Dear Fellow Shareholders:
Exceptional returns and growth in assets under management highlight
our report for the fiscal year ending June 30, 2000 for both of the fixed
income portfolios in the Morgan Keegan Select Series. As the investment
advisor, our primary mission is to deliver competitive performance results.
To that end, both portfolios have outperformed their respective indices. For
the six-month period ending June 30, 2000, the Intermediate portfolio
returned 4.56%, while the Lehman Intermediate Aggregate Index posted a 4.04%
return. For the year ending June 30, 2000, the Intermediate Fund provided a
6.46% return, versus 4.77% for the Index. The High Income portfolio
performance for the six-month period ending June 30, 2000, was 7.50%. This
advance stacked up well against the Lehman BB High Yield Index return of
1.34%. For the year ending June 30, 2000, the High Income portfolio returned
10.14%, compared to a return of 2.14% for the Lehman BB Index.
While a portfolios total return is the bottom line in performance measurement,
it is also important to consider how the bottom line is produced. In managing
the Intermediate and High Income portfolios, our performance goals include
providing stable income (dividends) and principal value (share price). Over the
past year, both portfolios have exhibited more
stability with regard to principal value than the comparable market indices.
Income distributions have also proven quite stable in spite of the fact that
yields on government bonds (10 yr.) rose over 100 basis points from June of
1999 to January of 2000 and then fell more than 80 basis points over the next
six months. In light of this significant interest rate volatility over the last
year, we are quite pleased with out stable share price and consistent dividend
payouts and hope to see both continue in the future.
We are also pleased to report that asset growth in the Select Series continues
to advance at a considerable pace. Total assets in the Intermediate portfolio
grew 12.8% over the six-month period ending June 30, 2000 and 96.5% from the
previous year-end. The High Income portfolio also experienced considerable
growth, increasing 42.5% and 199.0% over the same respective periods. Asset
growth in the Select Fund fixed income portfolios stands in stark contrast to
general bond mutual fund flows, both investment-grade and high yield, which
have been decidedly negative over the last twelve months. The considerable
outflow of investment capital from bond funds is the result of a very turbulent
bond market that began to affect market participants in late 1998. More recently
Federal Reserve policy has been, by far, the most powerful force driving
financial markets. Over the past thirteen months, the Federal Reserve has raised
short-term rates six times, from 4.75% to 6.50%, in an attempt to moderate the
pace of U.S. economic growth and to avert any further increases in the inflation
rate. To make things more difficult, this typical interest rate cycle has been
accompanied by a pronounced credit deterioration cycle, making positive
performance results even more elusive. Intermediate investment-grade bonds
outperformed similar long-term bonds but underperformed most structured finance
securities, such as mortgage-backed and asset-backed bonds. Our emphasis on
these asset classes has helped stabilize our portfolios by producing steady
cash flows from fixed-asset pools. The markets sensitivity to creditworthiness
was most evident in the high yield or below-investment grade arena. High yield
corporate bond indices underperformed their investment grade counterparts for
both the six and twelve-month periods ended June 30, 2000. Even within the high
yield universe, the highest credit quality bonds outperformed lower rated
issues by a wide margin.
Despite the difficult environment, the Select portfolios have rewarded investors
with good performance, and we believe that market conditions are set improve.
Recent economic data leads us to believe that we are in the mature stages of
this interest rate cycle, meaning that interest rate hikes by the Federal
Reserve should be nearing an end. If tradition holds, market participants will
begin to invest in more aggressive financial assets again, as short-term rates
stabilize. Maintaining fully invested portfolios under such conditions should
prove rewarding to Select Fund investors.
/s/ Allen Morgan, Jr. /s/ Jim Kelso
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.
<TABLE>
<CAPTION>
Intermediate Bond Fund
Six Months Twelve Months
Ended 6/30/00 Ended 6/30/00
<S> <C> <C>
Class A shares 2.34% 4.05%
Class C shares 4.25% 5.81%
Class I shares 4.56% 6.46%
</TABLE>
[FN]
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.
