Dear Fellow Shareholders:
We are pleased to announce that the Morgan Keegan Southern Capital Fund posted a
3.99%* return for the first six months of the calendar year and a 5.20%* return
for the Funds fiscal year ending June 30, 1999. This marks Elkan Scheidts
fifth year as portfolio manager of the Southern Capital Fund, and during this
period the Fund achieved a 19.5% average annual return. In addition, the Funds
assets under management increased to a record high $95 million at year-end, and
its net asset value finished at $27.10.
The market began the calendar year in a similar fashion to recent years, in
which the largest, most liquid stocks continued
to rise, as their smaller peers languished. By the end of February, the S&P 500
had already returned 5% while the smaller-cap Russell 2000 Index was down 7%. In
April, a series of strong economic news revived smaller-cap stocks and ignited a
broad stock market rally. However, in late May the U.S. stock and bond markets
weakened due to fears that the Federal Reserve would raise interest rates. On
June 30, The Federal Reserve confirmed investors speculation by raising
interest rates 25 basis points
in an attempt to ward off future inflation. This recent rate hike reflects the
market volatility seen over the last few months, as it was only last October
that the Fed lowered interest rates three times in response to global economic
crises.
While the Fund achieved positive returns over the last six months, it did not
match the performance of the S&P 500 and Russell 2000. The Fund, which invests
primarily in growth stocks, did not participate in the recent rebound in
cyclical (economically sensitive) stocks which drove the indices. On the other
hand, we are pleased with the recent performance of the Funds small- to mid-cap
holdings. Telecommunications was the strongest sector, and MCI WorldCom, the
Funds largest position, was the strongest contributor to that groups
performance. Health Care was the Funds weakest sector for the six-month period
due to fears of cuts in Medicare and Medicaid reimbursement and fears of
increased regulation of the pharmaceutical industry. These developments served
to incite a wholesale sell-off in almost all areas of health care. Health
Management Associates, an acute care, rural hospital company, was the Funds
most affected stock in this sector.
For the trailing twelve months ending June 30, 1999 the
Fund posted a 5.20%* return a finish significantly better than
the smaller-cap Russell 2000, but trailing the larger-cap S&P 500. With the
majority of the Funds holdings residing in the small- to mid-cap segment of the
market, the Fund outperformed the Russell 2000 by over 40% during the last five
years. As in
the six-month period, Telecommunications proved to be the Funds strongest
sector and Health Care remained the Funds weakest sector for the year.
Our outlook for the market remains optimistic despite the markets high current
valuation and recent rate hike by the Federal Reserve. Strong corporate
earnings, solid economic growth, relatively low interest rates, low inflation,
positive demographics, high consumer confidence, and a vigilant Federal Reserve
should continue to provide a positive environment for
the market. We remain committed to selecting the best Southern companies for the
Funds portfolio, regardless of market capitalization. The South, which
continues to grow more rapidly than the rest of the country, provides the Fund
with many investment opportunities. We believe our approach to investing will
continue to reward long-term investors, and we look forward to what should be an
exciting 2000 fiscal year.
Allen Morgan, Jr. E. Elkan Scheidt
President and Director Portfolio Manager
July 31, 1999
Below are the performance comparisons of the Southern Capital Fund and other
selected indices.
Six months Twelve months
ended 6/30/99 ended 6/30/99
Southern Capital Fund* 3.99% 5.20%
Russell 2000 Index 9.15% 1.38%
S&P 500 Index 12.32% 22.77%
*Fund results in this report were computed without a sales charge unless
otherwise indicated. Load-adjusted return for the six months ended 6/30/99 was
.87% and for the fiscal year was 2.04%. Past performance is not
indicative of future results. Share price and return will vary, so you may have
a gain or loss of principal when you sell your shares.
Stocks mentioned in this report may or may not be currently owned by the Fund.
INVESTMENTS
Morgan Keegan
Southern Capital Fund, Inc.
