TO OUR SHAREHOLDERS
The end of June marked the first full quarter of operation, as well as the end
of the first fiscal year for the Morgan Keegan Select Fund. The Select Fund
family began operations March 22, 1999 offering two portfolio options: the
Intermediate Bond Fund and the High Income Fund. These two fixed income vehicles
offer complementary investment alternatives to the existing Morgan Keegan
Southern Capital Fund, which invests solely in common stock.
Many new mutual funds experience significant asset growth in the initial months
of operation, and we are pleased to report that the Select Fund is no exception.
Since opening to investors, our assets have increased to more than $12 million
and we believe that trend will continue.
In addition, both portfolios turned in a respectable performance over the last
quarter when measured against their respective benchmarks. The Intermediate Bond
portfolio total return was down .32%* versus the Lehman Aggregate Intermediate
Index which finished the quarter down .45%. The High Income portfolio turned in
a 2.78%* total return compared to the Lehman BB High Yield Indexs -.47%.
Both Fund portfolios benefited from being able to invest new funds in a
declining market. This situation allowed us to select-ively purchase attractive
assets as fixed income markets came under pressure. Our value-oriented style
also played an important role, in that the selection of out of favor or
undervalued securities provided some downside protection, as both debt and
equity markets experienced meaningful corrections.
A close look at the market conditions driving this performance reveals some
extraordinary forces at work. On the one hand, economic fundamentals have been
strong and helped produce a solid round of corporate earnings, but at the same
time, credit spreads have continued to widen. This is unusual, because normally
a strong economy produces strong corporate and individual balance sheets, which
together, should cause spreads to tighten.
So why are spreads expanding? This answer lies in a supply/ demand imbalance.
The crisis events of 1998 and the impending Y2K date have created strong demand
for liquid assets and a lower risk profile among market participants. In other
words, both corporate issuers (supply) and investors (demand) want cash going
into the new millennium. This puts both the suppliers and buyers in the awkward
position of being on the supply side of the market, creating far more sellers
than buyers. In order to induce investors to spend their cash on debt
instruments, corporations have had to issue debt offerings at higher yields.
This, in turn, has created some very attractive investment opportunities and
helped the portfolios get off to a very positive start. We are very pleased to
have finished our first full quarter with such strong performance and asset
growth. The Select Fund was designed to address specific financial needs, while
adding greater flexibility to the investment program available to Morgan
Keegans clients. This first quarter has been a decisive step in that direction,
and we want to thank you for investing with us and making the launch of the
Select Fund such a success.
Allen Morgan, Jr. Jim Kelsoe
President and Director Portfolio Manager
Below are the load-adjusted performance figures for the Morgan Keegan Select
Funds Intermediate Bond and High Income portfolios for the three months ended
June 30, 1999.
Intermediate Bond Fund
Class A shares -2.27%
Class C shares -0.47%
Class I shares -0.32%
Class A shares carry a maximum sales load of 2% with a 12b-1 fee of .25%. Class
C shares carry no sales load but have a 12b-1 fee of .60%. Class I shares carry
no sales load or 12b-1 fee.
High Income Fund
Class A shares 0.06%
Class C shares 2.59%
Class I shares 2.78%
Class A shares carry a maximum sales load of 2.5% with a 12b-1 fee of .25%.
Class C shares carry no sales load but have a 12b-1 fee of .75%. Class I shares
carry no sales load or 12b-1 fee.
*The performance cited represents that of the Class I shares for both
portfolios, which do not carry a sales load. Past performance is not indicative
of future results. Share price and return will vary, so you may have a gain or
loss of principal when you sell your shares.