</FN>
<TABLE>
<CAPTION>
High Income Fund
Six Months Twelve Months
Ended 6/30/00 Ended 6/30/00
<S> <C> <C>
Class A shares 4.69% 7.23%
Class C shares 7.11% 9.33%
Class I shares 7.50% 10.14%
</TABLE>
</FN>
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.
Holdings mentioned in this report may or may not be currently owned by the Fund.
<PAGE>
<TABLE>
<CAPTION>
Asset Backed Securities - Investment Grade - 64.8%
<S> <C> <C> <C> <C>
Commercial Loans - 13.1%
$100,000 Comm 1999-1 F, 7.239% 10/15/08 A $91,947 $87,993
400,000 Commercial Mortgage 1999-C2, 7.80% 7/17/13 A 381,699 391,000
300,000 Deutsche Mtg. & Asset 1998-C1 C, 6.861% 3/15/08 A 297,948 278,022
300,000 GMACC 1997-C1 A3, 6.869% 8/15/07 A 306,768 289,116
600,000 GMACC 1997-C2 B, 6.703% 12/15/07 AA 542,554 557,922
1,620,916 1,604,053
Home Equity Loans (High Loan-To-Value) - 26.3%
100,000 Cityscape Home Equity 1997-3 B, 8.17% 7/25/18 BBB+ 91,382 94,777
500,000 Cityscape Home Equity 1997-4 M2, 7.71% 10/25/18 A 469,428 61,975
399,708 Empire Funding 1998-1 M2, 7.43% 6/25/24 A 371,289 368,975
244,821 Empire Funding 1998-1 B1, 8.56% 6/25/24 BBB 203,697 211,737
300,000 Empire Funding 1998-2 B1, 9.03% 6/25/24 BBB 241,592 256,947
300,000 First Plus Home Loan 1997-2 M2, 7.59% 4/10/23 A 286,451 286,170
600,000 First Plus Home Loan 1997-2 B1, 7.93% 4/10/23 BBB 541,122 531,984
300,000 First Plus Home Loan 1998-2 M2, 7.51% 5/10/24 AAA 275,631 282,960
300,000 First Plus Home Loan 1998-1 B1, 7.63% 1/10/24 (a) BBB 243,916 250,959
200,000 Impac Secured Assets 1998-1 M2, 7.77% 7/25/25 A 186,354 177,808
300,000 PSB Lending 1997-3 M2, 7.63% 2/20/24 A 274,841 281,199
3,185,703 3,205,491
Home Equity Loans (Non-High Loan-To-Value) - 9.2%
100,000 Amresco Residential 1997-2 M2F, 7.665% 6/25/27 A+ 98,261 97,532
270,000 Countrywide Certificates 1999-1 AF2, 6.16% 9/25/25 AAA 260,222 257,229
500,000 Delta Funding Home Equity 1998-1 A4F, 6.55% 3/25/27 AAA 437,602 440,690
350,000 The Money Store, 7.495% 5/15/30 A 324,509 323,666
1,120,594 1,119,117
Home Improvement Loans - 6.7%
350,000 Green Tree Fin. Corporation 1998-E HEM2, 7.27% 6/15/28 A+ 328,290 320,180
600,000 Keystone Owner Trust 1998-P2 B1, 8.5% 1/25/29 (a) BBB- 488,604 501,168
816,894 821,348
Legal Settlements - 1.5%
200,783 Structured Settlements 1999-A A, 7.25% 12/20/15 (a) A 186,956 187,827
Manufactured Housing Loans - 3.0%
200,000 Green Tree Fin. Corporation 1997-4 B1, 7.23% 2/15/29 BBB+ 191,497 178,240
200,000 UCFC Manufactured Housing 1996-1 M, 7.9% 1/15/28 A 186,901 190,988
