THE NEW AMERICA HIGH INCOME FUND, INC.
[NEW AMERICA HIGH INCOME FUND LOGO]
ANNUAL REPORT
DECEMBER 31, 2002
EQUISERVE TRUST COMPANY N.A.
P.O. BOX 43011
PROVIDENCE, RI 02940-3011
NEHCM-AR-02
February 3, 2003
DEAR SHAREHOLDER,
The year ended December 31, 2002 was among the worst ever for the high yield
bond market. Our Fund's leveraged structure magnified the market's poor
performance. As we have often reminded our shareholders, leverage is a two-edged
sword. New America's total return for the year was approximately -13%,
calculated from the decline in the market value of $.63 cents a share, offset in
part by dividends of $.2875 paid during the year. The Fund's net asset value per
share declined from $2.61 to $1.89 during 2002. Part of this decline has been
recovered in 2003 as the net asset value has risen to $1.96 at January 31, 2003.
The Board has currently targeted a monthly dividend of $.0175 per share although
as we move through the year, market conditions and actual portfolio results will
determine what is paid.
For the last two years conventional wisdom has been that the high yield market
was at, or near, a bottom. Conventional wisdom proved to be wrong. It is of
little comfort to note that the major equity market indices have fared even
worse than the high yield bond market. News about corporate malfeasance,
declining consumer confidence, and fear of war were some of the factors that
influenced investors to flee from any asset class perceived to have high risk.
For most of the year, the prices of high yield bonds declined despite a climate
of historically low interest rates on higher quality assets and an economy that
may be showing signs of a slow recovery.
The reduction in the Fund's Auction Term Preferred Stock (the "ATP") outstanding
was a principal cause of the dividend reduction announced in December. The ATP
creates the leverage in our Fund. The ATP maintains a AAA rating from Moody's
Investors Service and Fitch Ratings, provided the Fund meets specified asset
coverage requirements. The Fund must also meet certain asset coverage
requirements under federal securities laws. During the year the Fund reduced the
amount of ATP outstanding by $50 million in order to maintain compliance with
the applicable asset coverage requirements, leaving $100 million outstanding at
year-end. A reduction in the amount of the Fund's leverage (the ATP) generally
causes a reduction in the Fund's income. At year-end, the Fund was paying an
effective cost of 4.50% on the ATP, while its portfolio of high yield bonds
yielded over 9%. Other factors that contributed to the decline in the Fund's
income were portfolio defaults earlier in 2002 and an upgrading of the Fund's
portfolio that resulted in a lower portfolio yield. The Fund's portfolio was
approximately 43% leveraged at year-end, which should offer an advantage if the
high yield market improves in 2003.
The Fund's performance is summarized in the table below.
TOTAL RETURNS FOR THE PERIODS
ENDED DECEMBER 31, 2002
-------------------------------------------
3 YEARS
---------------------------
12 MONTHS CUMULATIVE AVERAGE ANNUAL
--------- ---------- --------------
New America High Income Fund (Stock Price and Dividends)* (13.0)% (4.6)% (1.6)%
New America High Income Fund (NAV and Dividends) (17.1) (27.6) (10.2)
Lipper Closed-End Fund Leveraged High Yield Average (5.9) (20.6) (7.7)
* Because the Fund's shares may trade at either a discount or a premium to the
Fund's net asset value per share, returns based upon the share price and
dividends will tend to differ from those derived from the underlying change
in net asset value.
Sources: Lipper Analytical Services and The New America High Income Fund, Inc.
On December 2, 2002, T. Rowe Price Associates, Inc. ("TRP") became the Fund's
investment adviser. The Board selected TRP after an extensive search for a very
experienced, high yield bond management team with a superior investment record
and the resources to service the Fund. We are delighted that TRP and, in
particular, Mark Vaselkiv, the portfolio manager responsible for the Fund's
investments, were able to take on this assignment. Mark elaborates on the state
of the high yield bond market below.
HIGH YIELD MARKET UPDATE
The high yield market rebounded in the last two months of the year, after
enduring significant challenges for most of 2002. Improving investor psychology
and significant new demand for higher yielding securities had a big positive
impact on the asset class. The rally in the stock market helped get the recovery
started, but high yield bonds also held their own in December when stocks
corrected again. Many individual and institutional investors appear to be
viewing high yield bonds as a lower risk alternative to equities, with
comparable return potential at significantly lower volatility. This theme is
translating to significant new cash flow into the market, and lifting the prices
of non-investment grade bonds, as managers put their cash to work.
On the fundamental side, cautious optimism is also returning to the high yield
market. Last year all corporate bond sectors were rocked by management
malfeasance at major companies, a very high default rate and geopolitical risks
which slowed economic activity. While these three big negative forces have not
been completely resolved, some light exists at the end of the tunnel. These same
forces led to a record wave of downgrades into the high yield market last year,
dramatically increasing the overall size of the asset class. Fortunately,
management teams have woken up to these challenges and have focused on fixing
balance sheets as a major priority in 2003. The emphasis on repairing capital
structures will be a major theme this year, which could have favorable
implications for high yield investors.
STRATEGY REVIEW
Sector selection remained the critical determining factor for performance in the
high yield market last year. Many stable, Old Economy industries generated
double digit positive returns in 2002. Included in this category were gaming,
energy, broadcasting, healthcare and consumer products. Conversely, four sectors
inflicted most of the pain felt by high yield investors over the past twelve
months. Utilities, airlines, cable television and technology companies faced
major operating problems and industry specific challenges. Restructurings and
bankruptcies were disproportionately weighted in these areas of the economy. The
Fund's portfolio had meaningful positions in these problem areas, but recently,
these sectors have reversed course and are outperforming the market as a whole.
Our last shareholder report noted how bifurcated the high yield market had
become. This dynamic has become more pronounced. Specifically, about half the
asset class is yielding less than 9%, with most of these securities trading at
premiums to par value. On the opposite side of the spectrum, 50% of the market
is still priced at discounts, with a shrinking component of bonds classified as
fundamentally distressed. Last year, over half the bonds in the market trading
at less than 50 defaulted on their obligations, but this year we expect the
experience to be different. Therefore, we intend to exercise particular care
when considering the sale of the portfolio's discounted securities, mindful of
the fact that many could enjoy meaningful capital appreciation in an improving
market.
