<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1996
Securities Act File No. 33-75116
Investment Company Act of 1940 File No. 811-8352
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 4
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 4
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LKCM FUND
(Exact Name of Registrant)
c/o Luther King Capital Management
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
(Address of Principal Executive Office)
Registrant's Telephone Number (817) 332-3235
Karl O. Hartmann, Esq.
c/o Chase Global Funds Services Company
73 Tremont Street, Boston, MA 02108
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective
(check appropriate box)
[X] immediately upon filing pursuant to Paragraph (b)
[_] on _______________________ pursuant to Paragraph (b)
[_] 60 days after filing pursuant to Paragraph (a)
[_] on _______________________ pursuant to Paragraph (a) of Rule 485
------------------
Registrant has previously and hereby continues its elections to register an
indefinite number of shares pursuant to Regulation 24f-2 under the Investment
Company Act of 1940.
<PAGE>
CROSS REFERENCE SHEET
Form N-1A Item Number Location in Prospectus
- --------------------- ----------------------
Item 1. Cover Page............................Cover Page
Item 2. Synopsis..............................Prospectus Summary; Estimated
Fund Expenses
Item 3. Condensed Financial Information.......Financial Highlights
Item 4. General Description of Registrant.....Investment Objective and
Policies; Investment
Limitations; General Information
Item 5. Management of the Fund................Management
Item 6. Capital Stock and Other Securities....Purchase of Shares; Redemption
of Shares; Valuation of
Shares; Dividends, Capital
Gain Distributions and Taxes;
General Information
Item 7. Purchase of Securities Being Offered..Purchase of Shares; Valuation
of Shares; Shareholder Services
Item 8. Redemption or Repurchase..............Redemption of Shares
Item 9. Pending Legal Proceedings.............Not Applicable
Location in Statement
Form N-1A Item Number of Additional Information
- --------------------- -------------------------
Item 10. Cover Page............................Cover Page
Item 11. Table of Contents.....................Table of Contents
Item 12. General Information and History.......Investment Objectives and
Policies; General Information
Item 13. Investment Objective and Policies.....Investment Objective and
Policies; Investment Limitations
Item 14. Management of the Fund................Management
Item 15. Control Persons and Principal
Holders of Securities.................Management
Item 16. Investment Advisory and
Other Services........................Management
Item 17. Brokerage Allocation and
Other Practices.......................Portfolio Transactions and
Brokerage
Item 18. Capital Stock and Other Securities....General Information
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered..............Purchase, Redemption, and
Pricing of Shares
Item 20. Tax Status............................Dividends, Capital Gains, and
Taxes
Item 21. Underwriters..........................Management
Item 22. Calculations of Performance Data......Performance Information
Item 23. Financial Statements..................Financial Statements
Part C
- ------
Information required to be included in Part C is set forth under the appropriate
item so numbered in Part C to this Registration Statement.
<PAGE>
PART A
LKCM FUND
POST-EFFECTIVE AMENDMENT NO. 4
Prospectuses included in this filing:
The Prospectus for the LKCM Small Cap Equity Portfolio fund dated June 28, 1996
and the Prospectus for the LKCM Equity Portfolio dated June 28, 1996. The LKCM
Equity Portfolio Prospectus is supplemented by the financial highlights filed
herein to comply with the Fund's undertaking to file a Post-Effective Amendment
containing reasonable current financial statements, which need not be audited,
within four to six months of the effective date of the Registration Statement.
<PAGE>
LKCM SMALL CAP EQUITY PORTFOLIO
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
FOR INFORMATION CALL 800-688-LKCM
- -------------------------------------------------------------------------------
PROSPECTUS
June 28, 1996
The LKCM Small Cap Equity Portfolio (the "Portfolio") is an open-end,
diversified, investment management company whose investment objective is to
seek to maximize capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in equity securities of smaller
companies (those with market values at the time of investment of less than $1
billion) which the Portfolio's investment adviser believes are likely to have
above-average growth in revenue and/or earnings and potential for above-
average capital appreciation.
------------------------------------
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. It should be
retained for future reference. A Statement of Additional Information dated
June 28, 1996 and containing additional information about the Portfolio has
been filed with the Securities and Exchange Commission. The Statement of
Additional Information, as it may be supplemented from time to time, is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information may be obtained, without charge, by writing or calling
the Fund at the address or telephone number shown above.
------------------------------------
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.
------------------------------------
<PAGE>
ESTIMATED PORTFOLIO EXPENSES
The following table illustrates the various expenses and fees that a
shareholder of the Portfolio may incur either directly or indirectly. The fees
and expenses are based on the most recent fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases....................................... None
Sales Load Imposed on Reinvested Dividends............................ None
Redemption Fees....................................................... None+
Exchange Fees......................................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fee............................................... .68%
12b-1 Fees............................................................ None
Other Expenses........................................................ .32%*
-----
Total Operating Expenses............................................ 1.00%*
</TABLE>
Until further notice, the Adviser has voluntarily agreed to waive its advisory
fees and reimburse expenses to the extent necessary to keep Total Operating
Expenses from exceeding 1.00%. Absent reimbursements by the Adviser, it is
estimated that the Investment Advisory Fee would be .75% and Total Operating
Expenses would be 1.07%.
- --------
+ The Portfolio's transfer agent imposes a direct $8.00 charge on each wire
redemption. See "Redemption of Shares--By Telephone or Wire."
*After expense reimbursement and advisory fee waivers.
EXAMPLE:
You would pay the following expenses on a $1,000 investment over various
time periods assuming (1) a 5% annual rate of return and (2) redemption at the
end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$10 $32
</TABLE>
The purpose of this table is to assist in understanding the various expenses
that an investor in the Portfolio will bear directly or indirectly.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN ABOVE.
2
<PAGE>
PROSPECTUS SUMMARY
THE PORTFOLIO
The Portfolio is an open-end, diversified, management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is to seek to maximize capital
appreciation. The Portfolio seeks to achieve its objective by investing
primarily in equity securities of smaller companies (those with total market
values at the time of investment of less than $1 billion) which the
Portfolio's investment adviser believes are likely to have above-average
growth in revenues and/or earnings and potential for above-average capital
appreciation. Although the Portfolio may also invest in fixed income
instruments and may use various special investment techniques, under normal
market conditions the Portfolio will invest at least 65% of its total assets
in the equity securities of smaller companies. See "Investment Objective and
Policies" and "Other Investment Policies."
INVESTMENT ADVISER
Luther King Capital Management Corporation (the "Adviser") serves as the
investment adviser to the Portfolio. Founded in 1979, the Adviser provides
investment counseling services to employee benefit plans, endowment funds,
foundations and high net-worth individuals. As of the date of this Prospectus,
the Adviser had in excess of $4.5 billion in assets under management. See
"Management--Investment Adviser."
HOW TO INVEST
Shares of the Portfolio are offered directly to investors without a sales
commission at the net asset value of the Portfolio next determined after
receipt of the order. Share purchases may be made by sending investments
directly to the Portfolio, subject to acceptance by the Portfolio. The minimum
initial investment is $10,000 and the minimum for subsequent investments is
$1,000. The Portfolio's officers are authorized to waive the minimum initial
and subsequent investment requirements. See "Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time at the net asset value
of the Portfolio next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price. See "Redemption
of Shares."
ADMINISTRATOR
Chase Global Funds Services Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank, provides the Portfolio with administrative, dividend
disbursing, and transfer agency services. See "Management--Administrator."
RISK FACTORS
The investment policies of the Portfolio involve certain risks and
considerations of which an investor should be aware. Because the Portfolio
invests primarily in smaller-sized companies which are more vulnerable to
financial and other risks than larger companies, investments may involve a
higher degree of risk and price volatility than investments in the general
equity markets. In addition, the Portfolio may invest in foreign securities
and repurchase and reverse repurchase agreements, lend its portfolio
securities, and purchase securities on a when-issued basis. Each of these
investment strategies involves specific risks. For a discussion of these
risks, see "Other Investment Policies."
3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table provides financial highlights for a share outstanding
throughout the period presented and is part of the Portfolio's Financial
Statements included in the Portfolio's 1995 Annual Report to Shareholders
which is incorporated by reference into the Portfolio's Statement of
Additional Information. The Portfolio's Financial Statements have been
examined by Deloitte & Touche LLP whose opinion thereon (which is unqualified)
is also incorporated by reference into the Statement of Additional
Information. The following information should be read in conjunction with the
Portfolio's 1995 Annual Report to Shareholders.
<TABLE>
<CAPTION>
MAY 1, 1995
TO
DECEMBER 31, 1995
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $ 11.48
--------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income....................................... 0.03+
Net Realized and Unrealized Gain on Investments............. 2.33
--------
Total From Investment Operations.......................... 2.36
--------
NET ASSET VALUE, END OF PERIOD................................ $ 13.84
========
TOTAL RETURN.................................................. 20.56%
========
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)......................... $121,430
Ratio of Expenses to Average Net Assets....................... 1.00%*
Ratio of Net Investment Income to Average Net Assets.......... .53%*
Portfolio Turnover Rate....................................... 57%
</TABLE>
- --------
* Annualized.
+ Net of voluntarily waived fees and reimbursed expenses of $0.003 per share
for the period May 1, 1995 to December 31, 1995.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
PERFORMANCE INFORMATION
From time to time the Portfolio advertises its yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "average annual" total return
shows the average percentage change in value of an investment in the Portfolio
from the beginning date of the measuring period to the end of the measuring
period. Such figures reflect changes in the price of the Portfolio's shares
and assume that any income dividends and/or capital gain distributions made by
the Portfolio during the period were reinvested in additional shares of the
Portfolio. Figures will be given for recent one, five- and ten-year periods
(if applicable), and may be given for other periods as well (such as from
commencement of the Portfolio's operations). When considering "average" total
return figures for periods longer than one year, it is important to note that
the Portfolio's annual total return for any one year in the period might have
been greater or less than the average for the entire period.
In addition to "average annual" total return, the Portfolio may also quote a
"cumulative" total return for various periods representing the cumulative
change in value of an investment in the Portfolio for a specific period (again
reflecting changes in the Portfolio's share price and assuming reinvestment of
dividends and distributions).
The "yield" of the Portfolio is computed by dividing the net investment
income per share earned during the 30-day period stated in the advertisement
by the closing price per share on the last day of the period (using the
average number of shares entitled to receive dividends.) For the purpose of
determining net investment income, the calculation includes in expenses of the
Portfolio all recurring fees that are charged to all shareholder accounts and
any nonrecurring charges for the period stated. The yield formula provides for
semi-annual compounding, which assumes that net investment income is earned
and reinvested at a constant rate and annualized at the end of a six-month
period.
ADVISER'S INVESTMENT PHILOSOPHY
The Adviser follows a long-term investment philosophy grounded in the
fundamental analysis of individual companies. The Adviser believes that a
consistently high return on shareholders' equity, assuming the prudent use of
leverage, will drive value and over time create a high return on a
shareholder's investment.
The Adviser's primary approach to investing has two distinct but
complementary components. First, the Adviser seeks to identify quality
companies with high levels of profitability by analyzing individual companies
in terms of specified criteria. Companies meeting the criteria will display
most of the following attributes: above average return on shareholder equity,
low debt ratios relative to their industry or the market, prominent market
share, the ability to generate excess cash flow after capital expenditures and
dividends, and management with a significant ownership stake in the company.
The Adviser then imposes a value discipline on the selected companies. In
making value determinations, the Adviser uses financial tools such as
price/earnings ratio and price/cash flow multiple in conjunction with judgment
and experience.
The Adviser also invests in companies whose underlying assets are
undervalued in the marketplace. These include companies with tangible assets
such as real estate, oil and gas or timber and companies that generate cash
flow from intangible assets such as licenses. As with the primary approach
described above, cash flow, return on equity and financial leverage are
important variables in the analysis.
While the Portfolio's securities will generally be selected using the
strategies discussed above, the Adviser may also select investments based on
other criteria.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to seek to maximize capital
appreciation. The Portfolio's objective is a fundamental policy and may not be
changed without shareholder approval. The achievement of this objective cannot
be assured.
5
<PAGE>
The Portfolio pursues its objective by investing primarily in equity
securities of smaller companies (those with total market values at the time of
investment of less than $1 billion) which the Portfolio's investment adviser
believes are likely to have above-average growth in revenues and/or earnings
and potential for above average capital appreciation. Under normal market
conditions, the Portfolio will invest at least 65% of its total assets in the
equity securities of smaller companies. The equity securities in which the
Portfolio may invest are: common stocks, preferred stocks, securities
convertible into common stock, rights and warrants. Up to 5% of the
Portfolio's total assets may be invested in convertible debt securities which
at time of purchase are rated below investment grade. These securities are
considered to be "junk" or high yield, high risk securities with increased
risks of potential issuer defaults than with higher rated securities. The
balance of the Portfolio may be invested in U.S. Government securities,
corporate debt securities which at time of purchase are rated at least
investment grade by at least one unaffiliated nationally recognized
statistical rating organization ("NRSRO") (or if unrated, deemed by the
Adviser to be of comparable quality), and short-term investments as described
below under "Description of Securities and Other Investment Policies." When
the Adviser believes market conditions warrant such action, the Portfolio may
assume a temporary defensive position and invest all or a portion of its
assets in these instruments or hold its assets in cash or cash equivalents.
The Portfolio may also use derivative instruments, including financial
futures, options, and options on financial futures for hedging purposes and
engage in foreign currency transactions. Except as specified under "Investment
Limitations", the Portfolio's investment policies are not fundamental policies
which means that the Board of Trustees may change them without shareholder
approval.
Risks of Investing in Smaller Companies: The Adviser currently believes that
investment in smaller companies may offer greater opportunities for growth of
capital than larger, more established companies but also involves certain
risks. Smaller companies may have limited product lines, markets or financial
resources, and may lack management depth. The securities of these companies
may be subject to more abrupt or erratic market movements and may be less
liquid than securities of larger, more established companies or the market
averages in general.
DESCRIPTION OF SECURITIES AND OTHER INVESTMENT POLICIES
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
CORPORATE DEBT SECURITIES
Corporate debt securities include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate income-
producing securities may also include forms of preferred or preference stock.
TEMPORARY INVESTMENTS
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association.
(2) Commercial paper rated in the highest rating category by a NRSRO at time
of purchase or, if not rated, issued by a corporation having an outstanding
unsecured debt issue that meets such rating requirement;
6
<PAGE>
(3) Short-term corporate obligations rated in the highest rating category by
a NRSRO at time of purchase;
(4) U.S. Government Obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) U.S. Government Agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers
Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank,
Federal National Mortgage Association, Federal Financing Bank, the Tennessee
Valley Authority, and others; and
(6) Repurchase agreements collateralized by securities listed above.
FOREIGN SECURITIES
The Portfolio may invest to a limited degree in securities of foreign
issuers. Investors should recognize that investing in foreign issuers involves
certain special considerations which are not typically associated with
investing in U.S. issuers. Since the securities of foreign issuers are
frequently denominated in foreign currencies, and since the Portfolio may
temporarily hold invested reserves in bank deposits in foreign currencies, the
Portfolio will be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, and may incur costs in connection
with conversions between various currencies. The investment policies of the
Portfolio permit it to enter into forward foreign currency exchange contracts
in order to hedge the Portfolio's holdings and commitments against changes in
the level of future currency rates. Such contracts involve an obligation to
purchase or sell a specific currency at a future date at a price set at the
time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more
volatile than securities of comparable domestic companies. There is generally
less government supervision and regulation of stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Although the Portfolio will endeavor to
achieve most favorable execution costs in its portfolio transactions, fixed
commissions on many foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges. In addition, it is expected that the
expenses for custodian arrangements of the Portfolio's foreign securities will
be somewhat greater than the expenses for the custodian arrangements for
handling the U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will
reduce the income received from the companies comprising the Portfolio.
However, these foreign withholding taxes are not expected to have a
significant impact on the Portfolio, since the Portfolio's investment
objectives are to seek long-term capital appreciation and any income should be
considered incidental.
SECURITIES LENDING
The Portfolio may lend its portfolio securities to qualified brokers,
dealers, banks and other financial institutions for the purpose of realizing
additional income. Loans of securities will be collateralized by cash, letters
of credit, or securities issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the current market value
of the loaned securities. Such loans will not be made if, as a result, the
aggregate of all outstanding loans of the Portfolio exceeds one-third of the
value of its total assets. There may be risks of delay in receiving additional
collateral or in recovering the securities loaned or even a
7
<PAGE>
loss of rights in the collateral should the borrower of the securities fail
financially. However, loans are made only to borrowers deemed by the Adviser
to be of good standing and when, in the Adviser's judgment, the income to be
earned from the loan justifies the attendant risks.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines established by the Board of Trustees. In
a repurchase agreement, the Portfolio buys a security from a seller that has
agreed to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week and never exceeds one year. A
repurchase agreement may be viewed as a fully collateralized loan of money by
the Portfolio to the seller. The Portfolio always receives securities as
collateral with a market value at least equal to the purchase price, including
accrued interest, and this value is maintained during the term of the
agreement. If the seller defaults and the collateral value declines, the
Portfolio might incur a loss. If bankruptcy proceedings are commenced with
respect to the seller, the Portfolio's realization upon the collateral may be
delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Portfolio may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, the Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. It may also be viewed
as the borrowing of money by the Portfolio. The Portfolio's investment of the
proceeds of a reverse repurchase agreement is the speculative factor known as
leverage. The Portfolio may enter into a reverse repurchase agreement only if
the interest income from investment of the proceeds is greater than the
interest expense of the transaction and the proceeds are invested for a period
no longer than the term of the agreement. The Portfolio will maintain with the
Custodian a separate account with a segregated portfolio of cash, U.S.
Government securities or other liquid high grade debt obligations in an amount
at least equal to its purchase obligations under these agreements.
WHEN-ISSUED SECURITIES
The Portfolio may purchase securities on a "when-issued" basis. In buying
"when-issued" securities, the Portfolio commits to buy securities at a certain
price even though the securities may not be delivered for up to 120 days. No
payment or delivery is made by the Portfolio in a "when-issued" transaction
until the Portfolio receives payment or delivery from the other party to the
transaction. Although the Portfolio receives no income from the above-
described securities prior to delivery, the market value of such securities is
still subject to change. As a consequence, it is possible that the market
price of the securities at the time of delivery may be higher or lower than
the purchase price. The Portfolio will maintain with the Custodian a separate
account with a segregated portfolio of cash or high-grade debt securities in
an amount at least equal to the amount of its outstanding forward commitments.
ILLIQUID INVESTMENTS
The Portfolio may invest up to 15% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of restricted securities eligible for resale (i) to qualified
institutional purchasers pursuant to Rule 144A under the Securities Act of
1933 or (ii) commercial paper issued pursuant to Section 4(2) under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines established by the Board of Trustees. If there is a lack of trading
interest in particular Rule 144A securities, the Portfolio's holdings of those
securities may be illiquid. There may be delays in selling illiquid securities
and sales may be made at less favorable prices.
8
<PAGE>
CORPORATE REORGANIZATIONS
The Portfolio may invest a portion of its assets in securities for which a
tender or exchange offer has been made or announced if, in the judgment of the
Adviser, there is a reasonable prospect of capital appreciation significantly
greater than the added portfolio turnover expenses inherent in the short term
nature of such transactions. The primary risk is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of the investment, in which case, unless such offers or proposals are
replaced by equivalent or increased offers of proposals which are consummated,
the Portfolio may sustain a loss.
OTHER INVESTMENT COMPANIES
The Portfolio may invest up to 10% of its total assets in other investment
companies. Not more than 5% of the Portfolio's total assets may be invested in
more than 3% of the securities of any one investment company. In addition to
the advisory fees and other expenses the Portfolio bears directly in
connection with its own operations, as a shareholder of another investment
company, the Portfolio would bear its pro rata portion of the other investment
company's advisory fees and other expenses. As such, the Portfolio's
shareholders would indirectly bear the expenses of the Portfolio and the other
investment company, some or all of which would be duplicative.