378,398 369,228
Small Business Loans - 4.2%
499,968 ACLC Business Trust 1999-2, 9.35% 1/15/21 (a) A 489,852 506,519
Student Loans - 0.8%
95,235 Banc One Student Loan 1994-A A2, 6.82% 10/25/16 AAA 89,559 90,474
7,888,872 7,904,056
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Corporate Bonds - Investment Grade - 28.4%
Automobile Manufacturers - 1.9%
<S> <C> <C> <C> <C>
250,000 General Motors Acceptance Corp., 6.15% Bond 4/05/07 A 243,609 232,708
Automobile Rental - 2.2%
275,000 Hertz Corp., 7.625% Bond 8/15/07 A- 273,194 273,479
Banks - 2.4%
300,000 Bank One, 6.875% Bond 8/01/06 A+ 293,195 289,902
Brokerage and Investment - 2.1%
290,000 Merrill Lynch & Co., 6.00% Bond 2/17/09 AA 273,189 258,149
Financial - 1.5%
200,000 Provident Companies Inc., 6.375% Bond 7/15/05 BBB+ 198,664 185,010
Machinery - 1.2%
155,000 Thermo Electron Corp., 7.625% Bond 10/30/08 A 145,017 145,942
Optical Supplies - 2.8%
400,000 Sola International, 6.875% Bond 3/15/08 BBB 372,953 343,124
Real Estate Investment Trusts - 3.7%
175,000 American Health Properties, 7.50% Bond 1/5/07 BBB 158,261 160,997
300,000 New Plan Realty, 6.80% Bond 5/15/02 A 295,976 295,836
454,237 456,833
Retail - Auto Parts - 2.8%
360,000 AutoZone, 6.00% Bond 11/01/03 A 350,789 340,067
Special Purpose Entity - 5.3%
185,000 BHP Finance USA LTD., 6.42% Bond 3/01/26 A 182,533 179,731
500,000 Deutsche Bank Capital Funding, 7.872% Bond 12/29/49 (a) AA 500,000 464,030
682,533 643,761
Telecommunications - 1.7%
250,000 Metronet Communications, Bond 6/15/08 BBB 193,072 202,180
(Zero coupon through 6/15/03, thereafter 9.95%)
Transportation - 0.8%
100,000 US Freightways, 6.50% Bond 5/01/09 A 99,273 92,884
3,579,724 3,464,038
<CAPTION>
Corporate Bonds - Non-Investment Grade - 1.5%
Containers - Metal/Glass
<S> <C> <C> <C> <C> <C>
200,000 Owens-Ill. Inc., 8.10% Bond 5/15/07 BB+ 198,168 186,794
<CAPTION>
Mortgage Backed Securities - Investment Grade - 5.3%
Collateralized Mortgage Obligation
<S> <C> <C> <C> <C>
200,000 Residential Asset Trust 1998-A5 A11, 6.75% 5/25/28 AAA
194,678 187,948
486,393 Norwest Asset Corp 1997-10 A4, 7.00% 8/25/27 AAA
468,389 462,780
663,067 650,728
Total Investments In Securities $12,329,831 $12,205,616
</TABLE>
(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. Pursuant to guidelines adopted by the Board of Directors,
these issues have been determined to be liquid by Morgan Asset Management. The
aggregate value of these securities at June 30, 2000, was $1,910,503
which represent 15.5% of total net assets.
