<PAGE>
- --------------------------------------------------------------------------------
LKCM FUND
P.O. BOX 2798
BOSTON, MA 02208-2798
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
Luther King, Jr. John M. Corcoran
Chairman of the Board, Assistant Treasurer
President
Raymond H. Edelman
H. Kirk Downey Assistant Treasurer
Trustee
Karl O. Hartman
Earle A. Shields, Jr. Assistant Secretary
Trustee
Helen A. Robichaud
David D. May Assistant Secretary
Vice President,
Treasurer and Secretary
- -------------------------------------------------
INVESTMENT ADVISER
Luther King Capital Management Corp.
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
- -------------------------------------------------
ADMINISTRATOR
Chase Global Funds Services Company
73 Tremont Street, Boston, MA 02108-3913
- -------------------------------------------------
CUSTODIAN
The Chase Manhattan Bank, N.A.
770 Broadway, New York, NY 10003-9598
- -------------------------------------------------
LEGAL COUNSEL
Gardere & Wynne
3000 Thanksgiving Tower Dallas, TX 75201
- -------------------------------------------------
INDEPENDENT AUDITORS
Deloitte & Touche LLP
125 Summer Street
Boston, MA 02110
- -------------------------------------------------
DISTRIBUTOR
San Jacinto Securities, Inc.
5949 Sherry Lane, Suite 960 Dallas, TX 75225
- -------------------------------------------------
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
- --------------------------------------------------------------------------------
LKCM FUND
- --------------------------------------------------------------------------------
LKCM SMALL CAP EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1995
<PAGE>
LKCM FUND
---------------------
---------------------
TO OUR SHAREHOLDERS:
We are pleased to report the following performance information for the LKCM
Small Cap Equity Portfolio (the "Portfolio"):
<TABLE>
<CAPTION>
AVERAGE
TOTAL ANNUAL
RETURN SINCE TOTAL RETURN RUSSELL 2000
NET ASSET INCEPTION ONE YEAR SINCE INCEPTION ONE YEAR TOTAL
VALUE AT 7/14/94 THRU TOTAL RETURN 7/14/94 THRU RETURN ENDED
12/31/95 12/31/95 ENDED 12/31/95 12/31/95 12/31/95
--------- ------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
$13.84 38.40% 31.81% 24.93% 26.21%
</TABLE>
We were pleased with the Portfolio's performance, especially when compared
to the performance of shares of small companies in general. Small companies
have historically grown faster than large companies and we feel that the
future should be the same due to the ability of small companies to grow
revenues and earnings from a smaller base and management's ability to exploit
market niches. Small companies remain relatively inexpensive when compared
with larger companies in terms of valuation parameters such as price/earnings
and price/cash flow. Stocks of small companies still stand to benefit from a
proposed tax cut, which would increase the premium investors will pay for
smaller, faster growing companies relative to larger companies.
After three years during which annualized financial market returns were
below historical averages, 1995 proved to be an extremely strong year for both
the equity and the fixed income markets. The advance was driven by lower
interest rates, stronger than anticipated corporate profit growth, record
merger and acquisition activity, strong money flow into mutual funds and on-
going corporate restructuring. The stock market, as measured by the Standard &
Poor's 500 Index, posted higher returns than during any calendar year since
1958. While the direction of stock prices during the fourth quarter was
consistent with the previous three quarters, the complexion of the gain
shifted significantly during the last quarter. As signs of a slowing economy
persisted during the quarter, investors began gravitating back toward
companies with the ability to generate consistent growth patterns, even in a
more difficult economic environment. Health care, consumer non-durables,
financial, and energy stocks were beneficiaries of this transition.
Technology, retail, and consumer cyclical stocks fared poorly during the
quarter as earnings forecasts were called into question with the slowing
economy.
The total net assets of the Portfolio as of December 31, 1995 were
$121,430,000, of which $106,077,000 was invested in common stocks and
$16,703,000 in short-term interest-bearing securities. The Portfolio continues
to hold a diversified list of companies operating in many different
industries. The largest industry holdings were health care--16.2%, energy--
10.5%, retail--9.2%, and financial services--8.6%. We continue to evaluate the
market for new company and industry investment opportunities.