INTERMEDIATE BOND FUND
Asset Backed Securities - Investment Grade - 42.3%
$100,000 Amresco Residential 1997-2 M2F, 7.665% 6/25/27 A+ 98,195 99,687
165,000 Cityscape Home Equity 1997-4 M2, 7.71% 10/25/18 A 153,111 148,603
100,000 Comm 1999-1 F, 7.239% 10/15/08 A 90,973 88,687
300,000 Deutsche Mtg. & Asset 1998-C1 C, 6.861% 3/15/08 A 297,680 291,562
199,854 Empire Funding 1998-1 B1, 8.56% 6/25/24 BBB 165,545 167,752
300,000 Empire Funding 1998-2 B1, 9.03% 6/25/24 BBB 239,151 239,250
150,000 First Plus 1997-2 M2, 7.59% 4/10/23 A 142,164 142,125
300,000 First Plus 1998-2 M2, 7.51% 5/10/24 AAA 274,606 272,812
300,000 First Plus 1998-1 B1, 7.63% 1/10/24 (a) BBB 241,526 243,843
300,000 GMACC 1997-C1 A3, 6.869% 8/15/07 A 307,719 295,875
40,000 Green Tree Fin. Corp 1998-E HEM2, 7.27% 6/15/28 A 39,078 38,725
200,000 Green Tree Fin. Corp 1997-4 B1, 7.23% 2/15/29 BBB 191,200 190,687
150,000 Impac Secured Assets 1998-1 M2, 7.77% 7/25/25 A 141,004 136,312
50,000 The Money Store, 7.495% 5/15/30 A 45,638 48,234
170,000 Nationslink Funding 1996-1 A2, 7.515% 7/20/05 AAA 172,250 172,815
2,599,840 2,576,969
Corporate Bonds - Investment Grade - 47.9%
Automobile Manufacturers - 7.8%
250,000 Ford Motor Credit Co., 5.75% Bond 2/23/04 A 243,934 240,840
250,000 General Motors Acc Corp., 6.15% Bond 4/05/07 A 242,817 238,149
486,751 478,989
Banks - 0.9%
50,000 Regions Fin. Corp., 7.75% Bond 9/15/24 A 52,834 53,156
Brokerage and Investment - 9.3%
350,000 Lehman Bros Hdlg.,6.125% Bond 7/15/03 A 340,833 337,272
250,000 Merrill Lynch & Co.,6.00% Bond 2/17/09 AA 236,306 230,171
577,139 567,443
Financial - 1.6%
100,000 Provident Companies, 6.375% Bond 7/15/05 BBB+ 100,753 97,131
Machinery - 0.4%
25,000 Thermo Electron Corp., 7.625% Bond 10/30/08 A 24,730 23,882
Optical Supplies - 5.7%
400,000 Sola International, 6.875% Bond 3/15/08 BBB 370,063 350,656
Real Estate Investment Trusts - 2.1%
75,000 American Health Properties, 7.50% Bond 1/5/07 BBB 68,650 66,365
60,000 New Plan Realty, 6.80% Bond 5/15/02 A 60,389 60,137
129,039 126,502
Retail - Auto Parts - 4.0%
250,000 Autozone, 6.00% Bond 11/01/03 A 244,612 241,824
Special Purpose Entity - 10.6%
175,000 BHP Finance USA LTD., 6.42% Bond 3/01/26 A 172,622 171,269
500,000 Deutsche Bank Cap Fund, 7.872% 12/29/49 (a) AA 500,000 477,515
672,622 648,784
Telecommunications - 3.9%
250,000 AT&T Corporation, 6.00% Bond 3/15/09 AA 240,518 235,414
Transportation - 1.6%
100,000 US Freightways, 6.50% Bond 5/01/09 A 99,204 95,124
2,998,265 2,918,905
Corporate Bonds - Non-Investment Grade - 6.3%
Containers - Metal/Glass - 3.3%
200,000 Owens-Ill. Inc., 8.10% Bond 5/15/07 BB+ 197,948 198,831
Financial - 1.5%
100,000 Advanta Corporation, 7.47% Bond 9/10/01 BB 93,734 91,881
Retail - Apparel/Shoes - 1.5%
100,000 Woolworth Corp., 6.98% Bond 10/15/01 BB 89,856 93,858
381,538 384,570
Mortgage Backed Securities - 3.5%
Collateralized Mortgage Obligation
215,000 Fed National Mort Assn. G93-19 N, 7.20% 4/25/23
AAA 217,406 216,612
Total Investments In Securities 6,197,049 6,097,056
(a) Securities sold within the terms of a private placement memorandum,
(b) exempt from registration under Section 144A of the
Securities Act of 1933, as amended, and may be sold only to dealers in
that program or to other accredited investors.
