<PAGE>
PROSPECTUS
Morgan Keegan Southern Capital Fund, Inc.
Morgan Keegan Southern Capital Fund, Inc. ("Fund") is a mutual fund
that seeks capital appreciation. The Fund invests principally in
securities of companies which are headquartered in the southern United
States.
This Prospectus sets forth concisely information about the Fund
that an investor ought to know before investing. It should be read and
retained for future reference. A Statement of Additional Information
about the Fund dated November 1, 1996, which is incorporated herein by
reference, has been filed with the Securities and Exchange Commission
and is available without charge upon request from Morgan Keegan &
Company, Inc. (address and telephone number listed below).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO
THE CONTRARY IS A
CRIMINAL OFFENSE.
MORGAN KEEGAN & COMPANY, INC.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100
(800) 366-7426
Dated: November 1, 1996
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<PAGE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT
MORGAN KEEGAN SOUTHERN CAPITAL FUND, INC.
How Can You Benefit From Investing in the Fund?
FIRST: Your securities investment is professionally managed, sparing
you the burden of selecting, supervising, and handling a securities
portfolio.
SECOND: Your investment is in a diversified portfolio of securities
of companies in a variety of industries, saving you the usual brokerage
costs associated with a series of small purchases.
THIRD: Your investment in the Fund through an individual retirement
account ("IRA"), simplified employee pension plan ("SEPP"),
self-employed individual retirement plan ("Keogh Plan"), cash or
deferred arrangement under section 401(k) of the Internal Revenue Code
of 1986, as amended ("401(k) Plan"), or other qualified retirement plan
allows you to shelter a portion of your current income and to defer tax
on the earnings on your investment. See "Investing Through Tax-Deferred
Retirement Plans."
FOURTH: Your investment is liquid, so that you may redeem your
shares at any time at their next determined net asset value (which may
be more or less than your purchase price). However, if you withdraw
before age 59 1/2 from an IRA, SEPP, Keogh Plan, 401(k) Plan or other
qualified retirement plan, a significant penalty may result. See
"Investing Through Tax-Deferred Retirement Plans" and "How You Can Sell
Your Fund Shares."
What is the Fund's Investment Objective?
The Fund's investment objective is capital appreciation. The Fund's
investment adviser, Morgan Asset Management, Inc. ("Adviser"), will seek
to achieve this objective by investing primarily in securities,
including common stock, preferred stock, and convertible and other debt
securities, of companies which are headquartered in the southern United
States. For purposes of this Prospectus, a company is "headquartered" in
the southern United States if its principal corporate offices are
located in the southern United States or if (alone or on a consolidated
basis) it derives 50% or more of its total revenues from either goods
produced, sales made or services performed in the southern United
States. For purposes of this Prospectus, the "southern United States"
consists of Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana,
Mississippi, Missouri, North Carolina, Oklahoma, South Carolina,
Tennessee, Texas, Virginia, and West Virginia. The Fund's investment
emphasis will make its performance especially subject to the economic
conditions in this region. Of course, there can be no assurance that the
Fund will achieve its objective. See "The Fund's Investment Objective
and Policies."
Who Should Invest in the Fund?
Morgan Keegan & Company, Inc. ("Distributor"), which sells the
Fund's shares, believes that the Fund's shares of common stock are
suitable for investors interested in long-term growth of capital.
Accordingly, the Fund is not intended for investors attempting to "time"
the market, seeking short-term price appreciation.
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Investors may purchase shares of the Fund at their then current net
asset value plus any applicable sales charge. The Fund pays a management
fee to the Adviser and a distribution fee to the Distributor as set
forth at pages 14-17 of this Prospectus.
The Adviser believes that the Fund's shares also may be appropriate
for investment by IRAs, SEPPs, Keogh Plans, 401(k) Plans and other
qualified retirement plans with principal investment objectives of
capital appreciation, provided that the risks associated with investment
in common stocks and in a particular geographic area are recognized.
Contributions to these plans are tax deductible within specified limits,
and earnings on investments by these plans in Fund shares accumulate
free of current income taxes.
SUMMARY OF FUND EXPENSES
Shareholder Transaction Expenses (as a percentage of public offering
price)
Maximum Sales Charge Imposed on Purchases. . . . . . . . . . 3.0%
Maximum Sales Charge Imposed on Reinvested Dividends . . . . None
Redemption Fees. . . . . . . . . . . . . . . . . . . . . . . None
Exchange Fees. . . . . . . . . . . . . . . . . . . . . . . . None
Annual Fund Operating Expenses (as a percentage of average net assets
after
waiver and reimbursement)*
Investment Advisory Fee. . . . . . . . . . . . . . . . . . .
1.00%
12b-1 Fee. . . . . . . . . . . . . . . . . . . . . . . . . .
0.50%
Other Expenses . . . . . . . . . . . . . . . . . . . . . . .
0.50%
Total Fund Operating Expenses . . . . . . . . . . . . .
2.00%
You would pay the following cumulative expenses on a $1,000 investment
over the time periods shown assuming, (1) a 5% annual return, and (2)
redemption at the end of each period. As noted, the Fund charges no
redemption fee of any kind.**
<TABLE>
<C> <C> <C> <C>
1 Year 3 Years 5 Years 10
Years
EXAMPLE. . . . . . . . . . . . $50 $91 $135
$256
</TABLE>
The purpose of the above tables is to assist an investor in
understanding the various costs and expenses that an investor in the
Fund bears directly or indirectly.
The above tables should not be considered a representation of past or
future expenses; the Fund's actual expenses may be greater or lesser
than those shown.
*Annual Fund operating expenses are based on the fiscal year ended
June 30, 1996. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc. rules regarding
investment companies. The Adviser waived its fee and reimbursed a
portion of the Fund's other expenses; without such waiver and
reimbursement, the Fund's ratio of expenses to average net assets would
have been 2.2% for that fiscal year. The Adviser intends to waive
</PAGE>
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its fee and to reimburse the Fund for a portion of its expenses during
the current fiscal year so that total operating expenses (excluding
brokerage, interest, taxes, and extraordinary expenses) do not exceed
2.0% of net assets annually. See "The Fund's Management and Investment
Adviser" on pages 14-16 for further information.
**The Example set forth above assumes that all dividends and
distributions are reinvested and that the percentage amounts listed
under Annual Fund Operating Expenses remain the same in the years shown.
The assumption in the Example of a 5% annual return is required by
regulation of the Securities and Exchange Commission applicable to all
mutual funds. The assumed 5% annual return is not a prediction of, and
does not represent, the Fund's actual or projected performance.
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FINANCIAL HIGHLIGHTS
The following table provides condensed audited information
concerning per share and other information for the periods shown. It has
been derived from financial statements which have been examined by
Coopers & Lybrand L.L.P., independent certified public accountants
through the fiscal year ended June 30, 1991, and by KPMG Peat Marwick
LLP, independent certified public accountants, for each of the years in
the five-year period ended June 30, 1996. These statements, and the
reports thereon, appear in the 1996 annual report to the shareholders
and are incorporated by reference in the Statement of Additional
Information.
Morgan Keegan Southern Capital Fund, Inc.
<TABLE>
Year Ended Year Ended Year Ended Year Ended
6/30/96 6/30/95 6/30/94 6/30/93
<S> <C> <C> <C> <C>
Net Asset Value,
beginning of period . . . $14.34 $12.96 $14.04 $13.56
Income from Investment
Operations
Net Investment Income
(loss). . . . . . . . (0.07) 0.08 0.06 0.05
Net Gains on
Securities. . . . . . 4.08 1.67 0.03 1.65
Total From Investment
Operations . . . . . 4.01 1.75 0.09 1.70
Less Distributions
Dividends (from net
investment income) . (0.03) (0.08) (0.06) (0.06)
Distributions (from
realized gains). . . (0.26) (0.29) (1.11) (1.16)
Net Asset Value, end
of period . . . . . $18.06 $14.34 $12.96 $14.04
Total Return* . . . . . 28.30% 13.81% .42% 13.32%
Ratios/Supplemental
Data
Net Assets, end of
period . . . . . 37,505,196 27,259,499 38,696,768 45,576,519
Ratio of Expenses
to Average Net
Assets** . . . . 2.0% 2.0% 2.0% 2.0%
Ratio of Net
Investment to
Average Net
Assets . . . . . (.5%) .6% .5% .4%
Portfolio Turnover
Rate . . . . . . 69% 54% 133% 179%
<FN>
*Total return does not include front end sales load.
**2.2%, 2.2%, 2.0%, 2.0%, 2.3%, 3.5%, 3.8%, 3.6%, 3.4% and 5.7% before
excess reimbursement and fee waiver from Adviser in 1996,
1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and 1987,
respectively.
***The Fund commenced operations on September 22, 1986.
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides condensed audited information
concerning per share and other information for the periods shown. It has
been derived from financial statements which have been examined by
Coopers & Lybrand L.L.P., independent certified public accountants
through the fiscal year ended June 30, 1991, and by KPMG Peat Marwick
LLP, independent certified public accountants, for each of the years in
the five-year period ended June 30, 1996. These statements, and the
reports thereon, appear in the 1996 annual report to the shareholders
and are incorporated by reference in the Statement of Additional
Information.
Morgan Keegan Southern Capital Fund, Inc.
<TABLE>
Year Ended Year Ended Year Ended Year
Ended
6/30/92 6/30/91 6/30/90 6/30/89
<S> <C> <C> <C> <C>
Net Asset Value,
beginning of period . . . $11.79 $11.49 $11.52 $11.09
Income from Investment
Operations
Net Investment Income
(loss). . . . . . . . 0.08 0.09 0.10 0.57
Net Gains on
Securities. . . . . . 1.98 .27 0.30 0.31
Total From Investment
Operations . . . . . 2.06 .36 0.40 0.88
Less Distributions
Dividends (from net
investment income) . (0.09) (0.06) (0.43) (0.45)
Distributions (from
realized gains). . . (0.20)
Net Asset Value, end
of period . . . . . $13.56 $11.79 $11.49 $11.52
Total Return* . . . . . 17.60% 3.23% 3.69% 8.05%
Ratios/Supplemental
Data
Net Assets, end of
period . . . . . 28,614,178 13,078,456 8,793,164 9,244,702
Ratio of Expenses
to Average Net
Assets** . . . . 2.0% 2.0% 2.0% 2.0%
Ratio of Net
Investment to
Average Net
Assets . . . . . .6% .9% .9% 5.1%
Portfolio Turnover
Rate . . . . . . 152% 187% 137% 136%
<FN>
*Total return does not include front end sales load.
**2.2%, 2.2%, 2.0%, 2.0%, 2.3%, 3.5%, 3.8%, 3.6%, 3.4% and 5.7% before
excess reimbursement and fee waiver from Adviser in 1996,
1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and 1987,
respectively.
***The Fund commenced operations on September 22, 1986.
</TABLE>
See accompanying notes to financial statements.
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Morgan Keegan Southern Capital Fund, Inc.