Regards,
/s/ Luther King
January 12, 1996
1
<PAGE>
PERFORMANCE COMPARISON
- --------------------------------------------------------------------------------
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 PURCHASE IN THE LKCM SMALL CAP
EQUITY PORTFOLIO AND THE STANDARD & POOR'S 500 (S&P 500) AND RUSSELL 2000
INDICES.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN SINCE SINCE
FOR PERIOD ENDED DECEMBER 31, 1995 JANUARY 1, 1995 JULY 14, 1994*
- --------------------------------------------------------------------------------
<S> <C> <C>
LKCM SMALL CAP EQUITY PORTFOLIO** 31.81% 24.93%
S&P 500 INDEX 37.58% 27.68%
RUSSEL 2000 INDEX 26.21% 20.05%
</TABLE>
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
LKCM SMALL
CAP EQUITY S&P RUSSELL 2000
PORTFOLIO 500 INDEX+ INDEX+
- --------------------------------------------------------
<S> <C> <C> <C>
7/14/94* 10,000 10,000 10,000
7/31/94 9,990 10,219 10,018
10/31/94 10,660 10,611 10,468
1/31/95 10,440 10,644 10,133
4/30/95 11,480 11,722 10,926
6/30/95 12,170 12,472 11,642
9/30/95 13,190 13,456 12,740
12/31/95 13,840 14,257 12,970
</TABLE>
Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate.
When shares are redeemed, they may be worth more or less than the original
cost.
* Commencement of Operations
** Total return reflects expenses waived and reimbursed by the Adviser. Without
such waivers or reimbursement, total return would be lower.
+ The comparative indices are not adjusted to reflect expenses or other fees
that the SEC requires to be reflected in the Portfolio's performance.
Definition of the Comparative Indices
-------------------------------------
The S&P 500 is an unmanaged index of 500 stocks designed to mimic the overall
equity market's industry weightings. Most, but not all, large capitalization
stocks are in the Index.
The Russell 2000 Index is an unmanaged index consisting of the 2,000 smallest
of the 3,000 largest stocks. Market capitalization is typically between $57
million and $610 million.
Please note that one can not invest in an unmanaged index.
2
<PAGE>
STATEMENT OF NET ASSETS
December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- --------------------------------------------------------------------------------
COMMON STOCKS (87.4%)
- --------------------------------------------------------------------------------
<S> <C> <C>
BASIC RESOURCES (4.4%)
Freeport McMoRan, Inc..................................... 50,166 $ 1,856
Longview Fibre Co......................................... 55,000 894
Mississippi Chemical Corp................................. 80,000 1,860
Reliance Steel & Aluminum Co.............................. 35,000 726
--------
5,336
--------
- --------------------------------------------------------------------------------
CONSUMER & COMMERCIAL SERVICES (7.6%)
* Carmike Cinemas, Inc. Class A............................. 71,200 1,602
* Extended Stay America, Inc................................ 40,000 1,100
* Kent Electronics Corp..................................... 62,650 3,657
National Service Industries, Inc.......................... 41,300 1,337
Olsten Corp............................................... 10,000 395
Premier Industrial Corp................................... 45,000 1,102
--------
9,193
--------
- --------------------------------------------------------------------------------
CONSUMER DURABLES (3.4%)
Centex Corp............................................... 50,000 1,737
Justin Industries, Inc.................................... 115,000 1,265
TJ International, Inc..................................... 61,000 1,129
--------
4,131
--------
- --------------------------------------------------------------------------------
ENERGY (10.5%)
* Brown (Tom), Inc.......................................... 83,000 1,214
* Cairn Energy USA, Inc..................................... 106,000 1,484
* Coda Energy, Inc.......................................... 200,000 1,487
Diamond Offshore Drilling, Inc............................ 40,000 1,350
* Hornbeck Offshore Services, Inc........................... 86,200 1,692
ICO, Inc.................................................. 169,300 825
* Nabors Industries, Inc.................................... 50,000 556
Noble Affiliates, Inc..................................... 60,000 1,793
* Noble Drilling Corp....................................... 140,000 1,260
* Parallel Petroleum Corp................................... 120,000 214
Western Gas Resources, Inc................................ 55,000 887
--------
12,762
--------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATEMENT OF NET ASSETS--(CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- --------------------------------------------------------------------------------
COMMON STOCK--(CONTINUED)
- --------------------------------------------------------------------------------
<S> <C> <C>
ENVIRONMENT (2.4%)
* U.S. Filter Corp.......................................... 110,000 $ 2,929
--------
- --------------------------------------------------------------------------------
FINANCIAL SERVICES (8.6%)
Atlantic Gulf Communities Corp............................ 87,000 587
* Capsure Holdings Corp..................................... 106,700 1,881
Crescent Real Estate Equities, Inc........................ 40,000 1,365
Cullen/Frost Bankers, Inc................................. 25,000 1,250
First Victoria National Bank.............................. 9,000 211
Gainsco, Inc.............................................. 60,637 690
Greenpoint Financial Corp................................. 25,000 669
Life Partners Group, Inc.................................. 95,000 1,294
Mercantile Bancorp........................................ 20,000 920