These issues have been determined by the Advisor to be liquid. The
aggregate value of these securities at June 30, 1999, was
$721,358 which represents 11.8% of total net assets.
(c) See Note 1 of accompanying Notes to Financial Statements regarding valuation
of securities.
HIGH INCOME FUND
Asset Backed Securities - Investment Grade - 36.0%
$100,000 Comm 1999-1 F, 7.239% 10/15/08 BBB- 90,973 88,687
219,839 Empire Funding 1998-1 B1, 8.56% 6/25/24 BBB 184,632 184,528
1,788,750 Empire Funding 1998-2 B1, 9.03% 6/25/24 BBB 1,426,563 1,426,528
120,000 First Plus 1997-4 B1, 7.69% 9/11/23 BBB 98,507 97,387
200,000 First Plus 1998-1 B1, 7.63% 1/10/24 BBB 161,016 162,562
125,000 Green Tree 1997-4 B1, 7.23% 2/15/29 BBB 119,500 119,179
2,081,191 2,078,871
Asset Backed Securities - Non-Investment Grade - 13.8%
500,000 First Plus 1997-4 B2, 8.52% 9/11/23 (a BB 275,558 262,187
1,000,000 First Plus 1998-2 B2,8.36% 5/10/24 (a) B 532,266 532,500
807,824 794,687
Corporate Bonds - Investment Grade - 4.6%
Optical Supplies
300,000 Sola International, 6.875% Bond 3/15/08 BBB 277,211 262,992
Corporate Bonds - Non-Investment Grade - 22.2%
Containers - Metal/Glass - 5.1%
300,000 Owens-Ill. Inc.,8.10% Bond 5/15/07 BB+ 304,235 298,247
Finance - Consumer - 1.4%
100,000 Macsaver Financial, 7.875% Bond 8/01/03 BB+ 73,390 82,000
Financial - 3.2%
200,000 Advanta Corporation 7.47% Bond 9/10/01 BB 187,469 183,762
Medical - Hospitals - 3.2%
200,000 Columbia/HCA, 6.91% Bond 6/15/05 BB+ 183,529 182,671
Retail - Apparel/Shoes - 2.4%
150,000 Woolworth Corporation, 6.98% Bond 10/15/01 BB 134,852 140,787
Retail - Petroleum Products - 4.8%
300,000 Clark USA Inc., 10.875% Bond 12/01/05 B+ 277,469 274,500
Telecommunications - 2.1%
200,000 Level 3 Communications, Bond 12/01/08 B 122,291 122,500
(Zero coupon through 12/01/2003, thereafter 10.50%)
1,283,235 1,284,467
Mortgage Backed Securities - 18.8%
Collateralized Mortgage Obligation 467,590
Hanover SPC-2 1998-B 3E, 6.25% 10/01/14 (a) BB 398,284 397,451
451,873 Norwest Asset Secs. 1999-15 B6, 6.25% 6/25/14
(subordinate class) (a) Non-rated 114,017 112,968
779,187 CS First Boston Mtg. 1998-1 B2, 6.75% 9/25/28
(subordinate class) (a) Non-rated 602,386 577,816
1,114,687 1,088,235
Stocks - 4.6%
(shares)
850 Cendant Corporation 28,472 29,218
3,700 General Growth Properties 85,571 88,800
3,000 Star Gas Partners 48,247 51,750
4,700 US Restaurant Properties 90,081 97,237
252,371 267,005
Total Investments in Securities 5,816,519 5,776,257
(a) Securities sold within the terms of a private placement memorandum,
exempt from registration under Section 144A of the Securities Act of 1933, as
amended, and may be sold only to dealers in that program or to other accredited
investors.