OTHER INVESTMENTS
Any remaining assets not invested as described above may be invested in
securities or obligations, including derivative securities. Options, futures
and options on futures are derivative securities, in which the Portfolio may
invest for hedging purposes, as well as to remain fully invested and to reduce
transaction costs. Investing for the latter two purposes may be considered
speculative. The Portfolio will not enter into futures contracts to the extent
that its outstanding obligations to purchase securities under these contracts
in combination with its outstanding obligations with respect to options
transactions would exceed 5% of its total assets. For additional discussion of
derivative instruments, see the Statement of Additional Information dated
August 28, 1995.
PORTFOLIO TURNOVER
The Adviser manages the Portfolio without regard generally to restrictions
on portfolio turnover, except those imposed by provisions of the federal tax
laws regarding short-term trading. Generally, the Portfolio will not trade for
short-term profits, but when circumstances warrant, investments may be sold
without regard to the length of time held. It is expected that the annual
turnover rate for the Portfolio will not exceed 100%.
A high rate of portfolio turnover may involve correspondingly greater
brokerage and portfolio trading costs which are paid by the Portfolio. In
addition, higher rates of portfolio turnover may result in the realization of
substantial net capital gains. To the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for Federal income tax purposes. See "Dividends, Capital Gain
Distributions, and Taxes."
INVESTMENT LIMITATIONS
The Portfolio has adopted certain limitations designed to reduce its
exposure to specific situations. Some of these limitations are:
(a) with respect to 75% of its assets, the Portfolio will not invest more
than 5% of its total assets in the securities of any single issuer (other
than obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities);
(b) with respect to 75% of its assets, the Portfolio will not purchase
more than 10% of any class of the outstanding voting securities of any
issuer;
9
<PAGE>
(c) the Portfolio will not invest more than 5% of its assets in the
securities of issuers (other than securities issued or guaranteed by the
U.S. or foreign governments or their political subdivisions) that have
(with predecessors) a record of less than 3 years of continuous operation;
(d) the Portfolio will not acquire any securities of companies within one
industry if, as a result of such acquisition, more than 25% of the value of
the Portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no limitation
on the purchase of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, or instruments issued by banks when the
Portfolio adopts a temporary defensive position;
(e) the Portfolio will not make loans except (i) by purchasing debt
securities in accordance with its investment objective and policies or
entering into repurchase agreements and (ii) by lending its portfolio
securities to banks, brokers, dealers and other financial institutions so
long as such loans are not inconsistent with the Investment Company Act of
1940, as amended or the rules and regulations or interpretations of the
Commission thereunder; and
(f) the Portfolio will not borrow, except (i) from banks and as a
temporary measure for extraordinary or emergency purposes (not for
leveraging or investment) or (ii) in connection with reverse repurchase
agreements provided that (i) and (ii) in combination do not exceed 33 1/3%
of the Portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings);
(g) the Portfolio will not pledge, mortgage, or hypothecate any of its
assets to an extent greater than 33 1/3% of its total assets at fair market
value;
(h) the Portfolio will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions
of assets or consolidations and except as may otherwise be permitted by the
Investment Company Act of 1940, as amended; and
(i) the Portfolio will not issue senior securities, except that this
limitation shall not apply to: (i) evidence indebtedness which the
Portfolio is permitted to incur; (ii) shares of the separate classes or
series of the Fund; or (iii) collateral arrangements with respect to
currency-related contracts, futures contracts, options or other permitted
investments, including deposits of initial and variation margin.
Limitations (a), (b), (d), (e), (f) and (i) and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a majority of the
outstanding voting securities of the Portfolio (see "General Information--
Shareholder Approval"). The other investment limitations described here and in
the Statement of Additional Information are not fundamental policies and the
Board of Trustees may change them without shareholder approval. If a
percentage limitation on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the
Portfolio's assets will not be considered a violation of the restriction, and
the sale of securities will not be required.
INVESTMENT SUITABILITY
The Portfolio is designed primarily for the investments of institutional
investors.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased at the net asset value per share
next determined after receipt of the purchase order. The Portfolio determines
net asset value at the normal close of trading of the New York Stock Exchange
("NYSE") (currently 4:00 P.M. Eastern Time) each day that the NYSE is open for
business. See "Valuation of Shares."
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<PAGE>
INITIAL INVESTMENTS
BY MAIL. Subject to acceptance by the Portfolio, an account may be opened by
completing and signing an Account Registration Form, and mailing it, together
with a check ($10,000 minimum) payable to LKCM Small Cap Equity Portfolio, to:
LKCM Small Cap Equity Portfolio
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Subject to acceptance by the Portfolio, payment for the purchase of shares
received by mail will be credited to your account at the net asset value per
share of the Portfolio next determined after receipt. Such payment need not be
converted into Federal Funds (monies credited to the Portfolio's Custodian
Bank by a Federal Reserve Bank) before acceptance by the Portfolio. Please
note that purchases made by check are not permitted to be redeemed until
payment of the purchase has been collected, which may take up to fifteen
business days after purchase.
BY WIRE. Subject to acceptance by the Portfolio, shares of the Portfolio may
be purchased by wiring Federal Funds ($10,000 minimum) to the Portfolio's
Custodian Bank. To make an initial purchase by wire, investors should use the
following procedures.
. Telephone the Portfolio at 800-688-LKCM (option 1) for instructions
and to receive an account number.
. Instruct a Federal Reserve System member bank to wire funds to:
THE CHASE MANHATTAN BANK
One Chase Manhattan Plaza
New York, NY 10081-1000
ADA #021000021
DOA #910-2-733095
Wire Reference Control Number
Account Registration
(including account number)
. Notify the Portfolio by calling the telephone number listed above
prior to 4:00 P.M. (Eastern Time) on the wire date.
. Promptly complete and mail an Account Registration Form to the
address shown above under purchases by mail.
Federal Funds purchases will be accepted only on a day on which the
Portfolio and the Custodian are open for business.
SUBSEQUENT INVESTMENTS
Additional investments may be made at any time (minimum subsequent
investment $1,000) by mailing a check payable to LKCM Small Cap Equity
Portfolio to the address noted under "Initial Investments--By Mail."
Additional investments may also be made by instructing your bank to wire
monies as outlined above and notifying the Portfolio prior to 4:00 P.M.
(Eastern Time) on the wire date.
OTHER PURCHASE INFORMATION
The Portfolio reserves the right, in its sole discretion, to suspend the
offering of its shares, to reject any purchase order, or to waive any minimum
investment requirements when, in the judgment of management, such action is in
the best interests of the Portfolio.
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<PAGE>
Purchases of the Portfolio's shares will be made in full and fractional
shares of the Portfolio calculated to three decimal places. In the interest of
economy and convenience, certificates for shares will not be issued except at
the written request of the shareholder. Certificates for fractional shares,
however, will not be issued.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits investors who own shares of the
Fund with a value of $10,000 or more, to purchase shares (minimum of $100 per
Fund per transaction) at regular intervals selected by the investor. The
minimum investment for an Automatic Investment Program account is $100 per
Fund. Provided the investor's financial institution allows automatic
withdrawals, shares are purchased by transferring funds from an investor's
checking, bank money market or NOW account designated by the investor. At the
investor's option, the account designated will be debited in the specified
amount, and shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month on both days.
The Automatic Investment Program is one means by which an investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the agreed upon fixed investment amount allows more shares
to be purchased during periods of lower share prices and fewer shares during
periods of higher prices. In order to be effective, Dollar Cost Averaging
should usually be followed on a sustained, consistent basis. Investors should
be aware, however, that shares bought using Dollar Cost Averaging are
purchased without regard to their price on the day of investment or market
trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his
or her shares at a price which is lower than their purchase price.
To establish an Automatic Investment account permitting investors to use the
Dollar Cost Averaging investment method described above, an investor must
complete the supplemental application contained in this Prospectus and mail it
to Chase Global Funds Services Company ("CGFSC"). An investor may cancel his
or her participation in this Program or change the amount of purchase at any
time by mailing written notification to CGFSC, P.O. Box 2798, Boston, MA
02208-2798 and notification will be effective three business days following
receipt. LKCM Fund may modify or terminate this privilege at any time or
charge a service fee, although no such fee currently is contemplated. An
investor may also implement the Dollar Cost Averaging method on his or her own
initiative or through other entities.
REDEMPTION OF SHARES
Shares of the Portfolio may be redeemed by mail, or, if authorized, by
telephone. No charge is made for redemptions. The value of shares redeemed may
be more or less than the purchase price, depending on the market value of the
investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its shares at the net asset value next determined
after the request is received in "good order" (as defined below). On days that
the NYSE is open for business, the net asset value per share of the Portfolio
is determined at the normal close of trading of the NYSE (currently 4:00 P.M.
Eastern Time). Redemption requests should be sent to LKCM Small Cap Equity
Portfolio, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston, MA
02208-2798.
To be in "good order", redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed, signed by
all registered owners of the shares in the exact names in which they are
registered;
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<PAGE>
(c) Any required signature guarantees (see "Signature Guarantees" below);
and
(d) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianship, corporations, pension and
profit sharing plans, and other organizations.
SIGNATURE GUARANTEES. To protect your account, the Portfolio, and the
Administrator from fraud, signature guarantees are required to enable the
Portfolio to verify the identity of the person who has authorized a redemption
from an account. Signature guarantees are required for (1) redemptions where
the proceeds are to be sent to someone other than the registered shareowner(s)
or the registered address, and (2) share transfer requests. Please contact the
Portfolio at 800-688-LKCM (option 1) for further details.
BY TELEPHONE OR WIRE
Investors who have so indicated on the Account Registration Form, or have
subsequently arranged in writing to do so, may redeem Shares by calling the
Portfolio and requesting that the redemption proceeds be mailed to the primary
registration address or wired directly to the investor's account at any
commercial bank in the United States. The Portfolio's transfer agent imposes
an $8.00 fee for each wire redemption which is deducted from the proceeds of
the redemption. The redemption proceeds for an investor must be paid to the
same bank and account as designated on the Account Registration Form or in
written instructions subsequently received by the Portfolio.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, an investor must send a written request to the Portfolio at the
address listed above under "Redemption of Shares--By Mail." Such requests must
be signed by the investor, with signatures guaranteed (see "Redemption of
Shares--By Mail" above, for details regarding signature guarantees). Further
documentation may be requested.
The Portfolio reserves the right to refuse a wire or telephone redemption if
it is believed advisable to do so. Procedures for redeeming shares by wire or
telephone may be modified or terminated at any time. The Portfolio and its
transfer agent will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed to be genuine.
In attempting to confirm that telephone instructions are genuine, the
Portfolio will use such procedures as are considered reasonable, including
recording those instructions and requesting information as to account
registration. To the extent that the Portfolio fails to use reasonable
procedures as a basis for its belief, it may be liable for instructions that
prove to be fraudulent or unauthorized.
OTHER REDEMPTION INFORMATION
Payment of the redemption proceeds will ordinarily be made within seven days
after receipt of a redemption request in "good order" (as defined above under
"Redemption of Shares--By Mail"). Redemption proceeds for shares of the
Portfolio purchased by check may not be distributed until payment for the
purchase has been collected, which may take up to fifteen business days. Such
funds are invested and earn dividends during this holding period. Shareholders
can avoid this delay by utilizing the wire purchase option.
Due to the relatively high cost of maintaining small accounts, the Portfolio
reserves the right to redeem shares in any account for their then-current
value (which will be promptly paid to the investor) if at any time, due to
redemption by the investor, the shares in the account do not have a value of
at least $1,000. A shareholder will receive advance notice of a mandatory
redemption and will be given at least 30 days to bring the value of its
account up to at least $1,000.
The Portfolio may suspend the right of redemption or postpone the date at
times when the NYSE is closed (other than customary weekend and holiday
closings) or under any emergency circumstances as determined by the Securities
and Exchange Commission.
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<PAGE>
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Portfolio may pay the redemption proceeds in
whole or in part by a distribution in-kind of readily marketable securities
held by the Portfolio in lieu of cash in conformity with applicable rules of
the Securities and Exchange Commission. Investors may incur brokerage charges
on the sale of portfolio securities so received in payment of redemptions.
SHAREHOLDER SERVICES
RETIREMENT PLANS
The Portfolio makes available individual retirement account plans ("IRAs"),
including Simplified Employee Pension Plan ("SEP") IRAs and IRA "Rollover
Accounts," offered by The Chase Manhattan Bank. Detailed information on these
plans is available from the Portfolio by calling the Portfolio at 800-688-LKCM
(option 1). Investors should consult with their own tax advisers before
establishing a retirement plan.
TRANSFER OF REGISTRATION
The registration of Portfolio shares may be transferred by writing to the
Portfolio, c/o Chase Global Funds Service Company, P.O. Box 2798, Boston, MA
02208-2798. As in the case of redemptions, the written request must be
received in "good order" as defined above under "Redemption of Shares--By
Mail."
VALUATION OF SHARES
Net asset value per share is computed by dividing the total value of the
investments and other assets of the Portfolio, less any liabilities, by the
total outstanding shares of the Portfolio. The net asset value per share is
determined as of the normal close of the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business.
Securities listed on a U.S. securities exchange or NASDAQ for which market
quotations are readily available are valued at the last quoted sale price on
the day the valuation is made. Price information on listed securities is taken
from the exchange where the security is primarily traded. Unlisted U.S.
securities and listed U.S. securities not traded on the valuation date for
which market quotations are readily available are valued at the mean of the
most recent quoted bid and asked price. Securities listed on a foreign
exchange for which market quotations are readily available are valued at the
latest quoted sales price available before the time when assets are valued.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using net foreign exchange quotations received from
independent dealers. Unlisted foreign securities are valued at fair value as
determined in accordance with policies established by the Board of Trustees.
Fixed-income securities (other than obligations having a maturity of 60 days
or less) are normally valued on the basis of quotes obtained from pricing
services, which take into account appropriate factors such as institutional-
sized trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data.
Fixed-income securities purchased with remaining maturities of 60 days or less
are valued at amortized cost if it reflects fair value. In the event that
amortized cost does not reflect market, market prices as determined above will
be used. Other assets and securities for which no quotations are readily
available (including restricted securities) will be valued in good faith at
fair value using methods determined by the Board of Trustees.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio intends to pay dividends and net capital gains distributions,
if any, on an annual basis. Dividends and capital gains distributions, if any,
will automatically be paid in additional shares of the Portfolio unless the
shareholder elects otherwise. Such election must be made in writing to the
Portfolio.
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<PAGE>
TAXES
The Portfolio intends to qualify for taxation as a "regulated investment
company" under the Internal Revenue Code so that the Portfolio will not be
subject to Federal income tax to the extent it distributes its income to its
shareholders. Dividends, either in cash or reinvested in shares, paid by the
Portfolio from net investment income will be taxable to shareholders as
ordinary income, and will qualify, in part, for the 70% dividends received
deduction for corporations, but the portion of the dividends so qualified
depends on the aggregate taxable qualifying dividend income received by the
Portfolio from domestic (U.S.) sources.
Whether paid in cash or additional shares of the Portfolio, and regardless
of the length of time the shares in the Portfolio have been owned by the
shareholder, the Portfolio's distributions of long-term capital gains are
taxable to shareholders as long-term capital gains. Capital gains
distributions are not eligible for the dividends received deduction for
corporations. Shareholders are notified annually by the Portfolio as to
Federal tax status of dividends and distributions paid by the Portfolio.
Any dividends and capital gains distributions declared in December by the
Portfolio will be deemed to have been paid by the Portfolio and received by
shareholders on the record date provided that the dividends are paid before
February 1 of the following year.
Redemptions of shares in the Portfolio are taxable events for Federal income
tax purposes. Individual shareholders may also be subject to state and
municipal taxes on such redemptions.
The Portfolio is required by Federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not complied with IRS regulations.
In order to avoid this withholding requirement, you must certify on the
Account Registration Form that your Social Security or Taxpayer Identification
Number provided is correct and that you are not currently subject to back-up
withholding, or that you are exempt from back-up withholding.
Dividends and distributions declared by the Portfolio may also be subject to
state and local taxes.
The foregoing summarizes some of the important tax considerations generally
affecting the Portfolio and its shareholders. POTENTIAL INVESTORS IN THE
PORTFOLIO SHOULD CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR
OWN TAX SITUATION.
MANAGEMENT
INVESTMENT ADVISER
Luther King Capital Management Corporation (the "Adviser") serves as the
investment adviser to the Portfolio. The Adviser was founded in 1979 and
provides investment counseling services to employee benefit plans, endowment
funds, foundations, and high net-worth individuals. As of the date of this
Prospectus, the Adviser had in excess of $4.5 billion in assets under
management. The Adviser has substantial experience as an investment adviser.
The Adviser also has experience as the adviser to common trust funds.
Under an Investment Advisory Agreement ("Agreement") with the Portfolio, the
Adviser, subject to the control and supervision of the Board of Trustees and
in conformance with the stated investment objective and policies of the
Portfolio, manages the investment and reinvestment of the assets of the
Portfolio. In this regard, it is the responsibility of the Adviser to make
investment decisions for the Portfolio and to place the Portfolio's purchase
and sales orders. As compensation for the services rendered by the Adviser
under the Agreement, the Portfolio pays the Adviser an advisory fee calculated
by applying a quarterly rate, equal on an annual basis to .75% of the
Portfolio's average daily net assets for the quarter. While the advisory fee
payable by the Portfolio is higher than advisory fees paid by most mutual
funds, it is comparable to that paid by many other funds that invest primarily
in small capitalization stocks.
15
<PAGE>
Certain managed account clients of the Adviser may purchase shares of the
Portfolio. To avoid the imposition of duplicative fees, the Adviser may make
adjustments in the management fees charged separately by the Adviser to these
clients to offset the generally higher level of management fees and expenses
resulting from a client's investment in the Portfolio.
PORTFOLIO MANAGER
Luther King is primarily responsible for the day-to-day management of the
Portfolio. Mr. King has been President, Principal, and Portfolio Manager of
the Adviser since 1979.
ADMINISTRATOR
Chase Global Funds Service Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank ("Chase"), provides the Portfolio with
administrative, fund accounting, dividend disbursing and transfer agency
services pursuant to a Fund Administration Agreement. The services under this
Agreement are subject to the supervision of the Trustees and officers, and
include day-to-day administration of matters necessary to the Portfolio's
operations, maintenance of its records, preparation of reports, supervision of
the Portfolio's arrangements with its custodians, compliance testing of the
Portfolio's activities, and preparation of periodic updates of the
registration statement under federal and state laws. The Administrator is
located at 73 Tremont Street, Boston, Massachusetts 02108. Pursuant to the
Fund Administration Agreement and a custody agreement under which Chase serves
as custodian of the Portfolio's assets, the Portfolio pays the Administrator
an aggregate monthly fee which on an annualized basis equals: 0.215 of 1% of
the first $75 million of the net assets of the Portfolio, plus 0.135 of 1% of
the next $75 million of the net assets of the Portfolio, plus 0.095 of 1% of
the net assets of the Portfolio in excess of $150 million (with a minimum
annual fee of $145,000 plus .015 of 1% of average daily net assets).
From time to time, subject to review by the Board of Trustees, the
Administrator may make certain adjustments to the fees it is entitled to
receive from the Portfolio pursuant to its Fund Administration Agreement.
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for the management of the
Portfolio. The officers of the Portfolio conduct and supervise its daily
business. Each Trustee, who is not also an officer or affiliated person,
receives an annual fee plus a meeting fee for each meeting attended and is
reimbursed for expenses incurred in attending Board meetings. Trustees who are
also officers or affiliated persons receive no remuneration for their service
as Trustees. The Portfolio's officers and employees are paid by the Adviser or
the Administrator.