We will also look to further diversify the portfolio, by investing in stable
industries that have been underweighted in the fund. Two examples are gaming and
broadcasting, sectors that have historically provided consistent positive
returns for high yield investors. Both are regarded as defensive because of
intrinsic asset protection as well as strong operating cash flows. Broadcasters
are highly regarded for the inherent value of radio and television stations, and
many gaming companies have valuable "bricks and mortar" facilities in prime real
estate locations. We expect these moves to improve the overall credit quality of
the portfolio, as well as reduce the volatility of the Fund.
In 2003, the portfolio's leveraged structure should be a positive for
performance if our fundamental outlook proves correct. We will look for
opportunities presenting higher current yield, as well as capital appreciation
potential. We particularly favor B-rated bonds trading at 10-12% yields, putting
our focus in the middle of the risk
2
spectrum of the high yield market as a whole, but attractive relative to the
income potential of investment grade fixed income sectors. We will maintain,
however, our strict risk control priorities of broad diversification,
conservative industry allocations and a strong sell discipline implemented by
our trading desk. These disciplines have served TRP's clients and shareholders
well over the past decade, and can help fulfill an important mission of high
yield managers, which is preserving our clients' capital.
The high yield bear market has been long and painful, but we are hopeful that
the market is now reaching the point where the perseverance of patient high
yield investors will be rewarded. We believe the major sector meltdowns are
largely behind us, the economy is slowly improving, and high yield managers have
shown new discipline after four tough years of high yield bond market
underperformance. Absent surprising negative developments on the global
political or military fronts, we are optimistic that the positive momentum
growing in this asset class over the past six months can be sustained for the
foreseeable future.
Both the Fund and T. Rowe Price Associates look forward to a long and rewarding
relationship with the shareholders of The New America High Income 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.
3
The New America High Income Fund, Inc.
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 2002 (Dollar Amounts in Thousands)
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- 172.55% (d)
AEROSPACE AND DEFENSE -- 1.17%
$ 1,600 Sequa Corporation, Senior Notes,
9%, 08/01/09 Ba3 $ 1,536
----------
AUTOMOBILE -- 5.00%
4,000 Accuride Corporation, Senior
Subordinated Notes,
9.25%, 02/01/08 Caa1 2,320
890 CSK Auto, Inc., Senior Notes,
12%, 06/15/06 B2 952
81 CSK Auto, Inc., Senior
Subordinated Notes,
11%, 11/01/06 B3 83
165 Cummins, Inc., Senior Notes,
9.50% 12/01/10 (g) Ba2 175
375 Dana Corporation, Notes
9%, 08/15/11 Ba3 363
395 Dana Corporation, Senior Notes,
10.125%, 03/15/10 Ba3 401
1,585 Dura Operating Corporation,
Senior Notes,
8.625%, 04/15/12 B1 1,601
690 Navistar International Corporation,
Senior Notes,
9.375%, 06/01/06 Ba3 662
----------
6,557
----------
BANKING -- 1.46%
1,670 People's Bank, Bridgeport, CT,
Subordinated Notes,
9.875% 11/15/10 Baa3 1,919
----------
BEVERAGE, FOOD AND TOBACCO -- 2.92%
1,050 Agrilink Foods, Inc., Senior
Subordinated Notes,
11.875%, 11/01/08 B3 1,129
1,200 B&G Foods, Inc., Senior
Subordinated Notes,
9.625%, 08/01/07 B3 1,236
1,500 Smithfield Foods, Inc., Senior
Subordinated Notes,
7.625%, 02/15/08 Ba3 1,470
----------
3,835
----------
BROADCASTING AND ENTERTAINMENT -- 17.49%
600 ACME Televison, LLC, Senior
Discount Notes,
10.875%, 09/30/04 B3 612
$ 720 Corus Entertainment Inc., Senior
Subordinated Notes,
8.75%, 03/01/12 B1 $ 763
950 CSC Holdings, Inc., Senior Notes,
7.625%, 04/01/11 B1 895
2,940 EchoStar DBS Corporation,
Senior Notes,
9.125%, 01/15/09 B1 3,072
225 EchoStar DBS Corporation,
Senior Notes,
10.375%, 10/01/07 B1 242
430 Entravision Communications Corp.,
Senior Subordinated Notes,
8.125%, 03/15/09 B3 447
3,450 Insight Midwest, L.P., Senior Notes,
9.75%, 10/01/09 B2 3,260
1,500 Insight Midwest, L.P., Senior Notes,
10.50%, 11/01/10 B2 1,455
1,500 Lamar Media Corporation, Senior
Subordinated Notes,
7.25%, 01/01/13 (g) Ba3 1,522
3,400 Mediacom Broadband LLC,
Senior Notes,
11%, 07/15/13 B2 3,434
1,955 Rogers Communications, Inc.,
Senior Notes,
8.875%, 07/15/07 Ba1 1,857
675 Salem Communications Holding
Corporation, Senior
Subordinated Notes,
7.75%, 12/15/10 B3 675
1,200 Sinclair Broadcasting Group, Inc.,
Senior Subordinated Notes,
8.75%, 12/15/11 B2 1,284
1,500 Time Warner Companies, Inc.,
Senior Notes,
9.125%, 01/15/13 Baa1 1,725
1,698 Young Broadcasting Inc., Senior
Subordinated Notes,
10%, 03/01/11 B3 1,698
----------
22,941
----------
BUILDING AND REAL ESTATE -- 6.73%
500 Associated Materials Incorporated,
Senior Subordinated Notes,
9.75%, 04/15/12 B3 525
The accompanying notes are an integral
part of these financial statements.