These issues have been determined by the Advisor to be liquid. The
aggregate value of these securities at June 30, 1999, was
$2,142,871 which represents 37.1% of total net assets.
(b) See Note 1 of accompanying Notes to Financial Statements regarding valuation
of securities.
STATEMENTS OF OPERATIONS
Intermediate High Income
Bond Fund Fund
Assets:
Investments, in securities as detailed in the accompanying schedules at
market $6,097,056 $5,776,257
(cost $6,197,049 and $5,816,519 respectively)
Cash on deposit with custodian 73,815 162,010
Accrued interest 81,471 65,027
Receivable for fund shares sold 69,340
Due from affiliates 16,261 12,902
TOTAL ASSETS 6,268,603 6,085,536
Liabilities:
Accrued expenses 10,590 10,621
Distributions payable 37,626 49,842
Total Liabilities 48,216 60,463
Net Assets 6,220,387 6,025,073
Net Assets consist of:
Net unrealized depreciation of investments
Net proceeds of capital stock, par value $.001 per share-
authorized 1 billion shares 6,319,945 6,065,335
Accumulated net realized gain from sale of investments 435
NET ASSETS $6,220,387 $6,025,073
Shares Outstanding and Net Asset Value Per Share:
Class A shares
Net Assets $3,164,863 $1,028,584
Shares outstanding 321,529 101,096
Net Asset Value per share $9.85 $10.17
Class C shares
Net Assets $1,986,591 $4,064,709
Shares outstanding 201,633 399,451
Net Asset Value per share $9.85 $10.18
Class I shares
Net Assets $1,068,933 $931,780
Shares outstanding 108,498 91,563
Net Asset Value per share $9.85 $10.18
See accompanying notes to audited financial statements.
Intermediate High Income
Bond Fund Fund
Investment Income:
Interest $67,823 $76,597
Dividends 2,268
67,823 78,865
Expenses:
Management fee 3,709 5,823
Distribution fee 2,462 4,084
Legal fees 1,000 1,000
Audit fees 7,500 7,500
Accounting and transfer agent fees 10,500 10,500
Custodian costs 1,063 2,057
Registration fees 1,000 1,000
Directors fees 1,500 1,500
Other 2,187 1,194
Less: Fee waiver from Advisor in excess of limit (22,432) (22,809)
8,489 11,849
Net Investment Income 59,334 67,016
Realized and Unrealized Gains (Losses) on Investments:
Change in unrealized depreciation for the period
Net realized gain on securities 435
Increase (decrease) in net assets resulting from op $(40,224) $26,754
See accompanying notes to audited financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
Intermediate High Income
Bond Fund Fund
Increase (decrease) in net assets from operations:
Net investment income $59,334 $67,016
Unrealized depreciation, net (99,993) (40,262)
Net realized gain from securities transactions 435
Increase (decrease) in net assets resulting from op (40,224) 26,754
Distributions to shareholders from net investment income:
Class A (30,196) (11,450)
Class C (18,933) (45,189)
Class I (10,205) (10,377)
Total distributions to shareholders (59,334) (67,016)
Proceeds from shares sold:
Class A (323,608 and 99,221 shares) 3,243,277 1,013,308
Class C (199,791 and 397,050 shares) 1,993,465 4,072,293
Class I (105,780 and 93,206 shares) 1,058,501 953,654
Proceeds from sales of shares as a result of reinvested dividends:
Class A (766 and 232 shares) 7,621 2,382
Class C (179 and 734 shares) 1,783 7,554
Class I (1,051 and 295 shares) 10,540 3,038
Less Shares Redeemed:
Class A (4,511 and 24 shares) (45,198) (249)
Class I (4 and 3,604 shares) (44) (36,645)
Net Increase in Net Assets from share transactions 6,269,945 6,015,335
Total Increase In Net Assets 6,170,387 5,975,073
NET ASSETS:
Beginning of Period 50,000 50,000
End of Period $6,220,387 $6,025,073
See accompanying notes to audited financial statements.