The following is a list of the Trustees and principal executive officers of
the Portfolio and a brief statement of their present positions and principal
occupations during the past five years:
LUTHER KING, JR., Chairman of the Board of Trustees and President and Co-
Manager of the Portfolio; President, Luther King Capital Management
Corporation.
H. KIRK DOWNEY, Trustee of the Portfolio; Dean, M. J. Neeley School of
Business, Texas Christian University Business School.
EARLE A. SHIELDS, JR., Trustee of the Portfolio; Consultant; formerly:
Consultant to NASDAQ Corp.; and Vice President Merrill Lynch & Co., Inc.
DISTRIBUTOR
Shares of the Portfolio are distributed through Funds Distributor, Inc. (the
"Distributor"). The Distributor is a broker-dealer registered with the
Securities and Exchange Commission. Jacqui Brownfield, an employee of the
Adviser and an officer of the LKCM Fund, will act as the registered
representative of the Distributor in connection with the sale of shares of the
Portfolios.
16
<PAGE>
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts
to obtain the best available price and most favorable execution with respect
to all transactions for the Portfolio.
It is not the Portfolio's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through
intermediary broker-dealers. However, the Adviser may place portfolio orders
with qualified broker-dealers who recommend the Portfolio or who act as agents
in the purchase of shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by the Adviser is considered at or about
the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Board of Trustees.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Portfolio is a series of the LKCM Fund (the "Fund") which was
established under Delaware law by a Declaration of Trust dated February 10,
1994. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited number of series of
shares. Currently, the Fund has authorized the shares of two series, one of
which is the shares of the Portfolio. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do
so. A shareholder is entitled to one vote for each full share held (and a
fractional vote for each fractional share held), then standing in his or her
name on the books of the Portfolio.
The Portfolio is not required, and does not intend, to hold regular annual
shareholder meetings. The Portfolio may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Portfolio's
shares to replace its Trustees. The Portfolio will assist in shareholder
communication in such matters to the extent required by law.
SHAREHOLDER APPROVAL
Other than election of Trustees, which is by plurality, any matter for which
shareholder approval is required by the Investment Company Act of 1940, as
amended, requires the affirmative vote of at least a majority of the
outstanding voting securities of the Portfolio or the Fund at a meeting called
for the purpose of considering such approval. A majority of the Portfolio's
outstanding voting securities is the lesser of (1) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the outstanding shares.
CUSTODIAN
The Chase Manhattan Bank serves as custodian of the Portfolio's assets.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Service Company, a subsidiary of The Chase Manhattan
Bank, 73 Tremont Street, Boston, MA 02108, acts as Dividend Disbursing and
Transfer Agent for the Portfolio.
REPORTS
Shareholders receive semi-annual and annual financial statements. Annual
financial statements are audited by Deloitte & Touche, LLP, independent
accountants.
LITIGATION
The Portfolio is not involved in any litigation.
17
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LKCM SMALL CAP EQUITY PORTFOLIO
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
800-688-LKCM
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PROSPECTUS
JUNE 28, 1996
Investment Adviser
LUTHER KING CAPITAL MANAGEMENT CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Estimated Portfolio Expenses....... 2
Prospectus Summary................. 3
Financial Highlights............... 4
Performance Information............ 5
Adviser's Investment Philosophy.... 5
Investment Objective and Policies.. 5
Description of Securities and Other
Investment Policies............... 6
Investment Limitations............. 9
Investment Suitability............. 10
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Purchase of Shares......... 10
Redemption of Shares....... 12
Shareholder Services....... 14
Valuation of Shares........ 14
Dividends, Capital Gains
Distributions, and Taxes.. 14
Management................. 15
Portfolio Transactions..... 17
General Information........ 17
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR ITS REPRESENTATIONS MUST
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE PORTFOLIO OR THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
<PAGE>
LKCM EQUITY PORTFOLIO
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
FOR INFORMATION CALL 800-688-LKCM
- -------------------------------------------------------------------------------
PROSPECTUS
June 28, 1996
The LKCM Equity Portfolio (the "Portfolio") is an open-end, diversified,
investment management company whose investment objective is to seek to
maximize long-term capital appreciation. The Portfolio seeks to achieve its
investment objective by investing primarily in equity securities of companies
which the Portfolio's investment adviser believes are likely to have above-
average growth in revenue and/or earnings with above average returns on
shareholders' equity and unleveraged balance sheets, and potential for above-
average capital appreciation. The Portfolio will also invest a portion of the
Portfolio's assets in companies whose public market value is less than the
manager's assessment of the companies' value.
------------------------------------
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor should know before investing. It should be
retained for future reference. A Statement of Additional Information dated
June 28, 1996, containing additional information about the Portfolio has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information, as it may be supplemented from time to time, is incorporated by
reference into this Prospectus. A copy of the Statement of Additional
Information may be obtained, without charge, by writing or calling the Fund at
the address or telephone number shown above.
------------------------------------
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.
THE INVESTMENT COMPANY SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR ENDORSED OR GUARANTEED BY, ANY BANK OR BANK AFFILIATE
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE
"FDIC"), THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THESE SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
<PAGE>
ESTIMATED PORTFOLIO EXPENSES
The following table illustrates the various expenses and fees that a
shareholder of the Portfolio may incur either directly or indirectly. The fees
and expenses are based on estimated amounts for the current fiscal year.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Redemption Fees........................................................ None
Exchange Fees.......................................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fee................................................ .70%
12b-1 Fees............................................................. None
Other Expenses......................................................... .10%*
----
Total Operating Expenses............................................. .80%*
</TABLE>
Until further notice, the Adviser has voluntarily agreed to waive its advisory
fees and reimburse expenses to the extent necessary to keep Total Operating
Expenses from exceeding .80%. Absent reimbursements by the Adviser, it is
estimated that Other Expenses would be .56% and Total Operating Expenses would
be 1.26%.
- --------
*After expense reimbursement.
EXAMPLE:
You would pay the following expenses on a $1,000 investment over various
time periods assuming (1) a 5% annual rate of return and (2) redemption at the
end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$8 $26
</TABLE>
The purpose of this table is to assist in understanding the various expenses
that an investor in the Portfolio will bear directly or indirectly.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN ABOVE.
2
<PAGE>
PROSPECTUS SUMMARY
THE PORTFOLIO
The Portfolio is an open-end, diversified, management investment company.
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is to seek to maximize long-term
capital appreciation. The Portfolio seeks to achieve its objective by
investing primarily in equity securities of companies which the Portfolio's
investment adviser believes are likely to have above average growth in
revenues and/or earnings with high returns on shareholders' equity,
unleveraged balance sheets, and potential for above average capital
appreciation. The Portfolio will also invest a portion of the Portfolio's
assets in companies whose public market value is less than the manager's
assessment of the companies' value. Although the Portfolio may also invest in
fixed income instruments and may use various special investment techniques,
under normal market conditions the Portfolio will invest at least 65% of its
total assets in equity securities. See "Investment Objective and Policies" and
"Description of Securities and Other Investment Policies."
INVESTMENT ADVISER
Luther King Capital Management Corporation (the "Adviser") serves as the
investment adviser to the Portfolio. Founded in 1979, the Adviser provides
investment counseling services to employee benefit plans, endowment funds,
foundations and high net-worth individuals. As of the date of this Prospectus,
the Adviser had in excess of $4.5 billion in assets under management. See
"Management--Investment Adviser."
HOW TO INVEST
Shares of the Portfolio are offered directly to investors without a sales
commission at the net asset value of the Portfolio next determined after
receipt of the order. Share purchases may be made by sending investments
directly to the Portfolio, subject to acceptance by the Portfolio. The minimum
initial investment is $10,000 and the minimum for subsequent investments is
$1,000. The Portfolio's officers are authorized to waive the minimum initial
and subsequent investment requirements. See "Purchase of Shares."
HOW TO REDEEM
Shares of the Portfolio may be redeemed at any time at the net asset value
of the Portfolio next determined after receipt of the redemption request. The
redemption price may be more or less than the purchase price. See "Redemption
of Shares."
ADMINISTRATOR
Chase Global Funds Services Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank, provides the Portfolio with administrative, dividend
disbursing, and transfer agency services. See "Management--Administrator."
RISK FACTORS
Investments in common stocks in general are subject to market risks that may
cause their prices to fluctuate over time. Therefore, an investment in this
Portfolio may be more suitable for long-term investors who can bear the risk
of these fluctuations. The Portfolio may invest in foreign securities and
repurchase and reverse repurchase agreements, lend its portfolio securities,
and purchase securities on a when-issued basis. Each of these investment
strategies involves specific risks. For a discussion of these risks, see
"Other Investment Policies."
3
<PAGE>
PERFORMANCE INFORMATION
From time to time the Portfolio advertises its yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "average annual" total return
shows the average percentage change in value of an investment in the Portfolio
from the beginning date of the measuring period to the end of the measuring
period. Such figures reflect changes in the price of the Portfolio's shares
and assume that any income dividends and/or capital gain distributions made by
the Portfolio during the period were reinvested in additional shares of the
Portfolio. Figures will be given for recent one, five- and ten-year periods
(if applicable), and may be given for other periods as well (such as from
commencement of the Portfolio's operations). When considering "average" total
return figures for periods longer than one year, it is important to note that
the Portfolio's annual total return for any one year in the period might have
been greater or less than the average for the entire period.
In addition to "average annual" total return, the Portfolio may also quote a
"cumulative" total return for various periods representing the cumulative
change in value of an investment in the Portfolio for a specific period (again
reflecting changes in the Portfolio's share price and assuming reinvestment of
dividends and distributions).
The "yield" of the Portfolio is computed by dividing the net investment
income per share earned during the 30-day period stated in the advertisement
by the closing price per share on the last day of the period (using the
average number of shares entitled to receive dividends.) For the purpose of
determining net investment income, the calculation includes in expenses of the
Portfolio all recurring fees that are charged to all shareholder accounts and
any nonrecurring charges for the period stated. The yield formula provides for
semi-annual compounding, which assumes that net investment income is earned
and reinvested at a constant rate and annualized at the end of a six-month
period.
ADVISER'S INVESTMENT PHILOSOPHY
The Adviser follows a long-term investment philosophy grounded in the
fundamental analysis of individual companies. The Adviser believes that a
consistently high return on shareholders' equity, assuming the prudent use of
leverage, will drive value and over time create an above-average return on a
shareholder's investment.
The Adviser's primary approach to investing has two distinct but
complementary components. First, the Adviser seeks to identify quality
companies with high levels of profitability by analyzing individual companies
in terms of specified criteria. Companies meeting the criteria will display
most of the following attributes: above-average return on shareholder equity,
low debt ratios relative to their industry or the market, prominent market
share, the ability to generate excess cash flow after capital expenditures and
dividends, and management with a significant ownership stake in the company.
The Adviser then imposes a value discipline on the selected companies. In
making value determinations, the Adviser uses financial tools such as
price/earnings ratio and price/cash flow multiple in conjunction with judgment
and experience.
The Adviser also invests in companies whose underlying assets are
undervalued in the marketplace. These include companies with tangible assets
such as real estate, oil and gas, or timber, and companies that generate cash
flow from intangible assets such as licenses. As with the primary approach
described above, cash flow, return on equity and financial leverage are
important variables in the analysis.
While the Portfolio's securities will generally be selected using the
strategies discussed above, the Adviser may also select investments based on
other criteria.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Portfolio is to seek to maximize long-term
capital appreciation. The Portfolio's objective is a fundamental policy and
may not be changed without shareholder approval. The achievement of this
objective cannot be assured.
4
<PAGE>
The Portfolio pursues its objective by investing primarily in equity
securities which the Portfolio's investment adviser believes are likely to
have above-average growth in revenues and/or earnings and potential for above
average capital appreciation. The equity securities in which the Portfolio may
invest are: common stocks, preferred stocks, securities convertible into
common stock, rights and warrants. The balance of the Portfolio may be
invested in U.S. Government securities, corporate debt securities which at
time of purchase are rated at least investment grade by at least one
unaffiliated nationally recognized statistical rating organization ("NRSRO")
(or if unrated, deemed by the Adviser to be of comparable quality), and short-
term investments as described below under "Description of Securities and Other
Investment Policies." When the Adviser believes market conditions warrant such
action, the Portfolio may assume a temporary defensive position and invest all
or a portion of its assets in these instruments or hold its assets in cash or
cash equivalents. Except as specified under "Investment Limitations", the
Portfolio's investment policies are not fundamental policies which means that
the Board of Trustees may change them without shareholder approval.
DESCRIPTION OF SECURITIES AND OTHER INVESTMENT POLICIES
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
CORPORATE DEBT SECURITIES
Corporate debt securities include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate income-
producing securities may also include forms of preferred or preference stock.
TEMPORARY INVESTMENTS
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association;
(2) Commercial paper rated in the highest rating category by a NRSRO at time
of purchase or, if not rated, issued by a corporation having an outstanding
unsecured debt issue that meets such rating requirement;
(3) Short-term corporate obligations rated in the highest rating category by
a NRSRO at time of purchase;
(4) U.S. Government Obligations including bills, notes, bonds and other debt
securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) U.S. Government Agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers
Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank,
Federal National Mortgage Association, Federal Financing Bank, the Tennessee
Valley Authority, and others; and
(6) Repurchase agreements collateralized by securities listed above.
5
<PAGE>
ILLIQUID INVESTMENTS
The Portfolio may invest up to 7% of its net assets in securities that are
illiquid by virtue of the absence of a readily available market, or because of
legal or contractual restrictions on resale. This policy does not limit the
acquisition of restricted securities eligible for resale (i) to qualified
institutional purchasers pursuant to Rule 144A under the Securities Act of
1933 or (ii) commercial paper issued pursuant to Section 4(2) under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines established by the Board of Trustees. If there is a lack of trading
interest in particular Rule 144A securities, the Portfolio's holdings of those
securities may be illiquid. There may be delays in selling illiquid securities
and sales may be made at less favorable prices.
CORPORATE REORGANIZATIONS
The Portfolio may invest a portion of its assets in securities for which a
tender or exchange offer has been made or announced if, in the judgment of the
Adviser, there is a reasonable prospect of capital appreciation significantly
greater than the added portfolio turnover expenses inherent in the short term
nature of such transactions. The primary risk is that such offers or proposals
may not be consummated within the time and under the terms contemplated at the
time of the investment, in which case, unless such offers or proposals are
replaced by equivalent or increased offers of proposals which are consummated,
the Portfolio may sustain a loss.
OTHER INVESTMENT COMPANIES
The Portfolio may invest up to 10% of its total assets in other investment
companies. Not more than 5% of the Portfolio's total assets may be invested in
any one investment company and not more than 3% of the Portfolio's assets may
be invested in the voting securities of any one investment company. In
addition to the advisory fees and other expenses the Portfolio bears directly
in connection with its own operations, as a shareholder of another investment
company, the Portfolio would bear its pro rata portion of the other investment
company's advisory fees and other expenses. As such, the Portfolio's
shareholders would indirectly bear the expenses of the Portfolio and the other
investment company, some or all of which would be duplicative.
PORTFOLIO TURNOVER
The Adviser manages the Portfolio without regard generally to restrictions
on portfolio turnover, except those imposed by provisions of the federal tax
laws regarding short-term trading. Generally, the Portfolio will not trade for
short-term profits, but when circumstances warrant, investments may be sold
without regard to the length of time held. It is expected that the annual
turnover rate for the Portfolio will not exceed 80%.
A high rate of portfolio turnover may involve correspondingly greater
brokerage and portfolio trading costs which are paid by the Portfolio. In
addition, higher rates of portfolio turnover may result in the realization of
substantial net capital gains. To the extent net short-term capital gains are
realized, any distributions resulting from such gains are considered ordinary
income for Federal income tax purposes. See "Dividends, Capital Gain
Distributions, and Taxes."
INVESTMENT LIMITATIONS
The Portfolio has adopted certain limitations designed to reduce its
exposure to specific situations. Some of these limitations are:
(a) with respect to 75% of its assets, the Portfolio will not invest more
than 5% of its total assets in the securities of any single issuer (other
than obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities);
(b) with respect to 75% of its assets, the Portfolio will not purchase
more than 10% of any class of the outstanding voting securities of any
issuer;
6
<PAGE>
(c) the Portfolio will not invest more than 5% of its assets in the
securities of issuers (other than securities issued or guaranteed by the
U.S. or foreign governments or their political subdivisions) that have
(with predecessors) a record of less than 3 years of continuous operation;
(d) the Portfolio will not acquire any securities of companies within one
industry if, as a result of such acquisition, more than 25% of the value of
the Portfolio's total assets would be invested in securities of companies
within such industry; provided, however, that there shall be no limitation
on the purchase of obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, or instruments issued by banks when the
Portfolio adopts a temporary defensive position;
(e) the Portfolio will not make loans except (i) by purchasing debt
securities in accordance with its investment objective and policies or
entering into repurchase agreements and (ii) by lending its portfolio
securities to banks, brokers, dealers and other financial institutions so
long as such loans are not inconsistent with the Investment Company Act of
1940, as amended, or the rules and regulations or interpretations of the
Commission thereunder;
(f) the Portfolio will not borrow, except from banks as a temporary
measure for extraordinary or emergency purposes (not for leveraging or
investment). In this situation, the Portfolio may not (1) borrow more than
33 1/3% of its gross assets and (2) cannot buy additional securities if it
borrows more than 5% of its total assets;
(g) the Portfolio will not invest its assets in securities of any
investment company, except by purchase in the open market involving only
customary brokers' commissions or in connection with mergers, acquisitions
of assets or consolidations and except as may otherwise be permitted by the
Investment Company Act of 1940, as amended; and
(h) the Portfolio will not issue senior securities, except that this
limitation shall not apply to: (i) evidence indebtedness which the
Portfolio is permitted to incur; (ii) shares of the separate classes or
series of the Fund; or (iii) collateral arrangements with respect to
currency-related contracts, futures contracts, options or other permitted
investments, including deposits of initial and variation margin.
Limitations (a), (b), (d), (e), (f.1) and (h) and certain other limitations
described in the Statement of Additional Information are fundamental and may
be changed only with the approval of the holders of a majority of the
outstanding voting securities of the Portfolio (see "General Information--
Shareholder Approval"). The other investment limitations described here and in
the Statement of Additional Information are not fundamental policies and the
Board of Trustees may change them without shareholder approval. If a
percentage limitation on investment or utilization of assets as set forth
above is adhered to at the time an investment is made, except for borrowing, a
later change in percentage resulting from changes in the value or total cost
of the Portfolio's assets will not be considered a violation of the
restriction, and the sale of securities will not be required.
INVESTMENT SUITABILITY
The Portfolio has been designed primarily for the investments of
institutional investors.
PURCHASE OF SHARES
Shares of the Portfolio may be purchased at the net asset value per share
next determined after receipt of the purchase order. The Portfolio determines
net asset value at the normal close of trading of the New York Stock Exchange
("NYSE") (currently 4:00 P.M. Eastern Time) each day that the NYSE is open for
business. See "Valuation of Shares."
7
<PAGE>
INITIAL INVESTMENTS
BY MAIL. Subject to acceptance by the Portfolio, an account may be opened by
completing and signing an Account Registration Form, and mailing it, together
with a check ($10,000 minimum) payable to LKCM Equity Portfolio, to:
LKCM Equity Portfolio
c/o Chase Global Funds Services Company
P.O. Box 2798
Boston, MA 02208-2798
Subject to acceptance by the Portfolio, payment for the purchase of shares
received by mail will be credited to your account at the net asset value per
share of the Portfolio next determined after receipt. Such payment need not be
converted into Federal Funds (monies credited to the Portfolio's Custodian
Bank by a Federal Reserve Bank) before acceptance by the Portfolio. Please
note that purchases made by check are not permitted to be redeemed until
payment of the purchase has been collected, which may take up to fifteen
business days after purchase.