4
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 2,200 Beazer Homes USA, Inc.,
Senior Notes,
8.875%, 04/01/08 Ba2 $ 2,277
1,500 D.R. Horton, Inc., Senior Notes,
8%, 02/01/09 Ba1 1,500
1,750 The Ryland Group, Inc., Senior
Subordinated Notes,
8.25%, 04/01/08 Ba3 1,776
2,000 Standard Pacific Corp., Senior Notes,
8%, 02/15/08 Ba2 2,000
750 Standard Pacific Corp., Senior Notes,
8.50%, 06/15/07 Ba2 754
----------
8,832
----------
CARGO TRANSPORTATION -- 2.12%
2,530 The Kansas City Southern Railway
Company, Senior Notes,
9.50%, 10/01/08 Ba2 2,783
----------
CHEMICALS, PLASTICS AND RUBBER -- 11.77%
260 American Pacific Corporation,
Senior Notes,
9.25%, 03/01/05 B2 265
3,400 ARCO Chemical Company,
Debentures,
9.80%, 02/01/20 Ba3 2,788
1,040 Buckeye Cellulose Corp., Senior
Subordinated Notes,
8.50%, 12/15/05 Caa1 946
125 Compass Minerals Group, Inc.,
Guaranteed Senior
Subordinated Notes,
10%, 08/15/11 B3 137
2,175 Hercules Incorporated,
Senior Notes,
11.125%, 11/15/07 Ba2 2,425
2,000 IMC Global Inc., Senior Notes,
11.25%, 06/01/11 Ba2 2,170
1,525 Koppers Industries, Inc., Senior
Subordinated Notes,
9.875%, 12/01/07 B2 1,372
2,620 Lyondell Chemical Company,
Senior Subordinated Notes,
10.875%, 05/01/09 B2 2,214
$ 2,330 Resolution Performance
Products LLC, Senior
Subordinated Notes,
13.50%, 11/15/10 B3 $ 2,458
575 Salt Holdings Corporation, Senior
Discount Notes,
12.75%, 12/15/12 (g)(h) (e) 310
460 UCAR Finance Inc.,
Senior Notes,
10.25%, 02/15/12 B3 359
----------
15,444
----------
CONTAINERS, PACKAGING AND GLASS -- 10.33%
500 BWAY Corporation, Senior
Subordinated Notes,
10%, 10/15/10 (g) B3 519
415 Graphic Packaging Corp.,
Senior Subordinated Notes,
8.625%, 02/15/12 B2 438
460 MDP Acquisitions Plc, Senior Notes,
9.625%, 10/01/12 (g) B2 481
2,000 Owens-Brockway Glass
Container, Inc., Senior
Secured Notes,
8.875%, 02/15/09 B2 2,050
1,000 Owens-lllinois, Inc., Senior Notes,
7.85%, 05/15/04 B3 985
865 Paperboard Industries
International Inc.,
Senior Notes,
8.375%, 09/15/07 B2 830
1,700 Plastipak Holdings, Inc.,
Senior Notes,
10.75%, 09/01/11 B3 1,794
3,000 Silgan Corporation, Senior
Subordinated Debentures,
9%, 06/01/09 B1 3,120
550 Smurfit Capital Funding Plc,
Senior Notes,
6.75%, 11/20/05 Ba3 558
1,400 Stone Container Corporation,
Senior Notes,
8.375%, 07/01/12 B2 1,435
1,265 Stone Container Corporation,
Senior Notes,
9.25%, 02/01/08 B2 1,341
----------
13,551
----------
The accompanying notes are an integral
part of these financial statements.
5
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
DIVERSIFIED/CONGLOMERATE MANUFACTURING -- 5.83%
$ 575 Actuant Financial Corporation,
Senior Subordinated Notes,
13%, 05/01/09 B2 $ 673
275 AGCO Corporation, Senior Notes,
9.50%, 05/01/08 Ba3 297
475 The Manitowoc Company, Inc., Senior
Subordinated Notes,
10.50%, 08/01/12 (g) B2 494
420 Numatics, Incorporated, Senior
Subordinated Notes,
9.625%, 04/01/08 Caa2 189
625 SPX Corporation, Senior Notes,
7.50%, 01/01/13 Ba3 633
1,175 Trimas Corporation, Senior
Subordinated Notes,
9.875%, 06/15/12 (g) B3 1,163
195 Tyco International Group, S.A.,
Senior Notes,
5.80%, 08/01/06 Ba2 182
720 Tyco International Group, S.A.,
Senior Notes,
6.125%, 01/15/09 Ba2 659
360 Tyco International Group, S.A.,
Senior Notes,
6.375%, 02/15/06 Ba2 340
2,865 Tyco International Group, S.A.,
Senior Notes,
6.375%, 10/15/11 Ba2 2,679
360 Tyco International Group, S.A.,
Senior Notes,
6.75%, 02/15/11 Ba2 333
----------
7,642
----------
DIVERSIFIED/CONGLOMERATE SERVICE -- 1.14%
275 Brickman Group Ltd., Senior
Subordinated Notes,
11.75%, 12/15/09 (g) B2 287
1,500 United Rentals (North America), Inc.,
Senior Subordinated Notes,
9%, 04/01/09 B2 1,208
----------
1,495
----------
DIVERSIFIED NATURAL RESOURCES, METALS AND MINERALS -- 2.66%
2,300 Georgia Pacific Corporation, Notes,
9.50%, 12/01/11 Ba1 2,254
$ 350 Longview Fibre Company, Senior
Subordinated Notes,
10%, 01/15/09 B2 $ 368
825 National Waterworks, Inc., Senior
Subordinated Notes
10.50%, 12/01/12 (g) B3 866
----------
3,488
----------
ECOLOGICAL -- .77%
1,000 Allied Waste North America, Inc.,
Senior Notes,
8.50%, 12/01/08 Ba3 1,005
----------
ELECTRONICS -- 11.74%
4,000 Amkor Technology, Senior Notes,
9.25%, 05/01/06 B1 3,480
950 Amkor Technology, Senior
Subordinated Notes,
10.50%, 05/01/09 B3 741
150 Avaya Inc., Senior Secured Notes,
11.125%, 04/01/09 B2 138
575 Chippac International Ltd., Senior
Subordinated Notes, Series B,
12.75%, 08/01/09 B3 604
1,145 Fairchild Semiconductor Corporation,
Senior Subordinated Notes,
10.375%, 10/01/07 B2 1,202
875 Fairchild Semiconductor Corporation,
Senior Subordinated Notes,
10.50%, 02/01/09 B2 949
1,125 IPC Acquisition Corporation,
Senior Subordinated Notes,
11.50%, 12/15/09 B3 990
2,725 Lucent Technologies, Inc., Notes,
5.50%, 11/15/08 Caa1 1,335
450 Sanmina-SCI Corporation,
Senior Secured Notes,
10.375%, 01/15/10 (g) Ba2 455
4,705 SCG Holding Corporation, Senior
Subordinated Notes,
12%, 08/01/09 Caa1 1,929
1,875 Solectron Corporation, Senior Notes,
9.625%, 02/15/09 Ba3 1,828
2,175 WESCO Distribution, Inc., Senior
Subordinated Notes,
9.125%, 06/01/08 B3 1,740
----------
15,391
----------
The accompanying notes are an integral
part of these financial statements.