<TABLE>
Year Ended Year Ended
6/30/88 6/30/87***
<S> <C> <C>
Net Asset Value,
beginning of period . . . $12.16 $10.00
Income from Investment
Operations
Net Investment Income
(loss). . . . . . . . 0.11 0.04
Net Gains on
Securities. . . . . . (.78) 2.12
Total From Investment
Operations . . . . . (.67) 2.16
Less Distributions
Dividends (from net
investment income) . (0.01)
Distributions (from
realized gains). . . (0.39)
Net Asset Value, end
of period . . . . . $11.09 $12.16
Total Return* . . . . . (5.95%) 21.60%
Ratios/Supplemental
Data
Net Assets, end of
period . . . . . 13,588,528 9,859,268
Ratio of Expenses
to Average Net
Assets** . . . . 2.0% 2.1%
Ratio of Net
Investment to
Average Net
Assets . . . . . 1.0% .4%
Portfolio Turnover
Rate . . . . . . 184% 82%
<FN>
*Total return does not include front end sales load.
**2.2%, 2.2%, 2.0%, 2.0%, 2.3%, 3.5%, 3.8%, 3.6%, 3.4% and 5.7% before
excess reimbursement and fee waiver from Adviser in 1996,
1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and 1987,
respectively.
***The Fund commenced operations on September 22, 1986.
</TABLE>
See accompanying notes to financial statements.
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THE FUND'S INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. Absent
approval of the holders of a majority of the Fund's outstanding voting
securities, this objective cannot be changed. There is no assurance that
the Fund's investment objective can be achieved. The Fund, consistent
with its objective of capital appreciation, invests primarily in
securities, including common and preferred stock, and convertible and
other debt securities, of companies headquartered in the southern United
States, and may invest in securities that pay no dividends or interest.
The timing of purchases and sales on behalf of the Fund is made on the
fundamental investment merits of the securities and generally will be
uninfluenced by whether any gain from such transactions would be
classified as short-term or long-term for tax purposes.
The Fund's Adviser selects investments primarily based on a
fundamental analysis of specific companies. Analysis includes
consideration of the overall financial health and prospects of given
companies, with attention to the following factors: return on equity;
rate of growth of earnings; and price to earnings ratios, as compared to
the company's historic performance and to the ratios of the industry at
large.
Under normal circumstances, at least 65% of the Fund's assets will
be invested in equity and debt securities of companies that are
headquartered in the southern United States. Consequently the Fund may
invest up to 35% of its assets in securities of companies headquartered
outside that region. The Fund's Adviser believes that the demographic
and economic characteristics of the fifteen states in the region are
such that many companies headquartered there have greater than average
potential for capital appreciation. For example, recent statistics
suggest that such companies may enjoy favorable labor conditions, with
average annual pay below the national average. The Adviser also believes
that other factors exert a positive influence on companies headquartered
in the region, including generally mild climate, lower state taxes,
labor availability, and government attitudes generally favorable to
business development.
Of course, there is no assurance that the demographic and economic
characteristics that the Adviser believes favor many southern companies
will continue in the future. Local, national, and international
political events and economic trends may adversely affect the economic
climate of the southern United States. However, the Adviser believes
that by investing in carefully selected southern companies, the Fund
will be able to have a securities portfolio with greater than average
potential for capital appreciation.
While the Fund will concentrate at least 65% of its investments in
companies headquartered in the southern United States, the Fund may
invest up to 35% of its assets in companies headquartered outside that
region, so as to allow the Fund to take advantage of attractive
opportunities in securities of other companies. From time to time, the
Fund may write (sell) covered call options on certain of its portfolio
securities.
Investment in a portfolio of securities of companies headquartered
in a specific geographical region may involve greater risk of possible
loss than investment in a portfolio of securities of companies which
have headquarters throughout the United States. The Fund may be more
affected by a common adverse factor than a fund with a portfolio which
is not geographically concentrated.
</PAGE>
<PAGE>
For example, there is a risk that those economic, demographic and other
factors that, in the opinion of the Adviser, favor the growth of
companies headquartered in the southern United States might not result
in the growth of such companies or in their stock prices and, even if
that opinion was accurate that it could change in the future. However,
given these economic and demographic factors, the Adviser believes that
such investments may also offer greater than average long-term capital
appreciation potential.
The Fund invests primarily in common stock, preferred stock and
convertible debt securities. Normally the Fund would not expect to
invest more than 35% of its assets in non-convertible debt securities,
including high quality money market instruments (such as certificates of
deposit), repurchase agreements and cash. The Fund expects to invest
only in investment grade debt securities. The value of such securities
normally is expected to increase as interest rates decrease, and
conversely to decrease as interest rates increase. For temporary
defensive purposes, the Fund may invest up to 100% of its assets in
money market instruments, repurchase agreements and cash.
As noted above, the Fund may invest in repurchase agreements. As
engaged in by the Fund, a repurchase agreement is an agreement under
which U.S. government obligations are acquired from a securities dealer
or bank subject to resale at an agreed upon price (which includes an
interest factor) and date. The Fund bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its
obligations and the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities. Under procedures
approved by the Fund's Board of Directors, the Adviser enters into
repurchase agreements only with financial institutions deemed to present
minimal risk of bankruptcy or insolvency during the term of the
agreement. The Fund will not enter into repurchase agreements of more
than seven days' duration if more than 10% of its net assets would be
invested in such agreements and other illiquid investments.
THE FUND'S INVESTMENT LIMITATIONS
Under the Fund's current investment limitations, which, along with
its investment objective, cannot be changed except by vote of the
holders of a majority of the Fund's outstanding voting securities, the
Fund may not among other things:
1. Invest more than 25% of its total assets in securities of
issuers in the same industry.
2. Invest more than 5% of its total assets (taken at market value)
in securities of any one issuer, other than the U.S.
Government,
its agencies and instrumentalities, or buy more than 10% of
the voting securities or more than 10% of all the securities
of any one issuer.
3. Invest more than 5% of its total assets (taken at market value)
in securities of companies that, including their predecessors,
have been in operation for less than three years.
The Fund's other investment limitations are described in the Statement
of Additional Information.
</PAGE>
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HOW YOU CAN INVEST IN THE FUND
The minimum initial investment in the Fund for each account is $500
and the minimum investment for each purchase of additional shares is
$250. However, initial and subsequent investments in an IRA account
established on behalf of a nonworking spouse of a shareholder who has an
IRA invested in the Fund require a minimum amount of only $250. In
addition, once an account is established, the minimum amount for
subsequent investments will be waived if an investment in an IRA or
similar plan is the maximum amount permitted under the Internal Revenue
Code of 1986, as amended ("Code").
There are three ways you can invest in the Fund:
1. Through your Morgan Keegan Broker.
Fund shares may be purchased through any Morgan Keegan broker who
will be pleased to open a Morgan Keegan account for you, explain to you
the shareholder services available from the Fund, and answer any
questions you may have. After you have established a Morgan Keegan
account, you can order Fund shares from Morgan Keegan brokers in person,
by telephone or by mail. A regular order placed with Morgan Keegan will
be effected and shares will be purchased at the net asset value next
determined plus the applicable sales charge described below ("offering
price"). Special documents available from your broker must be completed
if you invest in Fund shares through an IRA, SEPP, Keogh Plan, 401(k)
Plan or other qualified retirement plan. Payment for Fund shares
generally is due to Morgan Keegan on the third business day ("settlement
date") after the trade date.
2. Through Morgan Keegan & Company, Inc.
If you do not wish to purchase Fund shares through a Morgan Keegan
broker, you may purchase Fund shares directly from Morgan Keegan &
Company, Inc., the Fund's distributor, by completing the application
included in this Prospectus and sending it along with a check to Morgan
Keegan at the address set forth in the application. Additional documents
required to purchase Fund shares through an IRA, Keogh or other
qualified investment plan are available from Morgan Keegan. Shares will
be purchased at the offering price next determined after receipt of the
completed application and check.
An order placed with Morgan Keegan on behalf of an IRA, SEPP, Keogh
Plan, 401(k) Plan or other qualified retirement plan will not be
transmitted to the Fund until Morgan Keegan's Memphis Office receives a
check for the amount of the purchase. Orders received by Morgan Keegan's
Memphis Office before the close of business of the New York Stock
Exchange, Inc. ("Exchange") (currently 4:00 p.m. Eastern Time) on any
day the Exchange is open will be executed at the offering price of Fund
shares as determined as of the close of the Exchange on that day. Orders
received by Morgan Keegan's Memphis Office after the close of the
Exchange or on days the Exchange is closed will be executed at the
offering price determined as of the close of the Exchange on its next
trading day. The Fund and Morgan Keegan reserve the right to reject any
order for Fund shares.
3. Through Pre-authorized Check Plan and Other Transfers of the Funds
from Financial Institutions.
Once you are a Fund shareholder, you can make additional
investments through the Fund's pre-authorized Check Plan for convenient
monthly investments. For additional information, contact your Morgan
Keegan broker.
Investors may purchase shares at the net asset value next
determined after receipt of their orders plus a sales charge equal to 3%
of the public offering </PAGE>
<PAGE>
price (3.09% of the net amount of the purchase price invested in shares
of the Fund). On sales of $1 million or more, investors may purchase
shares at the net asset value next determined after receipt of the order
plus a sales charge equal to 1% of the public offering price (1.01% of
the net amount of the purchase price invested in Fund shares). Investors
who intend to purchase at least $1 million of Fund shares may also
purchase shares at a 1% sales charge pursuant to a letter of intention
program that permits purchases within a two-year period to be aggregated
for this purpose.
The sales charge is waived on shares of the Fund purchased (1) as
a result of reinvestment of dividends and capital gain distributions and
(2) by officers, directors and full-time employees (and their immediate
families, which includes their spouse, children, mother, father and
siblings) of Morgan Keegan & Company, Inc. (or its direct or indirect
subsidiaries), or by directors or officers (and their immediate
families, which includes their spouse, children, mother, father and
siblings) of the Fund. The sales charge also is waived on purchases of
Fund shares in an initial amount of not less than $250,000, and
thereafter for subsequent purchases if the purchaser's Fund account
balance is at least $250,000, by (1) common or collective trust funds
maintained by a bank, (2) stock bonus, pension or profit sharing plans
qualified under section 401(a) of the Code (including Keogh Plans and
401(k) Plans), and (3) organizations exempt from taxation pursuant to
section 501(a) of the Code. Also, shares of the Fund may be acquired
without a sales charge if the purchase is made through a Morgan Keegan
representative who formerly was employed as a broker with another firm
registered as a broker-dealer with the Securities and Exchange
Commission, if the following conditions are met: (1) the purchaser was
a client of the investment executive at the other firm for which the
investment executive previously served as a broker; (2) within 90 days
of the purchase of the Fund's shares, the purchaser redeemed shares of
one or more mutual funds for which that other firm or its affiliates
served as principal underwriter, provided that either the purchaser had
paid a sales charge in connection with investment in such funds or a
contingent deferred sales charge upon redeeming shares in such funds;
and (3) the aggregate amount of the Fund's shares purchased pursuant to
this sales charge waiver does not exceed the amount of the purchaser's
redemption proceeds from the shares of the mutual fund(s) for which the
other firm or its affiliates served as principal underwriter. The sales
charge is also waived on purchases through Morgan Keegan Mutual Fund
"Wrap Accounts". Investors seeking to avail themselves of this waiver
will be required to provide satisfactory evidence that all the
above-noted conditions are met and should contact their Morgan Keegan
representative for more information.