BY WIRE. Subject to acceptance by the Portfolio, shares of the Portfolio may
be purchased by wiring Federal Funds ($10,000 minimum) to the Portfolio's
Custodian Bank. To make an initial purchase by wire, investors should use the
following procedures.
. Telephone the Portfolio at (800) 688-LKCM (option 1) for
instructions and to receive an account number.
. Instruct a Federal Reserve System member bank to wire funds to:
THE CHASE MANHATTAN BANK
One Chase Manhattan Plaza
New York, NY 10081-1000
ABA #021000021
DDA #910-2-733095
Wire Reference Control Number
Account Registration
(including account number)
. Notify the Portfolio by calling the telephone number listed above
prior to 4:00 P.M. (Eastern Time) on the wire date.
. Promptly complete and mail an Account Registration Form to the
address shown above under purchases by mail.
Federal Funds purchases will be accepted only on a day on which the
Portfolio and the Custodian are open for business.
OTHER PURCHASE INFORMATION
Shares of the Portfolio may be purchased by customers of certain banks
acting as their Service Agent. Service Agents will have established a
shareholder servicing relationship with the Fund on behalf of their customers
or entered into selling agreements with the Distributor. Service Agents may
impose additional or different conditions or other account fees on the
purchase and redemption of Portfolio shares. Each Service Agent is responsible
for transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Shareholders who are customers of Service Agents should consult
their Service Agent for information regarding these fees and conditions.
8
<PAGE>
Service Agents may enter confirmed purchase orders on behalf of their
customers. If you buy shares of the Portfolio in this manner, the Service
Agent must receive your investment order before the close of trading on the
New York Stock Exchange ("NYSE"), and transmit it to the Fund's Transfer Agent
prior to the close of the Transfer Agent's business day and to the Distributor
to receive that day's share price. Proper payment for the order must be
received by the Transfer Agent no later than the time when Portfolio is priced
on the following business day. Service Agents are responsible to their
customers, the Fund and the Fund's Distributor for timely transmission of all
subscription and redemption requests, investment information, documentation
and money.
Persons purchasing through a Service Agent should consult with their Service
Agent for specific information with respect to purchases and redemptions
because certain procedures described in other sections may not be available.
SUBSEQUENT INVESTMENTS
Additional investments may be made at any time (minimum subsequent
investments $1,000) by mailing a check payable to LKCM Equity Portfolio to the
address noted under "Initial Investments-By Mail." Additional investments may
also be made by instructing your bank to wire monies as outlined above and
notifying the Portfolio prior to 4:00 P.M. (Eastern Time) on the wire date.
OTHER INFORMATION
The Portfolio reserves the right, in its sole discretion, to suspend the
offering of its shares, to reject any purchase order, or to waive any minimum
investment requirements when, in the judgment of management, such action is in
the best interests of the Portfolio.
Purchases of the Portfolio's shares will be made in full and fractional
shares of the Portfolio calculated to three decimal places. In the interest of
economy and convenience, certificates for shares will not be issued except at
the written request of the shareholder. Certificates for fractional shares,
however, will not be issued.
AUTOMATIC INVESTMENT PROGRAM
The Automatic Investment Program permits investors who own shares of the
Fund with a value of $10,000 or more, to purchase shares (minimum of $100 per
Fund per transaction) at regular intervals selected by the investor. The
minimum investment for an Automatic Investment Program account is $100 per
Fund. Provided the investor's financial institution allows automatic
withdrawals, shares are purchased by transferring funds from an investor's
checking, bank money market or NOW account designated by the investor. At the
investor's option, the account designated will be debited in the specified
amount, and shares will be purchased, once a month, on either the first or
fifteenth day, or twice a month on both days.
The Automatic Investment Program is one means by which an investor may use
"Dollar Cost Averaging" in making investments. Instead of trying to time
market performance, a fixed dollar amount is invested in shares at
predetermined intervals. This may help investors to reduce their average cost
per share because the agreed upon fixed investment amount allows more shares
to be purchased during periods of lower share prices and fewer shares during
periods of higher prices. In order to be effective, Dollar Cost Averaging
should usually be followed on a sustained, consistent basis. Investors should
be aware, however, that shares bought using Dollar Cost Averaging are
purchased without regard to their price on the day of investment or market
trends. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his
or her shares at a price which is lower than their purchase price.
To establish an Automatic Investment account permitting investors to use the
Dollar Cost Averaging investment method described above, an investor must
complete the supplemental application contained in this Prospectus and mail it
to Chase Global Funds Services Company ("CGFSC"). An investor may cancel his
or her participation in this Program or change the amount of purchase at any
time by mailing written notification to
9
<PAGE>
CGFSC, P.O. Box 2798, Boston, MA 02208-2798 and notification will be effective
three business days following receipt. LKCM Fund may modify or terminate this
privilege at any time or charge a service fee, although no such fee currently
is contemplated. An investor may also implement the Dollar Cost Averaging
method on his or her own initiative or through other entities.
REDEMPTION OF SHARES
Shares of the Portfolio may be redeemed by mail, or, if authorized, by
telephone. No charge is made for redemptions. The value of shares redeemed may
be more or less than the purchase price, depending on the market value of the
investment securities held by the Portfolio.
BY MAIL
The Portfolio will redeem its shares at the net asset value next determined
after the request is received in "good order" (as defined below). On days that
the NYSE is open for business, the net asset value per share of the Portfolio
is determined at the normal close of trading of the NYSE (currently 4:00 P.M.
Eastern Time). Redemption requests should be sent to LKCM Equity Portfolio,
c/o Chase Global Funds Services Company, P.O. Box 2798, Boston, MA 02208-2798.
To be in "good order", redemption requests must include the following
documentation:
(a) The share certificates, if issued;
(b) A letter of instruction, if required, or a stock assignment
specifying the number of shares or dollar amount to be redeemed, signed by
all registered owners of the shares in the exact names in which they are
registered;
(c) Any required signature guarantees (see "Signature Guarantees" below);
and
(d) Other supporting legal documents, if required, in the case of
estates, trusts, guardianships, custodianship, corporations, pension and
profit sharing plans, and other organizations.
SIGNATURE GUARANTEES. To protect your account, the Portfolio, and the
Administrator from fraud, signature guarantees are required to enable the
Portfolio to verify the identity of the person who has authorized a redemption
from an account. Signature guarantees are required for (1) redemptions where
the proceeds are to be sent to someone other than the registered shareowner(s)
or the registered address, and (2) share transfer requests. Please contact the
Portfolio at (800) 688-LKCM (option 1) for further details.
BY TELEPHONE OR WIRE
Investors who have so indicated on the Account Registration Form, or have
subsequently arranged in writing to do so, may redeem Shares by calling the
Portfolio and requesting that the redemption proceeds be mailed to the primary
registration address or wired directly to the investor's account at any
commercial bank in the United States. The redemption proceeds for an investor
must be paid to the same bank and account as designated on the Account
Registration Form or in written instructions subsequently received by the
Portfolio.
In order to arrange for redemption by wire or telephone after an account has
been opened or to change the bank or account designated to receive redemption
proceeds, an investor must send a written request to the Portfolio at the
address listed above under "Redemption of Shares--By Mail." Such requests must
be signed by the investor, with signatures guaranteed (see "Redemption of
Shares--By Mail" above, for details regarding signature guarantees). Further
documentation may be requested.
The Portfolio reserves the right to refuse a wire or telephone redemption if
it is believed advisable to do so. Procedures for redeeming shares by wire or
telephone may be modified or terminated at any time. The Portfolio and its
transfer agent will not be liable for any loss, liability, cost or expense for
acting upon telephone
10
<PAGE>
instructions that are reasonably believed to be genuine. In attempting to
confirm that telephone instructions are genuine, the Portfolio will use such
procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration. To the
extent that the Portfolio fails to use reasonable procedures as a basis for
its belief, it may be liable for instructions that prove to be fraudulent or
unauthorized.
OTHER REDEMPTION INFORMATION
Payment of the redemption proceeds will ordinarily be made within seven days
after receipt of a redemption request in "good order" (as defined above under
"Redemption of Shares--By Mail"). Redemption proceeds for shares of the
Portfolio purchased by check may not be distributed until payment for the
purchase has been collected, which may take up to fifteen business days. Such
funds are invested and earn dividends during this holding period. Shareholders
can avoid this delay by utilizing the wire purchase option.
Due to the relatively high cost of maintaining small accounts, the Portfolio
reserves the right to redeem shares in any account for their then-current
value (which will be promptly paid to the investor) if at any time, due to
redemption by the investor, the shares in the account do not have a value of
at least $1,000. A shareholder will receive advance notice of a mandatory
redemption and will be given at least 30 days to bring the value of its
account up to at least $1,000.
The Portfolio may suspend the right of redemption or postpone the date at
times when the NYSE is closed (other than customary weekend and holiday
closings) or under any emergency circumstances as determined by the Securities
and Exchange Commission.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Portfolio to make payment
wholly or partly in cash, the Portfolio may pay the redemption proceeds in
whole or in part by a distribution in-kind of readily marketable securities
held by the Portfolio in lieu of cash in conformity with applicable rules of
the Securities and Exchange Commission. Investors may incur brokerage charges
on the sale of portfolio securities so received in payment of redemptions.
SHAREHOLDER SERVICES
RETIREMENT PLANS
The Portfolio makes available individual retirement account plans ("IRAs"),
including Simplified Employee Pension Plan ("SEP") IRAs and IRA "Rollover
Accounts," offered by the Chase Manhattan Bank. Detailed information on these
plans is available from the Portfolio by calling the Portfolio at (800) 688-
LKCM (option 1). Investors should consult with their own tax advisers before
establishing a retirement plan.
TRANSFER OF REGISTRATION
The registration of Portfolio shares may be transferred by writing to the
Portfolio, c/o Chase Global Funds Services Company, P.O. Box 2798, Boston, MA
02208-2798. As in the case of redemptions, the written request must be
received in "good order" as defined above under "Redemption of Shares--By
Mail."
VALUATION OF SHARES
Net asset value per share is computed by dividing the total value of the
investments and other assets of the Portfolio, less any liabilities, by the
total outstanding shares of the Portfolio. The net asset value per share is
determined as of the normal close of the New York Stock Exchange ("NYSE")
(currently 4:00 p.m. Eastern Time) on each day that the NYSE is open for
business.
11
<PAGE>
Securities listed on a U.S. securities exchange or NASDAQ for which market
quotations are readily available are valued at the last quoted sale price on
the day the valuation is made. Price information on listed securities is taken
from the exchange where the security is primarily traded. Unlisted U.S.
securities and listed U.S. securities not traded on the valuation date for
which market quotations are readily available are valued at the mean of the
most recent quoted bid and asked price. Securities listed on a foreign
exchange for which market quotations are readily available are valued at the
latest quoted sales price available before the time when assets are valued.
Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using net foreign exchange quotations received from
independent dealers. Unlisted foreign securities are valued at fair value as
determined in accordance with policies established by the Board of Trustees.
Fixed-income securities (other than obligations having a maturity of 60 days
or less) are normally valued on the basis of quotes obtained from pricing
services, which take into account appropriate factors such as institutional-
sized trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data.
Fixed-income securities purchased with remaining maturities of 60 days or less
are valued at amortized cost if it reflects fair value. In the event that
amortized cost does not reflect market, market prices as determined above will
be used. Other assets and securities for which no quotations are readily
available (including restricted securities) will be valued in good faith at
fair value using methods determined by the Board of Trustees.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Portfolio intends to pay dividends and net capital gains distributions,
if any, on an annual basis. Dividends and capital gains distributions, if any,
will automatically be paid in additional shares of the Portfolio unless the
shareholder elects otherwise. Such election must be made in writing to the
Portfolio.
TAXES
The Portfolio intends to qualify for taxation as a "regulated investment
company" under the Internal Revenue Code so that the Portfolio will not be
subject to Federal income tax to the extent it distributes its income to its
shareholders. Dividends, either in cash or reinvested in shares, paid by the
Portfolio from net investment income will be taxable to shareholders as
ordinary income, and will qualify, in part, for the 70% dividends received
deduction for corporations, but the portion of the dividends so qualified
depends on the aggregate taxable qualifying dividend income received by the
Portfolio from domestic (U.S.) sources.
Whether paid in cash or additional shares of the Portfolio, and regardless
of the length of time the shares in the Portfolio have been owned by the
shareholder, the Portfolio's distributions of long-term capital gains are
taxable to shareholders as long-term capital gains. Capital gains
distributions are not eligible for the dividends received deduction for
corporations. Shareholders are notified annually by the Portfolio as to
Federal tax status of dividends and distributions paid by the Portfolio.
Any dividends and capital gains distributions declared in December by the
Portfolio will be deemed to have been paid by the Portfolio and received by
shareholders on the record date provided that the dividends are paid before
February 1st of the following year.
Redemptions of shares in the Portfolio are taxable events for Federal income
tax purposes. Individual shareholders may also be subject to state and
municipal taxes on such redemptions.
The Portfolio is required by Federal law to withhold 31% of reportable
payments (which may include dividends, capital gains distributions, and
redemptions) paid to shareholders who have not complied with IRS regulations.
In order to avoid this withholding requirement, you must certify on the
Account Registration Form
12
<PAGE>
that your Social Security or Taxpayer Identification Number provided is
correct and that you are not currently subject to back-up withholding, or that
you are exempt from back-up withholding.
Dividends and distributions declared by the Portfolio may also be subject to
state and local taxes.
The foregoing summarizes some of the important tax considerations generally
affecting the Portfolio and its shareholders. Potential investors in the
Portfolio should consult their tax advisers with specific reference to their
own tax situation.
MANAGEMENT
INVESTMENT ADVISER
Luther King Capital Management Corporation (the "Adviser") serves as the
investment adviser to the Portfolio. The Adviser was founded in 1979 and
provides investment counseling services to employee benefit plans, endowment
funds, foundations, and high net-worth individuals. As of the date of this
Prospectus, the Adviser had in excess of $4.5 billion in assets under
management. The Adviser has substantial experience as an investment adviser.
The Adviser also has experience as the adviser to common trust funds.
Under an Investment Advisory Agreement ("Agreement") with the Portfolio, the
Adviser, subject to the control and supervision of the Board of Trustees and
in conformance with the stated investment objective and policies of the
Portfolio, manages the investment and reinvestment of the assets of the
Portfolio. In this regard, it is the responsibility of the Adviser to make
investment decisions for the Portfolio and to place the Portfolio's purchase
and sales orders. As compensation for the services rendered by the Adviser
under the Agreement, the Portfolio pays the Adviser an advisory fee calculated
by applying a quarterly rate, equal on an annual basis to .70% of the
Portfolio's average daily net assets for the quarter. However, until further
notice, the Adviser has voluntarily agreed to waive its advisory fees and
reimburse expenses to the extent necessary to keep the Total Operating
Expenses from exceeding .80%.
Certain managed account clients of the Adviser may purchase shares of the
Portfolio. To avoid the imposition of duplicative fees, the Adviser may make
adjustments in the management fees charged separately by the Adviser to these
clients to offset the generally higher level of management fees and expenses
resulting from a client's investment in the Portfolio.
PORTFOLIO MANAGER
Luther King is primarily responsible for the day-to-day management of the
Portfolio. Mr. King has been President, Principal, and Portfolio Manager of
the Adviser since 1979.
ADMINISTRATOR
Chase Global Funds Services Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank ("Chase Manhattan") provides the Portfolio with
administrative, fund accounting, dividend disbursing and transfer agency
services pursuant to a Fund Administration Agreement. The services under this
Agreement are subject to the supervision of the Trustees and officers, and
include day-to-day administration of matters necessary to the Portfolio's
operations, maintenance of its records, preparation of reports, supervision of
the Portfolio's arrangements with its custodians, compliance testing of the
Portfolio's activities, and preparation of periodic updates of the
registration statement under federal and state laws. The Administrator is
located at 73 Tremont Street, Boston, Massachusetts 02108. Pursuant to the
Fund Administration Agreement and a Custody Agreement under which Chase
Manhattan serves as custodian of the Portfolio's assets, the Portfolio pays
the Administrator an aggregate monthly fee which on an annualized basis
equals: 0.185 of 1% of the first $75 million of the net assets of the
Portfolio, plus 0.135 of 1% of the next $75 million of the net assets of the
Portfolio, plus 0.095 of
13
<PAGE>
1% of the net assets of the Portfolio in excess of $150 million and custody
fees (with a minimum annual fee of $100,000 plus .015 of 1% of average daily
net assets).
From time to time, subject to review by the Board of Trustees, the
Administrator may make certain adjustments to the fees it is entitled to
receive from the Portfolio pursuant to its Fund Administration Agreement.
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for the management of the
Portfolio. The officers of the Portfolio conduct and supervise its daily
business. Each Trustee, who is not also an officer or affiliated person,
receives an annual fee plus a meeting fee for each meeting attended and is
reimbursed for expenses incurred in attending Board meetings. Trustees who are
also officers or affiliated persons receive no remuneration for their service
as Trustees. The Portfolio's officers and employees are paid by the Adviser or
the Administrator.
The following is a list of the Trustees and principal executive officers of
the Portfolio and a brief statement of their present positions and principal
occupations during the past five years:
LUTHER KING, JR., Chairman of the Board of Trustees and President and
Manager of the Portfolio; President, Luther King Capital Management
Corporation.
H. KIRK DOWNEY, Trustee of the Portfolio; Dean, M. J. Neeley School of
Business, Texas Christian University Business School.
EARLE A. SHIELDS, JR., Trustee of the Portfolio; Consultant; formerly:
Consultant to NASDAQ Corp.; and Vice President Merrill Lynch & Co., Inc.
DISTRIBUTOR
Shares of the Portfolio are distributed through Funds Distributor, Inc. (the
"Distributor"). The Distributor is a broker-dealer registered with the
Securities and Exchange Commission. Jacqui Brownfield, an employee of the
Adviser and an officer of the Fund, will act as registered representative of
the Distributor in connection with the sale of shares of the Portfolio.
PORTFOLIO TRANSACTIONS
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolio and directs the Adviser to use its best efforts
to obtain the best available price and most favorable execution with respect
to all transactions for the Portfolio.
It is not the Portfolio's practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through
intermediary broker-dealers. However, the Adviser may place portfolio orders
with qualified broker-dealers who recommend the Portfolio or who act as agents
in the purchase of shares of the Portfolio for their clients.
Some securities considered for investment by the Portfolio may also be
appropriate for other clients served by the Adviser. If purchase or sale of
securities consistent with the investment policies of the Portfolio and one or
more of these other clients served by the Adviser is considered at or about
the same time, transactions in such securities will be allocated among the
Portfolio and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Board of Trustees.
14
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Portfolio is a series of the LKCM Fund (the "Fund") which was
established under Delaware law by a Declaration of Trust dated February 10,
1994. The Fund is authorized to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited number of series of
shares. Currently, the Fund has authorized the shares of two series, one of
which is the shares of the Portfolio. The shares have non-cumulative voting
rights, which means that the holders of more than 50% of the shares voting for
the election of Trustees can elect 100% of the Trustees if they choose to do
so. A shareholder is entitled to one vote for each full share held (and a
fractional vote for each fractional share held), then standing in his or her
name on the books of the Portfolio.
The Portfolio is not required, and does not intend, to hold regular annual
shareholder meetings. The Portfolio may hold special meetings for
consideration of proposals requiring shareholder approval, such as changing
fundamental policies or upon the written request of 10% of the Portfolio's
shares to replace its Trustees. The Portfolio will assist in shareholder
communication in such matters to the extent required by law.
SHAREHOLDER APPROVAL
Other than election of Trustees, which is by plurality, any matter for which
shareholder approval is required by the Investment Company Act of 1940, as
amended, requires the affirmative vote of at least a majority of the
outstanding voting securities of the Portfolio or the Fund at a meeting called
for the purpose of considering such approval. A majority of the Portfolio's
outstanding voting securities is the lesser of (1) 67% of the shares
represented at a meeting at which more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the outstanding shares.