NOTES TO FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Morgan Keegan Intermediate Bond Fund and Morgan Keegan High Income Fund (the
Funds) are separate diversified investment portfolios and series of capital
stock of Morgan Keegan Select Fund, Inc., an open-end management investment
company. The investment objectives of the Funds are as follows:
The objective of the Morgan Keegan Intermediate Bond Fund is total return
(including capital appreciation and income) by investing in
investment grade, fixed income debt securities. The Morgan
Keegan Intermediate Bond Fund will invest at least 65% of total
assets in investment grade, intermediate term
maturity bonds with average effective maturities between 3 and 10 years.
The objective of the Morgan Keegan High Income Fund is total return
(includ- ing capital appreciation and income) by investing in
below investment grade, fixed income debt securities. The
Morgan Keegan High Income Fund primari- ly invests in debt
securities rated below investment grades by Standard and Poors
or Moodys rating agency.
All organizational costs will be unconditionally absorbed by Morgan Asset
Management, Inc. (the Advisor).
The inception of the Funds was January 13, 1999, and the commencement of
operations was March 22, 1999. The only transaction prior to March 22,
1999 was the initial contribution of $50,000 for each Fund from the Advisor on
January 13, 1999.
SIGNIFICANT ACCOUNTING POLICIES
Security Valuation:
Investments in securities traded on national securities exchanges are stated at
the last reported sales price on the day of valuation. Securities traded in the
over-the-counter market and listed securities for which no sale was reported on
that date are stated at the last quoted bid price. An outside pricing service
may be utilized to provide such valuations. For fixed income securities, the
pricing service may employ electronic data processing techniques and/or a matrix
system to determine valuations using methods which include consideration of
yields or prices of bonds of comparable quality, type of issue, coupon, maturity
and rating indications as to value from dealers, and general market conditions.
Securities for which quotations are not readily available are valued at fair
value as determined in good faith by management under supervision of the Board
of Directors. Short-term securities are valued at amortized cost or original
cost plus accrued interest, both of which approximate market.
Federal Income Taxes:
The Funds policy is to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all its taxable income to its shareholders. Therefore, no federal
income tax provision is required.
Other Policies:
The Funds follow industry practice and records security transactions on
the trade date. Dividend income and distributions to shareholders are
recognized on the ex-dividend date and interest is recognized on an accrual
basis.
Repurchase Agreements:
It is the Funds policy for securities purchased under agreements to
resell to have market value equal to or greater than the Funds purchase price
and to have such securities taken into possession by the Funds custodian.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
Note 2: Multiple Class Structure and Plan of Distribution
A multiple class structure has been adopted pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended, on behalf of each Fund. Each Fund
offers three share classes Class A, Class C and Class I. Class A shares are sold
with an initial sales charge. Class C shares are sold without an initial sales
charge and are subject to a contingent deferred sales charge within the first
year of purchase. Class I shares are sold without sales charges of any kind and
are available only to certain retirement accounts and other special programs.
The Class A and Class C shares at each Fund have a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended.