HOW YOUR SHAREHOLDER ACCOUNT IS MAINTAINED
When you initially purchase your Fund shares, an account is
automatically established for you. Any shares that you purchase or
receive as a distribution from time to time will be credited directly to
your account at the time of purchase or receipt. No certificates are
issued unless you specifically request them in writing. Certificates
will be issued in full shares only. No certificates will be issued for
shares prior to 15 business days after purchase of such shares by check
unless the Fund can be reasonably assured during that period that
payment for the purchase of such shares has been collected.
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HOW YOU CAN SELL YOUR FUND SHARES
There are two ways you can sell and receive cash for your Fund
shares. First, you may give your Morgan Keegan broker an order for
redemption of your shares. Second, you may send a written request for
redemption directly to Morgan Keegan Southern Capital Fund, Inc., Fifty
Front Street, Memphis, TN 38103.
A redemption request received by Morgan Keegan's Memphis Office
from a Morgan Keegan broker will be forwarded on the same day to the
Fund's transfer agent, and will be redeemed after receipt by the Fund at
the net asset value per share next determined at the close of the
Exchange. Upon receipt of a request for redemption in "good order," as
described below, before the close of business on the Exchange on any day
when the Exchange is open, Morgan Keegan & Company, Inc., as transfer
agent for the Fund, will redeem Fund shares at the net asset value per
share determined at the close of the Exchange on that day. Requests for
redemption received by the transfer agent after the close of business on
the Exchange or on a day when the Exchange is not open for business,
will be executed at the net asset value determined at the close of the
Exchange on its next trading day.
The Fund normally transmits payment for credit to the shareholder's
account at Morgan Keegan for all shares redeemed three business days
after receipt of a redemption request. The proceeds of your redemption
may be more or less than your original cost. If the shares to be
redeemed were paid for by check (including certified or cashier's
checks) within 15 business days of the redemption request, the proceeds
may not be disbursed unless the Fund can be reasonably assured that the
check has been collected.
A redemption request will be considered to be received in "good
order" only if:
1. You have indicated in writing the number of shares to be redeemed
and your shareholder account number.
2. The written request is signed by you and by any co-owner
of the account with exactly the same name or names used
in establishing the account.
3. The written request is accompanied by any certificates
representing
the shares that have been issued to you, and you have endorsed the
certificates for transfer or an accompanying stock power exactly
as
the name or names appear on the certificates.
4. The signatures on the written redemption request and on any
certificates
for your shares (or an accompanying stock power) have been
guaranteed
by any U.S. trust company, a member firm of a U.S. stock exchange,
or any
other eligible guarantor institution.
Other supporting legal documents may be required from corporations
or other organizations, fiduciaries or persons other than the
stockholder of record making the request for redemption. If you have a
question concerning the sale of Fund shares, contact Morgan Keegan or
your Morgan Keegan broker.
Because of the high cost of maintaining small accounts, if your
account's current value falls below $500 due to your redemption of
shares, the Fund may elect to close your account and mail the proceeds
to you. However, if the Fund so elects, you will be notified in writing
that your account is below $500 and you will be allowed 60 days in which
to make an additional investment in order to avoid having your account
closed.
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HOW NET ASSET VALUE IS DETERMINED
The offering price of one share is its net asset value plus a sales
charge (currently a maximum of 3% of the offering price, or 3.09% of the
net amount invested). See "How You Can Invest in the Fund" on pages 8-9.
Net asset value per Fund share will be determined daily as of the close
of the Exchange, on every day that the Exchange is open for business, by
dividing the value of the total assets of the Fund, less liabilities, by
the total number of shares outstanding at such time. Securities owned by
the Fund for which market quotations are readily available will be
valued at current market value, and other securities and assets will be
valued at fair value by or under the direction of the Board of
Directors.
PERFORMANCE INFORMATION
From time to time the Fund may quote its "total return" in
advertisements or other promotional materials. A mutual fund's total
return is a measurement of the overall change in value of an investment
in a fund, including changes in share price and assuming reinvestment of
dividends and other distributions. "Cumulative total return" shows a
fund's performance over a specific period of time. "Average annual total
return" is the average annual compound return that would have produced
the same cumulative total return if the fund's performance had been
constant over the entire period. Average annual returns, which differ
from actual year-to-year results, tend to even out variations in a
fund's returns.
From time to time the Fund may advertise its ranking and other
assessments of its performance by independent companies that monitor
mutual fund performance (e.g., Lipper Analytical Services, Inc., Value
Line and Morningstar, Inc.) and may advertise similar analyses that are
reported periodically in national financial publications such as
BARRON'S and MONEY Magazine. The Fund may also compare its performance
to the performance of Standard & Poor's 500 Index and other relevant
unmanaged indices.
Performance information and quoted rankings are indicative only of
past performance and are not intended to and do not represent future
investment results. The Fund's share price will fluctuate and your
shares, when redeemed, may be worth more or less than you originally
paid for them.
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<PAGE>
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAXES
Dividends and Capital Gain Distributions
Shortly after the end of each fiscal year (June 30), the Fund
declares and distributes to shareholders as dividends substantially all
of its investment company taxable income, which includes net investment
income and net short-term capital gain (gain from the sale of securities
held for one year or less), if any, but excludes the excess of net
long-term capital gain over net short-term capital loss ("net capital
gain"), if any. The Fund also distributes to shareholders substantially
all realized net capital gain, if any, after the end of the fiscal year
in which the gain is realized. To avoid having to pay a certain excise
tax, however, the Fund may be required by the end of each calendar year
to make a second distribution of substantially all of (i) its ordinary
income earned between the end of its fiscal year and December 31 and
(ii) any capital gain net income realized between the end of its fiscal
year and October 31. Distributions to Keogh Plans, 401(k) Plans and
other qualified retirement plans generally are reinvested in Fund shares
(without a sales charge). Other shareholders may elect to:
1. Receive (reinvest) both dividends and capital gain distributions
in Fund
shares;
2. Receive dividends in cash and receive (reinvest) capital gain
distributions in Fund shares;
3. Receive (reinvest) dividends in Fund shares and receive capital
gain
distributions in cash; or
4. Receive both dividends and capital gain distributions in cash.
No sales charge is imposed on the reinvestment of dividends or
capital gain distributions.
If no election is made, then ordinarily by the fifth business day
after the record date for payment, both dividends and capital gain
distributions are credited to your account (without a sales charge) in
additional Fund shares at the net asset value of the shares determined
at the close of business on the day following the record date. The
payment date for shareholders electing to receive dividends and/or
capital gain distributions in cash also is ordinarily the fifth business
day after the record date. You may elect to change your option by
notifying in writing the Fund's transfer and dividend-disbursing agent,
Morgan Keegan & Company, Inc., Fifty Front Street, Memphis, TN 38103.
Your election will become effective for the succeeding dividend and/or
capital gain distribution, provided your election is made at least 15
days prior to the record date of the dividend or capital gain
distribution.
Taxes
The Fund intends to continue to qualify for treatment as a
regulated investment company under the Code so that it (but not its
shareholders) will be relieved of federal income tax on that part of its
investment company taxable income and net capital gain that may be
distributed to its shareholders.
</PAGE>
<PAGE>
Dividends from the Fund's investment company taxable income
(whether paid in cash or reinvested in additional Fund shares) are
taxable to its shareholders (other than IRAs, Keogh Plans, SEPPs and
other qualified retirement plans) as ordinary income to the extent of
the Fund's earnings and profits. Distributions of the Fund's net capital
gain (whether paid in cash or reinvested in additional Fund shares) are
taxable to those shareholders as long-term capital gain, regardless of
how long they have held their Fund shares.
The Fund sends a notice to each shareholder following the end of
each calendar year specifying the amounts of all dividends and capital
gain distributions paid (or deemed paid) during that year and the
portion of those dividends that qualifies for the corporate
dividends-received deduction. The Fund is required to withhold 31% of
all dividends, capital gain distributions and redemption proceeds
payable to any individuals and certain other noncorporate shareholders
who do not provide the Fund with a correct taxpayer identification
number. The Fund also is required to withhold 31% of all dividends and
capital gain distributions paid to such shareholders who otherwise are
subject to backup withholding.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the fair market value of
the redemption proceeds exceeds or is less than the shareholder's
adjusted basis for the redeemed shares (which normally includes any
initial sales charge paid).
The foregoing is only a summary of some of the important federal
tax considerations generally affecting the Fund and its shareholders;
see the Statement of Additional Information for a further discussion. In
addition to those considerations, which are applicable to any investment
in the Fund, there may be other federal, state or local tax
considerations applicable to a particular investor. Prospective
shareholders are therefore urged to consult their tax advisers with
respect to the effects of this investment on their own tax situations.
SHAREHOLDER SERVICES
Confirmations and Reports
You will receive from the transfer agent after each purchase or
sale a confirmation showing the particular transaction and the current
status of your account. Reports will be sent to shareholders at least
semiannually showing the Fund's portfolio and other information. An
annual report containing financial statements audited by independent
certified public accountants will also be sent to shareholders each
year.
Shareholder inquiries may be made in writing to Morgan Keegan
Southern Capital Fund, Inc., Morgan Keegan Tower, Fifty Front Street,
Memphis Tennessee 38103, or by telephoning (901) 524-4100.
INVESTING THROUGH TAX-DEFERRED RETIREMENT PLANS
An investment in Fund shares may be appropriate for IRAs, SEPPs,
Keogh Plans, 401(k) Plans and other qualified retirement plans.
Investors who are considering establishing such a plan may wish to
consult their attorneys or tax advisers with respect to specific tax
questions regarding such plans. Morgan Keegan can make available to you
forms of IRAs, SEPPs, Keogh Plans, 401(k) Plans and other qualified
retirement plans which have been approved as to form by the Internal
Revenue Service. Additional information with respect to these plans is
available upon request from any Morgan Keegan broker.
/PAGE
<PAGE>
<PAGE>
THE FUND'S MANAGEMENT AND INVESTMENT ADVISER
The Fund's Board of Directors has overall responsibility for the
operation of the Fund. Pursuant to such responsibility, it has selected
Morgan Asset Management, Inc. ("Adviser"), a wholly-owned subsidiary of
Morgan Keegan, Inc., which is also the parent of Morgan Keegan &
Company, Inc., to serve as the Fund's investment adviser and manager.
Subject to the supervision of the Board of Directors, the Adviser
manages the investment and other affairs of the Fund and directs the
investments of the Fund in accordance with its investment objective,
policies and limitations pursuant to an Investment Advisory and
Management Agreement between the Fund and the Adviser, dated August 14,
1986. The Adviser's address is Morgan Keegan Tower, Fifty Front Street,
Memphis, Tennessee 38103.
The Adviser receives for its services a management fee, calculated
daily and payable quarterly, at an annual rate of 1% of the average
daily net assets of the Fund for the first $100 million of average daily
net assets and 0.75% of average daily net assets exceeding $100 million.