CUSTODIAN
The Chase Manhattan Bank serves as custodian of the Portfolio's assets.
DIVIDEND DISBURSING AND TRANSFER AGENT
Chase Global Funds Services Company, a subsidiary of The Chase Manhattan
Bank, 73 Tremont Street, Boston, MA 02108, acts as Dividend Disbursing and
Transfer Agent for the Portfolio.
REPORTS
Shareholders receive semi-annual and annual financial statements. Annual
financial statements are audited by Deloitte & Touche, LLP, independent
auditors, whose selection is ratified by shareholders.
LITIGATION
The Portfolio is not involved in any litigation.
15
<PAGE>
LKCM EQUITY PORTFOLIO
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
800-688-LKCM
- -------------------------------------------------------------------------------
PROSPECTUS
JUNE 28, 1996
Investment Adviser
LUTHER KING CAPITAL MANAGEMENT CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Estimated Portfolio Expenses....... 2
Prospectus Summary................. 3
Performance Information............ 4
Adviser's Investment Philosophy.... 4
Investment Objective and Policies.. 4
Description of Securities and Other
Investment Policies............... 5
Investment Limitations............. 6
Investment Suitability............. 7
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Purchase of Shares........ 7
Redemption of Shares...... 10
Shareholder Services...... 11
Valuation of Shares....... 11
Dividends, Capital Gains
Distributions and Taxes.. 12
Management................ 13
Portfolio Transactions.... 14
General Information....... 15
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION, IN CONNECTION WITH THE OFFERING MADE BY THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR ITS REPRESENTATIONS MUST
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PORTFOLIO OR THE DISTRIBUTOR.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE PORTFOLIO OR THE
DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
<PAGE>
LKCM EQUITY PORTFOLIO
STATEMENT OF NET ASSETS
May 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (80.4%)
- -------------------------------------------------------------------------------
BASIC RESOURCES (4.2%)
Du Pont (E.I.) De Nemours & Co. 5,000 $ 399
Kimberly-Clark Corp. 8,000 583
Willamette Industries, Inc. 6,000 360
---------------
1,342
- -------------------------------------------------------------------------------
BEVERAGE & PERSONAL PRODUCTS (4.1%)
Estee Lauder Cos., Class A 15,000 570
PepsiCo, Inc. 22,000 731
---------------
1,301
- -------------------------------------------------------------------------------
CONSUMER & COMMERCIAL SERVICES (4.6%)
Belo (A.H.) Corp., Class A 10,000 382
Gannett Company, Inc. 6,700 467
Manpower, Inc. 16,000 616
---------------
1,465
- -------------------------------------------------------------------------------
CONSUMER DURABLES (6.7%)
Centex Corp. 18,000 542
Colgate-Palmolive Co. 7,000 551
Sherwin-Williams Co. 10,500 471
Westinghouse Electric Corp. 30,000 551
---------------
2,115
- -------------------------------------------------------------------------------
ENERGY (10.1%)
Amoco Corp. 7,000 507
Exxon Corp. 5,000 424
Mobil Corp. 4,500 508
Nabors Industries, Inc. 37,000 569
Noble Affiliates, Inc. 16,000 542
Schlumberger Ltd. 8,000 667
---------------
3,217
- -------------------------------------------------------------------------------
ENVIRONMENT (1.7%)
WMX Technologies, Inc. 15,000 529
- -------------------------------------------------------------------------------
ENGINEERING (1.4%)
Jacobs Engineering Group 17,000 457
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (7.9%)
American International Group, Inc. 5,500 518
Cullen/Frost Bankers, Inc. 11,000 566
Donaldson, Lufkin & Jenrette, Inc. 11,000 351
Federal National Mortgage Association 15,200 469
Marsh & McLennan Companies, Inc. 6,600 618
---------------
2,522
- -------------------------------------------------------------------------------
FOOD, TOBACCO & OTHER (1.9%)
Heinz (H.J.) Co. 18,000 598
- -------------------------------------------------------------------------------
HEALTH CARE (12.1%)
Bard (C. R.), Inc. 17,000 559
Baxter International, Inc. 14,000 619
Genzyme Corp. - General Division 10,000 583
Johnson & Johnson 7,000 682
Pharmacia & Upjohn, Inc. 13,000 531
Schering-Plough Corp. 8,000 469
Steris Corp. 11,500 394
---------------
3,837
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
HEAVY INDUSTRY / TRANSPORTATION (4.2%)
Centex Construction Products, Inc. 6,000 $ 85
Kirby Corp. 24,000 423
Raytheon Corp. 10,000 533
Union Pacific Corp. 4,000 281
---------------
1,322
- -------------------------------------------------------------------------------
MANUFACTURING (2.4%)
Eastman Kodak Co. 7,500 558
Keystone International, Inc. 10,000 219
---------------
777
- -------------------------------------------------------------------------------
RETAIL (4.2%)
Home Depot, Inc. 15,600 798
Tandy Corp. 10,000 540
---------------
1,338
- -------------------------------------------------------------------------------
TECHNOLOGY (13.9%)
AMP, Inc. 8,000 337
Airtouch Communications, Inc. 15,500 494
Cisco Systems, Inc. 3,000 164
General Electric Co. 8,000 662
General Motors Corp., Class E 5,000 282
Hewlett-Packard Co. 5,000 534
Intel Corp. 5,000 378
Lucent Technologies, Inc. 25,000 950
Motorola, Inc. 9,500 634
---------------
4,435
- -------------------------------------------------------------------------------
UTILITIES (1.0%)
Alltel Corp. 10,000 315
- -------------------------------------------------------------------------------
TOTAL COMMON STOCK (COST $23,868) 25,570
- -------------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -------------------------------------------------------------------------------
<S> <C>
SHORT TERM INVESTMENT (19.5%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (19.5%)
Chase Securities, Inc., 5.10%, dated
5/31/96, due 6/3/96, to be repurchased
at $6,214, collateralized by $6,250
U.S. Treasury Bonds, 6.00%, due 8/31/97,
valued at $6,20 (COST $6,211) $ 6,211 6,211
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.9%) (COST $30,079) 31,781
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.1%)
- -------------------------------------------------------------------------------
Cash 1
Dividends Receivable 38
Interest Receivable 3
Other Assets 7
Payable for Administrative Fees (12)
Payable for Investment Advisory Fees (9)
Other Liabilities (12)
---------------
16
- -------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 2,968,167 outstanding shares of beneficial
interest (unlimited authorization, no par value) $31,797
===============================================================================
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE $10.71
===============================================================================
</TABLE>
+ - See Note A to Financial Statements.
The accompanying notes are an integral part of the financial statements.
<PAGE>
LKCM EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 3, 1996**
TO MAY 31,
1996
(In Thousands) (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends......................................... $ 130
Interest.......................................... 121
- --------------------------------------------------------------------------------
TOTAL INCOME.................................... 251
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees - Note B
Basic Fee....................................... $76
Less: Fee Waived................................ (63) 13
------
Administrative Fees - Note C...................... 48
Trustees' Fees - Note E........................... 4
Other Expenses.................................... 23
- --------------------------------------------------------------------------------
Total Expenses.................................. 88
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME.......................... 163
- --------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS..................... 140
NET CHANGE IN UNREALIZED APPRECIATION
ON INVESTMENTS.................................... 1,702
- --------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION........................... 1,842
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS......................... $ 2,005
================================================================================
** Commencement of operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
LKCM EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 3, 1996**
TO MAY 31,
1996
(In Thousands) (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income................................... $ 163
Net Realized Gain....................................... 140
Net Change in Unrealized Appreciation................... 1,702
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations. 2,005
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:(1)
Issued - Regular........................................ 30,774
Redeemed................................................ (982)
- --------------------------------------------------------------------------------
Net Increase from Capital Share Transactions......... 29,792
- --------------------------------------------------------------------------------
Total Increase......................................... 31,797
Net Assets:
Beginning of Period.................................... -
- --------------------------------------------------------------------------------
End of Period (2)...................................... $ 31,797
================================================================================
(1) Shares Issued and Redeemed:
Shares Issued........................................ 3,065
Shares Redeemed...................................... (97)
--------------
2,968
--------------
================================================================================
(2) Net Assets Consist of:
Paid in Capital...................................... $ 29,792
Undistributed Net Investment Income.................. 163
Accumulated Net Realized Gain........................ 140
Unrealized Appreciation.............................. 1,702
--------------
$ 31,797
--------------
================================================================================
** Commencement of Operations.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
LKCM EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
JANUARY 3,
1996** TO
MAY 31,
1996
(UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+....................................... 0.05
Net Realized and Unrealized Gain
on Investments............................................ 0.66
- --------------------------------------------------------------------------------
Total From Investment Operations.......................... 0.71
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $10.71
================================================================================
TOTAL RETURN++.................................................... 7.10 %
================================================================================
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)............................. $31,797
Ratio of Expenses to
Average Net Assets............................................ 0.80 %*
Ratio of Net Investment
Income to Average Net Assets.................................. 1.51 %*
Portfolio Turnover Rate........................................... 39 %
Average Commission Rate........................................... $0.0605
- --------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Commencement of Operations.
+ Net of voluntarily waived fees of $0.02 per share for the period ended May
31, 1996.
++ Total return would have been lower had the adviser not waived or reimbursed
certain expenses during the period ended May 31, 1996.
The accompanying notes are an integral part of the financial statements.
<PAGE>
LKCM FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
LKCM Fund (the "Fund") was established under Delaware law by a Declaration of
Trust dated February 10, 1994 and is registered under the Investment Company Act
of 1940 as an open-end, management investment company. The LKCM Equity Portfolio
(the "Portfolio"), a diversified portfolio of the Fund, commenced operations on
January 3, 1996. At May 31, 1996, the Fund was comprised of two active
Portfolios. The financial statements of the LKCM Small Cap Equity Portfolio is
presented separately.
A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Portfolio
in the preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates
1. SECURITY VALUATION: Securities listed on a U.S. securities
exchange or NASDAQ for which market quotations are readily available
are valued at the last quoted sale price on the day the valuation is
made. Price information on listed securities is taken from the
exchange where the security is primarily traded. Unlisted U.S.
securities and listed U.S. securities not traded on the valuation date
for which market quotations are readily available are valued at the
mean of the most recent quoted bid and asked price. Securities listed
on a foreign exchange for which market quotations are readily
available are valued at the latest quoted sales price available before
the time when assets are valued. Fixed-income securities (other than
obligations having a maturity of 60 days or less) are normally valued
on the basis of quotes obtained from pricing services. Fixed-income
securities purchased with remaining maturities of 60 days or less are
valued at amortized cost if it reflects fair value. Other assets and
securities for which no quotations are readily available (including
restricted securities) will be valued in good faith at fair value
using methods determined by the Board of Trustees.
2. FEDERAL INCOME TAXES: It is the Portfolio's intention to qualify
for taxation as a regulated investment company under the Internal
Revenue Code so that the Portfolio will not be subject to Federal
income tax to the extent it distributes its income to its
shareholders.
At May 31, 1996, the Portfolio's cost for Federal income tax purposes
was approximately $30,079,000. Unrealized appreciation for Federal
income tax purposes aggregated approximately $1,702,000 of which
$1,972,000 related to appreciated securities and $270,000 related to
depreciated securities.
3. REPURCHASE AGREEMENTS: The Portfolio may enter into repurchase
agreements with brokers, dealers or banks that meet the credit
guidelines established by the Board of Trustees. In a repurchase
agreement, the Portfolio buys a security from a seller that has agreed
to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The term of
these agreements is usually from overnight to one week and never
exceeds one year. A repurchase agreement may be viewed as a fully
collateralized loan of money by the Portfolio to the seller. The
Portfolio always receives securities as collateral with a market value
at least equal to the purchase price, including accrued interest, and
this value is maintained during the term of the agreement. If the
seller defaults and the collateral value declines, the Portfolio might
incur a loss. If bankruptcy proceedings are commenced with respect to
the seller, the Portfolio's realization upon the collateral may be
delayed or limited.
4. DISTRIBUTION TO SHAREHOLDERS: The Portfolio intends to pay
dividends and net capital gains distributions, if any, on an annual
basis. All distributions will be recorded on ex-dividend date for book
purposes.
The amount and character of income and capital gain distributions are
determined in accordance with Federal income tax regulations which may
differ from generally accepted accounting principles.
<PAGE>
LKCM FUND
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains
and losses on the sale of investment securities are those of specific
securities sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recognized using the
accrual basis.
B. ADVISORY SERVICES: Luther King Capital Management Corporation (the
"Adviser"), serves as the investment adviser to the Portfolio. Under an
Investment Advisory Agreement (the "Agreement"), the Adviser receives a fee
calculated by applying a quarterly rate, equal on an annual basis to .70% of the
Portfolio's average daily net assets for the quarter. Until further notice, the
Adviser has voluntarily agreed to waive its advisory fees and reimburse expenses
to the extent necessary to keep total operating expenses from exceeding .80%.
C. ADMINISTRATIVE SERVICES: Chase Global Services Company (the
"Administrator"), a subsidiary of The Chase Manhattan Bank, N.A., ("Chase"),
provides the Fund with administrative, fund accounting, divided disbursing and
transfer agency services pursuant to a fund administration agreement. Chase
provides the Fund with custodial services pursuant to a custodial agreement.
Pursuant to the fund administration agreement and a custody agreement, the Fund
pays the Administrator an aggregate monthly fee, which on an annualized basis
equals .185% of the first $75 million of the net assets of the Fund, plus .135%
of the next $75 million of the net assets of the Fund, plus .095% of the net
assets of the Fund in excess of $150 million (with a graduated minimum annual
fee which rises from $100,000 in the first year to $140,000 in subsequent years,
plus .015% of average daily net assets of the Portfolio).
D. PURCHASES AND SALES: For the period ended May 31, 1996, the cost of
purchases and proceeds from sales of investment securities other than long-term
Government Securities and temporary cash investments for the Portfolio were
approximately $32,186,000 and $8,458,000, respectively. There were no purchases
or sales of long-term U.S. Government securities.
E. BOARD OF TRUSTEES: Trustees, other than those who are officers or
affiliates of the Adviser, receive an annual fee plus a meeting fee for each
meeting attended and are reimbursed for expenses incurred in attending Board
Meetings.
F. OTHER: During the period ended May 31, 1996, the Portfolio incurred
approximately $1,800 in brokerage commission fees paid to San Jacinto
Securities, Inc. an affiliated broker/dealer of the Portfolio.
<PAGE>
PART B
LKCM FUND
POST-EFFECTIVE AMENDMENT NO. 4
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
LKCM FUND
LKCM SMALL CAP EQUITY PORTFOLIO
LKCM EQUITY PORTFOLIO
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
June 28, 1996
__________________________________________________
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of the LKCM Small Cap Equity Portfolio dated
June 28, 1996 and the LKCM Equity Portfolio dated June 28, 1996 as supplemented
from time to time. A copy of the Prospectus may be obtained without charge by
calling the the LKCM Fund at (800) 688-LKCM (option 1).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES.................................................................. B-3
Equity Securities........................................................................ B-3
Preferred Stock.......................................................................... B-3
Warrants and Rights...................................................................... B-3
Convertible Securities................................................................... B-3
Securities Subject to Reorganization..................................................... B-4
Temporary Investments......................................................................... B-5
Derivative Instruments........................................................................ B-6
Options.................................................................................. B-6
Options on Foreign Currencies............................................................ B-7
Futures Contracts........................................................................ B-8
Restrictions on the Use of Futures Contracts............................................. B-9
Risk Factors in Futures Transactions..................................................... B-9
Forward Foreign Currency Exchange Contracts.............................................. B-9
Risks of Options on Futures, Forward Contracts, and Options on Foreign Currencies........ B-10
Combined Transactions.................................................................... B-11
Asset Coverage for Futures and Options Positions......................................... B-11
Illiquid Investments and Restricted Securities................................................ B-11
Illiquid Investments..................................................................... B-11
Restricted Securities.................................................................... B-12
Foreign Securities............................................................................ B-12
Securities Lending............................................................................ B-13
Repurchase Agreements.................................................................... B-13
Reverse Repurchase Agreements............................................................ B-13
When-Issued Securities................................................................... B-13
INVESTMENT LIMITATIONS............................................................................. B-14
MANAGEMENT......................................................................................... B-16
Investment Adivser............................................................................ B-16
Control of Adviser....................................................................... B-16
Administrator................................................................................. B-16
Distributor................................................................................... B-17
Trustees and Officers......................................................................... B-17
Principal Shareholders........................................................................ B-18
PORTFOLIO TRANSACTIONS AND BROKERAGE............................................................... B-19
PURCHASE, REDEMPTION, AND PRICING OF SHARES........................................................ B-20
Purchase of Shares............................................................................ B-20
Redemption of Shares.......................................................................... B-20
Pricing of Shares............................................................................. B-21
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES.................................................. B-21
General....................................................................................... B-21
Foreign Withholding Taxes..................................................................... B-21
</TABLE>
B-1
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<TABLE>
<S> <C>
PERFORMANCE INFORMATION................................................ B-22
Performance Calculations.......................................... B-22
Total Return................................................. B-22
Yield........................................................ B-22
Comparison of Portfolio Performance............................... B-23
GENERAL INFORMATION.................................................... B-23
Description of Shares and Voting Rights........................... B-23
Shareholder and Trustee Liability................................. B-24
Custodian......................................................... B-24
Auditors.......................................................... B-24
Code of Ethics.................................................... B-24
FINANCIAL STATEMENTS................................................... B-24
APENDIX................................................................ B-25
Description of Bond Ratings....................................... B-25
</TABLE>
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INVESTMENT OBJECTIVE AND POLICIES
The investment objective and policies of the Portfolios are described in
the Prospectus. Additional information about those policies is provided below.
Certain capitalized terms used in the Statement of Additional Information are
defined in the Prospectus.
EQUITY SECURITIES
The equity securities in which the Portfolios may invest are common stocks,
convertible and non-convertible preferred stocks, debt securities convertible
into or exchangeable for common or preferred stock, rights and warrants.
PREFERRED STOCK. Preferred stock offers a stated dividend rate payable
from the corporation's earnings. These preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the
price of preferred stocks to decline. Preferred stock may have mandatory sinking
fund provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline. The rights of preferred stocks are
generally subordinate to rights associated with a corporation's debt securities.
Dividends on some preferred stock may be "cumulative" if stated dividends
from prior periods have not been paid. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks are generally subordinate to
rights associated with a corporation's debt securities.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at
specific prices valid for a specific period of time. Their prices do not
necessarily move parallel to the prices of the underlying securities. Rights are
similar to warrants but normally have a short duration and are distributed by
the issuer to its shareholders. Warrants and rights have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities. Convertible securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk that the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of the
issuer at a predetermined price. If a convertible security held by a Portfolio
is called for redemption, the Portfolio would be required to permit the issuer
to redeem the security and convert it to underlying common stock, or would sell
the convertible security to a third party.
As disclosed in the Prospectus of the LKCM Small Cap Equity Fund , up to 5%
of the Portfolio's assets may be invested in lower quality convertible debt
securities. The market values of lower quality fixed income securities tend to
be less sensitive to changes in prevailing interest rates than high-quality
securities but more sensitive to individual corporate developments than higher-
quality securities. Such lower-quality securities also tend to be more sensitive
to economic conditions than are higher-quality securities. Accordingly, these
lower-quality securities are considered predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the higher-quality categories.