6
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
FINANCE -- .38%
$ 630 Fairfax Financial Holdings, Ltd., Notes,
7.375%, 03/15/06 Ba3 $ 504
----------
FURNISHINGS, HOUSEWARES, DURABLE CONSUMER PRODUCTS -- .48%
575 Simmons Company, Senior
Subordinated Notes,
10.25%, 03/15/09 B2 624
----------
GROCERY STORES -- .74%
950 Winn-Dixie Stores, Inc., Senior Notes,
8.875%, 04/01/08 Ba2 969
----------
HEALTHCARE, EDUCATION AND CHILDCARE -- 12.16%
640 Advanced Medical Optics Inc.,
Senior Subordinated Notes,
9.25%, 07/15/10 B3 659
1,500 Alaris Medical Systems, Inc.,
Senior Secured Notes
11.625%, 12/01/06 B2 1,695
785 Alaris Medical Systems, Inc.,
Senior Subordinated Notes,
9.75%, 12/01/06 Caa1 793
565 AmerisourceBergen Corporation,
Senior Notes,
7.25%, 11/15/12 (g) Ba3 581
3,125 Athena Neurosciences Financial,
Senior Notes,
7.25%, 02/21/08 Caa2 1,687
2,000 Beverly Enterprises, Inc.,
Senior Notes,
9%, 02/15/06 B1 1,700
1,000 Bio-Rad Laboratories, Inc.,
Senior Subordinated Notes,
11.625%, 02/15/07 B2 1,105
75 Concentra Operating Corporation,
Senior Subordinated Notes,
13%, 08/15/09 B3 76
1,150 CONMED Corporation, Senior
Subordinated Notes,
9%, 03/15/08 B2 1,196
405 HealthSouth Corporation,
Senior Notes,
8.50%, 02/01/08 Ba3 350
945 HealthSouth Corporation,
Senior Notes,
7.375%, 10/01/06 Ba3 817
$ 1,420 NDC Health Corporation, Senior
Subordinated Notes,
10.50%, 12/01/12 (g) (e) $ 1,424
2,815 Radiologix Inc., Senior Notes,
10.50%, 12/15/08 B2 2,196
380 Sybron Dental Specialities, Senior
Subordinated Notes,
8.125%, 06/15/12 B2 384
725 Total Renal Care, Inc.,
Subordinated Convertible Notes,
7%, 05/15/09 B2 719
275 Triad Hospitals Holdings, Inc.,
Senior Notes,
8.75%, 05/01/09 B1 294
250 Triad Hospitals Holdings, Inc.,
Senior Subordinated Notes,
11%, 05/15/09 B2 276
----------
15,952
----------
HOTELS, MOTELS, INNS AND GAMING -- 16.24%
1,500 Ameristar Casinos, Inc., Senior
Subordinated Notes,
10.75%, 02/15/09 B3 1,635
575 Coast Hotels and Casinos, Inc.,
Senior Subordinated Notes,
9.50%, 04/01/09 B2 611
75 Courtyard By Marriott II Limited
Partnership, Senior Notes,
10.75%, 02/01/08 B1 76
1,825 John Q. Hammons Hotels, L.P.,
First Mortgage Notes,
8.875%, 05/15/12 B2 1,839
775 Hard Rock Hotel, Inc., Senior
Subordinated Notes,
9.25%, 04/01/05 Caa1 787
1,575 Harrah's Operating Company, Inc.,
Guaranteed Senior Notes,
8%, 02/01/11 Baa3 1,816
1,000 Harrah's Operating Company, Inc.,
Guaranteed Senior
Subordinated Notes,
7.875%, 12/15/05 Ba1 1,067
180 Host Marriott, L.P., Senior Notes,
9.25%, 10/01/07 Ba3 181
The accompanying notes are an integral
part of these financial statements.
7
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 2,215 Host Marriott,L.P., Senior Notes,
9.50%, 01/15/07 Ba3 $ 2,248
1,750 MGM Mirage, Senior Secured Notes,
8.50%, 09/15/10 Ba1 1,925
1,650 Penn National Gaming, Inc.,
Senior Subordinated Notes,
11.125%, 03/01/08 B3 1,799
2,300 Riviera Holdings Corporation,
Senior Secured Notes,
11%, 06/15/10 B2 2,070
600 Starwood Hotels & Resorts
Worldwide Inc., Senior Notes
7.375%, 05/01/07 Ba1 592
2,200 Station Casinos, Inc., Senior
Subordinated Notes,
8.875%, 12/01/08 B2 2,293
400 Turning Stone Casino Resorts
Enterprise, Senior Notes
9.125%, 12/15/10 (g) B1 410
1,875 Venetian Casino Resort, LLC,
Second Mortgage Notes,
11%, 06/15/10 Caa1 1,959
----------
21,308
----------
LEISURE, AMUSEMENT AND ENTERTAINMENT -- 2.51%
825 Hasbro Inc., Notes,
6.15%, 07/15/08 Ba3 792
1,600 Icon Health and Fitness Inc.,
Senior Subordinated Notes,
11.25%, 04/01/12 B3 1,392
350 Speedway Motorsports, Inc.,
Senior Subordinated Notes,
8.50%, 08/15/07 Ba2 366
700 TravelCenters of America, Inc.,
Senior Subordinated Notes,
12.75%, 05/01/09 B3 742
----------
3,292
----------
MACHINERY -- 3.26%
1,450 Case Corporation, Notes,
7.25%, 08/01/05 Ba2 1,218
675 Terex Corporation, Senior
Subordinated Notes,
10.375%, 04/01/11 B3 635
$ 2,375 Universal Compression, Inc.,
Senior Discount Notes,
9.875%, 02/15/08 (h) B1 $ 2,422
----------
4,275
----------
MINING, STEEL, IRON AND NON-PRECIOUS METALS -- 4.70%
1,195 AK Steel Corporation, Senior Notes,
7.75%, 06/15/12 (g) B1 1,204
650 AK Steel Corporation, Senior Notes,
7.875%, 02/15/09 B1 657
1,800 Century Aluminum Company, Senior
Secured First Mortgage Notes,
11.75%, 04/15/08 Ba3 1,746
1,500 Russel Metals, Inc.,
Senior Notes, Units,
10%, 06/01/09 B1 1,586
255 Steel Dynamics, Inc., Senior Notes,
9.50%, 03/15/09 B2 268
600 United States Steel Corporation,
Senior Notes,
10.75%, 08/01/08 Ba3 591
1,100 Weirton Steel Corporation, Senior
Secured Notes,
10%, 04/01/08 (b) Caa3 110
----------
6,162
----------
OIL AND GAS -- 12.81%
3,500 Clark Refining & Marketing, Inc.,
Senior Notes,
8.375%, 11/15/07 Ba3 3,360
875 Dresser, Inc., Senior
Subordinated Notes,
9.375%, 04/15/11 B2 884
975 Energy Corporation of America,
Senior Subordinated Notes,
9.50%, 05/15/07 Caa3 566
1,275 Ferrellgas Partners L.P., Senior Notes,
8.75%, 06/15/12 B2 1,320
1,455 Forest Oil Corporation, Senior Notes,
8%, 06/15/08 Ba3 1,535
1,000 Forest Oil Corporation, Senior Notes,
8%, 12/15/11 Ba3 1,055
1,650 Giant Industries, Inc., Senior
Subordinated Notes,
11%, 05/15/12 B3 1,122
The accompanying notes are an integral
part of these financial statements.