The advisory fee is higher than fees paid by most other funds to their
investment advisers. The Adviser has agreed to waive its fee and to
reimburse the Fund to the extent its annual expenses (excluding
brokerage, interest, taxes, and extraordinary expenses) exceed 2.0% of
net assets. The Fund expects to use Morgan Keegan & Company, Inc. as
broker for all or a substantial portion of its agency transactions in
listed securities at commission rates and under circumstances consistent
with the policy of best execution. Morgan Keegan & Company, Inc. also
provides accounting services to the Fund and acts as its transfer and
dividend disbursing agent.
Since July 1, 1994, E. Elkan Scheidt, a vice president of Morgan
Keegan & Company, Inc. and an employee of Morgan Asset Management, Inc.
has served as the portfolio manager of the Fund. From November 1990 to
July 1, 1994, Mr. Scheidt served as assistant to the portfolio manager
of the Fund. Mr. Scheidt joined Morgan Keegan as an investment broker in
1985. He received a B.A. in Economics from Tulane University in New
Orleans, Louisiana. Morgan Keegan investment personnel may engage in
securities transactions for their own accounts pursuant to a code of
ethics that establishes procedures for personal investing and restricts
certain transactions.
The Fund's portfolio turnover rate is computed by dividing the
lesser of purchases or sales of securities for the period by the average
value of portfolio securities for that period. High portfolio turnover
rates will result in the payment by the Fund of above average
transaction costs and could result in the payment by shareholders of
above average taxes as realized investment gains. The Adviser expects
that the Fund's rate of portfolio turnover generally will not exceed
200%, but it may vary from year to year, and will not be a limiting
factor when management deems portfolio changes appropriate.
/PAGE
<PAGE>
<PAGE>
Management's Discussion of Fund Performance
As of June 30, 1996, the Fund's portfolio was invested in 68
stocks, representing 19 different industries. Its largest holdings were
in the financial, energy-related and technology sectors. Our outlook for
the market continues to be favorable, despite its current high valuation
and recent volatility. Relatively low interest rates, a slow-growing
economy and a Federal Reserve determined to keep inflation under control
should provide an excellent foundation for an extended market rally. The
South, which continues to be one of the most rapidly-growing regions of
the United States, provides the Fund with excellent investment
opportunities in companies with strong growth prospects. The Fund
remains focused on the best opportunities in our region, regardless of
market capitalization. By maintaining a blend of large and small company
stocks, the Fund offers both the higher growth potential of small
emerging companies and the stability typically provided by larger firms.
/PAGE
<PAGE>
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE
SOUTHERN CAPITAL FUND AND THE S&P 500
AVERAGE ANNUAL TOTAL RETURN
[C] [C] [C]
1 YEAR 5 YEAR INCEPTION
24.45% 13.64% 9.96%
Past performance is not predictive of future
performance.
SOUTHERN CAPITAL FUND -- S&P 500
Prior to 1987, the Fund had no sales charge.
The Fund commenced operations on September 22, 1986.
<TABLE>
<S> <C> <C> <C> <C> <C>
<C>
1986 1987 1988 1989 1990
1991
Southern Capital Fund $10,000 $12,160 $11,437 $12,357 $12,812
$13,226
S&P 500 Stock Index $10,000 $12,940 $11,642 $13,607 $15,239
$15,799
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
Southern Capital Fund $15,554 $17,626 $17,701 $20,145 $25,846
S&P 500 Stock Index $17,373 $19,177 $18,911 $23,188 $29,240
</TABLE>
THE FUND'S DISTRIBUTOR
Morgan Keegan & Company, Inc. acts as distributor of the Fund's
shares pursuant to a plan of distribution ("Plan") adopted by the Board
of Directors pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act") and an Underwriting Agreement between it and the
Fund. The Underwriting Agreement obligates the Distributor to promote
the Fund, to solicit and accept orders for the purchase of the Fund's
shares and to pay certain expenses in connection with the offering of
Fund shares, including the expenses of the printing and distribution of
Prospectuses, Statements of Additional Information and periodic reports
used in connection with the offering to prospective investors and for
supplementary sales literature, and advertising costs and administrative
and overhead expenses related to distribution of shares. The Distributor
also pays sales commissions and other compensation, including special
additional compensation and promotional incentives from time to time, to
investment brokers for sales of Fund shares. For its services, the
Distributor receives distribution and service fees described below and
the proceeds of the sales charges paid by investors, unless such sales
charge is waived. See "How You Can Invest In The Fund."
Under the Plan, the Fund pays the Distributor a service fee
computed daily and paid monthly at the annual rate of .25% of the Fund's
average daily net assets as compensation for its servicing of
shareholder accounts, and pays the Distributor a distribution fee as
compensation for its distribution services, computed daily and paid
monthly, at the annual rate of .25% of the Fund's average daily net
assets. While the Plan is in effect, the Fund is obligated to pay
service and distribution fees, in the aggregate, of .50% of net assets,
regardless of whether the Distributor's service and distribution
expenses equal such fee income; however, the Fund pays no greater fees
if the Distributor's distribution and service expenses for a given year
exceed the amount of the fees it receives from the Fund. The Plan does
not provide for expenses of Morgan Keegan to be "carried over" to a
succeeding year if such expenses exceed the .50% limit.
The Distributor's expenses as distributor may or may not exceed the
amount paid to it by the Fund under the Plan, depending, among other
things, on the amount of compensation paid to Morgan Keegan brokers
(other than commissions paid at the time of sale from sales charge
proceeds), and its advertising and other costs of distribution, as well
as the asset size of the Fund.
/PAGE
<PAGE>
<PAGE>
THE FUND'S CUSTODIAN, TRANSFER AND DIVIDEND-DISBURSING AGENT
State Street Bank and Trust Company, National Association (108
Myrtle St., Quincy, MA 02171) is custodian of the Fund's assets. As
indicated, Morgan Keegan & Company, Inc., Fifty Front Street, Memphis,
Tennessee 38103 serves as the transfer and dividend-disbursing agent of
the Fund.
DESCRIPTION OF THE FUND AND ITS SHARES
The Fund is a diversified open-end management investment company
incorporated in Maryland on May 5, 1986. The Fund has authorized capital
of 100 million shares of common stock, par value $0.001. All shares are
the same class, and each share is entitled to one vote for the election
of directors and on any other matter submitted to a shareholder vote.
The Directors may create additional series of shares from time to time
although they have no present intention to do so. Fractional shares will
have fractional voting rights. Voting rights are not cumulative. All
shares of the Fund are fully paid and nonassessable and have no
preemptive or conversion rights.
The Fund does not hold annual meetings of shareholders. There will
normally be no meetings of shareholders for the purpose of electing
Directors unless and until such time as less than a majority of the
Directors holding office has been elected by shareholders, at which time
the Directors then in office will call a shareholders' meeting for the
election of Directors. The Fund's by-laws require the Directors to call
a meeting of shareholders when requested in writing to do so by the
shareholders of record of not less than 25% of the Fund's outstanding
shares.
/PAGE
<PAGE>
<PAGE>
Morgan Keegan Southern Capital Fund, Inc.
Application for Purchase of Shares
TEAR ALONG THIS LINE
You may purchase shares of the Morgan Keegan Southern Capital Fund,
Inc. by (1) contacting a Morgan Keegan broker, or (2) completing this
application and sending it along with a check made payable to Morgan
Keegan Southern Capital Fund, Inc. to:
Morgan Keegan & Company, Inc.
Morgan Keegan Tower - Fifty Front Street
Memphis, TN 38103 - Attn: Southern Capital Fund, Inc.
Additional documents available from a Morgan Keegan broker are
required to purchase Fund shares through an IRA, SEPP, Keogh, 401(k)
Plan or other qualified retirement plan.
Account Registration Amount
Name $
(First Name) (Middle) (Last Name) (500 minimum)
Joint owner or other
registration, if applicable
Street
City State Zip
Phone Number
Social Security Number or Tax Identification Number
Distributions
Shareholders may elect to:
Receive both dividends and capital gain distributions in
Fund shares;
Receive dividends in cash and capital gains distributions in
Fund shares;
Receive dividends in Fund shares and capital gain distributions in
cash; or
Receive both dividends and capital gain distributions in cash.
If no selection is made dividends and capital gain distributions will be
reinvested in Fund shares.
Signature
I have received and read a copy of the prospectus of Morgan Keegan
Southern Capital Fund, Inc., and agree to its terms.
I am of legal age.
Under the penalties of perjury, I certify (1) that the Social Security
Number or other Taxpayer Identification Number shown above is correct,
and (2) that unless the box below is checked, I am not subject to backup
withholding either because I have not been notified that I am subject to
backup withholding as a result of a failure to report all interest and
dividends, or the Internal Revenue Service has notified me that I am no
longer subject to backup withholding. The certifications in this
paragraph are required for all nonexempt persons to prevent backup
withholding of 20% of all taxable distributions and gross redemption
proceeds under the federal income tax law.
Check here if you are subject to backup withholding.
Signature Date Joint Registrant, if any
Do not complete
Account number Rep number
</PAGE>
<PAGE>
<PAGE>
Morgan Keegan
Southern Capital Fund, Inc. Prospectus
TABLE OF CONTENTS Page
Questions and Answers About Morgan Keegan
Southern Capital Fund, Inc. . . . . . . . . . . . . . . . 2
Summary of Fund Expenses. . . . . . . . . . . . . . . . . . 3
Financial Highlights. . . . . . . . . . . . . . . . . . . . 5
The Fund's Investment Objective and Policies. . . . . . . . 6
The Fund's Investment Limitations . . . . . . . . . . . . . 7
How You Can Invest in the Fund. . . . . . . . . . . . . . . 8
How Your Shareholder Account is Maintained. . . . . . . . . 9
How You Can Sell Your Fund Shares . . . . . . . . . . . . . 10
How Net Asset Value is Determined . . . . . . . . . . . . . 11
Performance Information . . . . . . . . . . . . . . . . . . 11
Dividends, Capital Gain Distributions and Taxes . . . . . . 12
Shareholder Service . . . . . . . . . . . . . . . . . . . . 13
Investing Through Tax-Deferred Retirement Plans . . . . . . 13
The Fund's Management and Investment Adviser. . . . . . . . 14
The Fund's Distributor. . . . . . . . . . . . . . . . . . . 16
The Fund's Custodian, Transfer and Dividend-Disbursing
Agent . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Description of the Fund and its Shares. . . . . . . . . . . 17
Morgan Keegan
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100 / (800) 366-7426
This Prospectus does not constitute an offering by the Fund
or by the principal underwriter in any jurisdiction
in which such offering may not lawfully be made.
/PAGE
<PAGE>
<PAGE>
MORGAN KEEGAN SOUTHERN CAPITAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Morgan Keegan Southern Capital Fund, Inc. ("Fund") is a mutual fund
seeking capital appreciation. The Fund invests principally in
securities, including common stock, preferred stock, convertible and
other debt securities, of companies which are headquartered in the
southern United States. For purposes of this Statement of Additional
Information, the "southern United States" consists of Alabama, Arkansas,
Florida, Georgia, Kentucky, Louisiana, Mississippi, Missouri, North
Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia and West
Virginia. A company is "headquartered" in the southern United States if
either its principal corporate offices are located in the southern
United States, or if (alone or on a consolidated basis) it derives 50%
or more of its total revenues from either goods produced, sales made or
services performed in the southern United States.