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Even securities rated Baa or BBB by Moody's and S&P respectively, which
ratings are considered investment grade, possess some speculative
characteristics. There are risks involved in applying credit ratings as a method
for evaluating high yield obligations in that credit ratings evaluate the safety
of principal and interest payments, not market value risk. In addition, credit
rating agencies may not change credit ratings on a timely basis to reflect
changes in economic or company conditions that affect a security's market value.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case for
higher grade bonds. The Portfolios will rely on the Adviser's judgment, analysis
and experience in evaluating the creditworthiness of an issuer. In this
evaluation, the Adviser will take into consideration, among other things, the
issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Factors adversely affecting the market value of securities will adversely
affect a Portfolio's net asset value. In addition, a Portfolio may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal of or interest on its portfolio holdings.
From time to time, proposals have been discussed regarding new legislation
designed to limit the use of certain high yield debt securities by issuers in
connection with leveraged buy-outs, mergers and acquisitions, or to limit the
deductibility of interest payments on such securities. Such proposals, if
enacted into law, could reduce the market for such debt securities generally,
could negatively affect the financial condition of issuers of high yield
securities by removing or reducing a source of future financing, and could
negatively affect the value of specific high yields issues and the high yield
market in general. For example, under a provision of the Internal Revenue Code
enacted in 1989, a corporate issuer may be limited from deducting all of the
original issue discount on high-yield discount obligations (i.e., certain types
of debt securities issued at a significant discount to their face amount). The
likelihood of passage or any additional legislation or the effect thereof is
uncertain.
The secondary trading market for lower-quality fixed income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and the LKCM Small Cap Equity
Portfolio's ability to dispose of particular issues when necessary to meet the
Portfolio's liquidity needs or in response to a specific economic event such as
a deterioration in the creditworthiness of the issuer. The relative lack of an
active secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing
the Portfolio's portfolio. Market quotations are generally available on many
high yield issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During such
times, the responsibility of the Portfolio's Board of Trustees to value the
securities becomes more difficult and judgment plays a greater role in valuation
because there is less reliable, objective data available.
SECURITIES SUBJECT TO REORGANIZATION. The Portfolios may invest in
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of the Adviser,
there is a reasonable prospect of capital appreciation significantly greater
than the brokerage and other transaction expenses involved. Generally,
securities which are the subject of such an offer or proposal sell at a premium
to their historic market price immediately prior to the announcement of the
offer or may also discount what the stated or appraised value
B-4
<PAGE>
of the security would be if the contemplated transaction were approved or
consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved, significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction, or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires broad knowledge and experience on the part of the
Adviser which must appraise not only the value of the issuer and its component
businesses as well as the assets or securities to be received as a result of the
contemplated transaction but also the financial resources and business
motivation of the offeror and the dynamics and business climate when the offer
or proposal is in process. Since such investments are ordinarily short-term in
nature, they will tend to increase the turnover ratio of the Portfolio thereby
increasing its brokerage and other transaction expenses as well as make it more
difficult for the Fund to meet the tests for favorable tax treatment as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code"). The Adviser intends to select investments of the type described which,
in its view, have a reasonable prospect of capital appreciation which is
significant in relation to both risk involved and the potential of available
alternate investments as well as to monitor the effect of such investments on
the tax qualification test of the Code.
TEMPORARY INVESTMENTS
The temporary investments that the Portfolios may make include:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a commercial
bank or savings and loan association. Time deposits are non negotiable deposits
maintained in a banking institution for a specified period of time at a stated
interest rate. Time deposits maturing in more than seven days will not be
purchased by the Portfolios, and time deposits maturing from two business days
through seven calendar days will not exceed 15% of the total assets of the
Portfolios. Certificates of deposit are negotiable short-term obligations issued
by commercial banks or savings and loan associations against funds deposited in
the issuing institution. Variable rate certificates of deposit are certificates
of deposit on which the interest rate is periodically adjusted prior to their
stated maturity based upon a specified market rate. A bankers' acceptance is a
time draft drawn on a commercial bank by a borrower usually in connection with
an international commercial transaction (to finance the import, export, transfer
or storage of goods).
The Portfolios may invest in obligations of U.S. banks, foreign branches of
U.S. banks (Eurodollars), and U.S. branches of foreign banks (Yankee dollars).
Euro and Yankee dollar investments will involve the same risks of investing in
international securities that are discussed under "Investment Objective and
Policies -- Foreign Securities". Although the Adviser carefully considers these
factors when making investments, the Portfolios do not limit the amount of their
assets which can be invested in any one type of instrument or in any foreign
country in which a branch of a U.S. bank or the parent of a U.S. branch is
located.
The Portfolios will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the equivalent
in other currencies, or, in the case of domestic banks which do not have total
assets of at least $1 billion, the aggregate investment made in any one such
bank is limited to $100,000 and the principal amount of such investment is
insured in full by the Federal Deposit Insurance Corporation, (ii) in the case
of U.S. banks, it is a member of the Federal Deposit Insurance Corporation, and
(iii) in the case of foreign branches of U.S. banks, the security is deemed by
the Adviser to be of an investment quality comparable with other debt securities
which may be purchased by the Portfolios.
(2) Commercial paper which at the time of purchase is rated in the highest
rating category by a NRSRO or, if not rated, issued by a corporation having an
outstanding unsecured debt issue that meets such rating requirement at time of
purchase;
(3) Short-term corporate obligations rated in the highest rating category
by a NRSRO, at time of purchase;
B-5
<PAGE>
(4) U.S. Government Obligations including bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct obligations of the
U.S. Government and differ mainly in interest rates, maturities and dates of
issue;
(5) U.S. Government Agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers
Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank,
Federal National Mortgage Association, Federal Financing Bank, the Tennessee
Valley Authority, and others; and
(6) Repurchase agreements collateralized by securities listed above.
DERIVATIVE INSTRUMENTS
In pursuing its objective, the LKCM Small Cap Equity Portfolio may, to a
limited extent, purchase and sell (write) options on securities, securities
indices, and foreign currencies and enter into interest rate, foreign currency
and index futures contracts and purchase and sell options on such futures
contracts for hedging purposes.
OPTIONS. An option is a legal contract that gives the holder the right to
buy or sell a specified amount of the underlying security at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy, in return for a premium paid, and a put option conveys the right,
in return for a premium, to sell a specified quantity of the underlying
security. The Portfolio has no present intention of purchasing or selling
options in an amount greater than 5% of its net assets.
There are certain risks associated with transactions in options on
securities and on indices. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may
be unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the
Portfolio seeks to close out an option position. If the Portfolio were unable to
close out an option that it had purchased on a security, it would have to
exercise the option in order to realize any profit or the option may expire
worthless. If the Portfolio were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise. As the writer of a covered
call option, the Portfolio forgoes, during the life of the option, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call.
If trading were suspended in an option purchased by the Portfolio, the
Portfolio would not be able to close out the option. If restrictions on exercise
were imposed, the Portfolio might be unable to exercise an option it has
purchased. Except to the extent that a call option on an index written by the
Portfolio is covered by an option on the same index purchased by the Portfolio,
movements in the index may result in a loss to the Portfolio; however, such
losses may be mitigated by changes in the value of the Portfolio's securities
during the period the option was outstanding.
The Portfolio is authorized to purchase and sell over-the-counter options
("OTC Options") in addition to exchange listed options. OTC Options are
purchased from or sold to securities dealers, financial institutions or other
parties ("Counterparties") through direct bilateral agreement with the
Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC Option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will only sell OTC Options that are subject to a buy-back provision permitting
the Portfolio to require the Counterparty to sell the option back to the
Portfolio at a formula
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<PAGE>
price within seven days. The Portfolio expects generally to enter into OTC
Options that have cash settlement provisions, although it is not required to do
so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC Option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
Option it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of the option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor of credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC Option will be
satisfied. The Portfolio will engage in OTC Option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from Standard and
Poor's or "P-1" from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may purchase and write
options on foreign currencies for hedging purposes. For example, a decline in
the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Portfolio may purchase put
options on the foreign currency. If the value of the currency does decline, the
Portfolio will have the right to sell such currency for a fixed amount in
dollars and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transaction in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
The Portfolio may write options on foreign currencies for the same types of
hedging purposes. For example, where the Portfolio anticipates a decline in the
dollar value of foreign currency denominated securities due to adverse
fluctuations in exchange rates it could, instead of purchasing a put option,
write a call option on the relevant currency. If the anticipated decline occurs,
the option will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
The Portfolio may write covered call options on foreign currencies. A call
option written on a foreign currency by the Portfolio is "covered" if the
Portfolio owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by the Custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Portfolio has a call
on the same
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foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, U.S.
Government securities or other high-grade liquid debt securities in a segregated
account with the Custodian.
The Portfolio also may write call options on foreign currencies for cross-
hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the Portfolio owns or has the right to acquire
and which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, the Portfolio will
collateralize the option by maintaining in a segregated account with the
Custodian, cash or U.S. Government securities or other high-grade liquid debt
securities in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
FUTURES CONTRACTS. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securi ties, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
acceptable securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on the basis of
margin deposits that may range upward from less than 5% of the value of the
contract being traded. A Portfolio's margin deposits, consisting of cash, U.S.
Government securities and other liquid, high grade debt obligations, will be
placed in a segregated account maintained by the Portfolio's Custodian.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolio
expects to earn interest income on its margin deposits.
Regulations of the CFTC applicable to the Portfolio require that all of its
futures transactions constitute bona fide hedging transactions or to the extent
that the Portfolio's futures and options positions are for other purposes, the
aggregate initial margins and premiums required to establish such non-hedging
positions do not exceed 5% of the liquidation value of the Portfolio. The
Portfolio will only sell futures contracts to protect securities owned by them
against price declines or purchase contracts to protect against an increase in
the price of securities it intends to purchase. As evidence of this hedging
interest, the Portfolio expects that approximately 75% of its futures contracts
purchased will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Portfolio upon sale of
open futures contracts. Although techniques other than the sale and purchase of
futures contracts could be used to control the Portfolio's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure.
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While the Portfolio will incur commission expenses in both opening and closing
out futures positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Portfolio intends to use
futures contracts only for bona fide hedging purposes. The Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts in combination with its outstanding
obligations with respect to options transactions would exceed 5% of its total
assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying interest rate futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on a Portfolio's
ability to effectively hedge. The Portfolio will minimize the risk that it will
be unable to close out a futures contract by only entering into futures which
are traded on national futures exchanges and for which there appears to be a
liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 15% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the
Adviser does not believe that the Portfolio is subject to the risks of loss
frequently associated with futures transactions. The Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("Forward Contract") is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders, usually
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large commercial bands, and their customers. The Portfolio may use Forward
Contracts to manage currency risks and to facilitate transactions in foreign
securities. The following discussion summarizes the principal currency
management strategies involving Forward Contracts that the Portfolio may use.
In connection with purchases and sales of securities denominated in foreign
currencies, the Portfolio may enter into Forward Contracts to fix a definite
price for the purchase or sale in advance of the trade's settlement date
("transaction hedge" or "settlement hedge"). The Adviser will use settlement
hedges in the normal course of managing the Portfolio's foreign investments.
The Portfolio may also use Forward Contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if the Portfolio owned securities denominated in pounds sterling, it could enter
into a forward contract to sell pounds sterling in return for U.S. dollars to
hedge against possible declines in the pound's value ("position hedge"). A
position hedge would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. The Portfolio could also hedge the position by selling another currency
expected to perform similarly to the pound sterling ("proxy hedge"). A proxy
hedge could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a simple hedge
into U. S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
The Portfolio's Custodian will place cash, U.S. Government securities, or
other liquid high-quality debt securities in a separate account of the Portfolio
having a value equal to the aggregate amount of the Portfolio's commitments
under Forward Contracts entered into with respect to position hedges and cross-
hedges. If the value of the securities placed in a segregated account declines,
additional cash or securities will be placed in the account on a daily basis so
that the value of the account will equal the amount of the Portfolio's
commitments with respect to such contracts. Alternatively, the Portfolio may
purchase a call option permitting the Portfolio to purchase the amount of
foreign currency being hedged by a forward sale contract at a price no higher
than the Forward Contract price or the Portfolio may purchase a put option
permitting the Portfolio to sell the amount of foreign currency subject to a
forward purchase contract at a price as high or higher than the Forward Contract
price. Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
RISKS OF OPTIONS ON FUTURES, FORWARD CONTRACTS, AND OPTIONS ON FOREIGN
CURRENCIES. Options on foreign currencies and forward contracts are not traded
on contract markets regulated by the CFTC or (with the exception of certain
foreign currency options) by the SEC. To the contrary, such instruments are
traded through financial institutions acting as market-makers, although foreign
currency options are also traded on certain national securities exchanges, such
as the Philadelphia Stock Exchange and the Chicago Board Options Exchange,
subject to SEC regulation. Similarly, options on currencies may be traded over-
the-counter. In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. Although the purchase of
an option cannot lose more than the amount of the premium plus related
transaction costs, this entire amount could be lost. Moreover, the option writer
and a trader of forward contracts could lose amounts substantially in excess of
their initial investments, due to the margin and collateral requirements
associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Furthermore, a liquid
secondary market in options traded on a national securities exchange may be more
readily available than in the over-the-counter market, potentially permitting
the Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
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The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts, and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
COMBINED TRANSACTIONS. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including Forward Contracts) and any combination
of futures, options, and foreign currency transactions, instead of a single
transaction, as part of a single hedging strategy when, in the opinion of the
Adviser, it is in the best interest of the Portfolio to do so. A combined
transaction, while part of a single hedging strategy, may contain elements of
risk that are present in each of its component transactions.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Portfolio will
comply with guidelines established by the Securities and Exchange Commission
with respect to coverage of options and futures strategies by mutual funds, and
if the guidelines so require will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the futures or option strategy is
outstanding, unless they are replaced with other suitable assets. Consequently,
there is a possibility that segregation of a large percentage of the Portfolio's
assets could impede portfolio management of the Portfolio's ability to meet
redemption requests or other current obligations.
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be
sold or disposed of within seven days in the ordinary course of business at
approximately the prices at which they are valued. Under the supervision of the
Board of Trustees, the Adviser determines the liquidity of a Portfolio's
investments and, through reports from the Adviser and the Administrator, the
Board monitors investments in illiquid securities. In determining the liquidity
of the Portfolios' investments, the Adviser may consider various
factors, including the frequency of trades and quotations, the number of dealers
and prospective purchasers in the marketplace, dealer undertakings to make a
market, the nature of the security, and the nature of the marketplace for
trades. Investments currently considered by the Portfolios to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days, certain over-the-counter options, and restricted
securities (other than restricted securities pursuant to Rule 144A under the
Securities Act of 1933 and commercial paper sold in reliance on Section 4(2) of
the Securities Act of 1933). With respect to over-the-counter ("OTC") options
that the Portfolios write, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option and
the nature and terms of any agreement the Portfolios may have to close out the
option before expiration. The Portfolios will treat as illiquid an amount of
assets used to
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cover written OTC options, equal to the formula price at which a
Portfolio would have the absolute right to purchase the option less the amount
by which the option is "in-the-money." The absence of a trading market can make
it difficult to ascertain a market value for illiquid investments. When no
market quotations are available, illiquid investments are priced at fair value
as determined in good faith by a committee appointed by the Board of Trustees.
Disposing of these investments may involve time-consuming negotiation and legal
expenses, and it may be difficult or impossible for the Portfolios to sell them
promptly at an acceptable price. If through a change in values, net assets, or
other circumstances, the LKCM Small Cap Equity Portfolios was in a position
where more than 15% of its net assets were invested in illiquid
securities, it would take appropriate steps to protect liquidity; for the LKCM
Equity Portfolio, if more than 7% of its net assets were invested in illiquid
securities, it would take appropriate steps to protect liquidity .
RESTRICTED SECURITIES. Restricted securities can generally be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the Securities Act of 1933, or in a registered public offering. Where
registration is required, the Portfolios may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it or they decide to seek registration and the time the Portfolios may
be permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, a Portfolio
might obtain a less favorable price than prevailed at the time it decided to
seek registration of the security.
FOREIGN SECURITIES
The LKCM Small Cap Equity Portfolio may invest to a limited degree in
securities of foreign issuers. Investors should recognize that investing in
foreign issuers involves certain special considerations which are not typically
associated with investing in U.S. issuers. Since the securities of foreign
issuers are frequently denominated in foreign currencies, and since the
Portfolio may temporarily hold invested reserves in bank deposits in foreign
currencies, the Portfolio will be affected favorably or unfavorably by changes
in currency rates and in exchange control regulations, and may incur costs in
connection with conversions between various currencies. The investment policies
of the Portfolio permit it to enter into forward foreign currency exchange
contracts in order to hedge the Portfolio's holdings and commitments against
changes in the level of future currency rates. Such contracts involve an
obligation to purchase or sell a specific currency at a future date at a price
set at the time of the contract.
As foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries. Although the Portfolio will endeavor to
achieve most favorable execution costs in its portfolio transactions, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodian arrangements of the Portfolio's foreign securities will be somewhat
greater than the expenses for the custodian arrangements for handling the U.S.
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Portfolio. However, these
foreign withholding taxes are not expected to have a significant impact on the
Portfolio, since the Portfolio's investment objectives are to seek long-term
capital appreciation and any income should be considered incidental.
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SECURITIES LENDING
The Portfolios may lend securities to qualified brokers, dealers, banks and
other financial institutions. Securities lending allows the Portfolios to retain
ownership of the securities loaned and, at the same time, to earn additional
income. Since there may be delays in the recovery of loaned securities, or even
a loss of rights in collateral supplied should the borrower fail financially,
loans will be made only to parties deemed by the Adviser to be of good standing.
In addition, they will only be made if, in the Adviser's judgment, the
consideration to be earned from such loans would justify the risk. Such loans
will not be made if, as a result, the aggregate of all outstanding loans of a
Portfolio exceed one-third of the value of its total assets.
It is the Adviser's understanding that the current view of the staff of the
Securities and Exchange Commission is that the Portfolios may engage in loan
transactions only under the following conditions: (1) the Portfolios must
receive 100% collateral in the form of cash or cash equivalents (i.e., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Portfolios must be able to terminate the loan at any time; (4) the
Portfolios must receive reasonable interest on the loan (which may include the
Portfolios investing any cash collateral in interest bearing short-term
investments) or a flat fee from the borrower, as well as amounts equivalent to
any dividends, interest, or other distributions on the securities loaned and to
any increase in market value; (5) the Portfolios may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees must
be able to vote proxies on the securities loaned, either by terminating the loan
or by entering into an alternative arrangement with the borrower.
REPURCHASE AGREEMENTS
The Portfolios may enter into repurchase agreements with brokers, dealers
or banks that meet the credit guidelines established by the Board of Trustees.
In a repurchase agreement, the Portfolios buy a security from a seller that has
agreed to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week and never exceeds one year. A
repurchase agreement may be viewed as a fully collateralized loan of money by a
Portfolio to the seller. A Portfolio always receives securities as collateral
with a market value at least equal to the purchase price, including accrued
interest, and this value is maintained during the term of the agreement. If the
seller defaults and the collateral value declines, a Portfolio might incur a
loss. If bankruptcy proceedings are commenced with respect to the seller, a
Portfolio's realization upon the collateral may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Portfolios may enter into reverse repurchase agreements with brokers,
dealers, domestic and foreign banks or other financial institutions. In a
reverse repurchase agreement, a Portfolio sells a security and agrees to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. It may also be viewed as the
borrowing of money by a Portfolio. A Portfolio's investment of the proceeds of a
reverse repurchase agreement is the speculative factor known as leverage. The
Portfolios may enter into a reverse repurchase agreement only if the interest
income from investment of the proceeds is greater than the interest expense of
the transaction and the proceeds are invested for a period no longer than the
term of the agreement. The Portfolios will maintain with the Custodian a
separate account with a segregated portfolio of cash, U.S. Government securities
or other liquid high grade debt obligations in an amount at least equal to its
purchase obligations under these agreements.