Note 3: Payment to Related Parties
Morgan Asset Management, Inc. is the investment advisor for each Fund. Morgan
Keegan and Company, Inc. acts as a distributor of each of the Funds shares
under a plan of distribution pursuant to Rule 12b-1. Investment advisory and
management fees and 12b-1 distribution fees are based on a percentage of each
Funds average daily net assets value. The following chart represents sales
charges and fees:
Morgan Keegan Intermediate Bond Fund
Class A Class C Class I
Initial Sales Charge 2.00%
Deferred Sales Charge 1.00%
Investment Advisory Fee 0.40% 0.40% 0.40%
12b-1 Fees 0.25% 0.60%
Morgan Keegan High Income Fund
Class A Class C Class I
Initial Sales Charge 2.50%
Deferred Sales Charge 1.00%
Investment Advisory Fee 0.75% 0.75% 0.75%
12b-1 Fee 0.25% 0.75%
Morgan Keegan and Company, Inc. provides funds accounting services and transfer
agent services for each Fund. The Advisor has agreed to waive its fee and to
reimburse each Fund for its first twelve months of operations to the extent each
Funds annual operating expenses (excluding brokerage, interest, taxes and
extraordinary expenses) exceed the following:
Class A Class B Class C
Morgan Keegan Intermediate Bond Fund 0.90% 1.25% 0.65%
Morgan Keegan High Income Fund 1.25% 1.75% 1.00%
Note 4: Capital Share Transactions
At June 30, 1999, there were 1 billion shares of .001 par value capital shares
authorized, and paid-in capital was $6,319,829 for the Morgan Keegan
Intermediate Bond Fund and $6,065,255 for the Morgan Keegan High Income Fund.
Note 5: Investment Securities
Information related to investment securities (excluding short-term investments)
By
portfolio in 1999 is as follows:
Morgan Keegan Morgan Keegan
Intermediate Bond Fund High Income Fund
Cost of purchases $6,388,114 $5,816,519
Proceeds from sales 191,500 0
Securities with appreciation 15,062 35,778
Securities with depreciation (115,055) (76,040)
Unrealized depreciation $(99,993) $(40,262)
FINANCIAL HIGHLIGHTS
Intermediate High Income
Bond Fund Fund
CLASS A CLASS C CLASS I CLASS A CLASS C CLASS I
Net Asset Value, beginning of period
$10.00 $10.00 $10.00 $10.00 $10.00 $10.00
Income (loss) from Investment Operations:
Net Inv Inc 0.16 0.15 0.16 0.20 0.18 0.20
Net Gains (loss) on Securities
(0.15) (0.15) (0.15) 0.17 0.18 0.18
Total from Investment Operations
0.01 0.00 0.01 0.37 0.36 0.38
Less Distributions:
Dividends (from net investment income)
(0.16) (0.15) (0.16) (0.20) (0.18) (0.20)
Net Asset Value, end of period
9.85 9.85 9.85 10.17 10.18 10.18
Total Return * 0.06% (0.04%) 0.13% 3.69% 3.64% 3.85%
Ratios/Supplemental Data
Net Assets, end of period
$3,164,863 $1,986,591 $1,068,933 $1,028,584 $4,064,710 $931,780
Expenses to Average Net Assets ** 0.90% 1.25% 0.65% 1.25% 1.75% 1.00%
Net Investment Income to Average Net Assets 6.48% 6.22% 6.82% 8.74%
8.65% 9.40%
Portfolio Turnover Rate 6.66% 6.66% 6.66% 0% 0% 0%
*Total return does not include front end sales load.
**3.41%, 3.82%, 3.13%, 4.39%, 4.86%, and 4.02% before excess reimbursement and
fee waiver from Advisor for classes A, C and I of the
Intermediate Bond Fund and High Income Fund, respectively.
See accompanying notes to audited financial statements.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Morgan Keegan Select Fund, Inc.
We have audited the accompanying statements of assets and liabilities
including the schedules of investments of Morgan Keegan Intermediate Bond Fund
and Morgan Keegan High Income Fund (funds within Morgan Keegan Select Fund,
Inc.), as of June 30, 1999, and the related statements of operations, statements
of changes in net assets and financial higlights for the period from
commencement (March 22, 1999) to June 30, 1999. These financial statements and
financial highlights are the responsibility of fund management. Our
responsibility is to ex-press an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 June
30, 1999, by correspondence with the custodian. 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 be-lieve
that our audits provide 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
Morgan Keegan Intermediate Bond Fund and Morgan Keegan High Income Fund as of
June 30, 1999, the results of their operations, changes in their net assets and
financial highlights for the period from commencement (March 22, 1999) to June
30, 1999 in conformity with generally accepted accounting principles.
Memphis, Tennessee
July 30, 1999