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Fund's Prospectus, dated November
1, 1996, which has been filed with the Securities and Exchange
Commission. A copy of the current Prospectus is available without
charge from Morgan Keegan & Company, Inc., the Fund's distributor.
Morgan Keegan & Company, Inc.
Morgan Keegan Tower
Fifty Front Street
Memphis, Tennessee 38103
(901) 524-4100
TABLE OF CONTENTS PAGE
Additional Information About Investment Limitations
and Policies . . . . . . . . . . . . . . . . . . . . . . . 2
Additional Tax Information . . . . . . . . . . . . . . . . . 6
Additional Purchase and Redemption Information . . . . . . . 7
Valuation of Shares. . . . . . . . . . . . . . . . . . . . . 9
Performance Information. . . . . . . . . . . . . . . . . . . 9
Tax-Deferred Retirement Plans. . . . . . . . . . . . . . . . 11
The Fund's Directors and Officers. . . . . . . . . . . . . . 13
The Fund's Principal Shareholders. . . . . . . . . . . . . . 14
The Fund's Investment Adviser. . . . . . . . . . . . . . . . 14
Portfolio Transactions and Brokerage . . . . . . . . . . . . 16
The Fund's Distributor . . . . . . . . . . . . . . . . . . . 17
The Fund's Custodian, Transfer Agent, Dividend
Disbursing Agent, and Portfolio Accounting
Service Agent. . . . . . . . . . . . . . . . . . . . . . . 20
The Fund's Legal Counsel . . . . . . . . . . . . . . . . . . 21
The Fund's Certified Public Accountants. . . . . . . . . . . 21
Financial Statements . . . . . . . . . . . . . . . . . . . . 21
Dated: November 1, 1996
/PAGE
<PAGE>
<PAGE>
ADDITIONAL INFORMATION ABOUT INVESTMENT LIMITATIONS AND POLICIES
In addition to the investment objective and the three numbered
investment limitations described in the Prospectus, Morgan Keegan
Southern Capital Fund, Inc. ("Fund") has adopted certain investment
limitations that cannot be changed except by vote of the holders of a
majority of the Fund's outstanding voting securities. The Fund may not:
1. Borrow money, including entry by the Fund into reverse
repurchase agreements, except for temporary purposes
in an aggregate amount not to exceed 5% of the value
of its total assets at the time of borrowing. Although
not a fundamental policy subject to shareholder approval,
the Fund intends to repay any money borrowed before any
additional portfolio securities are purchased;
2. Mortgage, pledge or hypothecate any of its assets, except
to secure permitted borrowings up to 5% of the value of
its total assets at the time of borrowing, provided that
the deposit in escrow of underlying securities in
connection with the writing of call options is not deemed
to be a pledge;
3. Purchase securities on "margin," make short sales of
securities or maintain a short position in any security;
4. Invest in securities issued by other investment companies,
except in connection with a merger, consolidation,
acquisition or reorganization or by purchase in the open
market of securities of closed-end investment companies
where no underwriter or dealer's commission or profit,
other than a customary brokerage commission, is involved
and only if immediately thereafter not more than 10% of
the Fund's total assets (taken at market value) would be
invested in such securities;
5. Purchase or sell commodities and commodity contracts;
6. Underwrite the securities of other issuers, except
that the Fund may invest in securities that are not
readily marketable without registration under the
Securities Act of 1933, as amended, if immediately
after the making of such investment not more than 5%
of the value of the Fund's total assets (taken at
cost) would be so invested;
7. Make loans, except loans of portfolio securities and
except to the extent the purchase of a portion of an
issue of publicly distributed notes, bonds or other
evidences of indebtedness or deposits with banks and
other financial institutions may be considered loans;
/PAGE
<PAGE>
<PAGE>
8. Write (sell) or purchase put, call, straddle or spread
options except that the Fund may write covered call
options with respect to its portfolio securities
listed on a national securities exchange and enter
into closing purchase transactions with respect to
call options so listed or quoted;
9. Purchase or sell real estate, except that the Fund may
invest in securities collateralized by real estate or
interests therein or in securities issued by companies
that invest in real estate or interests therein; or
10. Purchase or sell interests in oil or gas or other
mineral exploration or development programs.
As noted above, the investment limitations of the Fund described in
the preceding paragraphs, the investment limitations described in the
Prospectus, and the Fund's investment objective are fundamental and may
not be changed without the vote of the holders of a majority of the
Fund's outstanding voting securities. Under the Investment Company Act
of 1940 ("1940 Act"), a "vote of a majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or (2) 67% or more
of the shares present at a shareholders' meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
Whenever an investment policy or limitation states a maximum percentage
of the Fund's assets which may be invested in any security or other
standard or percentage limitation, such percentage shall be determined
immediately after and as a result of the acquisition of such security or
other asset. Accordingly, any later increase or decrease in percentage
resulting from a change in values, net assets or other circumstances
will not be considered when determining whether the investment complies
with the Fund's investment policies and limitations.
Illiquid Securities
Although not a fundamental policy subject to shareholder vote, the
Fund will not invest more than 10% of its net assets in illiquid
securities (securities which, in the judgment of Morgan Asset
Management, Inc. ("Adviser"), could not be sold within seven business
days without substantial adverse impact on their market prices because
of such sales), including repurchase agreements of more than seven
days' duration.
Warrants
Although not a fundamental policy subject to shareholder vote, as
long as the Fund's shares are registered in certain states, the Fund may
not invest more than 5% of the value of its net assets, taken at the
lower of cost or market value, in warrants or invest more than 2% of the
value of such net assets in warrants not listed on the New York or
American Stock Exchanges. The Fund currently has no intention of
purchasing any warrants in the coming year.
</PAGE>
<PAGE>
Options
The Fund may from time to time write (sell) covered call options on
certain of its portfolio securities. The Fund intends only to engage in
transactions in exchange-traded options. A covered call option is an
option to purchase a portfolio security owned by the Fund. In such a
transaction, the Fund obligates itself to sell the underlying security
to the purchaser of the option at a fixed price if the purchaser
exercises the option during the option period. In return, the Fund
receives a premium from the purchaser. During the option period, the
Fund foregoes the opportunity to profit from any increase in the market
price of the security above the exercise price of the option, but
retains the risk that the price of the security may decline.
The Fund may seek to terminate its obligation as a writer of a call
option prior to its expiration by entering into a "closing purchase
transactions." There is no assurance that the Fund will be able to
effect a closing purchase transaction, particularly with respect to
thinly traded call options. The selling of call options could result in
an increase in the Fund's portfolio turnover rate, particularly in
periods of appreciation in the market price of the underlying
securities. The Fund would use such options only as a defensive
strategy and not as a primary investment technique. Although not a
fundamental policy subject to shareholder vote, the Fund does not intend
during the coming year to write call options on portfolio securities
exceeding 5% of its total assets or to write options that are not traded
on a national securities exchange. Normally such options will be
written only on those portfolio securities which the Adviser does not
expect to have significant short-term capital appreciation.
Lending Portfolio Securities
The Fund may lend portfolio securities to broker/dealers in
corporate or government securities, banks or other recognized
institutional borrowers of securities, provided that cash or equivalent
collateral, equal to at least 100% of the market value of the securities
loaned, plus any accrued interest, is continuously maintained by the
borrower with the Fund, and further provided that the Adviser determines
that the borrower presents minimal credit risk. The Adviser will
monitor the credit status of the borrower during the period of the loan.
During the time portfolio securities are on loan, the borrower will pay
the Fund an amount equivalent to any dividends or interest paid on such
securities, and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed upon amount of interest
income form the borrower who has delivered equivalent collateral. These
loans are subject to termination at the option of the Fund or the
borrower. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or
placing broker. The Fund does not have the right to vote securities on
loan, but would terminate the loan and regain the right to vote if such
vote were considered important with respect to the </PAGE>
<PAGE>
investment. The Fund does not intend during the coming year to loan
more than 5% of its portfolio securities at any given time.
Repurchase and Reverse Repurchase Agreements
Available cash may be invested by the Fund in repurchase
agreements. A repurchase agreement is an agreement under which U.S.
Government obligations are acquired from a securities dealer or Bank
subject to resale at a previously agreed upon price and date. The
resale price reflects an agreed upon interest rate which is unrelated to
the interest rate provided by the securities which are transferred. The
securities will be held for the Fund by its custodian as collateral
until retransferred and will be supplemented by additional collateral
(without cost to the Fund) if necessary to maintain a total value equal
to or in excess of the value of the repurchase agreement. Repurchase
agreements are usually for periods of one week or less, but may be for
longer periods.
To the extent that proceeds from any sale upon a default of the
obligation to repurchase were less than the repurchase price, the Fund
might suffer a loss. If bankruptcy proceedings are commenced with
respect to the seller of the security, realization upon the collateral
by the Fund would be delayed or limited. However, the Fund has adopted
standards for the parties with whom it may enter into repurchase
agreements, including monitoring by the Adviser of the creditworthiness
of such parties, which the Fund's Board of Directors believes are
reasonably designed to assure that each party presents no serious risk
of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase agreement.
As stated in the Fund's investment limitations, the Fund may enter
into reverse repurchase agreements for temporary purposes. Because such
agreements are considered to be borrowings, the agreements are subject
to the limitation that the Fund may not borrow in an aggregate amount
that exceeds 5% of the value of the Fund's total assets at the time of
borrowing. Reverse repurchase agreements involve the sale of securities
held by the Fund pursuant to the Fund's agreement to repurchase the
securities at an agreed upon price, date and rate of interest. While
reverse repurchase transactions are outstanding, the Fund will maintain
in a segregated account cash, U.S. government securities or other
liquid, high grade debt securities of an amount at least equal to the
market value of the securities, plus accrued interests, subject to the
agreement.
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ADDITIONAL TAX INFORMATION
The following is a general summary of certain federal tax
considerations affecting the Fund and its shareholders. Investors are
urged to consult their own tax advisers for more detailed information
and for information regarding any state, local or foreign taxes that may
be applicable to them.
General
The Fund intends to continue to qualify for treatment as a
regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code of 1986, as amended ("Code"). In order to qualify for that
treatment, the Fund must distribute annually to its shareholders at
least 90% of its investment company taxable income (generally, net
investment income plus net short-term capital gain) and must meet
several additional requirements. Among these requirements are the
following: (1) at least 90% of the Fund's gross income each taxable year
must be derived from dividends, interest, payments with respect to
securities loans and gains from the sale or other disposition of
securities, or other income (including gains from options) derived with
respect to its business of investing in securities; (2) less than 30% of
its gross income each taxable year the Fund must derive from the sale or
other disposition of securities or options held for less than three
months ("Short-Short Limitation"); (3) at the close of each quarter of
the Fund's taxable year, at least 50% of the value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with such other
securities limited, with respect to any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does
not represent more than 10% of the outstanding voting securities of such
issuer; and (4) at the close of each quarter of the Fund's taxable year,
not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities or the securities of
other RICs) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the
extent that it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain
net income for the one-year period ending on October 31 of that year,
plus certain other amounts.