WHEN-ISSUED SECURITIES
The Portfolios may purchase securities on a "when-issued" basis. In buying
"when-issued" securities, the Portfolios commit to buy securities at a certain
price even though the securities may not be delivered for up to 120 days. No
payment or delivery is made by a Portfolio in a "when-issued" transaction until
the Portfolio
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receives payment or delivery from the other party to the transaction. Although
the Portfolios receive no income from the above-described securities prior to
delivery, the market value of such securities is still subject to change. As a
consequence, it is possible that the market price of the securities at the time
of delivery may be higher or lower than the purchase price. The Portfolios will
maintain with the Custodian a separate account with a segregated portfolio of
cash or high-grade debt securities in an amount at least equal to the amount of
their outstanding forward commitments.
INVESTMENT LIMITATIONS
The Portfolios are subject to the following restrictions which are
fundamental polices and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of a Portfolio present at a
meeting if the holders of more than 50% of the outstanding voting securities of
the Portfolio are present or represented by proxy, or (2) more than 50% of the
outstanding voting securities of a Portfolio.
AS A MATTER OF FUNDAMENTAL POLICY, THE PORTFOLIOS WILL NOT:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although they may purchase and sell securities
of companies which deal in real estate, other than real estate limited
partnerships, and may purchase and sell marketable securities which are secured
by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance with its
investment objective and policies, or entering into repurchase agreements,
subject to the limitations described in (h) below; (ii) by lending their
portfolio securities so long as such loans are not inconsistent with the
Investment Company Act of 1940, as amended (the "1940 Act") or the Rules and
Regulations or interpretations of the Securities and Exchange Commission
thereunder;
(4) with respect to 75% of their assets, purchase a security if, as a result,
they would hold more than 10% (taken at the time of such investment) of the
outstanding voting securities of any issuer;
(5) with respect to 75% of their assets, purchase securities of any issuer if,
as the result, more than 5% of a Portfolio's total assets, taken at market value
at the time of such investment, would be invested in the securities of such
issuer except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities;
(6) borrow money, except (i) as a temporary measure for extraordinary or
emergency purposes (not for leveraging or investment) or (ii) in connection with
reverse repurchase agreements provided that (i) and (ii) in combination do not
exceed 33% of a Portfolio's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings); and the Portfolio cannot buy additional
securities if it borrows more than 5% of its total assets;
(7) underwrite the securities of other issuers (except to the extent that a
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities);
(8) acquire any securities of companies within one industry if, as a result of
such acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in securities of companies within such industry; provided,
however, that there shall be no limitation on the purchase of obligations issued
or guaranteed by the U.S. Government, its agencies or instrumentalities, when
the Portfolio adopts a temporary defensive position; and
(9) issue senior securities, except that this limitation shall not apply to: (i)
evidence indebtedness which the Portfolio is permitted to incur; (ii) shares of
the separate classes or series of the Fund; or (iii) collateral arrangements
with respect to currency-related contracts, futures contracts, options or other
permitted investments, including deposits of initial and variation margin.
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The Portfolios are also subject to the following restrictions which are
non-fundamental policies and may be changed by the Board of Trustees without
shareholder approval.
AS A MATTER OF NON-FUNDAMENTAL POLICY, THE PORTFOLIOS WILL NOT:
(a) enter into futures contracts and/or options on futures unless not more than
5% of a Portfolio's assets are invested in such futures;
(b) invest in puts, calls, straddles or spreads except as described above in
(a);
(c) invest in warrants, valued at the lower of cost or market, in excess of 5%
of the value of its total assets. Included within that amount, but not to exceed
2% of the value of a Portfolio's net assets, may be warrants that are not listed
on the New York or American Stock Exchanges or an exchange with comparable
listing requirements. Warrants attached to securities are not subject to this
limitation;
(d) purchase on margin, except for use of short-term credit as may be necessary
for the clearance of purchases and sales of securities, but it may make margin
deposits in connection with transactions in options, futures, and options on
futures; or sell short unless, by virtue of its ownership of other securities,
it has the right to obtain securities equivalent in kind and amount to the
securities sold and, if the right is conditional, the sale is made upon the same
conditions. Transactions in futures contracts and options are not deemed to
constitute selling securities short;
(e) purchase or retain securities of an issuer if those Officers and Trustees
of the Portfolio or its investment adviser owning more than l/2 of 1% of such
securities together own more than 5% of such securities;
(f) borrow money other than from banks or in connection with reverse repurchase
agreements; or purchase additional securities when borrowings exceed 5% of total
gross assets;
(g) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 1/3 of its total assets at fair market value;
(h) invest more than an aggregate of 15% of the net assets of a Portfolio in
securities deemed to be illiquid including securities which are not readily
marketable, the disposition of which is restricted (excluding securities that
are not registered under the Securities Act of 1933, as amended (the "1933 Act")
but which can be sold to qualified institutional investors in accordance with
Rule 144A under the 1933 Act and commercial paper sold in reliance on Section
4(2) of the 1933 Act), repurchase agreements having maturities of more than
seven days and certain OTC options;
(i) invest for the purpose of exercising control over management of any
company;
(j) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act;
(k) invest more than 5% of its total assets in securities of issuers (other
than securities issued or guaranteed by U.S. or foreign governments or political
subdivisions thereof) which have (with predecessors) a record of less than three
years' continuous operation;
(l) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
Unless otherwise indicated, if a percentage limitation on the investment or
utilization of assets as set forth above is adhered to at the time an investment
is made, a later change in percentage resulting from changes in the
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value or total cost of a Portfolio's assets will not be considered a violation
of the restriction, and the sale of securities will not be required.
MANAGEMENT
INVESTMENT ADVISER
The investment adviser to the Portfolios, Luther King Capital
Management Corporation, was founded in 1979 and is located at 301 Commerce
Street, Fort Worth, Texas 76102. The Adviser provides investment counseling
services to employee benefit plans, endowment funds, foundations and high net-
worth investors.
Under an Investment Advisory Agreement ("Agreement") with the LKCM Small
Cap Equity Portfolio, dated June 21, 1994 and with the LKCM Equity Fund, dated
December 5, 1995, the Adviser, subject to the control and supervision of the
Board of Trustees and in conformance with the stated investment objectives and
policies of the Portfolios, manages the investment and reinvestment of the
assets of the Portfolios. In this regard, it is the responsibility of the
Adviser to make investment decisions for the Portfolios and to place the
Portfolios purchase and sales orders for investment securities. As compensation
for the services rendered by the Adviser under the Agreement and the assumption
by the Adviser of the expenses related thereto (other than the cost of
securities purchased for the Portfolios and the taxes and brokerage commissions,
if any, payable in connection with the purchase and/or sale of such securities),
the LKCM Equity Portfolio pays the Adviser an advisory fee calculated by
applying a quarterly rate, equal on an annual basis to .70% of the Portfolio's
average daily net assets for the quarter and the LKCM Small Cap Equity Portfolio
pays the Adviser an advisory fee equal on an annual basis to .75% of the
Portfolio's average daily net assets for the quarter.
The Agreement was approved by the Board of Trustees on June 21, 1994 for
the LKCM Small Cap Equity Fund and on December 5, 1995 for the LKCM Equity Fund.
By its terms, the Agreement continues in effect for a period of two years from
the date of the Agreement, and thereafter for successive one year periods, only
if each renewal is specifically approved by a vote of the Board of Trustees,
including the affirmative votes of a majority of the Trustees who are not
parties to the agreement or "interested persons" (as defined in the Investment
Company Act of 1940, as amended) of any such party in person at a meeting called
for the purpose of considering such approval. The Agreement was approved for
both Portfolios for an additional one year term on June 21, 1996. In addition,
the question of continuance of the Agreement may be presented to the
shareholders of a Portfolio; in such event, continuance shall be effective only
if approved by the affirmative vote of a majority of the outstanding voting
securities of the Portfolio. During the period from May 1, 1995 to December 31,
1995, the amount of voluntarily waived advisory fees was approximately $47,000,
or approximately .07% of the Portfolio's average daily net assets for the LKCM
Small Cap Equity Portfolio.
CONTROL OF ADVISER
The Adviser, Luther King Capital Management Corporation, is a corporation
of which Luther King is a "controlling person" (as that term is defined in the
Rules and Regulations of the Securities and Exchange Commission).
ADMINISTRATOR
Chase Global Funds Services Company (the "Administrator"), a subsidiary of
The Chase Manhattan Bank, N.A., ("Chase") provides the Portfolios with
administrative, fund accounting, dividend disbursing and transfer agency
services pursuant to a Fund Administration Agreement. The Administrator is
located at 73 Tremont Street, Boston, Massachusetts 02108. The services under
the Fund Administration Agreement are subject to the supervision of the
Portfolios' Trustees and Officers and include day-to-day administration of
matters related to the operations of the Portfolios, such as maintenance of
records,
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preparation of reports, supervision of the Portfolios' arrangements
with its custodians, compliance testing of the Portfolios' activities, and
preparation of periodic updates of the Portfolios' registration statement under
federal and state laws. Pursuant to the Fund Administration Agreement and a
Custody Agreement under which Chase Manhattan serves as custodian of the
Portfolios' assets, the Portfolios pay the Administrator an aggregate monthly
fee which on an annualized basis equals: 0.215% of 1% of the first $75 million
of the net assets of the LKCM Small Cap Equity Portfolios, and 0.185 of 1% of
the first $75 million of the net assets of the LKCM Equity Portfolio, plus 0.135
of 1% of the next $75 million of the net assets of the Portfolios, plus 0.095 of
1% of the net assets of the Portfolios in excess of $150 million and custody
fees (with a minimum annual fee of $145,000 for the LKCM Small Cap Equity
Portfolio and $100,000 for the LKCM Equity Portfolio, plus .015 of 1% of average
daily net assets). From time to time, subject to review by the Board of
Trustees, the Administrator may make certain adjustments to the fees it is
entitled to receive pursuant to the Fund Administration Agreement.
DISTRIBUTOR
Shares of the Portfolios are distributed through Funds Distributor Inc.
(the "Distributor"). The Distributor is a broker-dealer registered with the
Securities and Exchange Commission. Jacqui Brownfield, an employee of the
Adviser and an officer of the Fund will act as the registered representative of
the Distributor in connection with the sale of shares of the
Portfolios.
TRUSTEES AND OFFICERS
The Trustees and officers of the Portfolios, their ages, their business
addresses and principal occupations during the past five years are as follows:
H. KIRK DOWNEY; 53; 2900 Lubbock Street, Fort Worth, Texas 76109; Trustee of the
Fund; Dean, M.J. Neeley School of Business, Texas Christian
University Business School.
J. LUTHER KING, JR.*; 56; 301 Commerce Street, Fort Worth, Texas 76102; Chairman
of the Board of Trustees, President, Chief Executive Officer and Manager of the
Fund; President, Luther King Capital Management Corporation.
EARLE A. SHIELDS, JR.; 75; 53 Westover Terrace, Fort Worth, Texas 76107; Trustee
of the Fund; Consultant; formerly: Consultant for NASDAQ Corp.
and Vice President, Merrill Lynch & Co., Inc.
PAUL W. GREENWELL; 301 Commerce Street, Fort Worth, Texas 76102; Vice President
of the Fund; Vice President, Luther King Capital Management.
JACQUI BROWNFIELD; 301 Commerce Street, Fort Worth, Texas 76102; Secretary and
Treasurer of the Fund; Fund Administrator, Luther King Capital Management.
JOHN M. CORCORAN; 73 Tremont Street, Boston, Massachusetts 02108; Assistant
Treasurer of the Fund; Assistant Vice President and Manager,
Fund Administration and Compliance, Chase Global Funds Services Company;
formerly Audit Manager, Ernst & Young.
______________________________
* Trustee King is an "interested person" of the Portfolio (as defined in the
Investment Company Act of 1940, as amended) because of his affiliation with the
Adviser.
B-17
<PAGE>
RAYMOND H. EDELMAN; 73 Tremont Street, Boston, Massachusetts 02108; Assistant
Treasurer of the Fund; Vice President and Director of Fund
Administration, Chase Global Funds Services Company; formerly: Tax Manager,
Ernst & Young; Tax Associate, Price Waterhouse.
KARL O. HARTMANN; 73 Tremont Street, Boston, Massachusetts 02108; Assistant
Secretary of the Fund; Senior Vice President and General Counsel, Chase Global
Funds Services Company; formerly: Senior Vice President, Secretary and General
Counsel of Leland O'Brien Rubinstein Associates, Inc., (an investment adviser);
Vice President and Associate General Counsel of The Boston Company Advisers,
Inc. (a mutual fund servicing agent).
HELEN A. ROBICHAUD; 73 Tremont Street, Boston, Massachusetts 02108; Assistant
Secretary of the Fund; Vice President and Associate General Counsel, Chase
Global Funds Services Company; formerly Associate Counsel of 440 Financial Group
of Worcester, Inc.; Counsel, Palmer & Dodge; associate lawyer, Gaston &
Snow.
The following table shows aggregate compensation paid to each of the Fund's
trustees and officers by the Fund and total compensation paid by the Fund in the
fiscal year ended period from May 1, 1995 to December 31, 1995.
Compensation Table
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of person, Aggregate Pension Retirement Estimated Annual Total
position compensation from Benefits Accrued Benefits upon Compensation
Registrant as Part of Fund Retirement from Registrant
Expenses and Fund Complex
Paid to Directors
<S> <C> <C> <C> <C>
H. Kirk Downey $4,500.00 0 0 $4,500.00
J. Luther King, Jr. 0 0 0 0
Earle A. Shields $4,500.00 0 0 $4,500.00
John M. Corcoran 0 0 0 0
Raymond H. Edelman 0 0 0 0
Karl O. Hartmann 0 0 0 0
Helen A. Robichaud 0 0 0 0
</TABLE>
Trustees other than those who are officers or affiliated with the Adviser
receive an annual fee plus a meeting fee for each meeting attended and are
reimbursed for expenses incurred in attending Board Meeting. Trustees who are
also officers or affiliated persons receive no remuneration for their services
as Trustees. The Fund's officers and employees are paid by the
Adviser or the Administrator.
PRINCIPAL SHAREHOLDERS
As of December 31, 1995, the following persons owned of record or
beneficially 5% or more of the shares of the LKCM Small Cap Equity
Portfolio:
Gannett Co. 401K Plan, c/o Mellon Trust, Medford, Massachusetts, 6.4%
Sid Richardson Foundation, c/o Texas Commerce Bank, Houston, Texas, 6.5%
Andrew W. Mellon Foundation, c/o Advisor Services, Nashville, Tennessee,
10.4%
Northern Trust as Trustee for Gannett Master Retirement Trust, Chicago,
Illinois, 16.3%*
B-18
<PAGE>
* Denotes shares held by a trustee or other fiduciary for which beneficial
ownership is disclaimed or presumed disclaimed.
As of March 31, 1995, the following persons owned of record or beneficially
5% or more of the shares of the LKCM Equity Portfolio:
Overton & Co., c/o Trust Department of Overton Bank & Trust, Fort Worth, Texas,
33.6%
Amarillo National Bank, Common Trust Fund, 54%
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Advisory Agreement authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for the Portfolios and directs the Adviser to use its best efforts to
obtain the best execution with respect to all transactions for the Portfolios.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may cause the Portfolios to pay higher commission rates than the
lowest available when the Adviser believes it is reasonable to do so in light of
the value of the research services provided by the broker effecting the
transaction. These services, which in some cases may also be purchased for cash,
include such matters as general economic and security market reviews, industry
and company reviews, evaluations of securities and recommendations as to the
purchase and sale of securities. Some of these services are of value to the
Adviser in advising various clients, including the Portfolios, although
not all of these services are necessarily useful and of value in managing the
Portfolios.
It is not the Portfolios' practice to allocate brokerage or principal
business on the basis of sales of shares which may be made through intermediary
brokers of dealers. However, the Adviser may place portfolio orders with
qualified broker-dealers who recommend the Portfolios or who act as agents in
the purchase of shares of the Portfolios for their clients.
Some securities considered for investment by the Portfolios may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Portfolios and one or
more of these other clients serviced by the Adviser is considered at or about
the same time, transactions in such securities will be allocated among the
Portfolios and clients in a manner deemed fair and reasonable by the Adviser.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Adviser, and the results of such
allocations, are subject to periodic review by the Board of Trustees.
The Adviser manages the Portfolios without regard generally to restrictions
on portfolio turnover, except those imposed on its ability to engage in short-
term trading by provisions of the federal tax laws. The use of futures contracts
and other derivative instruments with relatively short maturities may tend to
exaggerate the portfolio turnover rate for a Portfolio. Trading in fixed-income
securities does not generally involve the payment of brokerage commissions, but
does involve indirect transaction costs. The use of futures contracts may
involve the payment of commissions to futures commission merchants. The higher
the rate of portfolio turnover of a Portfolio, the higher these transaction
costs borne by a Portfolio generally will be.
The portfolio turnover rate of a Portfolio is calculated by dividing (i)
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by (ii) the monthly average of the value of the portfolio securities
owned by the Portfolio during the particular fiscal year. In calculating the
rate of portfolio turnover, there is excluded from both (i) and (ii) all
securities, including options, whose maturities or expiration dates at the time
of acquisition were one year or less. Proceeds from short sales and assets used
to cover short positions undertaken are included in the amounts of securities
sold and purchased, respectively, during the year.
B-19
<PAGE>
During the period from May 1, 1995 to December 31, 1995, the LKCM Small Cap
Equity Portfolio paid brokerage commissions of approximately $168,642.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
PURCHASE OF SHARES
Certain managed account clients of the Adviser may purchase shares of the
Portfolios. To avoid the imposition of duplicative fees, the Adviser may be
required to make adjustments in the management fees charged separately by the
Adviser to these clients to offset the generally higher level of management fees
and expenses resulting from a client's investment in a Portfolio.
Certain clients of the Adviser may, subject to the approval of the
Portfolios, purchase shares of the Portfolios with liquid securities that are
eligible for purchase by a Portfolio (consistent with the Portfolio's investment
policies and restrictions) and that have a value that is readily ascertainable
(and not established only by evaluation procedures) as evidenced by a listing on
the American Stock Exchange, the New York Stock Exchange, or NASDAQ. These
transactions will be effected only if the Adviser intends to retain the security
in the Portfolios as an investment. Assets so purchased by the Portfolios will
be valued in generally the same manner as they would be valued for purposes of
pricing a Portfolio's shares, if such assets were included in the Portfolio's
assets at the time of purchase.
Shares of the Portfolios are not qualified or registered for sale in all
states. Prospective investors should inquire as to whether shares of a Portfolio
are available for offer and sale in their state of domicile or residence. Shares
of the Portfolios may not be offered or sold in any state unless registered or
qualified in the jurisdiction unless an exemption from registration or
qualification is available.
The Portfolios reserve the right in their sole discretion (i) to suspend
the offering of their shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of the Portfolios,
(iii) to reduce or waive the minimum for initial and subsequent investments for
certain fiduciary accounts such as employee benefit plans or under circumstances
where certain economies can be achieved in sales of a Portfolio's shares. The
officers of the Portfolios may from time to time waive the minimum initial and
subsequent investment requirements in connection with investments in a Portfolio
by employees of the Adviser.
REDEMPTION OF SHARES
The Portfolios may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission ("SEC"), (ii) during any period when an emergency exists as
defined by the rules of the SEC as a result of which it is not reasonably
practicable for a Portfolio to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the SEC may permit.
The Fund has made an election with the SEC to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of a Portfolio at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part in investment securities or in cash, as the Trustees may deem
advisable; however, payment will be made wholly in cash unless the Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the Portfolios. If redemptions are
paid in investment securities the redeeming shareholders might incur brokerage
expenses if they converted these securities to cash. Securities used to make
such "in-kind" redemptions will be readily marketable. The method of valuing
such securities will be the same as the method of valuing portfolio securities
described in the Prospectus under "Valuation of Shares," and such valuation will
be made as of the same time the redemption price is determined.
