street Baltimore, Maryland 21202 ADMINISTRATOR The New America High Income Fund, Inc. 33 Broad Street Boston, MA 02109 (617) 263-6400 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, MA 02110 TRANSFER AGENT EquiServe Trust Company N.A. P.O. Box 43011 Providence, RI 02940-3011 (617) 328-5000 ext. 6406 (800) 426-5523 INDEPENDENT PUBLIC ACCOUNTANTS KPMG LLP 99 High Street Boston, MA 02110 Listed: NYSE Symbol: HYB Web site: www.newamerica-hyb.com 26 INFORMATION ABOUT THE FUND'S DIRECTORS AND OFFICERS INDEPENDENT DIRECTORS NUMBER OF PORTFOLIOS PRINCIPAL IN FUND OTHER NAME, POSITION(S) TERM OF OFFICE(2) OCCUPATION(S) COMPLEX(3) DIRECTORSHIPS ADDRESS(1), AND HELD WITH AND LENGTH OF DURING OVERSEEN HELD BY DATE OF BIRTH FUND TIME SERVED PAST 5 YEARS BY DIRECTOR DIRECTOR -------------------------------------------------------------------------------------------------------------------- Joseph L. Bower Director Director Professor, Harvard Business 1 Director of Anika DOB: 09/21/38 since 1988 School since 1963 - as Therapeutics, Inc., Donald K. David Professor Sonesta International of Business Administration Hotels Corporation, since 1986, Senior Loews, Corporation Associate Dean, Chair of the (a conglomerate), Doctoral Programs, Chair of and Brown Shoe the General Management Company, Inc., Area, and currently, Chair Independent of the General Manager General Partner of Program. ML-Lee Acquisition Funds, L.P., and Trustee of TH Lee-Putnam Emerging Opportunities Portfolio. Bernard J. Korman Director Director Chairman of the Board of 1 Director of DOB: 10/13/31 since 1987 Directors of Philadelphia Kramont Realty Health Care Trust. Trust, Omega Healthcare Investors, Inc. (real estate investment trust), The Pep Boys, Inc. (automotive supplies) and Nutramax Products, Inc. (a consumer healthcare products company). (1) The address for each Director is c/o The New America High Income Fund, Inc., 33 Broad Street, Boston, MA 02109. (2) Each Director serves as such until the next annual meeting of the Fund's stockholders and until the Director's successor shall have been duly elected and qualified. (3) The New America High Income Fund, Inc. is not part of any fund complex. 27 NUMBEROF PORTFOLIOS PRINCIPAL IN FUND OTHER NAME, POSITION(S) TERM OF OFFICE(2) OCCUPATION(S) COMPLEX(3) DIRECTORSHIPS ADDRESS(1), AND HELD WITH AND LENGTH OF DURING OVERSEEN HELD BY DATE OF BIRTH FUND TIME SERVED PAST 5 YEARS BY DIRECTOR DIRECTOR -------------------------------------------------------------------------------------------------------------------- Ernest E. Monrad Director Director Trustee since 1960 and 1 Trustee Century DOB: 5/30/30 since 1988 Chairman of the Trustees Shares Trust and from 1969 to May 2001 of Century Small Northeast Investors Trust; Cap Select Chairman, Assistant Treasurer and a Director since 1981 of Northeast Investors Growth Fund; Director of Northeast Investment Management, Inc., Northeast Management & Research Co., Inc. INTERESTED DIRECTORS AND OFFICERS Robert F. Birch(4) Director Director Mutual Fund Director 1 Director of DOB: 3/12/36 and since 1992 Hyperion Funds and President the Brandywine Funds Richard E. Floor(5) Director Director Partner through his 1 Director of DOB: 8/3/40 and since 1987 professional corporation Affiliated Managers Secretary with the law firm of Group, Inc. Goodwin Procter LLP, Boston, Massachusetts (1) The address for each Director is c/o The New America High Income Fund, Inc., 33 Broad Street, Boston, MA 02109. (2) Each Director serves as such until the next annual meeting of the Fund's stockholders and until the Director's successor shall have been duly elected and qualified. (3) The New America High Income Fund, Inc. is not part of any fund complex. (4) As the Fund's President, Mr. Birch is an interested person of the Fund within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). (5) Mr. Floor is an interested person of the Fund within the meaning of the 1940 Act because, through his professional corporation, Mr. Floor is a partner of Goodwin Procter LLP, counsel to the Fund. Ellen E. Terry (D.O.B. 4/9/59), Vice President and Treasurer of the Fund since February 18, 1992, is the only executive officer of the Fund not named in the above table of interested Directors. Ms. Terry served as Acting President and Treasurer of the Fund from October 1991 through February 18, 1992, and as Vice President of the Fund prior to such time. Ms. Terry's address is: c/o The New America High Income Fund, 33 Broad Street, Boston, MA 02109. A Fund officer holds office until the officer's successor is duly elected and qualified, until the officer's death or until the officer resigns or has been removed. 28 EquiServe Trust Company N.A. P.O. Box 43011 Providence, RI 02940-3011 NEHCM-SA-03 ITEM 2. CODE OF ETHICS. As of December 31, 2003, the Fund has adopted a code of ethics, as defined in Item 2 of Form N-CSR, that applies to its Principal Executive Officer, Principal Financial Officer/Chief Financial Officer, Principal Accounting Officer, Vice President, Treasurer and Manager of Accounting and Finance. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Fund's Board of Directors has determined that none of the members of the Fund's Audit and Nominating Committee is an "audit committee financial expert" as that term is defined in the instructions to this Item. The Fund's Board of Directors has also determined that there is no need to appoint a Director to the Audit and Nominating Committee who qualifies as an "audit committee financial expert" at this time because the Board of Directors (a) has determined that each member of the Audit and Nominating Committee is "financially literate" and has "accounting or related financial management experience" as these terms are used in the corporate governance standards of the New York Stock Exchange and (b) believes that each has substantial experience relating to the review of financial statements and the operations of audit committees. Accordingly, the Board believes that the Audit and Nominating Committee members are qualified to evaluate the Fund's financial statements, supervise the Fund's preparation of its financial statements, and oversee the work of the Fund's independent auditors. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. AUDIT FEES. For fiscal 2003 and 2002, the aggregate fees billed by KPMG LLP ("KPMG"), the Fund's independent public accountants, for audit of the Fund's annual financial statements, review of the semi-annual financial statements and assistance in connection with the Fund's filing of the registration statements totaled $96,000 and $48,500, respectively. AUDIT-RELATED FEES. KPMG billed $31,500 and $26,000 for fiscal 2003 and 2002, respectively, for assurance and related services that are reasonably related to the performance of the audit and review of the Fund's financial statements, including quarterly agreed upon procedures related to requirements of the Fund's articles supplementary. TAX FEES. During fiscal 2003, KPMG's fees for its professional services related to preparation of the Fund's federal and state tax returns, review of excise distributions, and testing of quarterly asset diversification totaled $7,000. During fiscal 2002, KPMG's fees for its professional services related to preparation of the Fund's federal and state tax returns, review of excise distributions, and testing of quarterly asset diversification totaled $6,000. ALL OTHER FEES. KPMG did not provide any other services to the Fund in 2003 or 2002 other than those listed above. The services described in the three preceding paragraphs, representing engagements entered into prior to the effective date of the SEC's pre-approval requirements, although not formally pre-approved, were reviewed by the Audit and Nominating Committee. NON-AUDIT FEES. KPMG did not provide any other services to the Fund in 2003 or 2002 other than those listed above. KPMG's fees for non-audit services in fiscal 2003 billed to T. Rowe Price Group, Inc. ("Price Group") and its subsidiaries totaled $852,200. KPMG's fees for non-audit services in fiscal 2002 billed to Price Group totaled $372,490, other than fees billed for professional services rendered for the audit of the annual financial statements and the reviews of the financial statements included in Forms 10-Q. The Committee has considered and determined that the performance by KPMG of non-audit services to Price Group and its subsidiaries is compatible with maintaining that firm's independence in connection with serving as the Fund's independent public accountants. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The Fund has a separately-designated standing audit committee, the Audit and Nominating Committee, established by and amongst the Fund's Board of Directors for the purpose of overseeing the accounting and financial reporting processes of the Fund and audits of the Fund's financial statements. The Audit and Nominating Committee consists of the Fund's Directors who are not "interested persons" of the Fund within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act") - Joseph L. Bower, Bernard J. Korman and Ernest E. Monrad. ITEM 6. [Reserved.] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. PROXY VOTING POLICIES AND PROCEDURES At its June 26, 2003 meeting, the Fund's Board of Directors authorized and directed T. Rowe Price, the Fund's investment adviser, to vote proxies relating to the Fund's portfolio securities in accordance with T. Rowe Price's proxy voting policies and procedures. T. Rowe Price, as an investment adviser with a fiduciary responsibility to the Fund, analyzes the proxy statements of issuers whose stock is owned by the Fund, if any. PROXY ADMINISTRATION. The T. Rowe Price Proxy Committee develops T. Rowe Price's positions on all major corporate issues, creates guidelines, and oversees the voting process. The Proxy Committee, composed of portfolio managers, investment operations managers, and internal legal counsel, analyzes proxy policies based on whether they would adversely affect stockholders' interests and make a company less attractive to own. In evaluating proxy policies each year, the Proxy Committee relies upon its own fundamental research, independent research provided by third parties, and information presented by company managements and stockholder groups. Once the Proxy Committee establishes its recommendations, they are distributed to the firm's portfolio managers as voting guidelines. Ultimately, the portfolio manager votes on the proxy proposals of companies in his or her portfolio. When portfolio managers cast votes that are counter to the Proxy Committee's guidelines, they are required to document their reasons in 2 writing to the Proxy Committee. Annually, the Proxy Committee reviews T. Rowe Price's proxy voting process, policies, and voting records. T. Rowe Price has retained Institutional Shareholder Services ("ISS"), an expert in the proxy voting and corporate governance area, to provide proxy advisory and voting services. These services include in-depth research, analysis, and voting recommendations as well as vote execution, reporting, auditing and consulting assistance for the handling of proxy voting responsibility and corporate governance-related efforts. While the Proxy Committee