A redemption of Fund shares may result in taxable gain or loss to
the redeeming shareholder, depending on whether the redemption proceeds
are more or less than the shareholder's adjusted basis for the redeemed
shares (which normally includes any initial sales charge paid on Fund
shares). If Fund shares are purchased within 30 days before or after
redeeming Fund shares at a loss, that loss will not be deductible, to
the extent the redemption proceeds are reinvested, and the disallowed
loss instead will increase the basis of the newly purchased shares.
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Dividends and Other Distributions
A portion of the dividends from the Fund's investment company
taxable income (whether paid in cash or reinvested in additional Fund
shares) is eligible for the dividends-received deduction allowed to
corporations. The eligible portion may not exceed the aggregate
dividends received by the fund from domestic corporations. However,
dividends received by a corporate shareholder and deducted by it
pursuant to the dividends-received deduction are subject indirectly to
the alternative minimum tax. Distributions by the Fund of net capital
gain (the excess of net long-term capital gain over net short-term
capital loss) do not qualify for the dividends-received deduction.
Dividends or other distributions declared by the Fund in October,
November or December of any year and payable to shareholders or record
on a date in any of those months will be deemed to have been paid by the
Fund and received by the shareholders on December 31 of that year if
they are paid by the Fund during the following January. Accordingly,
such distributions will be taxed to the shareholders for the year in
which that December 31 falls.
Any loss on a sale or exchange of Fund shares held for six months
or less will be treated as a long-term, instead of a short-term, capital
loss to the extent of any capital gain distributions received on those
shares.
A dividend or capital gain distribution paid shortly after shares
have been purchased, although in effect a return of investment, is
subject to federal taxation. Accordingly, an investor should not
purchase Fund shares immediately prior to a dividend or capital gain
distribution record date solely for the purpose of receiving the
dividend or distribution.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Letter of Intention
The sales charge applicable to purchases is reduced to 1% pursuant
to a Letter of Intention that states that the purchaser intends to
purchase shares equal to at least $1,000,000 within a 24-month period.
Investors may obtain a form of a Letter of Intention ("Letter") from
their Morgan Keegan investment broker or the Fund's transfer agent,
Morgan Keegan & Company, Inc. ("Transfer Agent"). Under a Letter,
purchases of shares of the Fund which are sold with a sales charge made
within a 24-month period starting with the first purchase pursuant to a
Letter will be aggregated for purposes of calculating the sales charges
applicable to each purchase. To qualify under a Letter, a minimum
initial purchase of $50,000 must be made; purchases must be made for a
single account;
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and purchases made for related accounts may not be aggregated under a
single Letter. The Letter is not a binding obligation to purchase any
amount of shares, but its execution will result in paying a reduced
sales charge for the anticipated amount of the purchase. If the total
amount of shares purchased does not equal the amount stated in the
Letter (minimum of $1,000,000), the investor will be notified and must
pay, within 20 days of the expiration of the Letter, the difference
between the sales charge on the shares purchased at the reduced rate and
the sales charge applicable to the shares actually purchased under the
Letter. Shares equal to 5% of the intended amount will be held in
escrow during the 24-month period (while remaining registered in the
name of the purchaser) for this purpose.
Additional Information on Redemptions
Suspension of the right of redemption, or postponement of the date
of payment, may be made (1) for any periods when the New York Stock
Exchange, Inc. ("Exchange") is closed (other than customary weekend and
holiday closings); (2) when trading is restricted in markets normally
utilized by the Fund or when an emergency, as defined by the rules and
regulations of the Securities & Exchange Commission ("SEC") exists,
making disposal of the Fund's investments or determination of its net
asset value not reasonably practicable; or (3) for such other periods as
the SEC by order may permit for protection of the Fund's shareholders.
In the case of any such suspension, you may either withdraw your request
for redemption or receive payment based upon the net asset value next
determined after the suspension is lifted.
The Fund reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption by making
payment in whole or in part by securities valued in the same way as they
would be valued for purposes of computing the Fund's per share net asset
value. However, the Fund has committed itself to pay in cash all
requests for redemption by any shareholder of record, limited in amount
with respect to each shareholder during any ninety-day period to the
lesser of (1) $250,000, or (2) 1% of the net asset value of the Fund at
the beginning of such period. If payment is made in securities, a
shareholder will incur brokerage or transactional expenses in converting
those securities into cash, will be subject to fluctuation in the market
price of those securities until they are sold, and may realize taxable
gain or loss (depending on the value of the securities received and the
shareholder's adjusted basis of the redeemed shares).
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VALUATION OF SHARES
Net asset value of a Fund share will be determined daily as of the
close of the Exchange, on every day that the Exchange is open for
business, by dividing the value of the total assets of the Fund, less
liabilities, by the total number of shares outstanding at such time.
Pricing will not be done on days when the Exchange is closed.
Currently, the Exchange is closed on weekends and on certain days
relating to the following holidays: New Year's Day, President's Day,
Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving, and
Christmas. Securities owned by the Fund for which market quotations are
readily available will be valued at current market value, or, in their
absence, at fair value as determined under procedures adopted by the
Fund's Board of Directors. Securities traded on an exchange or NASD
National Market System securities (including debt securities) will
normally be valued at their last sale price. Other over-the-counter
securities (including debt securities), and securities traded on
exchanges for which there is no sale on a particular day (including debt
securities), will be valued by a method which the Fund's Board of
Directors believes accurately reflects fair value. Premiums received on
the sale of call options are included in the Fund's net asset value, and
the current market value of options sold by the Fund will be subtracted
from net assets.
PERFORMANCE INFORMATION
The Fund's performance information and quoted rankings used in
advertising and other promotional materials ("Performance
Advertisements") are indicative only of past performance and are not
intended to and do not represent future investment results. The Fund's
share price will fluctuate and your shares, when redeemed, may be worth
more or less than you originally paid for them.
Total Return Calculations
Average annual total return quotes ("Standardized Return") used in
the Fund's Performance Advertisements are calculated according to the
following formula:
P(1 + T)3 = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
that period
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated at
least to the last day of the most recent quarter prior to submission of
the Performance Advertisements for publication. Total return, or "T" in
the formula above, is computed by finding the average annual change in
the value of an initial $1,000 investment over the period. In
calculating the ending </PAGE>
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redeemable value, all dividends and other distributions by the Fund are
assumed to have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total
return performance data that are not calculated according to the formula
set forth above ("Non-Standardized Return"). The Fund calculates Non-
Standardized Return for specified periods of time by assuming an
investment of $1,000 in Fund shares and assuming the reinvestment of all
dividends and other distributions. The rate of return is determined by
subtracting the initial value of the investment from the ending value
and by dividing the remainder by the initial value. Initial sales
charges are not taken into account in calculating Non-Standardized
Return; the inclusion of those charges would reduce the return.
Other Information
From time to time the Fund may compare its performance in
Performance Advertisements to the performance of other mutual funds or
various market indices. One such market index is the S&P 500, a widely
recognized unmanaged index composed of the capitalization-weighted
average of the prices of 500 of the largest publicly traded stocks in
the United States. The S&P 500 includes reinvestment of all dividends.
It takes no account of the costs of investing or the tax consequences of
distributions. The Fund may invest in securities that are not included
in the S&P 500.
The Fund may also quote rankings and ratings, and compare the
return of the Fund with data published by Lipper Analytical Services,
Inc., IBC/Donaghue's Money Market Fund Report, CDA Investment
Technologies, Inc., Wiesenberger Investment Companies Service,
Investment Company Data Inc., Morningstar Mututal Funds, Value Line and
other services or publications that monitor, compare, rank and/or rate
the performance of mutual funds. The Fund may refer in such materials
to mutual fund performance rankings, ratings or comparisons with funds
having similar investment objectives, and other mutual funds reported in
independent periodicals, including, but not limited to, THE WALL STREET
JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD,
BARRON'S, FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE
WASHINGTON POST and THE KIPLINGER LETTERS.
The Fund may also compare its performance with, or may otherwise
discuss, the performance of bank certificates of deposit ("CDs") and
other bank deposits, and may quote from organizations that track the
rates offered on such deposits. In comparing the Fund or its
performance to CDs investors should keep in mind that bank CDs are
insured up to specified limits by an agency of the U.S. government.
Shares of the Fund are not insured or guaranteed by the U.S. government,
the value of Fund shares will fluctuate and your shares, when redeemed,
may be worth more or less than you originally paid for them. Unlike the
interest paid on many CDs, which remains as a specified rate for a
specified period of time, the return on the Fund's shares will vary.
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The Fund's Performance Advertisements may reference the history of
the Fund's distributor and its affiliates or biographical information of
key investment and managerial personnel including the portfolio manager.
The Fund may illustrate hypothetical investment plans designed to help
investors meet long-term financial goals, such as saving for a college
education or for retirement. The Fund may discuss the advantages of
saving through tax-deferred retirement plans or accounts.
From time to time the Fund may quote information including, but
not limited to, data regarding the southern region of the United States
from sources considered by Morgan Keegan & Company, Inc. to be reliable,
including information relating to economic and financial trends in the
southern region. The Fund may also quote or discuss information or
other data concerning the southern region reported in independent
periodicals, including, but not limited to, THE WALL STREET JOURNAL,
MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S,
FORTUNE, THE NEW YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST,
THE KIPLINGER LETTERS and THE ECONOMIST.
TAX-DEFERRED RETIREMENT PLANS
As noted in the Fund's Prospectus, and investment in Fund shares
may be appropriate for IRAs, Keogh Plans, SEPPS, 401(k) Plans and other
qualified retirement plans. In general, income earned through the
investment of assets of a qualified retirement plan is not taxed to the
beneficiaries until the income is distributed to them. Investors who
are considering establishing such a plan may wish to consult their
attorneys or other tax advisers with respect to individual tax
questions. Additional information with respect to these plans is
available upon request from any Morgan Keegan broker.
Individual Retirement Accounts - IRAs
If neither you nor your spouse is an active participant in a
qualified employer or government retirement plan, or if either you or
your spouse is an active participant in such a plan and your adjusted
gross income does not exceed a certain level, you may deduct cash
contributions made to an IRA in an amount for each taxable year not
exceeding the lesser of 100% of your earned income or $2,000. If your
spouse is not employed and you file a joint return, you may establish a
separate IRA for your spouse and contribute up to a total of $2,250 to
the two IRAs ($4,000 for tax years after 1996), provided that a legally
specified minimum amount is contributed to each. If you and your spouse
are both employed and establish separate IRAs, you may together receive
tax deductions of up to $4,000 for contributions to your IRAs. If your
employer's plan permits voluntary contributions and meets certain other
requirements, you may make voluntary contributions to that plan that are
treated as deductible IRA contributions.