8
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 750 Magnum Hunter Resources, Inc.,
Senior Notes,
9.60%, 03/15/12 B2 $ 795
2,000 Pioneer Natural Resources
Company, Senior Notes,
9.625%, 04/01/10 Ba1 2,330
1,400 Plains Exploration & Production
Co., L.P., Senior
Subordinated Notes,
8.75%, 07/01/12 (g) B2 1,456
2,650 Tesoro Petroleum Corporation,
Senior Subordinated Notes,
9.625%, 04/01/12 B3 1,723
580 Tesoro Petroleum Corporation,
Senior Subordinated Notes,
9.625%, 11/01/08 B3 371
275 Westport Resources Corporation,
Senior Subordinated Notes,
8.25%, 11/01/11 (g) Ba3 287
----------
16,804
----------
PERSONAL, FOOD AND MISCELLANEOUS SERVICES -- .90%
1,125 The Coinmach Corporation,
Senior Notes,
9%, 02/01/10 B2 1,181
----------
PERSONAL NON-DURABLE CONSUMER PRODUCTS -- 3.00%
2,500 Corning Consumer Products
Company, Senior
Subordinated Notes,
9.625%, 05/01/08 (a)(b) (e) 125
275 JohnsonDiversey, Inc., Senior
Subordinated Notes,
9.625%, 05/15/12 (g) B2 289
1,400 Jostens, Inc., Senior
Subordinated Notes,
12.75%, 05/01/10 B3 1,589
1,775 Playtex Products, Inc., Senior
Subordinated Notes,
9.375%, 06/01/11 B2 1,935
----------
3,938
----------
PERSONAL TRANSPORTATION -- 4.50%
3,440 Air Canada, Senior Notes,
10.25%, 03/15/11 B3 1,926
$ 2,000 Atlas Air, Inc., Senior Notes,
10.75%, 08/01/05 Caa1 $ 440
3,175 Delta Air Lines, Inc., Notes,
7.90%, 12/15/09 Ba3 2,159
325 Delta Air Lines, Inc., Notes,
10.375%, 02/01/11 Ba3 221
335 Northwest Airlines, Inc. Notes,
9.875%, 03/15/07 B2 214
1,500 Northwest Airlines, Inc., Senior Notes,
8.875, 06/01/06 B2 945
----------
5,905
----------
PRINTING AND PUBLISHING -- 11.47%
1,975 K III Communications Corporation,
Senior Notes,
8.50%, 02/01/06 B3 1,847
1,560 Mail-Well I Corp., Senior Notes,
9.625%, 03/15/12 B1 1,373
4,900 Quebecor Media Inc., Senior Notes,
11.125%, 07/15/11 B2 4,508
1,845 R.H. Donnelley, Inc.,
Senior Subordinated Notes,
10.875%, 12/15/12 (g) B2 2,011
2,150 Von Hoffman Corporation, Senior Notes,
10.25%, 03/15/09 B2 2,043
3,155 World Color Press, Inc., Senior
Subordinated Notes,
8.375%, 11/15/08 Baa2 3,259
----------
15,041
----------
RETAIL STORES -- 1.94%
1,400 Gap Inc., Notes,
10.55%, 12/15/08 Ba3 1,533
1,000 J.C. Penney Company, Inc., Notes,
7.60%, 04/01/07 Ba3 1,005
----------
2,538
----------
TELECOMMUNICATIONS -- 7.85%
1,025 AT&T Wireless Services, Inc.,
Senior Notes,
7.875%, 03/01/11 Baa2 1,025
4,500 NEXTEL Communications Inc.,
Senior Notes,
9.50%, 02/01/11 B3 4,117
2,322 Qwest Services Corporation, Senior
Subordinated Notes,
13.50%, 12/15/10 (g) (e) 2,438
The accompanying notes are an integral
part of these financial statements.