June 30, 1999
BEVERAGES 2.8%
Anheuser-Busch Companies, Inc. 14,000 $9,993,125
The Coca-Cola Company 27,000 1,687,500
CONSUMER PRODUCTS 0.9%
The Gillette Company 22,000 1,902,000
ENERGY/ENERGY RELATED 5.1%
Diamond Offshore Drilling Inc. 33,000 936,375
*Global Industries, Ltd. 43,600 558,625
Gulf Island Fabrication, Inc. 50,000 596,875
Mobil Corporation 18,000 1,782,000
*Pride International, Inc. 40,000 422,500
Santa Fe Snyder Corp. 71,750 547,094
FINANCIAL SERVICES 10.8%
Bank of America Corporation 18,000 1,319,625
BANC ONE Corporation 13,939 830,242
Coastal Bancorp, Inc. 45,000 759,375
The Colonial BancGroup, Inc. 78,000 1,087,125
Community Federal Bancorp 6,000 78,000
Compass Bancshares, Inc. 24,471 666,835
First Federal Bancshares (Arkansas) 25,000 462,500
First Tennessee National Corporation 45,000 1,724,063
Hibernia Corporation 50,000 784,375
ISB Financial Corp. 20,000 430,000
SouthTrust Corporation 25,000 959,375
Union Planters Corporation 29,000 1,295,938
HEALTH CARE/PHARMACEUTICAL7.9%
*Advance Paradigm, Inc. 12,500 762,500
*Capital Senior Living Corp. 41,600 416,000
*Health Management Associates 100,000 1,125,000
*HEALTHSOUTH Corp. 71,000 1,060,563
*Merck & Co., Inc. 16,000 1,184,000
*Orthodontic Centers of America, Inc. 60,000 847,500
*Renal Care Group, Inc. 82,000 2,121,750
HOTEL/LEISURE3.9%
*Promus Hotel Corp. 42,000 1,302,000
Royal Caribbean Cruises Ltd. 54,500 2,384,375
INDUSTRIAL EQUIPMENT 2.9%
*Emerson Electric Co. 22,000 1,383,250
*General Electric Company 12,000 1,356,000
INSURANCE 0.7%
Protective Life Corporation 20,000 660,000
NEWSPAPER / BROADCASTING 1.4%
*Gannett Co., Inc. 19,000 1,356,125
PAPER PRODUCTS 1.1%
*Buckeye Technologies Inc. 72,000 1,093,500
REAL ESTATE INVESTMENT TRUSTS1.5%
Mid-America Apartment
Communities, Inc. 30,000 693,750
RFS Hotel Investors, Inc. 35,000 439,688
Storage USA, Inc. 10,000 318,750
RESTAURANT3.3%
Cracker Barrel Old Country Store 17,000 294,313
McDonalds Corporation 30,000 1,239,375
*OCharleys Inc. 100,000 1,600,000
RETAIL11.4%
*AutoZone, Inc. 47,000 1,415,875
*Consolidated Stores Corporation 35,000 945,000
Dollar General Corporation 72,641 2,106,589
The Home Depot, Inc. 65,000 4,188,438
*Saks Inc. 80,000 2,310,000
SERVICES0.2%
Stewart Enterprises, Inc. 13,000 189,313
TECHNOLOGY21.5%
*America Online, Inc. 10,000 1,105,000
*Acxiom Corporation 45,000 1,122,188
Artesyn Technologies, Inc. 50,000 1,109,375
*BMC Software, Inc. 40,000 2,160,000
Compaq Computer Corporation 15,500 367,156
*Concord EFS, Inc. 105,300 4,455,506
Electronic Data Systems Corporation 35,000 1,979,688
*Microsoft Corporation 32,000 2,886,000
NOVA Corporation 29,000 725,000
*SCI Systems, Inc. 54,600 2,593,500
Texas Instruments Incorporated 14,500 2,102,500
TELECOMMUNICATIONS13.8%
*BellSouth Corporation 24,000 1,125,000
*Dycom Industries, Inc. 36,250 2,030,000
*Paging Network, Inc. 75,000 360,938
*SBC Communications Inc. 24,000 1,392,000
*SkyTel Communications, Inc. 50,000 1,046,875
*MCI WorldCom, Inc. 85,000 7,315,313
TEXTILES3.0%
*WestPoint Stevens Inc. 95,000 2,832,188
TRANSPORTATION4.8%
*Eagle USA Airfreight, Inc. 55,000 2,334,063
*Federal Express Corporation 24,000 1,302,000
*M.S. Carriers, Inc. 32,500 963,830
UTILITIES0.3%
The Southern Company 12,000 318,000
Total Equity Securities
(Cost $58,030,150) $93,243,314
*Non-Income Producing
STATE STREET BANK & TRUST COMPANY:
*Dated June 30, 1999, 3.75%, to be
repurchased at $1,180,122.92 on $1,180,000
July 1, 1999 (Euro Deposit)
$1,180,000
Total Investments (cost $59,210,150) 98.5% $94,423,314
Other assets and liabilities, (net) 1.5% 1,470,487
Net Assets 100.0% $95,893,801
STATEMENTS OF ASSETS AND LIABILITIES
Assets:
Investments, at value
Equity securities $93,243,314
Repurchase agreements 1,180,000
Total investments (Cost $59,210,150) 94,423,314
Cash 3,837
Receivable for securities sold 2,592,833
Receivable for fund shares sold 14,691
Dividends and interest receivable 48,681
Other assets 16,113
TOTAL ASSETS 97,099,469
Liabilities:
Payable for securities purchased 666,562
Payable for fund shares redeemed 94,502
Accrued expenses 93,981
Due to affiliates 350,623
TOTAL LIABILITIES 1,205,668
Net Assets $95,893,801
NET ASSETS consist of:
Accumulated net realized losses on investments (182,091)
Net unrealized appreciation of investments 35,213,164
Par value 3,539
Additional paid-in capital 60,859,189
Net Assets $95,893,801
NET ASSET VALUE and Redemption Price Per Share
($95,893,801 divided by 3,538,983 Shares of Common Stock Outstanding) $27.10
Offering Price (based upon 3% commission) $27.93
See accompanying notes to audited financial statements.