Northern Trust Corp. ..................................... 20,000 1,120
Titan Holdings, Inc....................................... 30,450 438
--------
10,425
--------
- --------------------------------------------------------------------------------
HEALTH CARE (16.2%)
* Amsco International, Inc. ................................ 161,000 2,395
Bard (C. R.), Inc. ....................................... 75,000 2,419
* Biogen, Inc............................................... 15,000 922
* Emcare Holdings, Inc...................................... 73,000 1,752
Fisher Scientific International, Inc...................... 35,400 1,181
* Genzyme Corp.--General Division........................... 20,000 1,248
Kinetic Concepts, Inc. ................................... 100,000 1,200
* Magellan Health Services, Inc............................. 30,000 720
* Maxxim Medical, Inc. ..................................... 120,000 2,010
OccuSystems, Inc. ........................................ 20,000 400
* PhyCor, Inc. ............................................. 39,625 2,004
* Scherer R.P. Corp. ....................................... 20,000 982
* Sybron International Corp. ............................... 50,000 1,188
* TECNOL Medical Products, Inc.............................. 67,000 1,206
--------
19,627
--------
- --------------------------------------------------------------------------------
HEAVY INDUSTRY/TRANSPORTATION (8.2%)
Air Express International Corp. .......................... 30,000 690
* Covenant Transport, Inc., Class A......................... 70,000 840
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATEMENT OF NET ASSETS--(CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- -------------------------------------------------------------------------------
COMMON STOCK--(CONTINUED)
- -------------------------------------------------------------------------------
<S> <C> <C>
HEAVY INDUSTRY/TRANSPORTATION--(CONTINUED)
* Eagle USA Airfreight, Inc. .............................. 20,000 $ 525
Expeditors International of Washington, Inc. ............ 16,000 418
* Kirby Corp............................................... 205,900 3,346
Lawson Products, Inc. ................................... 58,500 1,434
Railtex, Inc............................................. 103,200 2,167
* UNC, Inc. ............................................... 86,700 520
--------
9,940
--------
- -------------------------------------------------------------------------------
PUBLISHING & BROADCASTING (6.0%)
Belo (A.H.) Corp., Class A............................... 50,000 1,737
* Clear Channel Communications, Inc........................ 8,000 353
Comcast Corp. ........................................... 80,000 1,455
* Comcast UK Cable Partners Ltd............................ 80,000 1,000
* Heftel Broadcasting Corp................................. 76,800 1,344
* Saga Communication, Inc.................................. 27,500 447
Thomas Nelson, Inc....................................... 30,000 390
Wiley (John) & Sons, Inc., Class A....................... 8,000 262
Wireless One, Inc. ...................................... 20,000 330
--------
7,318
--------
- -------------------------------------------------------------------------------
RETAIL (9.2%)
Borders Group, Inc. ..................................... 80,000 1,480
* Cameron Ashley, Inc...................................... 151,000 1,548
* Central Tractor Farm & Country, Inc...................... 38,000 389
* Consolidated Stores Corp................................. 30,000 652
Cross (A.T.) Co., Class A................................ 38,400 581
Gadzooks, Inc. .......................................... 30,000 758
Haverty Furniture Co., Inc............................... 12,000 167
Home Depot, Inc.......................................... 15,000 718
* Nine West Group, Inc..................................... 15,000 563
OfficeMax, Inc........................................... 30,000 671
The Limited, Inc. ....................................... 30,000 521
* Tractor Supply Co........................................ 59,000 1,165
* Tuesday Morning Corp..................................... 50,000 275
* Whole Foods Market, Inc.................................. 122,000 1,693
--------
11,181
--------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATEMENT OF NET ASSETS--(CONTINUED)
December 31, 1995
<TABLE>
<CAPTION>
VALUE
SHARES (000)+
- -----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK--(CONTINUED)
- -----------------------------------------------------------------------------
TECHNOLOGY (5.1%)
* Black Box Corp....................................... 60,000 $ 982
* Intersolv............................................ 30,000 386
Novadigm, Inc........................................ 47,500 1,348
* Rational Software Corp............................... 36,200 810
Spacetec IMC Corp.................................... 25,000 294
* 3D Systems Corp...................................... 100,000 2,375
--------
6,195
--------
- -----------------------------------------------------------------------------
TELECOMMUNICATIONS (5.8%)
* Airtouch Communications, Inc......................... 50,000 1,412
* Cellular Communications, Inc., Class A............... 25,000 1,244
* Metrocall, Inc....................................... 75,000 1,434
* Pronet, Inc.......................................... 100,000 2,950
--------
7,040
--------
- -----------------------------------------------------------------------------
TOTAL COMMON STOCKS (COST $91,964)..................... 106,077
- -----------------------------------------------------------------------------
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------
<S> <C> <C>
CASH EQUIVALENT (13.7%)