9
MOODY'S
PRINCIPAL RATING VALUE
AMOUNT/UNITS (UNAUDITED) (NOTE 1)
--------------------------------------------------------------------------------
CORPORATE DEBT SECURITIES -- CONTINUED
$ 1,000 Rogers Wireless Inc., Senior
Secured Notes,
8.30%, 10/01/07 Ba3 $ 910
275 Rogers Wireless Inc., Senior
Secured Notes,
9.625%, 05/01/11 Ba3 257
125 Rogers Wireless Inc., Senior
Subordinated Notes,
8.80%, 10/01/07 B2 106
450 Tritel PCS, Inc., Senior
Subordinated Notes,
10.375%, 01/15/11 Baa2 477
825 Triton PCS, Inc., Senior
Subordinated Discount Notes,
11%, 05/01/08 (h) B3 710
390 US West Capital
Funding Inc., Notes,
6.375%, 07/15/08 Caa2 254
----------
10,294
----------
TEXTILES AND LEATHER -- 3.22%
775 Interface, Inc., Senior Notes,
7.30%, 04/01/08 B2 659
3,100 Levi Strauss & Co., Senior Notes,
11.625%, 01/15/08 Caa1 3,007
575 Levi Strauss & Co., Senior Notes,
12.25%, 12/15/12 (g) B3 564
----------
4,230
----------
UTILITIES -- 5.26%
1,820 Avista Corporation, Senior Notes,
9.75%, 06/01/08 Ba1 1,784
1,515 Calpine Corporation, Senior Notes,
8.625% 08/15/10 B1 667
1,850 Mirant Americas Generation, LLC,
Senior Notes,
7.20%, 10/01/08 Ba3 833
775 TNP Enterprises, Inc., Senior
Subordinated Notes,
10.25%, 04/01/10 Ba3 728
2,500 Western Resources, Inc.,
Senior Notes,
7.125%, 8/01/09 Ba2 1,975
$ 1,000 Western Resources, Inc.,
Senior Notes,
9.75%, 05/01/07 Ba2 $ 910
----------
6,897
----------
TOTAL CORPORATE DEBT SECURITIES
(Total cost of $245,127) 226,333
----------
SHARES
--------------------------------------------------------------------------------
PREFERRED STOCK-- 2.46% (d)
BANKING - 0.00%
57,935 WestFed Holdings, Inc., Cumulative,
Series A, Preferred Stock,
15.50% (a)(c)(f) (e) $ --
----------
BROADCASTING AND ENTERTAINMENT -- 2.45%
34,300 CSC Holdings, Inc.,
Preferred Stock B3 3,207
----------
MINING, STEEL, IRON, NON-PRECIOUS METALS -- 0.01%
18,000 Weirton Steel Corp., Series C
Preferred Stock (f) (e) 18
----------
TOTAL PREFERRED STOCK
(Total cost of $8,222) 3,225
----------
COMMON STOCK -- 0.00% (d)
4,780 Mediq Inc. Common Stock (a)(c)(f) --
27,474 WestFed Holdings, Inc., Series B,
Common Stock (a)(c)(f) --
----------
TOTAL COMMON STOCK
(Total cost of $2,596) --
----------
PRINCIPAL
AMOUNT
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.53% (d)
$ 3,325 Ciesco, L.P., Commercial Paper,
due 01/02/03,
Discount of 1.22% P-1 3,325
----------
TOTAL SHORT-TERM INVESTMENTS
(Total cost of $3,325) 3,325
----------
TOTAL INVESTMENTS
(Total cost of $259,270) $ 232,883
==========
The accompanying notes are an integral
part of these financial statements.
10
(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, 2002 was $0.
(d) Percentages indicated are based on total net assets to common shareholders
of $131,170.
(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 $16,936 as of December 31, 2002.
(h) Securities are step interest bonds. Interest on these bonds accrue based on
the effective interest rate.
The accompanying notes are an integral
part of these financial statements.
11
The New America High Income Fund, Inc.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2002
ASSETS: (Dollars in thousands, except per share amounts)
INVESTMENTS IN SECURITIES, at value (Identified
cost of $259,270 see Schedule of Investments
and Notes 1 and 2) $ 232,883
RECEIVABLES:
Investment securities Sold 450
Interest and dividends 5,892
PREPAID EXPENSES 31
-----------
Total assets $ 239,256
-----------
LIABILITIES:
PAYABLES:
Dividend on common stock $ 749
Dividend on preferred stock 43
INTEREST RATE SWAP, at fair value (Note 6) 6,768
ACCRUED EXPENSES (Note 3) 526
-----------
Total liabilities $ 8,086
-----------
AUCTION TERM PREFERRED STOCK:
$1.00 par value, 1,000,000 shares authorized,
4,000 shares issued and outstanding,
liquidation preference of $25,000 per share
(Notes 4 and 5) $ 100,000
-----------
NET ASSETS $ 131,170
===========
REPRESENTED BY:
COMMON STOCK:
$0.01 par value, 200,000,000 shares authorized,
69,548,153 shares issued and outstanding $ 695
CAPITAL IN EXCESS OF PAR VALUE 340,125
UNDISTRIBUTED NET INVESTMENT INCOME
(Note 2) 351
ACCUMULATED NET REALIZED LOSS FROM
SECURITIES TRANSACTIONS (Note 2) (176,846)
NET UNREALIZED DEPRECIATION ON
INVESTMENTS AND INTEREST RATE SWAPS (33,155)
-----------
Net assets applicable to common stock
(Equivalent to $1.89 per share, based on
69,548,153 shares outstanding) $ 131,170
===========
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 2002
INVESTMENT INCOME: (Note 1) (Dollars in thousands)
Interest income $ 27,320
Other income 276
Dividend income 95
-----------
Total investment income $ 27,691
-----------
EXPENSES:
Cost of leverage:
Preferred and auction fees (Note 5) $ 278
-----------
Total cost of leverage $ 278
-----------
Professional services expenses:
Management fees (Note 3) $ 686
Legal fees 316
Custodian and transfer agent fees 240
Computer systems upgrade expense 101
Audit fees 77
-----------
Total professional services expenses $ 1,420
-----------
Administrative expenses:
General administrative fees $ 435
Directors' fees 212
NYSE fees 68
Miscellaneous expenses 64
Shareholder communications expenses 37
-----------
Total administrative expenses $ 816
-----------
Total expenses $ 2,514
-----------
Net investment income $ 25,177
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENT ACTIVITIES:
Realized loss on investments and interest rate
swap agreements $ (45,362)
-----------
Net swap settlement disbursements (Note 6) $ (2,851)
-----------
Change in net unrealized depreciation
on investments $ 3,926
Change in unrealized depreciation
on interest rate swap agreement (8,290)
-----------
Total change in net unrealized depreciation
on investments and interest rate swap $ (4,364)
-----------
Net loss on investments and interest rate swap $ (52,577)
-----------
COST OF PREFERRED LEVERAGE
Distributions to preferred stockholders $ (2,530)
-----------
Net decrease in net assets resulting from operations $ (29,930)
===========
The accompanying notes are an integral
part of these financial statements.
12
The New America High Income Fund, Inc.
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31,
2002 2001
----------- ----------
FROM OPERATIONS: (Dollars in thousands, except per share amounts)
Net investment income $ 25,177 $ 32,459
Realized loss on investments, net (45,362) (67,922)
Net swap settlement disbursements (2,851) (1,327)
Change in net unrealized depreciation on investments and other
financial instruments (4,364) 51,137
Distributions from net investment income related to preferred stock
Dividends to preferred stockholders ($488 and $1,057 per preferred share in
2002 and 2001, respectively) (2,530) (6,652)
----------- ----------
Net increase (decrease) in net assets resulting from operations $ (29,930) $ 7,695
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Net asset value of 1,215,044 shares and 1,064,683 shares issued to common
stockholders for reinvestment of dividends in 2002 and 2001, respectively $ 2,710 $ 3,043
----------- ----------
Increase in net assets resulting from fund share transactions $ 2,710 $ 3,043
----------- ----------
DISTRIBUTIONS TO COMMON STOCKHOLDERS:
From net investment income ($.29 and $.36 per share in 2002 and 2001,
respectively) $ (19,841) $ (24,435)
----------- ----------
Total net decrease in net assets $ (47,061) $ (13,697)
----------- ----------
NET ASSETS APPLICABLE TO COMMON STOCK:
Beginning of period $ 178,231 $ 191,928
----------- ----------
End of period (Including $351 and $317 of undistributed net investment
income at December 31, 2002 and December 31, 2001, respectively) $ 131,170 $ 178,231
=========== ==========
The accompanying notes are an integral
part of these financial statements.