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
<PAGE>
<TABLE>
<CAPTION>
Asset Backed Securities - Investment Grade - 20.5%
<S> <C> <C> <C> <C> <C>
Commercial Loans - 0.5%
$100,000 Comm 1999-1 F, 7.239% 10/15/08 BBB- $ 91,947 $ 87,993
Home Equity Loans (High Loan-To-Value) - 15.5%
500,000 Cityscape Home Equity Trust 1997-3 B, 8.17% 7/25/18 BBB+ 458,069 473,885
519,620 Empire Funding 1998-1 B1, 8.56% 6/25/24 BBB 439,215 449,400
1,788,750 Empire Funding 1998-2 B1, 9.03% 6/25/24 BBB- 1,441,088 1,532,046
420,000 First Plus Home Loan 1997-4 B1, 7.69% 9/11/23 (a) BBB 346,941 363,926
200,000 First Plus Home Loan 1998-1 B1, 7.63% 1/10/24 (a) BBB 162,609 167,306
2,847,922 2,986,563
Home Improvement Loans - 3.9%
900,000 Keystone Owner Trust 1998-P2 B1, 8.50% 1/25/29 (a) BBB- 727,260 751,752
Manufactured Housing Loans - 0.6%
125,000 Green Tree Fin. Corp. 1997-4 B1, 7.23% 2/15/29 BBB+ 119,687 111,400
3,786,816 3,937,708
<CAPTION>
Asset Backed Securities - Non-Investment Grade - 24.5%
<S> <C> <C> <C> <C>
Equipment Leases - 6.6%
1,000,000 Pegasus Aviation Lease 1999-1A D1, 5.878% 3/25/29 (a) BB 537,852 550,270
997,139 Pegasus Aviation Lease 2000-1 D1, 8.42% 3/25/30 (a) BB 697,009 714,321
1,234,861 1,264,591
Home Equity Loans (High Loan-To-Value) - 17.9%
925,000 First Plus Home Loan 1997-4 B2, 8.52% 9/11/23 (a) BB 517,969 598,854
1,500,000 First Plus Home Loan 1998-1 B2, 8.02% 1/10/24 (a) BB 879,749 881,970
750,000 First Plus Home Loan 1998-2 B2, 8.36% 5/10/24 (a) BB 413,339 441,810
1,000,000 First Plus Home Loan 1998-3 B2, 8.08% 5/10/24 (a) Non-rated 592,200 587,120
1,500,000 Master Fin Asset Trust 1998-2 B2, 10.02% 9/20/24 BB 934,430 935,130
3,337,686 3,444,884
4,572,547 4,709,475
<CAPTION>
Corporate Bonds - Investment Grade - 10.7%
<S> <C> <C> <C> <C>
Banks - 2.4%
500,000 Colonial Bank, 8.0% Bond 3/15/09 BBB- 482,741 461,145
Medical - Hospitals - 3.6%
350,000 Health Care REIT, 7.625% Bond 3/15/08 BBB- 298,073 289,328
500,000 Healthsouth, 3.25% Bond 4/01/03 BBB- 406,615 395,400
704,688 684,728
Machinery - 0.9%
175,000 Thermo Electron, 4.25% Bond 1/01/03 (a) BBB 147,532 162,087
Optical Supplies - 1.3%
300,000 Sola International, 6.875% Bond 3/15/08 BBB 279,411 257,343
Pharmacy Services - 1.9%
500,000 Omnicare, 5.0% Bond 10/01/07 BBB- 345,308 368,780
Waste Disposal - 0.6%
125,000 WMX Technologies, 7.1% Bond 8/01/26 BBB 113,455
119,474
2,073,134 2,053,556
<CAPTION>
<S> <C> <C> <C> <C>
Corporate Bonds - Non-Investment Grade - 22.5%
Automobile/Equipment Rental - 1.4%
300,000 United Rentals, 9.25% Bond 1/15/09 BB- 282,794 272,559
Containers - Metal/Glass - 1.5%
300,000 Owens-Ill. Inc., 8.10% Bond 5/15/07 BB+ 303,768 280,191
Finance - Customer - 0.3%
100,000 Macsaver Financial, 7.875% Bond 8/01/03 BB+ 79,262 60,810
Insurance - 1.3%
400,000 Vesta Insurance Group, 8.75% Bond 7/15/25 B+ 238,176
257,452
Medical - Hospitals - 2.9%
200,000 Columbia/HCA Healthcare, 6.91% Bond 6/15/05 BB+
186,002 183,786
140,000 Columbia/HCA Healthcare, 6.875% Bond 7/15/01 BB+
135,586 137,340