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An investment in Fund shares through IRA contributions may be
advantageous, regardless of whether the contributions are deductible by
you for tax purposes, because all dividends and capital gain
distributions on your Fund shares are not immediately taxable to you or
the IRA; they become taxable only when distributed to you. To avoid
penalties, your interest in an IRA must be distributed, or start to be
distributed, to you not later than April 1 following the calendar year
in which you attain age 70 1/2. Distributions made before age 59 1/2,
in addition to being taxable, generally are subject to a penalty equal
to 10% of the distribution, except in the case of death or disability,
where the distribution is rolled over into another qualified plan, or in
certain other situations.
Self-Employed Individual Retirement Plans - Keogh Plans
Morgan Keegan will assist self-employed individuals to set up a
retirement plan through which Fund shares may be purchased. Morgan
Keegan generally arranges for a bank to serve as trustee for the plan
and performs custodian services for the trustee and the plan by holding
and handling securities. However, you have the right to use a bank of
your choice to provide these services at your cost. There are penalties
for distributions from a Keogh Plan prior to age 59 1/2, except in the
case of death or disability.
Simplified Employee Pension Plans - SEPPS
Morgan Keegan also will make available in a similar manner to
corporate and other employers a SEPP for investment in Fund shares.
THE FUND'S DIRECTORS AND OFFICERS
The Fund's officers are responsible for the operation of the Fund
under the direction of the Board of Directors. The officers and
directors of the Fund and their principal occupations during the past
five years are set forth below. An asterisk (*) indicates officers
and/or directors who are interested persons of the Fund as defined by
the 1940 Act. The address of each officer and director is Morgan Keegan
Tower, 50 Front Street, Memphis, Tennessee 38103, unless otherwise
indicated.
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Position with the Fund and Principal
Name Occupation During Past Five Years
[C] [C]
Allen B. Morgan, Jr.* President and Director. Mr. Morgan is
Age 54 Chairman and Chief Executive Officer
of Morgan Keegan & Company, Inc. He
also is a Chairman of Morgan Keegan,
Inc., and a Director of Morgan Asset
Management, Inc., and a Director of
Control Computing, Inc.
James D. Witherington, Jr. Director. Mr. Witherington is
785 Crossover Lane President of SSM Corp. (financial
Suite 219 consulting). He is also a Principal
Memphis, Tennessee 38117 of SSM I, L.P., which is the general
Age 47 partner of SSM Venture Partners, L.P.,
and a Principal of Capital
Appreciation, L.P., which is the
general partner of Private
Investment Consortium Ltd. He also
serves as a Direct for several
private companies.
Robert D. Gooch, Jr.* Director. Mr. Gooch is a Managing
Age 59 Director of Morgan Keegan & Company,
Inc.
Spence L. Wilson Director. Mr. Wilson is President of
1629 Winchester Road Kemmons-Wilson, Inc. (private real
Memphis, Tennessee 38116 estate development). He also is
Age 53 President of Orange Lake Country Club,
Inc. and is a partner in several
Holiday Inn locations.
William Jefferies Mann Director. Mr. Mann is Chairman and
675 Oakleaf Office Lane President of Mann Investments, Inc.
Suite 100 (hotel operation).
Memphis, Tennessee 38117
Age 63
Joseph C. Weller* Vice President, Treasurer & Assistant
Age 57 Secretary. Mr. Weller is Executive
Vice President and Chief Financial
Officer of Morgan Keegan & Company,
Inc. He also is a Director of Morgan
Asset Management, Inc.
Charles D. Maxwell* Secretary and Assistant Treasurer.
Age 42 Mr. Maxwell is Vice President and
Assistant Secretary of Morgan Keegan
and Co., Inc., and Secretary/Treasurer
of Morgan Asset Management, Inc. He
was formerly a senior manager with
Ernst & Young (accountants) (1976-86).
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Officers and directors of the Fund who are interested persons
of the Fund receive no salary or fees from the Fund. Directors of
the Fund who are not interested persons of the Fund will receive a
fee of $1,000 and reimbursement for related expenses for each
meeting of the Board of Directors attended by them.
THE FUND'S PRINCIPAL SHAREHOLDERS
On October 1, 1996 there were 2,143,203.740 shares of the
Fund outstanding of which all the officers and directors of the
Fund as a group (7 persons) owned approximately 32,000 (1.5%).
Management of the Fund is not aware of any shareholder who owned of
record or beneficially 5% or more of the Fund's outstanding common
stock on October 1, 1996.
THE FUND'S INVESTMENT ADVISER
Morgan Asset Management, Inc., formerly Southern Capital
Advisors, Inc., ("Adviser"), an affiliate of Morgan Keegan, serves
as the Fund's investment adviser and manager under an Investment
Advisory and Management Agreement ("Advisory Agreement"). The
Advisory Agreement originally became effective as of August 14,
1986 and was most recently approved by the shareholders of the Fund
on October 20, 1987. The Advisory Agreement provides that, subject
to overall supervision by the Board of Directors of the Fund, the
Adviser manages the investment and other affairs of the Fund. The
Adviser is responsible for managing the Fund's portfolio securities
and for making purchases and sales of portfolio securities
consistent with the Fund's investment objective, policies and
limitations described in the Prospectus and this Statement of
Additional Information. The Adviser is obligated to furnish the
Fund with office space as well as with executive and other
personnel necessary for the operation of the Fund. In addition,
the Adviser is obligated to supply the Board of Directors and
officers of the Fund with certain statistical information and
reports, to oversee the maintenance of various books and records
and to arrange for the preservation of records in accordance with
applicable federal law and regulations. The Adviser and its
affiliates also are responsible for the compensation of directors
and officers of the Fund who are employees of the Adviser and/or
its affiliates.
The Fund bears all its other expenses which are not assumed by
the Adviser. These expenses include, among others: legal and audit
expense; organizational expenses; interest; taxes; governmental
fees; membership fees for investment company organizations: the
cost(including brokerage commissions or charges, if any) of
securities purchased or sold by the Fund and any losses incurred in
connection therewith; fees of custodians, transfer agents,
registrars or other agents; distribution fees; expenses of
preparing share certificates; expenses relating to the redemption
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of the Fund's shares; expenses of registering and qualifying Fund
shares for sale under applicable federal and state laws and
maintaining such registrations and qualifications; expenses of
preparing, setting in print, printing and distributing
prospectuses, proxy statements, reports, notices and dividends to
Fund shareholders; costs of stationery; costs of shareholders' and
other meetings of the Fund; compensation and expenses of the
independent directors; and insurance covering the Fund and its
officers and directors. The Fund also is liable for such
nonrecurring expenses as may arise, including litigation to which
the Fund may be party. The Fund also may have an obligation to
indemnify its directors and officers with respect to any such
litigation.
The Adviser receives for its services a management fee,
calculated daily and payable quarterly, at an annual rate of 1% of
the average daily net assets of the Fund for the first $100 million
of average daily net assets and 0.75% of average daily net assets
exceeding $100 million. The advisory fee is higher than fees paid
by most other funds to their investment advisers, but is not
significantly different, in the Adviser's opinion, from the fees of
advisers to mutual funds with similar specialized policies. The
adviser has agreed to reimburse the Fund for certain expenses,
including waiving the advisory fees received by it, in any fiscal
year in which the Fund's annual expenses (excluding interest,
taxes, brokerage fees and commissions, and certain extraordinary
charges), exceed 2.0% of the Fund's average net assets. For the
fiscal year ended June 30, 1992, the advisory fee was $219,150 and
the Adviser waived and reimbursed the Fund $66,084. For the fiscal
year ended June 30, 1993, the advisory fee was $377,058 and the
Adviser waived and reimbursed the Fund $16,023. For the Fiscal
year ended June 30, 1994, the advisory fee was $450,472 and the
Adviser waived and reimbursed the Fund $825. For the fiscal year
ended June 30, 1995, the advisory fee was $313,164 and the Adviser
waived and reimbursed the Fund $53,293. And for the fiscal year
ended June 30, 1996, the advisory fee was $309,063 and the Adviser
waived and reimbursed the Fund $55,903.
The Advisory Agreement will remain in effect from year to
year, provided such continuance is approved by a majority of the
Board of Directors or by vote of the holders of a majority of the
outstanding voting securities of the Fund. Additionally, the
Advisory Agreement must be approved annually by vote of a majority
of the directors of the Fund who are not parties to the Agreement
or "interested persons" of such parties as that term is defined in
the 1940 Act. The Advisory Agreement may be terminated by the
Adviser or the Fund, without penalty, on 60 days' written notice to
the other, and will terminate automatically in the event of its
assignment.
Under the Advisory Agreement, the Fund will have the non-
exclusive right to use the name "Morgan Keegan" until the Agreement
is terminated, or until the right is withdrawn in writing by the
Adviser.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser is responsible for
the execution of the Fund's portfolio transactions and must seek
the most favorable price and execution for such transactions,
subject to the possible payment, as described below, of higher
commissions to brokers who provide research and analysis. The Fund
may not always pay the lowest commission or spread available.
Rather, the Fund also will take into account such factors as size
of the order, difficulty of execution, efficiency of the executing
brokers facilities (including the services described below) and any
risk assumed by the executing broker.
The Adviser may give consideration to research, statistical
and other services furnished by broker/dealers to the Adviser for
its use, may place orders with broker/dealers who provide
supplemental investment and market research and securities and
economic analysis, and may pay to those brokers a higher brokerage
commission or spread than may be charged by other brokers. Such
research and analysis may be useful to the Adviser in connection
with services to clients other than the Fund. The Adviser's fee is
not reduced by reason of its receipt of such brokerage and research
services. During the fiscal year ended June 30, 1996, the Fund
paid brokerage commissions of $5,000 to brokers who provided
research services.
From time to time the Fund may use Morgan Keegan & Company,
Inc. ("Morgan Keegan") as broker for agency transactions in listed
and over-the-counter securities at commission rates and under
circumstances consistent with the policy of best execution. The
Adviser will not cause the Fund to pay Morgan Keegan any commission
for effecting a securities transaction for the Fund in excess of
the usual and customary amount other broker/dealers would have
charged for the transaction. Rule 17e-1 under the 1940 Act defines
"usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in
connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during
a comparable period of time."
The Adviser may also select other brokers to execute portfolio
transactions. In the over-the-counter market, the Fund generally
deals with responsible primary market-makers unless a more
favorable execution can otherwise be obtained through brokers. For
the fiscal year ended June 30, 1996, brokerage commissions paid to
Morgan Keegan constituted approximately 55% of all brokerage
commissions paid by the Fund in connection with 58% of the
aggregate dollar amount of transactions involving the payment of
commissions effected by the Fund in that year. Brokerage
commissions paid to Morgan Keegan were $17,500, $22,000, $85,000,
$123,000 and $78,000, for the fiscal years ended June 30, 1996,
1995, 1994, 1993, and 1992, respectively.
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The Fund may not buy securities from, or sell securities to,
Morgan Keegan as principal. The Fund's Board of Directors has
adopted procedures in conformity with Rule 10f-3 under the 1940 Act
whereby the Fund may purchase securities that are offered in
underwritings in which Morgan Keegan is a participant.