13
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,
2002 2001(c) 2000 1999 1998(b) 1997(b)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
Beginning of period $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03 $ 4.94
-------- -------- -------- -------- -------- --------
NET INVESTMENT INCOME .37 .48 .60 .66 .71# .70#
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS AND
OTHER FINANCIAL INSTRUMENTS (.72) (.24) (1.00) (.30) (.81)# .25#
DISTRIBUTIONS FROM NET INVESTMENT INCOME
RELATED TO PREFERRED STOCK: (.08) (.12) (.18) (.18) (.17) (.16)
-------- -------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS (.43) .12 (.58) .18 (.27) .79
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income (.29) (.36) (.43) (.48) (.54) (.53)
In excess of net investment income -- -- -- -- -- (.01)
-------- -------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (.29) (.36) (.43) (.48) (.54) (.54)
-------- -------- -------- -------- -------- --------
Effect of rights offering and related expenses;
and Auction Term Preferred Stock offering
costs and sales load -- -- -- -- (.06) (.16)
-------- -------- -------- -------- -------- --------
NET ASSET VALUE:
End of period $ 1.89 $ 2.61 $ 2.85 $ 3.86 $ 4.16 $ 5.03
======== ======== ======== ======== ======== ========
PER SHARE MARKET VALUE:
End of period $ 2.01 $ 2.64 $ 2.63 $ 3.13 $ 4.25 $ 5.63
======== ======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+ (12.97)% 13.97% (3.84)% (16.92)% (15.15)% 21.97%
======== ======== ======== ======== ======== ========
The accompanying notes are an integral
part of these financial statements.
14
FOR THE YEARS ENDED DECEMBER 31,
2002 2001(c) 2000 1999 1998(b) 1997(b)
--------- --------- --------- --------- --------- ---------
NET ASSETS, END OF PERIOD, APPLICABLE
TO COMMON STOCK (a) $ 131,170 $ 178,231 $ 191,928 $ 258,215 $ 273,518 $ 243,625
========= ========= ========= ========= ========= =========
NET ASSETS, END OF PERIOD, APPLICABLE
TO PREFERRED STOCK (a) $ 100,000 $ 150,000 $ 160,000 $ 210,000 $ 210,000 $ 150,000
========= ========= ========= ========= ========= =========
TOTAL NET ASSETS APPLICABLE
TO COMMON AND PREFERRED STOCK,
END OF PERIOD (a) $ 231,170 $ 328,231 $ 351,928 $ 468,215 $ 483,518 $ 393,625
========= ========= ========= ========= ========= =========
EXPENSE RATIOS:
Ratio of preferred and other debt
expenses to average net assets* .18% .17% .19% .18% .14% .13%
Ratio of operating expenses to average
net assets* 1.46% 1.11% .99% .89% .82% .92%
--------- --------- --------- --------- --------- ---------
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS* 1.64% 1.28% 1.18% 1.07% .96% 1.05%
========= ========= ========= ========= ========= =========
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS* 16.48% 16.70% 17.46% 16.36% 15.22% 13.86%
RATIO OF TOTAL EXPENSES TO AVERAGE
NET ASSETS APPLICABLE TO COMMON
AND PREFERRED STOCK .89% .71% .64% .60% .58% .66%
RATIO OF NET INVESTMENT INCOME TO
AVERAGE NET ASSETS APPLICABLE TO
COMMON AND PREFERRED STOCK 8.91% 9.23% 9.41% 9.16% 9.26% 8.75%
PORTFOLIO TURNOVER RATE 82.47% 38.89% 45.58% 66.74% 124.67% 108.84%
(a) Dollars in thousands.
(b) The Fund issued Series C ATP on May 6, 1997 and Series D ATP on May 20,
1998. The per share data and ratios for the years ended December 31, 1997
and 1998 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 did increase 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 1997 and March 1998
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.
15
The New America High Income Fund, Inc.
INFORMATION REGARDING
SENIOR SECURITIES
AS OF DECEMBER 31,
2002 2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
TOTAL AMOUNT OUTSTANDING:
Preferred Stock $ 100,000,000 $ 150,000,000 $ 160,000,000 $ 210,000,000 $ 210,000,000 $ 150,000,000
ASSET COVERAGE:
Per Preferred Stock Share (1) $ 57,793 $ 54,705 $ 54,989 $ 55,740 $ 57,562 $ 65,604
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.
16
The New America High Income Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
(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
generally accepted accounting principles 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 having
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 $7,514,000 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
17
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, 2002, the total cost of securities (including temporary cash
investments) for federal income tax purposes was approximately $259,345,000.
Aggregate gross unrealized gain on securities in which there was an excess of
value over tax cost was approximately $5,492,000. Aggregate unrealized loss on
securities in which there was an excess of tax cost over value was approximately
$31,954,000. Net unrealized loss on investments for tax purposes at December 31,
2002 was approximately $26,462,000.
At December 31, 2002, 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
21,822,000 December 31, 2008
67,042,000 December 31, 2009
46,118,000 December 31, 2010
-------------
$ 170,563,000
=============
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 $22,371,000 in 2002 was from ordinary income.
As of December 31, 2002, the components of distributable earnings on a tax
basis were approximately:
Undistributed Net Investment Income $ 402,000
Undistributed Long-Term Gain --
Unrealized Gain (Loss) $ (26,462,000)
Capital Losses Carry Forward
and Post October Losses Deferred $ (176,822,000)
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
resulted in additional interest income for financial reporting purposes only.
The Fund does not amortize market discounts or premiums for tax purposes.
Therefore, the additional interest income for financial reporting purposes does
not result in additional 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.
(3) INVESTMENT ADVISORY AGREEMENT
Wellington Management Company, LLP, the Fund's Investment Advisor, for the
eleven months ended
18
November 30, 2002 earned approximately $635,000 in management fees. Management
fees paid by the Fund to Wellington Management were calculated at .45 of 1% (on
an annual basis) of the average weekly value of the Fund's net assets
attributable to common stock.