250,000 Tenet Healthcare, 8.0% Bond 1/15/05 BB+ 245,996
243,783
567,584 564,909
Retail - Petroleum Products - 0.9%
300,000 Clark USA Inc., 10.875% Bond 12/01/05 B+ 280,393
176,769
Ship Building - 2.4%
775,000 Friede Goldman, 4.50% Bond 9/15/04 B 519,380 465,000
Telecommunications - 10.7%
390,000 AMSC Acquisition, 12.25% Bond 4/01/08 B- 328,772
309,176
500,000 Crown Castle, Bond 5/15/11 (Zero coupon through 5/15/04,
B 311,313 304,310
thereafter 10.375%)
300,000 Global Crossing, 9.625% Bond 5/15/08 BB+ 311,668
295,095
400,000 GlobalStar LP, 11.50% Bond 6/01/05 B 312,242
125,624
600,000 Level 3 Communications, Bond 12/01/08 (Zero coupon through
12/01/03, B 381,999 361,314
thereafter 10.50%)
500,000 Nextel Communications, 9.75% Bond 10/31/07 B
372,664 369,365
300,000 QWest Communications, 7.25% Bond 11/01/08 BB+
291,252 283,509
2,309,911 2,048,393
Textiles - 1.1%
250,000 Westpoint Stevens, 7.875% Bond 6/15/08 BB
245,040 205,615
4,826,309 4,331,698
<CAPTION>
Mortgage Backed Securities - Non-Investment Grade - 7.0%
<S> <C> <C> <C> <C>
Collateralized Mortgage Obligation 185,672
Chase Mtge Fin Corp 1999-S7 B5, 6.25% 6/25/14 (a) Non-rated
55,560 50,722 243,496 GE Capital Mtge Services
1998-26 B5, 6.25% 2/25/14 (a) Non-rated 70,646 67,018
422,218 Hanover SPC-2, 6.25% 10/01/14 (a) BB 363,746
351,691 637,485 Norwest Asset Corp. 1999-5 B6, 6.25%
3/25/14 (a) Non-rated 194,760 178,738 431,863
Norwest Asset Corp. 1999-15 B6, 6.25% 6/25/14 (subordinated class) (a)
Non-rated 130,605 120,334 769,905 CS First
Boston Mtg. 1998-1 B2, 6.75% 9/25/28 (subordinated class) BB 601,200
579,546
1,416,518 1,348,049
<CAPTION>
Stocks - 11.1%
(shares)
<S> <C> <C> <C> <C>
25,000 Amresco Capital Trust 220,056 253,125
5,500 Colonial Properties 94,050 119,972
2,000 Crown Castle International 66,175 73,000
7,000 General Growth Properties 151,357 152,250
10,000 Health Care Property 168,100 198,130
15,000 Healthsouth 77,630 107,820
8,000 Health Care REIT 137,985 130,000
1,000 Level 3 Communications 74,575 88,000
3,000 Nextel Communications 151,969 183,564
2,500 QWest Communications 88,279 124,220
12,000 RFS Hotel Investors 134,205 141,000
8,000 Sovran Self Storage 152,480 177,504
9,000 Star Gas Partners 146,993 138,375
3,700 Storage USA 99,812 109,150
4,000 United Rentals 64,175 68,500
2,500 Global Crossing 80,378 65,783
1,908,217 2,130,392
<CAPTION>
Repurchase Agreement - 3.7%
State Street Bank & Trust Company
Dated June 30, 2000, 3.0%, to be repurchased at $720,180
<S> <C> <C>
on July 3, 2000 (Euro deposit). 720,000 720,000
Total Investments in Securities $19,303,541 $19,230,879
</TABLE>
[FN]
(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. Pursuant to guidelines adopted by the Board of
Directors, these issues have been determined to be liquid by Morgan Asset
Management. The aggregate value of these securities at June 30, 2000, was
$5,987,919 which represent 31.1% of total net assets.
(b) See Note 1 of accompanying Notes to Financial Statements regarding
valuation of securities.