Section 11(a) of the Securities Exchange Act of 1934
prohibits Morgan Keegan from executing transactions on an exchange
for the Fund except pursuant to the provisions of Rule 11a2-2(T)
thereunder. That rule permits Morgan Keegan, as a member of a
national securities exchange, to perform functions other than
execution in connection with a securities transaction for the Fund
on that exchange only if the Fund expressly consents by written
contract. The Advisory Agreement expressly provides such consent
in accordance with Rule 11a2-2(T).
Investment decisions for the Fund are made independently from
those of other accounts advised by the Adviser. However, the same
security may be held in the portfolios of more that one account.
When two or more accounts simultaneously engage in the purchase or
sale of the same security, the prices and amounts will be equitably
allocated among the accounts. In some cases, this procedure may
adversely affect the price or quantity of the security available to
a particular account. In other cases, however, an account's
ability to participate in large volume transactions may produce
better executions and prices.
Morgan Keegan personnel may invest in securities for their own
accounts pursuant to a code of ethics that describes the fiduciary
duty owed to shareholders by all Morgan Keegan directors, officers
and employees, establishes procedures for personal investing and
restricts certain transactions. For example, personal trading in
most securities requires pre-clearance. In addition, the code of
ethics places restrictions on the timing of personal investing in
relation to trades by the Fund.
THE FUND'S DISTRIBUTOR
Morgan Keegan acts as distributor of the Fund's shares
pursuant to an Underwriting Agreement between the Fund and Morgan
Keegan dated August 14, 1986 and amended on February 12, 1987 and
July 7, 1993 ("Underwriting Agreement"). The shares of the Fund
are offered continuously. The Underwriting Agreement obligates
Morgan Keegan to provide certain services and to bear certain
expenses in connection with the offering of Fund shares, including,
but not limited to: printing and distribution of prospectuses and
reports to prospective shareholders; preparation and distribution
of sales literature, and advertising; administrative and overhead
cost of distribution such as the allocable costs of executive
office time expended on developing, managing and operating the
distribution program; operating expenses of branch offices, sales
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training expenses, and telephone and other communication expenses.
Morgan Keegan also compensates investment brokers of Morgan Keegan
and other persons who engage in or support distribution of shares
and shareholder service based on the sales for which they are
responsible and the average daily net asset value of Fund shares in
accounts of their clients.
Pursuant to the Underwriting Agreement, as currently in
effect, Morgan Keegan will receive as compensation for its services
a 3% sales charge on purchased shares. The sales charge is reduced
to 1% on sales of $1 million or more, and is waived on certain
purchases of Fund shares, as described in the Prospectus.
In addition, Morgan Keegan will receive an annual distribution
fee equivalent up to .25% of the Fund's average daily net assets
and an annual service fee equivalent to up to .25% of the Fund's
average net assets, in accordance with the Distribution Plan
described below. The distribution fee is computed daily and paid
monthly.
The Fund has adopted a Distribution Plan ("Plan") which, among
other things, permits it to pay Morgan Keegan a service fee and a
distribution fee out of its net assets. The Plan was approved by
the initial shareholder of the Fund on August 14, 1986, and, as
required by Rule 12b-1 under the 1940 Act, by the Board of
Directors on the same date, including a majority of the directors
who are not "interested persons" of the Fund as that term is
defined in the 1940 Act and who have no direct or indirect
financial interest in the operation of the Plan or the Underwriting
Agreement ("Qualified Directors"). The Plan was amended on
February 12, 1987, to reduce the annual distribution fee from an
equivalent of 1.0% of the Fund's average daily net assets to an
equivalent of .50% of the Fund's average daily net assets. The
Plan also was amended on July 7, 1993 to reflect compliance with
National Association of Securities Dealers, Inc. rule regarding
"asset-based" sales charges. The continuation of the Plan was
approved by a majority of the Board of Directors, including a
majority of the Qualified Directors on August 19, 1996.
Service fees and distribution fees paid by the Fund to Morgan
Keegan under the Plan may exceed or be less than Morgan Keegan's
expenses thereunder. For the fiscal year ended June 30, 1996, the
Fund paid service and distribution fees to Morgan Keegan pursuant
to the Plan of $154,546. For the fiscal year ended June 30, 1996,
expenses paid for by Morgan Keegan included $92,726 for commissions
and other compensation to employees, $38,949 for printing and
mailing, and $6,000 for promotional materials. No interested
person of the Fund or non-interested director had a direct or
indirect interest in the Plan or related agreements. The Fund
benefits from the Plan by virtue of the ongoing broker's
involvement with individual customers as well as the benefit from
continued promotion. For the fiscal year ended June 30, 1992,
Morgan Keegan retained sales charges for $95,000 received on sales
of the Fund's shares; and for the fiscal year ended June 30, 1993,
Morgan Keegan retained sales charges for $384,000 received on sales
of the Fund's shares; for the fiscal year ended June 30, 1994,
Morgan Keegan retained sales charges for $40,000 received on sales
of the Fund's shares; for the fiscal year ended June 30, 1995,
Morgan Keegan retained sales charges for $13,000 received on sales
of the Fund's shares; and for the fiscal year ended June 30, 1996,
Morgan Keegan retained sales charges for $185,000 received on sales
of the Fund's shares.
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In approving the Plan and the amendments to the Plan, in
accordance with the requirements of Rule 12b-1, the Directors
considered various factors, including the amount of the service and
distribution fees. In connection with its consideration of this
factor, the Board considered at the time of the amendment the
effect of the institution of a 3% sales charge by the distributor.
The Board determined that the service and distribution fees were
reasonable in view of the compensation Morgan Keegan investment
brokers can receive relative to the compensation offered by
competing equity funds sold with front-end sales loads, with or
without distribution fees. The Plan permits the Fund's shares to
be sold to investors with a front-end sales load of 3%, while some
competing equity funds traditionally have been sold with front-end
sales loads in an amount up to 8 1/2% of the purchase price (9.29%
of the net amount invested). The Board also determined that the
fees are reasonable in light of the service and distribution fees
paid by other similar funds. Finally, the Directors determined
that there was a reasonable likelihood that the Plan, and the
amendments to the Plan, would benefit the Fund and its
shareholders. This determination was based, in part, on the belief
that the Plan enables the Fund to have Morgan Keegan investment
brokers available to promote and sell the Fund, thereby assisting
the Fund to attract assets. Growth of assets is expected to
benefit both the Fund and the Adviser. The Fund is expected to
benefit from the potential for economies of scale in its operations
that can arise from growth in assets, as well as from the increased
potential for flexibility in portfolio management resulting from a
net inflow of assets, as opposed to net redemptions. Shareholders
of the Fund are expected to benefit from continuing services
provided by investment brokers and other staff members of Morgan
Keegan as distributor. The Adviser and Morgan Keegan are expected
to benefit from the fact that their advisory, service and
distribution fees, which are based on a percentage of assets,
increase as Fund assets grow and that their brokerage commissions
and transfer fees will also increase as assets grow. The Directors
acknowledged, however, that there is no assurance that benefits to
the Fund will be realized as a result to the Plan. In considering
whether to continue the Plan, the Directors, among other things,
also reviewed the expenses of the Plan, alternative methods of
distributing Fund shares and the overall expected costs and
benefits to the Fund.
The Plan may be terminated by vote of a majority of the
Qualified Directors or by vote of a majority of the outstanding
voting securities of the Fund. Termination of the Plan terminates
any obligation of the Fund to pay service and distribution fees to
Morgan Keegan, other than service and distribution fees that may
have accrued but that have not been paid as of the date of
termination. Any change in the Plan that would materially increase
the service and distribution costs to the Fund requires shareholder
approval; otherwise the Plan may be amended by the Directors,
including a majority of the Qualified Directors, as described
above.
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The Plan, as currently in effect, will continue for successive
one-year periods, provided that each such continuance specifically
is approved by (1) the vote of a majority of the Qualified
Directors and (2) the vote of a majority of the entire Board of
Directors.
Rule 12b-1 requires that any person authorized to direct the
disposition of monies paid or payable by the Fund pursuant to the
Plan or any related agreement shall provide to the Fund's Board of
Directors, and the Directors shall review, at least quarterly, a
written report of the amounts so expended and the purposes for
which expenditures were made. Rule 12b-1 also provides that the
Fund may rely on that rule only if the selection and nomination of
the Fund's independent directors are committed to the discretion of
such independent directors.
The current Underwriting Agreement was approved initially by
vote of the Board and the Qualified Directors on February 9, 1987,
and its continuance was most recently approved by vote of the Board
and the Qualified Directors on August 19, 1996. The Underwriting
Agreement is subject to the same provisions for annual renewal as
the Plan. In addition, the Underwriting Agreement will terminate
upon assignment or upon 60 days' notice from Morgan Keegan. The
Fund may terminate the Underwriting Agreement, without penalty,
upon 60 days' notice, by a majority vote of either its Board of
Directors, the Qualified Directors, or the outstanding voting
securities of the Fund.
THE FUND'S CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND PORTFOLIO ACCOUNTING SERVICE AGENT
Morgan Keegan & Company, Inc., Morgan Keegan Tower, Fifty
Front Street, Memphis, Tennessee 38103, serves as the transfer and
dividend disbursing agent of the Fund. For these services, Morgan
Keegan, the Fund's distributor, receives from the Fund a fee of
$5,000 per month, or $60,000 per year.
Morgan Keegan also provides accounting services to the Fund.
For these services, which include portfolio accounting, expense
accrual and payment, fund valuation and financial reporting, tax
accounting, and compliance control services, Morgan Keegan receives
from the Fund a fee of $2,500 per month, or $30,000 per year.
Shareholders who request an historical transcript of their
account will be charged a fee based on the number of years
researched. The Fund reserves the right, upon 60 days' written
notice, to make other charges to investors to cover administrative
costs.
State Street Bank and Trust Company, National Association, 108
Myrtle Street, Quincy, Massachusetts, 02171, serves as the Fund's
custodian.
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THE FUND'S LEGAL COUNSEL
Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W.,
Washington, D.C. 20036-1800, serves as counsel to the Fund and has
passed upon certain matters in connection with this offering.
THE FUND'S CERTIFIED PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP, Fifty North Front Street, Memphis,
Tennessee 38103, are the Fund's independent certified public
accountants. The financial information under the caption
"Financial Highlights" in the Prospectus has been derived from the
Fund's financial statements contained in the Fund's Annual Report
to shareholders for the period ended June 30, 1996 ("Annual
Report"). Those financial statements have been examined by KPMG
Peat Marwick LLP, whose report thereon also appears in the Annual
Report and have been incorporated by reference in this Statement of
Additional Information. KPMG Peat Marwick LLP, performs an audit
of the Fund's financial statements and reviews the Fund's federal
and state income tax returns.
FINANCIAL STATEMENTS
The Statement of Assets and Liabilities as of June 30, 1996;
the Statements of Changes in Net Assets for the years ended June
30, 1995 and 1996; the Statement of Operations for the year ended
June 30, 1996; the Investments as of June 30, 1996; the Notes to
Financial Statements; the Report of Independent Certified Public
Accountants; and the Financial Highlights for the fiscal years
ended June 30, 1992, 1993, 1994 1995 and 1996, each of which is
included in the Annual Report and attached hereto, are hereby
incorporated by reference.
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