B-20
<PAGE>
Due to the relatively high cost of maintaining smaller accounts, the
Portfolios reserve the right to redeem shares in any account for their then-
current value (which will be promptly paid to the investor) if at any time, due
to shareholder redemption, the shares in the account do not have a value of at
least $1,000. Investors will be notified that the value of their account is less
than the minimum and allowed at least 30 days to bring the value of the account
up to at least the minimum before the redemption is processed. The Declaration
of Trust also authorizes the Fund to redeem shares under certain other
circumstances as may be specified by the Board of Trustees.
No charge is made by the Portfolios for redemptions. Redemption proceeds
may be more or less than the shareholder's cost depending on the market value of
the securities held by a Portfolio.
PRICING OF SHARES
As indicated under "Valuation of Shares" in the Prospectuses, the
Portfolios' net asset value per share for the purpose of pricing purchase and
redemption orders is determined at 4:00 p.m. (Eastern Time) on each day the New
York Stock Exchange is open for trading. Net asset value will not be determined
on the following holidays: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas
Day.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAXES
GENERAL
The Portfolios' policy is to distribute substantially all of their net
investment income, if any, together with any net realized capital gains in the
amount and at the times that will avoid both income (including capital gains)
taxes on it and the imposition of the federal excise tax on undistributed income
and capital gains.
The Portfolios intend to declare and pay dividends and capital gain
distributions so as to avoid imposition of the Federal excise tax. To do so, the
Portfolios expect to distribute an amount at least equal to (i) 98% of their
calendar year ordinary income, (ii) 98% of their capital gains net income (the
excess of short and long-term capital gain over short and long-term capital
loss) for the one-year period ending December 31st, and (iii) 100% of any
undistributed ordinary or capital gain net income from the prior calendar year.
Dividends declared in December by the Portfolios will be deemed to have been
paid by the Portfolios and received by shareholders on the record date provided
that the dividends are paid before February 1st of the following year.
Undistributed net investment income is included in the Portfolios' net
assets for the purpose of calculating net asset value per share. Therefore, on
the "ex-dividend" date, the net asset value per share excludes the dividend
(i.e., is reduced by the per share amount of the dividend). Dividends paid
shortly after the purchase of shares by an investor, although in effect a return
of capital, are taxable as ordinary income.
As stated in the Prospectuses, unless the shareholder elects otherwise in
writing, all dividends and capital gain distributions are automatically
paid in additional shares of the Portfolios at net asset value
(as of the business day following the record date). This will remain in effect
until a Portfolio is notified by the shareholder in writing at least three days
prior to the record date that either the Income Option (income dividends in cash
and capital gains distributions in additional shares at net asset value) or the
Cash Option (both income dividends and capital gain distributions in cash) has
been elected. An account statement is sent to shareholders whenever an income
dividend or capital gain distribution is paid.
FOREIGN WITHHOLDING TAXES
Foreign governments may withhold taxes on dividend and interest paid with
respect to foreign securities. Because the Portfolios do not currently
anticipate that securities of foreign issuers will constitute more than 50%
B-21
<PAGE>
of their total assets at the end of their fiscal year, shareholders should not
expect to claim a foreign tax credit or deduction on their federal income tax
returns with respect to foreign taxes withheld.
PERFORMANCE INFORMATION
PERFORMANCE CALCULATIONS
The Portfolios may from time to time quote various performance figures to
illustrate their past performance. Performance quotations by investment
companies are subject to rules adopted by the Securities and Exchange Commission
("SEC"), which require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by a
Portfolio be accompanied by certain standardized performance information
computed as required by the SEC. An explanation of the SEC methods for computing
performance follows.
TOTAL RETURN
Average Annual Total Return. A Portfolio's average annual total return is
determined by finding the average annual compounded rates of return over 1, 5,
and 10 year periods (or, if shorter, the period since inception of the
Portfolio) that would equate an initial hypothetical $1,000 investment to its
ending redeemable value. The calculation assumes that all dividends and
distributions are reinvested when paid. The quotation assumes the amount was
completely redeemed at the end of each 1, 5, and 10 year period (or, if shorter,
the period since inception of the Portfolio) and the deduction of all applicable
Portfolio expenses on an annual basis.
Average annual total return is calculated according to the following formula:
P (1+T)/n/ = 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 $1000 payment made at
the beginning of the stated period.
Cumulative Total Return. A Portfolio may also calculate total return on a
cumulative basis which reflects the cumulative percentage change in value over
the measuring period. The formula for calculating cumulative total return can be
expressed as follows:
Cumulative Total Return = [ ( ERV ) - 1]
---
P
YIELD
In addition to total return, a Portfolio may quote performance in terms of
a 30-day yield. The yield figures provided will be calculated according to a
formula prescribed by the SEC and can be expressed as follows:
Yield = 2 [ (a-b) + 1)/6/ - 1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
B-22
<PAGE>
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Portfolio at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market value of the debt obligations.
COMPARISON OF PORTFOLIO PERFORMANCE
The performance of a Portfolio may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc.,
the Donoghue Organization, Inc. or other independent services which monitor the
performance of investment companies, and may be quoted in advertising in terms
of their rankings in each applicable universe. In addition, the Portfolios may
use performance data reported in financial and industry publications, including
Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money
Fund Report, Money Magazine, The Wall Street Journal and USA Today.
The Portfolios may from time to time use the following unmanaged index for
performance comparison purposes:
S&P 500 -- The S&P 500 is a portfolio of 500 stocks designed to mimic the
overall equity market's industry weightings. Most, but not all, large
capitalization stocks are in the index. There are also some small capitalization
names in the index. The list is maintained by Standard & Poor's Corporation. It
is market capitalization weighted. Unlike the Russell indices, there are always
500 names in the S&P 500. Changes are made by Standard & Poor's as needed.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Portfolios are a series of the LKCM Fund (the "Fund") which was
established under Delaware law by a Declaration of Trust dated February 10,
1994. The Declaration of Trust permits the Trustees of the Fund to issue an
unlimited number of shares of beneficial interest, without par value, from an
unlimited number of series ("portfolios") of shares. Currently, shares of two
series have been authorized which are the shares of the Portfolios. Pursuant to
the Declaration of Trust, the Trustees may also authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed Portfolios with distinct investment objectives
and policies and share purchase, redemption and net asset valuation procedures)
with such preferences, privileges, limitations and voting and dividend rights as
the Trustees may determine. All consideration received by the Fund for shares of
any additional series, and all assets in which such consideration is invested,
would belong to that series and would be subject to the liabilities related
thereto.
The Trustees, in their discretion, may authorize the division of shares of
the Portfolios into different classes permitting shares of different classes to
be distributed by different methods. Although shareholders of different classes
would have an interest in the same portfolio of assets, shareholders of
different classes may bear different expenses in connection with different
methods of distribution. The Trustees have no present intention of taking the
action necessary to effect the division of shares into separate classes (which
under present regulations would require the Portfolios first to obtain an
exemptive order of the Securities and Exchange Commission), nor of changing the
method of distribution of shares of the Portfolios.
When issued, the shares of the Portfolios are fully paid and non-
assessable, have no preemptive or subscription rights and are fully
transferable. There are no conversion rights. The shares of the Portfolios have
B-23
<PAGE>
non-cumulative voting rights, which means that the holders of more than 50% of
the shares voting for the election of Trustees can elect 100% of the Trustees if
they choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of a Portfolio.
SHAREHOLDER AND TRUSTEE LIABILITY
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Fund and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Fund or the Trustees, but this disclaimer may not be effective
in some jurisdictions or as to certain types of claims. The Declaration of Trust
further provides for indemnification out of the Portfolios' property of any
shareholder held personally liable for the obligations of the Fund. The
Declaration of Trust also provides that the Fund shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund itself would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
CUSTODIAN
The Chase Manhattan Bank, One Chase Manhattan Plaza, New York, NY
10081-1000, is custodian of the Fund's assets. The custodian is responsible for
the safekeeping of the Fund's assets and the appointment of subcustodian banks
and clearing agencies.
AUDITORS
Deloitte & Touche, LLP, Boston, Massachusetts serves as the Fund's
independent auditors, whose services include examination of the Portfolios'
financial statements and the performance of other related audit and tax
services.
CODE OF ETHICS
The Fund has adopted a Code of Ethics which restricts to a certain extent
personal transactions by access persons of the Fund and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The Financial Statement of the LKCM Small Cap Equity Portfolio and the
Financial Highlights for the period presented, which appear in the Portfolio's
Annual Reports to Shareholders dated April 30, 1995 and December 31, 1995, and
the reports thereon of Deloitte & Touche, LLP, independent auditors, also
appearing therein, are incorporated by reference into this Statement of
Additional Information. An Annual Report may be obtained, without charge, by
writing to the Fund or calling the Fund at 800-688-LKCM (option 1).
B-24
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. Corporate Bond Ratings:
- ---------------------------------------------------------------------
AAA: judged to be the best quality; carry the smallest degree of investment
risk; AA: judged to be of high quality by all standards; A: possess many
favorable investment attributes and are to be considered as higher medium grade
obligations; BAA: considered as lower medium grade obligations, i.e., they are
neither highly protected nor poorly secured; BA, B: protection of interest and
principal payments is questionable.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest. CA: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings. C: Bonds which are rated C are lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1,2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
EXCERPTS FROM STANDARD & POOR'S CORPORATION CORPORATE BOND RATINGS:
- -------------------------------------------------------------------
AAA: highest grade obligations; possess the ultimate degree of protection
as to principal and interest; AA: also qualify as high grade obligations, and in
the majority of instances differs from AAA issues only in small degree; A:
regarded as upper medium grade; have considerable investment strength but are
not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe; BBB: regarded as
borderline between definitely sound obligations and those where the speculative
element begins to predominate; this group is the lowest which qualifies for
commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid. D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P's believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
EXCERPTS FROM FITCH INVESTORS SERVICES, INC. CORPORATE BOND RATINGS:
- --------------------------------------------------------------------
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds
B-25
<PAGE>
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short term debt of these issuers is generally
rated "-,+".
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay interest
and repay principal may be affected over time by adverse economic changes.
However, business and financial alternatives can be identified which could
assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal payments.
Such bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. "DDD"
represents the highest potential for recovery on the these bonds, and "D"
represents the lowest potential for recovery.
PLUS (+) MINUS(-) Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
EXCERPTS FROM DUFF & PHELPS CORPORATE BOND RATINGS:
- ---------------------------------------------------
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+,BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
B-26
<PAGE>
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protections factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP: Preferred stock with dividend arrearage.
B-27
<PAGE>
PART C
LKCM FUND
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
1. This Post-Effective Amendment No. 4 is filed to comply with the
Registrant's undertaking to file a Post-Effective Amendment containing
reasonably current financial statements, which need not be audited,
within four to six months of the commencement date of the LKCM Equity
Portfolio. The following unaudited financial statement for the
Portfolio is included in Part B of this Post-Effective Amendment.
(a) Statement of Net Assets as of May 31, 1996;
(b) Statement of Operations for the period from January 3, 1996 to
May 31, 1996;
(c) Statement of Changes in Net Assets for the period from January 3,
1996 to May 31, 1996;
(d) Financial Highlights for the period from January 3, 1996 to May 31,
1996; and;
(e) Notes to Financial Statements.
2. The Annual Reports of the LKCM Small Cap Equity Portfolio dated April
30, 1995 and December 31, 1995, are incorporated by reference in the
SAI. The Annual Report for the fiscal year ended April 30, 1995 has
been filed previously with the Securities and Exchange Commission. The
audited financial statements included the Annual Report are:
(a) Statement of Net Assets as of April 30, 1995;
(b) Statement of Operations for the period from July 14, 1994 to April
30, 1995;
(c) Statement of Changes in Net Assets for the period from July 14, 1994
to April 30, 1995;
(d) Financial Highlights for the period from July 14, 1994 to April 30,
1995; and
(e) Notes to Financial Statements.
3. Incorporated by reference is the Annual Report for the LKCM Small Cap
Equity Portfolio dated December 31, 1995, filed electronically pursuant
to Section 30(B)(2) of the Investment Company Act of 1940, as Amended,
(Accession number: 0000950109-96-001034). The audited financial
statements included in the Annual Report are:
(a) Statement of Net Assets as of December 31, 1995;
(b) Statement of Operations for the period from May 1, 1995 to December
31, 1995;
(c) Statement of Changes in Net Assets for the period from May 1, 1995
to December 31, 1995;
(d) Financial Highlights for the period from May 1, 1995 to December 31,
1995; and
(e) Notes to Financial Statements.
<PAGE>
(b) Exhibits
Exhibits previously filed by the Fund are incorporated by reference to such
filings. The following table describes the location of all exhibits. In the
table, the following references are used: RS = original Registration Statement
on Form N-1A filed on February 9, 1994; Pre EA = Pre-Effective Amendment No. 1
filed April 13, 1994; PEA = Post-Effective Amendment (pertinent numbers for each
PEA are included after "PEA", e.g., PEA #3 means the Third PEA under the
Securities Act of 1933.)
<TABLE>
<CAPTION>
Incorporated by
Exhibit Reference to (Location):
------- ------------------------
<S> <C>
1. Articles of Incorporation RS
2. By-Laws RS
3. Voting Trust Agreement Not Applicable
4. Specimen of Securities Pre EA #2
5. Investment Advisory Agreements Pre EA #3
6. Distribution Agreement Pre EA #3
7. Directors' and Officers'
Contracts and Programs Not Applicable
8. Custody Agreements RS
9. Other Material Contracts RS
10. Opinion and Consent of Counsel Pre EA #3
11. Other Opinions and Consents
A. Consent of Independent
Accountants with respect
to Annual Report dated
April 30, 1995 PEA #2
B. Consent of Independent Included herein
Accountants with respect
to Annual Report dated
December 31, 1995
12. Other Financial Statements
A. 1994 Semi-Annual Report PEA #1
B. 1995 Annual Report dated
April 30, 1995 PEA #2
C. 1995 Annual Report dated
December 31, 1995 Incorporated by reference
13. Agreements relating to Initial
Capital Pre EA #3
14. Model Retirement Plans Not Applicable
15. 12b-1 Plans Not Applicable
16. Performance Quotation Schedule PEA #5, PEA #8
</TABLE>
Item 25.Persons controlled by or Under Common Control With Registrant.
Registrant is not controlled by or under common control with any person.
Item 26.Number of Holders of Securities (January 31, 1994)
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class or Series. May 31, 1996
------------------------- ------------
<S> <C>
LKCM Small Cap Equity
Portfolio 591
LKCM Equity Portfolio 54
</TABLE>
<PAGE>
Item 27.Indemnification
Reference is made to Article VI of the Registrant's Declaration of Trust, which
is incorporated herein by reference. Registrant hereby also makes the
undertaking consistent with Rule 484 under the Securities Act of 1933, as
amended.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provision, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28.Business and Other Connections of Investment Advisers
Reference is made to the captions "Investment Adviser" in the Prospectuses
constituting Part A of this Registration Statement and "Investment Adviser" in
Part B of this Registration Statement. The information required by this Item 28
with respect to each director, officer, or partner of Luther King Capital
Management Corporation is incorporated by reference to Form ADV filed by Luther
King Capital Management Corporation with the Securities and Exchange Commission
pursuant to the Investment Advisers Act of 1940, as amended (File No. 801-
14458).
Item 29. Principal Underwriters
(a) Funds Distributor, Inc., is the general distributor of the
Registrant's shares.
(b) The information contained in the registration on Form BD of Funds
Distributor, Inc., filed under the Securities Exchange Act of
1934, is incorporated herein by reference.
(c) Not applicable.
Item 30. Location of Accounts and records
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder
will be maintained at the offices of:
Luther King Capital Management Corporation
310 Commerce Street, Suite 1600
Fort Worth, Texas 76102
(records relating to its function as investment advisor)
Chase Global Funds Services Company
114 W. 47th Street
New York, New York 10036
(records relating to its function as custodian)
Chase Global Funds Service Company
73 Tremont Street
Boston, Massachusetts 02108
(records relation to its functions as administrator,
transfer agent and dividend disbursing agent)
Item 31. Management Services
Not applicable.
<PAGE>
Item 32. Undertakings
(a) Not applicable
(b) Not applicable
(c) Registrant undertakes to furnish each person to whom a prospectus is
delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
(d) Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of the removal of a Trustee of
Trustees when requested in writing to do so by the holders of at least
10% of the Registrant's outstanding shares and in connection with such
meeting to comply with the provisions of Section 16(c) of the Investment
Company Act of 1940, as amended relating to shareholder communications.
<PAGE>
PART C
LKCM FUND
POST-EFFECTIVE AMENDMENT NO. 4
EXHIBIT INDEX
Exhibit No. Description
------------ -----------
1 Independent Auditors'
Report dated January 12, 1996
27 LKCM EQUITY PORTFOLIO FINANCIAL
DATA SCHEDULE
<PAGE>
Deloitte &
Touche LLP
------------- --------------------------------------------------
125 Summer Street Telephone: (617) 261-8000
Boston, Massachusetts Facsimile: (617) 261-8111
02110-1617
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of LKCM Small Cap Equity Portfolio:
In planning and performing our audit of the financial statements of LKCM Small
Cap Equity Portfolio (the "Fund") for the period from May 1, 1995 to December
31, 1995 ( on which we have issued our report dated January 12, 1996), we
considered its internal control structure, including procedures for safeguarding
securities, in order to determine our auditing procedures for the purpose of
expressing our opinion on the financial statements and to comply with the
requirements of Form N-SAR, not to provide assurance on the internal control
structure.
The management of the Fund is responsible for establishing and maintaining an
internal control structure. In fulfilling this responsibility, estimates and
judgments by management are required to assess the expected benefits and related
costs of internal control structure policies and procedures. Two of the
objectives of an internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are safeguarded against loss
from unauthorized use or disposition and that transactions are executed in
accordance with management's authorization and recorded properly to permit
preparation of financial statements in conformity with generally accepted
accounting principles.
Because of inherent limitations in any control structure, errors or
irregularities may occur and not be detected. Also, projection of any
evaluation of the structure to future periods is subject to the risk that
procedures may become inadequate because of changes in condition or that the
effectiveness of the design and operation of policies and procedures may
deteriorate.
Our consideration of the internal control structure would not necessarily
disclose all matters in the internal control structure that might be material
weakness under standards established by the American Institute of Certified
Public Accountants. A material weakness is a condition in which the design or
operation of the specific internal control structure elements does not reduce to
a relatively low level the risk that errors or irregularities in amounts that
would be material in relation to the financial statements being audited may
occur and not be detected within a timely manner by employees in the normal
course of performing their assigned functions. However, we noted no matters
involving the internal control structure, including procedures for safeguarding
securities, that we considered to be material weakness as defined above as of
December 31, 1995.
This report is intended solely for the information and use of management and the
Securities and Exchange Commission.
January 12, 1996
- -------------
Deloitte Touche
Tohmatsu
International
- -------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUND
<SERIES>
<NUMBER> 2
<NAME> LKCM EQUITY PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-03-1996
<PERIOD-END> MAY-31-1996
<INVESTMENTS-AT-COST> 30,079
<INVESTMENTS-AT-VALUE> 31,781
<RECEIVABLES> 41
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 31,830
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 33
<TOTAL-LIABILITIES> 33
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 29,792
<SHARES-COMMON-STOCK> 2,968
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 163
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 140
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,702
<NET-ASSETS> 31,797
<DIVIDEND-INCOME> 130
<INTEREST-INCOME> 121
<OTHER-INCOME> 0
<EXPENSES-NET> (88)
<NET-INVESTMENT-INCOME> 163
<REALIZED-GAINS-CURRENT> 140
<APPREC-INCREASE-CURRENT> 1,702
<NET-CHANGE-FROM-OPS> 2,005
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,065
<NUMBER-OF-SHARES-REDEEMED> (97)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 31,797
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 76
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 151
<AVERAGE-NET-ASSETS> 26,333
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> 0.66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.71
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