STATEMENT OF OPERATIONS
Investment Income:
Dividends $ 754,634
Interest 175,256
929,890
Expenses:
Investment advisory fee 877,482
Service fee 219,370
Distribution fee 219,370
Legal 31,130
Audit 15,700
Accounting and transfer agent fees 90,000
Custodian costs 23,252
Registration fees 30,168
Directors fees 12,500
Other 7,126
1,526,098
Net Investment Loss (596,208)
realized and unrealized gains (losses) on investments:
Realized loss from securities transactions, net:
Proceeds from sales $13,309,938
Cost of securities sold $13,358,103
Net realized loss on investment transactions (48,165)
Change in unrealized appreciation for the period 5,017,540
Net gain on investments 4,969,375
Increase in net assets resulting from operations $4,373,167
See accompanying notes to audited financial statements.
STATEMENTS OF CHANGES....
1999 1998
Increase in net assets from operations
Net investment loss $(596,208) $(457,878)
Net realized gain on investment transactions (48,165) 4,464,314
Unrealized appreciation, net 5,017,540 10,822,439
Increase in net assets resulting from operations 4,373,167 14,828,875
Capital share transactions, net 5,900,039 20,736,096
Distributions to shareholders from:
Net realized gain on investments (2,479,628) (1,283,727)
Return of capital (106,784) 0
(2,586,412) (1,283,727)
Total increase in net assets 7,686,794 34,281,244
Net Assets:
Beginning of period 88,207,007 53,925,763
End of period $95,893,801 $88,207,007
See accompanying notes to audited financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SIGNIFICANT ACCOUNTING POLICIES
Organization:
The Fund commenced operations on September 22, 1986 and is registered under
the Investment Company Act of 1940 as an open-end, diversified management
investment company. The Fund invests primarily in equity securities in
Southern based companies that offer the opportunity for capital appreciation.
Security Valuation:
Investments in securities traded on national securities exchanges are stated
at the last reported sales price on the day of valuation. Securities traded
in the over-the-counter market and listed securities for which no sale was
reported on that date are stated at the last quoted bid price. Short-term
securities are valued at amortized cost or original cost plus accrued
interest, both of which approximate market.
Federal Income Taxes:
The Funds policy is to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute
substantially all its taxable income to its shareholders. Therefore, no
federal income tax provision is required.
For Federal income tax purposes, the Fund had a capital loss carryover of
$48,165 which expire in 2007 and 2008.
Realized Gains and Losses on Securities:
The Fund determines the gain or loss realized on sales of securities by
comparing the identified cost of the security lot sold with the net sales
proceeds.
Other Policies:
The Fund follows industry practice and records security transactions on the
trade date. Dividend income and distributions to shareholders are recognized
on the ex-dividend date and interest is recognized on an accrual basis.
Income distributions and capital gain distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for post-October 31 losses and wash sale transactions.
On the statement of assets and liabilities, as a result of permanent book to
tax differences, undistributed net investment income has been increased
$596,208 resulting in a reclassification to additional paid-in capital by the
same amount.
Repurchase Agreements:
It is the Funds policy for securities purchased under agreements to resell
to have market value equal to or greater than the Funds purchase price and
to have such securities taken into possession by the Funds custodian.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
NOTE 2: CAPITAL SHARE TRANSACTIONS
At June 30, 1999, there were 100 million shares of .001 par value capital shares
authorized, and paid-in capital aggregated $60,862,728.
Transactions in capital shares were as follows:
1999 1998
Shares Amount Shares Amount
Shares sold 716,481 $18,341,166 1,001,560 $25,075,648
Shares reinvested 106,506 2,573,186 54,569 1,269,269
Shares redeemed (604,584) (15,014,313) (227,495) (5,608,821)
Net increase 218,403 $5,900,039 828,634 $20,736,096)
NOTE 3: INVESTMENT TRANSACTIONS
Purchases of investment securities (excluding short-term investments and
other investments that are usually held until maturity) aggregated
$20,583,700 in 1999.
At June 30, 1999, the accumulated unrealized appreciation of securities with
gains was $38,561,294 and the accumulated unrealized depreciation of
securities with losses was $3,348,130 . The tax basis of the Funds
securities is $59,344,076.