- -----------------------------------------------------------------------------
REPURCHASE AGREEMENT
The Chase Manhattan Bank, N.A. 5.35%, dated 12/29/95,
due 1/2/96, to be repurchased at $16,713, collateral-
ized by $14,865 U.S. Treasury Bonds 7.25%, due 5/15/16,
valued at $17,039 (COST $16,703)....................... $ 16,703 16,703
- -----------------------------------------------------------------------------
TOTAL INVESTMENTS (101.1%) (COST $108,667).............. 122,780
- -----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (--1.1%)
- -----------------------------------------------------------------------------
Cash........................................................... 1
Receivable for Portfolio Shares Sold........................... 110
Dividends Receivable........................................... 71
Interest Receivable............................................ 7
Other Assets................................................... 46
Payable for Portfolio Shares Redeemed.......................... (1,263)
Payable for Investment Advisory Fees........................... (143)
Payable for Investments Purchased.............................. (77)
Payable for Administrative Fees................................ (21)
Payable for Trustees' Fees..................................... (1)
Other Liabilities.............................................. (80)
--------
(1,350)
- -----------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 8,771,779 outstanding shares of beneficial interest
(unlimited authorization, no par value) $121,430
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE.... $ 13.84
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995
TO
(In Thousands) DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Dividends............................................ $ 449
Interest............................................. 551
- -------------------------------------------------------------------------------
TOTAL INCOME.................................... 1,000
- -------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee......................................... $489
Less: Fee Waived.................................. (47) 442
----
Administrative Fees--Note C........................ 142
Trustees' Fees--Note E............................. 9
Other Expenses..................................... 59
- -------------------------------------------------------------------------------
TOTAL EXPENSES....................................... 652
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME............................... 348
- -------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS....................... 7,184
NET CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS... 10,134
- -------------------------------------------------------------------------------
TOTAL NET REALIZED GAIN AND NET CHANGE IN UNREALIZED
APPRECIATION.......................................... 17,318
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS... $17,666
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 14, 1994** MAY 1, 1995
TO TO
(In Thousands) APRIL 30, 1995 DECEMBER 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income.................... $ 234 $ 348
Net Realized Gain........................ 470 7,184
Net Change in Unrealized Appreciation.... 3,979 10,134
- -------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations.................... 4,683 17,666
- -------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular.......................... 62,359 44,760
Redeemed................................. (406) (7,732)
- -------------------------------------------------------------------------------
Net Increase from Capital Share
Transactions....................... 61,953 37,028
- -------------------------------------------------------------------------------
Total Increase........................... 66,636 54,694
Net Assets:
Beginning of Period...................... 100 66,736
- -------------------------------------------------------------------------------
End of Period (2)........................ $66,736 $121,430
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Shares Issued and Redeemed:
Shares Issued.......................... 5,841 3,541
Shares Redeemed........................ (36) (584)
------- --------
5,805 2,957
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(2) Net Assets Consist of:
Paid in Capital........................ $62,045 $ 99,066
Undistributed Net Investment Income.... 242 597
Accumulated Net Realized Gain.......... 470 7,654
Unrealized Appreciation................ 3,979 14,113
------- --------
$66,736 $121,430
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
** Commencement of Operations.
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
JULY 14, 1994** MAY 1, 1995
TO TO
APRIL 30, 1995 DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD......... $10.00 $11.48
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+................... 0.04 0.03
Net Realized and Unrealized Gain on
Investments............................. 1.44 2.33
- --------------------------------------------------------------------------------
Total From Investment Operations....... 1.48 2.36
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............... $11.48 $13.84
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL RETURN++............................... 14.80% 20.56%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)........ $66,736 $121,430
Ratio of Expenses to Average Net Assets...... 1.00%* 1.00%*
Ratio of Net Investment Income to Average Net
Assets...................................... 1.15%* 0.53%*
Portfolio Turnover Rate...................... 53% 57%
- --------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Commencement of Operations.