</FN>
<PAGE>
<TABLE>
<CAPTION>
Intermediate High Income
Bond Fund Fund
<S> <C> <C>
Assets:
Investments, in securities as detailed in the accompanying schedules at
value $12,205,616 $19,230,879
(cost $12,329,831 and $19,303,541, respectively)
Cash on deposit with custodian 86,383 1,017
Accrued interest and dividends receivable 134,940 239,259
TOTAL ASSETS 12,426,939 19,471,155
Liabilities:
Accrued expenses 20,106 20,120
Payable for fund shares redeemed 750
Distributions payable 74,176 174,277
Due to affiliates 6,788 38,206
Total Liabilities 101,070 233,353
Net Assets 12,325,869 19,237,802
Net Assets consist of:
Excess distribution from net investment income (10,856)
Accumulated net realized gain (loss) from sale of investments (58,518)
7,441
Net unrealized depreciation of investments (124,215) (72,662)
Net proceeds of capital stock, par value $.001 per share-authorized
1 billion shares; outstanding 1,265,900 and 1,927,163 shares, respectively
12,519,458 19,303,023
NET ASSETS $12,325,869 $19,237,802
Shares Outstanding and Net Asset Value Per Share:
Class A shares
Net Assets $6,101,095 $5,542,495
Shares outstanding 626,663 555,213
Net Asset Value per share $9.74 $9.98
Class C shares
Net Assets $4,401,369 $7,806,453
Shares outstanding 451,981 781,998
Net Asset Value per share $9.74 $9.98
Class I shares
Net Assets $1,823,405 $5,888,854
Shares outstanding 187,256 589,952
Net Asset Value per share $9.74 $9.98
</TABLE>
[FN]
See accompanying notes to audited financial statements.
</FN>
<PAGE>
<TABLE>
<CAPTION>
Intermediate High Income
Bond Fund Fund
<S> <C> <C>
Investment Income:
Interest $824,998 $1,607,499
Dividends 117,188
824,998 1,724,687
Expenses:
Management fee 40,855 101,623
Distribution fee 33,885 51,706
Legal fees 9,798 9,798
Audit 10,750 10,750
Accounting and transfer agent fees 42,000 42,000
Custodian costs 12,072 12,089
Registration fees 1,575 1,575
Directors fees 5,500 5,500
Other 9,805 9,788
Less: Fee waiver and reimbursement from Advisor in excess of limitation
(65,966) (57,625)
100,274 187,204
Net Investment Income 724,724 1,537,483
Realized and Unrealized Gains (Losses) on Investments:
Change in unrealized depreciation for the period (24,222) (32,400)
Net realized gain (loss) on securities (58,518) 21,211
Increase in net assets resulting from operations $641,984 $1,526,294
</TABLE>
[FN]
See accompanying notes to audited financial statements.
</FN>
<PAGE>
<TABLE>
<CAPTION>
Intermediate Bond Fund
2000 1999
<S> <C> <C>
Increase (decrease) in net assets from operations:
Net investment income $724,724 $59,334
Unrealized depreciation, net (24,222) (99,993)
Net realized gain (loss) from securities transactions (58,518) 435
Increase (decrease) in net assets resulting from operations641,984(40,224)
Distributions to shareholders from net investment income:
Class A (380,346) (30,196)
Class C (234,062) (18,933)
Class I (110,316) (10,205)
Distributions to shareholders in excess of net investment income:
Class A (5,374)
Class C (3,876)
Class I (1,606)
Distributions to shareholders from net realized gain on investments:
Class A (215)
Class C (155)
Class I (64)
Total distributions to shareholders (736,014) (59,334)
Capital share transactions
Proceeds from shares sold:
Class A (350,267 and 323,608 shares) 3,422,705 3,243,277
Class C (249,165 and 199,791 shares) 2,426,320 1,993,465
Class I (69,773 and 105,780 shares) 679,114 1,058,501
Proceeds from sales of shares as a result of reinvested dividends:
Class A (36,159 and 766 shares) 351,487 7,621
Class C (19,938 and 179 shares) 193,697 1,783
Class I (11,071 and 1,051 shares) 107,585 10,540
Less shares redeemed:
Class A (81,021 and 4,511 shares) (778,563) (45,198)
Class C (18,755 and 0 shares) (182,833)
Class I (2,086 and 4 shares) (20,000) (44)
Net Increase in Net Assets from share transactions 6,199,512 6,269,945
Total Increase In Net Assets 6,105,482 6,170,387
NET ASSETS:
Beginning of Period 6,220,387 50,000
End of Period $12,325,869 $6,220,387
</TABLE>
[FN]
See accompanying notes to audited financial statements.