NOTE 4: INVESTMENT ADVISORY FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
The Fund pays advisory fees for investment management and advisory services
to Morgan Asset Management, Inc. (Advisor) under a management and
investment advisory agreement (Agreement) that provides for fees to be
computed at an annual rate of 1% of the Funds average daily net assets up to
$100 million and .75% of the Funds average daily net assets over
$100 million. The Advisor has agreed to reimburse expenses exclusive of taxes,
interest on borrowings, brokerage commissions, distribution fees, an
extent that they exceed 1.5% of the Funds average daily net assets for any
full fiscal year.
Morgan Keegan & Co., Inc. acts as a distributor of the Funds shares pursuant
to an agreement, Distribution Agreement. To compensate Morgan Keegan &
Company, Inc. for acting as distributor and for its expenses incurred under
the Distribution Agreement, the Fund has adopted a Plan of Distribution
pursuant to Rule 12b-1 (the plan) under the Investment Company Act of 1940.
Under the Plan, the Fund pays Morgan Keegan & Company, Inc. a distribution
fee and a service fee, which each are accrued daily and paid
one percent (.25%) on an annualized basis of the Funds average daily net
assets. Amounts due to and from the Advisor and Morgan Keegan & Company, Inc.
are presented net as Due to Affiliates. The Fund also pays Morgan Keegan
& Company, Inc. for all fund accounting services and transfer agent services
which amount to $90,000, annually. Commissions of $3,425 were paid to Morgan
Keegan & Company, Inc. for execution of portfolio transactions.
Morgan Keegan & Co., Inc. also charges a three percent commission on all
sales of the Funds shares except (1) reinvestment of dividends and capital
gains; (2) sales to Morgan Keegan employees, Fund directors, and their
immediate families; and (3) sales of more than $1,000,000 (on which a one
percent commission is charged). Sales commissions retained by Morgan Keegan &
Company, Inc. from the proceeds of capital share transactions were
approximately $224,000 for the year ended June 30, 1999.
Certain officers and directors of the Fund are also officers and directors
of the Advisor and distributor.
REPORT OF INDEPENDENT>....
We have audited the accompanying statement of assets and liabilities of
Morgan Keegan Southern Capital Fund, Inc.,
including the schedule of investments, as of June 30, 1999, and the related
statement of operations for the year ended June 30, 1999 and the statements
of changes in net assets for each of the years in the two-year period then
ended and financial highlights for each of the years in the five-year period
then ended. These financial statements and financial highlights are the
responsibility of the Funds management. Our responsibility is to express an
opinion on these financial statements and financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial
highlights are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements.
Our procedures included confirmation of securities owned
as of June 30, 1999, by correspondence with the custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the over all financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Morgan Keegan Southern Capital Fund, Inc. as of June 30, 1999, the results of
its operations for the year ended June 30, 1999 and changes in its net assets
for each of the years in the two-year period then ended, and financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
Memphis, Tennessee
July 30, 1999 KPMG LLP
FINANCIAL HIGHLIGHTS
Year Ended Year Ended Year Ended Year Ended Year Ended
06/30/99 06/30/98 06/30/97 06/30/96 06/30/95
Net Asset Value, beginning of period $26.56 $21.64 $18.06 $14.34 $12.96
Income from Investment Operations
Net Investment Income (loss) (0.17) (0.16) (0.11) (0.07) 0.07
Net Gains on Securities 1.46 5.57 4.64 4.08 1.68
Total from Investment Operations 1.29 5.41 4.53 4.01 1.75
Less Distributions
Dividends (from net investment income) (0.03) (0.08)
Distribution (from realized gains) (0.72) (0.49) (0.87) (0.26) (0.29)
Distribution (return of capital) (0.03) (0.08)
Net Asset Value, end of period $27.10 $26.56 $21.64 $18.06 $14.34
Total Return* 5.20% 25.32 26.32% 28.30% 13.81%
Ratios/Supplemental Data
Net Assets, end of period 95,893,801 88,207,007 53,925,763 37,505,196
27,259,499
Expenses to Average Net Assets** 1.7% 1.8% 2.0% 2.0% 2.0%
Net Investment Income (loss) to Average Net Assets (0.7%)(0.7%)(0.6%)(0.5%)0.6%
Portfolio Turnover Rate 15% 28% 30% 69% 54%
**Total return does not include front end sales load.
**2.2% and 2.2% before excess reimbursement and fee waiver from Advisor in 1996
and 1995, respectively.
See accompanying notes to audited financial statements.
Shareholder Information: Dividend per share of $.72 paid during the 1999
fiscal year is taxable for Federal income purposes as long-term capital gains
(a $.03 dividend per share paid during the 1999 fiscal year represents return
of capital).