+ Net of voluntarily waived fees and reimbursed expenses of $0.04 and $0.003
per share for the periods ended April 30, 1995 and December 31, 1995,
respectively.
++ Total return would have been lower had the adviser not waived or reimbursed
certain expenses during the periods ended April 30, 1995 and December 31,
1995.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
LKCM FUND
NOTES TO FINANCIAL STATEMENTS
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
Small Cap Equity Portfolio (the "Portfolio"), a diversified portfolio of the
Fund, commenced operations on July 14, 1994.
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.
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 sales 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 continue 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.
Paid in capital and undistributed net investment income have been adjusted
for permanent book tax differences.
At December 31, 1995, the Portfolio's cost for Federal income tax purposes
was approximately $108,705,000. Unrealized appreciation for Federal income
tax purposes aggregated $14,075,000 of which $17,355,000 related to
appreciated securities and $3,280,000 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.
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.
10
<PAGE>
LKCM FUND
NOTES TO FINANCIAL STATEMENTS--(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. The preparation of the financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
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 .75% 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 to
reimburse expenses to the extent necessary to keep total operating expenses
from exceeding 1.00%.
C. ADMINISTRATIVE SERVICES: Effective September 1, 1995, Chase Global Funds
Services Company (the "Administrator"), an affiliate of The Chase Manhattan
Bank, NA, ("Chase") and formerly Mutual Funds Service Company, provides the
Portfolio with administrative, fund accounting, dividend disbursing and
transfer agency services pursuant to a fund administration agreement.
Effective September 1, 1995, Chase provides the Portfolio with custodial
services pursuant to a custodial agreement. Pursuant to the fund
administration agreement and the custody agreement, the Portfolio pays the
Administrator an aggregate monthly fee, which on an annualized basis equals
.215% of the first $75 million of the average daily net assets of the
Portfolio; plus .135% of the next $75 million of the average daily net assets
of the Portfolio; plus .095% of the average daily net assets of the Portfolio
in excess of $150 million (with a minimum annual fee of $145,000 plus .015% of
average daily net assets). Prior to September 1, 1995, Mutual Funds Service
Company and United States Trust Company of New York provided administration
and custodial services to the Portfolio under the same terms, conditions and
fees as stated above.
D. PURCHASES AND SALES: For the period ended December 31, 1995, the Portfolio
made purchases of approximately $79,777,000 and sales of $47,309,000 on
investment securities other than long-term U.S. Government Securities and
temporary cash investments. There were no purchases and 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 December 31, 1995, the Portfolio incurred
approximately $3,300 in brokerage commission fees paid to San Jacinto
Securities, Inc., an affiliated broker/dealer of the Portfolio.
At December 31, 1995, 26.7% of total shares outstanding were held by two
record shareholders owning 10% or greater of the aggregate total shares
outstanding.
G. CHANGE IN FISCAL YEAR: The Portfolio changed its fiscal year end from April
30 to December 31 effective May 1, 1995.
H. DIVIDEND DISTRIBUTION: On December 29, 1995, the Board declared a
distribution of $0.9448 per share, derived from net investment income and net
realized gains, payable on January 5, 1996, to shareholders of record on
December 29, 1995.
11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of
LKCM Small Cap Equity Portfolio:
We have audited the accompanying statement of net assets of LKCM Small Cap
Equity Portfolio (one of the Portfolios constituting LKCM Fund) as of December
31, 1995, and the related statement of operations for the period from May 1,
1995 to December 31, 1995 and the statement of changes in net assets and the
financial highlights for the period from the start of business, July 14, 1994
to April 30, 1995 and for the period from May 1, 1995 to December 31, 1995.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of the
securities owned at December 31, 1995 by correspondence with the custodian and
brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of LKCM Small Cap
Equity Portfolio at December 31, 1995, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 12, 1996
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FEDERAL TAX INFORMATION (UNAUDITED):
At December 31, 1995 the Portfolio hereby designates $13,000 as a long term
capital gain dividend for the purpose of the dividend paid deduction on its
Federal income tax return.
For the year ended December 31, 1995, the percentage of dividends that
qualify for the 70% dividend received deduction for corporate shareholders was
7% for the Portfolio.
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