</FN>
<PAGE>
<TABLE>
<CAPTION>
HIGH INCOME Fund
2000 1999
<S> <C> <C>
Increase in net assets from operations:
Net investment income $1,537,483 $67,016
Unrealized depreciation, net (32,400) (40,262)
Net realized gain from securities transactions 21,211
Increase in net assets resulting from operations 1,526,294 26,754
Distributions to shareholders from net investment income:
Class A (409,691) (11,450)
Class C (622,930) (45,189)
Class I (504,862) (10,377)
Distributions to shareholders from net realized gain on investments:
Class A (3,967)
Class C (5,588)
Class I (4,215)
Total distributions to shareholders (1,551,253) (67,016)
Capital share transactions
Proceeds from shares sold:
Class A (445,733 and 99,221 shares) 4,416,832 1,013,308
Class C (379,662 and 397,050 shares) 3,732,576 4,072,293
Class I (484,489 and 93,206 shares) 4,841,732 953,654
Proceeds from sales of shares as a result of reinvested dividends:
Class A (26,150 and 232 shares) 256,966 2,382
Class C (51,324 and 734 shares) 505,567 7,554
Class I (40,759 and 295 shares) 400,410 3,038
Less shares redeemed:
Class A (17,767 and 24 shares) (174,167) (249)
Class C (48,439 and 0 shares) (477,876)
Class I (26,859 and 3,604 shares) (264,352) (36,645)
Net Increase in Net Assets from share transactions 13,237,688 6,015,335
Total Increase In Net Assets 13,212,729 5,975,073
NET ASSETS:
Beginning of Period 6,025,073 50,000
End of Period $19,237,802 $6,025,073
</TABLE>
[FN]
See accompanying notes to audited financial statements.
</FN>
<PAGE>
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 primarily
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:
The Funds use an outside pricing service to obtain market quotations for its
equity securities. Fixed income securities are valued at fair value as
determined
in good faith by management under supervision of the Board of Directors. The
Funds utilize an internal pricing matrix system to determine valuations on
fixed income securities 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.
Short-term securities are valued at amortized cost or original cost plus accrued
interest, both of which approximate market value.
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:
<TABLE>
<CAPTION>
Morgan Keegan Intermediate Bond Fund
<S> <C> <C> <C>
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%
<CAPTION>
Morgan Keegan High Income Fund
<S> <C> <C> <C>
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%
</TABLE>
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 a twelve month period ending March, 2001 to the extent
each Funds annual operating expenses (excluding brokerage, interest, taxes and
extraordinary expenses) exceed the following:
<TABLE>
<<S> <C> <C>
Class A Class C Class I
Morgan Keegan Intermediate Bond Fund 0.90% 1.25% 0.65%
Morgan Keegan High Income Fund 1.25% 1.75% 1.00%
</TABLE>
Note 4: Investment Securities
Information related to investment securities (excluding short-term investments)
by
portfolio in 2000 is as follows:
<TABLE>
<CAPTION>
Morgan Keegan Morgan Keegan
Intermediate Bond Fund High Income Fund
<S> <C> <C>
Cost of purchases $9,066,586 $12,187,655
Proceeds from sales 2,906,466 785,048
Securities with appreciation 128,418 634,880
Securities with depreciation (252,633) (707,542)
Unrealized depreciation $(124,215) $(72,662)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CLASS A CLASS C CLASS I CLASS A CLASS C CLASS I
Net Asset Value, beginning of period$9.85 $9.85 $9.85 $10.17 $10.18 $10.18
Income (loss) from Investment Operations:
Net Investment Income 0.68 0.67 0.72 1.29 1.12 1.31