relies upon ISS research in establishing T. Rowe Price's voting guidelines--many of which are consistent with ISS positions--T. Rowe Price may deviate from ISS recommendations on general policy issues or specific proxy proposals. FIDUCIARY CONSIDERATIONS. T. Rowe Price's decisions with respect to proxy issues are made in light of the anticipated impact of the issue on the desirability of investing in the portfolio company. Proxies are voted solely in the interests of the Fund or Fund stockholders. Practicalities involved with international investing may make it impossible at times, and at other times disadvantageous, to vote proxies in every instance. CONSIDERATION GIVEN MANAGEMENT RECOMMENDATIONS. When determining whether to invest in a particular company, one of the key factors T. Rowe Price considers is the quality and depth of its management. As a result, T. Rowe Price believes that recommendations of management on most issues should be given weight in determining how proxy issues should be voted. T. ROWE PRICE VOTING POLICIES. Specific voting guidelines have been established by the Proxy Committee for recurring issues that appear on proxies. The following is a summary of the more significant T. Rowe Price policies: - ELECTION OF DIRECTORS. T. Rowe Price generally supports slates with a majority of independent directors and nominating committees chaired by an independent board member. T. Rowe Price withholds votes for inside directors serving on compensation and audit committees and for directors who miss more than one-fourth of the scheduled board meetings. - EXECUTIVE COMPENSATION. T. Rowe Price's goal is to assure that a company's equity-based compensation plan is aligned with stockholders' long-term interests. While it evaluates most plans on a case-by-case basis, T. Rowe Price generally opposes compensation packages that provide what it views as excessive awards to a few senior executives or that contain excessively dilutive stock option plans. T. Rowe Price bases its review on criteria such as the costs associated with the plan, plan features, dilution to stockholders and comparability to plans in the company's peer group. T. Rowe Price generally opposes plans that give a company the ability to reprice options. - ANTI-TAKEOVER AND CORPORATE GOVERNANCE ISSUES. T. Rowe Price generally opposes anti-takeover measures and other proposals designed to limit the ability of stockholders to act on possible transactions. When voting on 3 corporate governance proposals, T. Rowe Price will consider the dilutive impact to stockholders and the effect on stockholder rights. - SOCIAL AND CORPORATE RESPONSIBILITY ISSUES. T. Rowe Price generally votes with a company's management on social issues unless they have substantial economic implications for the company's business and operations that have not been adequately addressed by management. MONITORING AND RESOLVING CONFLICTS OF INTEREST. The Proxy Committee is also responsible for monitoring and resolving possible material conflicts between the interests of T. Rowe Price and those of its clients with respect to proxy voting. Because T. Rowe Price's voting guidelines are pre-determined by the Proxy Committee using recommendations from ISS, an independent third party, application of the T. Rowe Price guidelines to vote clients' proxies should in most instances adequately address any possible conflicts of interest. However, for proxy votes inconsistent with T. Rowe Price guidelines, the Proxy Committee reviews all such proxy votes in order to determine whether the portfolio manager's voting rationale appears reasonable. The Proxy Committee also assesses whether any business or other relationships between T. Rowe Price and a portfolio company could have influenced an inconsistent vote on that company's proxy. Issues raising possible conflicts of interest are referred to designated members of the Proxy Committee for immediate resolution. ITEM 8. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 10. CONTROLS AND PROCEDURES. (a) The Fund's principal executive officer and principal financial officer concluded that the Fund disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act) provide reasonable assurances that information required to be disclosed by the Fund on Form N-CSR is recorded, processed, summarized and reported within the required time periods and that information required to be disclosed by the Fund in the reports that it files or submits on Form N-CSR is accumulated and communicated to the Fund's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, based on their evaluation of the disclosure controls and procedures as of a date within 90 days of the filing date of this report. (b) There was no change in the Fund's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the Fund's second fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Fund's internal control over financial reporting. ITEM 11. EXHIBITS. 4 (a)(1) The code of ethics referenced in Item 2. (a)(2) The certifications required by Rule 30a-2(a) under the 1940 Act. (a)(3) Not applicable. (b) The certifications required by Rule 30a-2(b) under the 1940 Act. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. The New America High Income Fund, Inc. By: /s/ Robert F. Birch ------------------------------------ Name: Robert F. Birch Title: President and Director Date: March 8, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert F. Birch ------------------------------------ Name: Robert F. Birch Title: President Date: March 8, 2004 By: /s/ Ellen E. Terry ------------------------------------ Name: Ellen E. Terry Title: Treasurer Date: March 8, 2004 5