The Fund's Board of Directors voted to appoint T. Rowe Price Associates, Inc.
(T. Rowe Price) as the Fund's investment advisor succeeding Wellington
Management Company, LLP in that capacity. An interim investment advisory
agreement with T. Rowe Price took effect concurrently with the termination of
the existing investment advisory agreement on December 2, 2002. Prior to the
expiration of the 150 day term of the interim contract, the Fund will hold a
meeting of stockholders to seek stockholder approval of the new advisory
agreement with T. Rowe Price. If stockholders approve the new advisory
agreement, the annual advisory fee payable to T. Rowe Price will be 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 will be calculated based on assets attributable to the Fund's
common and auction term preferred stock. At December 31, 2002, the fee payable
to T. Rowe Price was approximately $51,000, which was included in accrued
expenses on the accompanying statement of assets and liabilities.
(4) AUCTION TERM PREFERRED STOCK (ATP)
The Fund had 4,000 shares of ATP issued and outstanding at December 31, 2002.
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 1.40% to 2.35% for
the year ended December 31, 2002. The average dividend rate as of December 31,
2002 was 1.47%.
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.
Under Emerging Issues Task Force (EITF) promulgation Topic D-98,
CLASSIFICATION AND MEASUREMENT OF REDEEMABLE SECURITIES, which was issued on
July 19, 2001, preferred securities that are redeemable for cash or other assets
are to be classified outside of permanent equity to the extent that redemption
is at a fixed or determinable price and at the option of the holder or upon the
occurrence of an event that is not solely within the control of the issuer.
Subject to the guidance of the EITF, the Fund's preferred stock is shown outside
of permanent equity (net assets) in the accompanying financial statements. In
connection with Topic D-98 distributions related to preferred stock are
reflected in the statements of changes in net assets and financial highlights as
distributions from operations. Prior year amounts have also been reclassified to
conform with this presentation. The impact of this reclassification creates no
change to the net assets available to common shareholders.
During 2002, the Fund repurchased $50,000,000 of ATP.
(5) ATP AUCTION-RELATED MATTERS
Bankers Trust Company (BTC) serves as the ATP's auction agent pursuant to an
agreement entered into on
19
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 $278,000 for
service charges through December 31, 2002. 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 at a variable
rate determined with reference to one month LIBOR. The variable rates ranged
from 1.44% to 2.14% for the year ended December 31, 2002. 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 accounts for interest rate swaps in accordance with the Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. This statement requires an entity to recognize all
freestanding derivative instruments in the balance sheet as either assets or
liabilities and measure them at fair value. Any change in the unrealized gain or
loss is recorded in current earnings. For the year ended December 31, 2002, the
Fund's obligations under the swap agreements were more than the amount received
from Fleet by approximately $2,851,000 and is included in the accompanying
statement of operations.
20
The estimated fair value of the interest rate swap agreement at December 31,
2002 amounted to approximately $6,768,000 of unrealized loss and is presented in
the accompanying balance sheet.
(7) REPURCHASE AGREEMENTS
At the time the Fund enters into a repurchase agreement, the value of the
underlying security, including accrued interest, will be equal to or exceed the
value of the repurchase agreement, and, in the case of repurchase agreements
exceeding one day, the value of the underlying security, including accrued
interest, is required during the term of the agreement to be equal to or exceed
the value of the repurchase agreement.
The underlying securities for all repurchase agreements are held in
safekeeping in an investment account of State Street Bank and Trust Company
(SSBT), the Fund's custodian, at the Federal Reserve Bank of Boston. In the case
of repurchase agreements exceeding one day, SSBT's Money Market Department
monitors the market value of the underlying securities by pricing them daily,
and in the event any individual repurchase agreement is not fully
collateralized, SSBT advises the Fund and additional collateral is obtained.
(8) PURCHASES AND SALES OF SECURITIES
Purchases and proceeds of sales or maturities of long-term securities during
the year ended December 31, 2002 were approximately:
Purchases of securities $ 224,214,000
Sales of securities $ 261,579,000
(9) 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
$248,000 for the year ended December 31, 2002. The Fund paid approximately
$249,000 during the year ended December 31, 2002 to two officers of the Fund for
the provision of certain administrative services.
CHANGE IN INDEPENDENT ACCOUNTANTS (UNAUDITED)
On June 27, 2002, the Board of Directors, upon the recommendation of the Board's
Audit and Nominating Committee, determined not to retain Arthur Andersen LLP and
approved a change in the Fund's independent auditors to KPMG LLP. For the fiscal
years ended December 31, 2001 and December 31, 2000, Arthur Andersen LLP's audit
reports on the Fund's financial statements contained no adverse opinion or
disclaimer of opinion; nor were their reports qualified or modified as to
uncertainty, audit scope, or accounting principals. Further, there were no
disagreements between the Fund and Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure or audit
scope or procedure, which if not resolved to the satisfaction of Arthur Andersen
LLP, would have caused them to make reference to the disagreements in their
report.
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.
21
The New America High Income Fund, Inc.
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, 2002, and the related statement of operations, statement of changes
in net assets and financial highlights for the year then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit. The statement of changes
in net assets for the year ended December 31, 2001 and the financial highlights
for each of the years in the five-year period ended December 31, 2001 were
audited by other auditors who have ceased operations. Those auditors expressed
an unqualified opinion on that financial statement and those financial
highlights in their report dated February 1, 2002.
We conducted our audit 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, 2002 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
New America High Income Fund, Inc. as of December 31, 2002, the results of its
operations, changes in its net assets and financial highlights for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Boston, Massachusetts
January 31, 2003
22
DIRECTORS
Robert F. Birch
Joseph L. Bower
Richard E. Floor
Bernard J. Korman
Ernest E. Monrad
DIRECTOR EMERITUS
Franco Modigliani
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
23
The New America High Income Fund, Inc.
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; member and ML-Lee
research fellow at the Acquisition Funds,
Institute of Politics since L.P., and Trustee of
1966; faculty member of the TH Lee-Putnam
John F. Kennedy School of Emerging
Government since 1969. 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.
24
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
----------------------------------------------------------------------------------------------------------------------------
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. Birch4 Director and Director Private Investor and 1 Director of
DOB: 3/12/36 President since 1992 Consultant Hyperion Funds and
the Brandywine
Funds
Richard E. Floor(5) Director and Director Partner through his 1 Director of
DOB: 8/3/40 Secretary since 1987 professional corporation with Affiliated Managers
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.
25