Net Loss on Securities (0.11) (0.11) (0.11) (0.19) (0.20) (0.20)
Total from Investment Operations 0.57 0.56 0.61 1.10 0.92 1.11
Less Distributions:
Dividends (from net investment income)(0.67)(0.66)(0.71)(1.29)(1.12)(1.31)
Dividends (in excess of net investment income)(0.01)(0.01)(0.01)
Net Asset Value, end of period$9.74 $9.74 $9.74 $9.98 $9.98 $9.98
Total Return * 6.17% 5.81% 6.46% 9.98% 9.33% 10.14%
Ratios/Supplemental Data
Net Assets, end of period$6,101,095$4,401,369$1,823,405$5,542,495$7,806,453
$5,888,854
Expenses to Average Net Assets ** 0.90% 1.25% 0.65% 1.25% 1.75% 1.00%
Net Investment Income to Average Net Assets 6.95% 6.71%7.30% 10.89% 10.68%
11.27%
Portfolio Turnover Rate 30% 30% 30% 12% 12% 12%
For the Period from Commencement (March 22, 1999) to June 30, 1999
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
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 Investment Income 0.16 0.15 0.16 0.20 0.18 0.20
Net Gains (loss) on Securities(0.15)(0.15)(0.15)0.170.18 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 7% 7% 7% 0% 0% 0%
</TABLE>
[FN]
*Total return does not include front end sales load.
**1.51%, 1.85%, 1.26%, 1.61%, 2.11%, and 1.37% before excess reimbursement and
fee waiver from Advisor for classes A, C and I of the Intermediate Bond Fund
and High Income Fund, respectively.
+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.
</FN>
Shareholder Information:7.47% of the ordinary income distribution from the
High Income Fund qualifies for the corporate dividend received deduction.
<PAGE>
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, 2000, and the related statements of operations,
statements
of changes in net assets and financial higlights for the periods presented.
These financial statements and financial highlights are the responsibility of
fund management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
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 June 30, 2000, 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 believe 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, 2000, the results of their operations, changes in their net assets and
financial highlights for the periods presented in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG
Memphis, Tennessee
July 29, 2000
<PAGE>
ALABAMA
Birmingham
(205) 879-0016
Decatur
(256) 350-1925
Fairhope
(334) 928-0555
Huntsville
(256) 539-6739
Mobile
(334) 316-3100
Montgomery
(334) 262-0100
ARKANSAS
Little Rock
(501) 666-1566
Rogers
(501) 936-7774
FLORIDA
Ft. Lauderdale
(954) 728-2800
Palm Beach
(561) 835-8141
Pensacola
(850) 434-2207
Sarasota
(941) 331-1100
GEORGIA
Alpharetta
(678) 566-2500
Athens
(706) 613-9915
Atlanta
(404) 240-6700
Augusta
(706) 821-2640
Columbus
(706) 257-7900
LaGrange
(706) 880-1300
KENTUCKY
Bowling Green
(270) 781-0430
Covington
(859) 291-9535
Lexington
(606) 253-9769
Louisville
(502) 589-7979
LOUISIANA
Baton Rouge
(225) 344-9020
Lafayette
(337) 232-0644
Mandeville
(504) 727-9923
New Orleans
(504) 529-1556
Shreveport
(318) 424-2000
MASSACHUSETTS
Boston
(617) 542-9515
MISSISSIPPI
Jackson
(601) 368-2200
NEW YORK
New York
(212) 319-0443
NORTH CAROLINA
Charlotte
(704) 442-4700
Durham
(919) 419-2500
Raleigh
(919) 781-8187
Wilmington
(910) 256-2406
TENNESSEE
Jackson
(901) 668-1010
Knoxville
(865) 521-6653
Memphis
Morgan Keegan Tower
(901) 524-4100
Memphis
Crescent Center
(901) 766-7700
Nashville
(615) 255-0600
TEXAS
Austin
(512) 329-6700
Dallas
(214) 365-5500
Houston
Post Oak Park
(713) 840-3600
Houston
Memorial City Plaza
(713) 647-5300
VIRGINIA
Richmond
(804) 225-1100
</PAGE>
