As filed with the Securities and Exchange Commission on February 27, 1998
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. 8
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 8
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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
Mary S. Kraft
c/o Firstar Trust Company
615 E. Michigan Street, Milwaukee, WI 53202
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective
(check appropriate box)
[ ] immediately upon filing pursuant to Paragraph (b)
[_] on _______________________ pursuant to Paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on May 1, 1998 pursuant to Paragraph (a)(1)
[_] 75 days after filing pursuant to Paragraph (a)(2)
[_] on ________________ pursuant to Paragraph (a) of Rule 485
If appropriate, check the following box:
[_] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
Title of securities being registered...shares of beneficial interest
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<PAGE>
LKCM FUND
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Cross Reference Sheet
Prospectus
Statement of Additional Information
Part C of Form N-1A
Signature Page
Exhibits
This filing is made to add prior performance in the prospectus for the LKCM
Balanced Fund and to include the financial statements for the LKCM Small Cap
Equity Fund and the LKCM Equity Fund.
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LKCM FUND
FORM N-1A 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.......Not Applicable
Item 4. General Description of Registrant.....Investment Objectives and
Policies; Description of
Securities and Other
Investment Policies; 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, Other
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 Objectives 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.......................Fund 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, Other
Distributions, and
Taxes
Item 21. Underwriters..........................Management
Item 22. Calculations of Performance Data......Performance Information
Item 23. Financial Statements..................Financial Statements
Part C
- ------
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Information required to be included in Part C is set forth under the appropriate
item so numbered in Part C to this Registration Statement.
4
<PAGE>
PART A
LKCM FUND
POST-EFFECTIVE AMENDMENT NO. 8
Prospectus included in this filing:
PRELIMINARY PROSPECTUS
DATED MAY 1, 1998
SUBJECT TO COMPLETION
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER, SOLICITATION OR SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
5
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P R O S P E C T U S
May 1, 1998
LKCM FUNDS
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
FOR INFORMATION CALL 800-688-LKCM
LKCM Funds (the "Trust") is an open-end, management investment company having
five separate diversified funds (the "Funds"), each of which is treated as a
separate mutual fund.
THE LKCM SMALL CAP EQUITY FUND
The Small Cap Equity Fund seeks to maximize capital appreciation. The Fund
invests primarily in equity securities of smaller companies (those with market
values at the time of investment of less than $1 billion) which the Luther King
Capital Management Corporation (the "Adviser") believes are likely to have
above-average growth in revenue and/or earnings and potential for above-average
capital appreciation.
THE LKCM EQUITY FUND
The Equity Fund seeks to maximize long-term capital appreciation. The Fund
invests primarily in equity securities of companies which the Fund's 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 Fund invests a portion
of its assets in companies whose public market value is less than the Adviser's
assessment of the companies' value.
THE LKCM BALANCED FUND
The Balanced Fund seeks current income and capital appreciation. The Fund
invests primarily in a diversified portfolio of equity and fixed-income
securities, including common stocks, income producing securities convertible
into common stocks, fixed-income securities, and cash equivalent securities.
THE LKCM FIXED INCOME FUND
The Fixed Income Fund seeks current income. The Fund invests primarily in a
diversified portfolio of investment grade, intermediate-term debt securities
issued by corporations, the U.S. Government, agencies or instrumentalities of
the U.S. Government, and cash equivalent securities. The Fund seeks to maintain
a dollar-weighted average expected maturity between 3 to 10 years under normal
market and economic conditions.
THE LKCM INTERNATIONAL FUND
The International Fund seeks a total return in excess of the total return of the
Morgan Stanley Capital International Europe, Australasia, Far East Index. The
Fund invests at least 65% of its total assets in equity and equity-related
securities in non-U.S. markets and, to a limited extent, invests in U.S. markets
through the use of American Depository Receipts and similar instruments issued
by non-U.S. corporations.
This Prospectus sets forth concisely the information about each Fund that a
prospective investor should know before investing. It should be retained for
future reference. A Statement of Additional Information dated May 1, 1998
containing additional information about the Trust and the Funds has been filed
with the Securities and Exchange Commission (the "SEC"). The Statement of
Additional Information, as it may be supplemented from time to time, is
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incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information may be obtained, without charge, by writing or calling
the Trust at the address or telephone number shown above.
7
<PAGE>
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.
THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY FUND WILL BE
ACHIEVED.
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FUND EXPENSES
The following table illustrates the various expenses and fees that a shareholder
of the Funds may incur either directly or indirectly. The fees and expenses for
the Balanced, Fixed Income and International Funds are based on estimated
amounts for the fiscal year ending December 31, 1998.
SHAREHOLDER TRANSACTION EXPENSES
- -------------------------------------------------------------------------------
Sales Load Imposed on Purchases.................. None
Deferred Sales Load.............................. None
Sales Load Imposed on Reinvested Dividends....... None
Redemption Fees.................................. None+
Exchange Fees.................................... None
+ The Funds' transfer agent imposes a $12.00 fee for each wire redemption.
See "Redemption of Shares - By Telephone or Wire."
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
- -------------------------------------------------------------------------------
Small Cap Equity Balanced Fixed Income International
Equity Fund Fund Fund Fund Fund
----------- ------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Investment Advisory
Fee (after waiver) 0.75% 0.70% 0.65% 0.50% 1.00%
12b-1 Fees None None None None None
Other Expenses (after
expense reimbursement) 0.20% 0.10% 0.15% 0.15% 0.20%
------- ------ ------ ------ ------
Total Operating Expenses
(after waivers and
expense reimbursements) 0.95% 0.80% 0.80% 0.65% 1.20%
======= ====== ====== ====== ======
</TABLE>
Although not required to do so, Luther King Capital Management Corporation (the
"Adviser"), has agreed to limit the annual operating expenses of the Small Cap
Equity Fund, the Equity Fund, the Balanced Fund, the Fixed Income Fund and the
International Fund to 1.00%, 0.80%, 0.80%, 0.65% and 1.20%, respectively, of
each Fund's average net assets. If the Adviser had not limited the Equity Fund's
expenses for the year ended December 31, 1997, Other Expenses would have been
0.46% and the Total Operating Expenses would have been 1.16%. With respect to
the Balanced Fund, Fixed Income Fund and International Fund, Other Expenses
before reimbursement are estimated to be 1.03%, 1.04% and 2.20% for the year
ending December 31, 1998, respectively, and Total Operating Expenses are
estimated to be 1.68%, 1.54% and 3.20% for the year ending December 31, 1998,
respectively. In addition to the fee waivers and expense reimbursements set
forth above, the Adviser from time to time voluntarily may waive all or a
portion of a Fund's advisory fee and/or reimburse expenses for a Fund. Any such
waivers and/or reimbursements will have the effect of increasing investment
returns for such periods. For additional information, see "Management -
Investment Adviser."
EXAMPLE
<TABLE>
<CAPTION>
You would pay the following expenses
on a $1,000 investment over various time
periods, assuming:
(1) 5% annual return
(2) redemption at the end of each time period:
Small
Cap Fixed
Equity Equity Balanced Income International
Fund Fund Fund Fund Fund
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One Year................... $9 $8 $8 $7 $12
Three Years................ $29 $26 $26 $21 $38
Five Years................. $50 $44 $44 $36 $66
Ten Years.................. $111 $99 $99 $81 $145
</TABLE>
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The Example should not be considered a representation of past or future
expenses; actual Fund expenses may be greater or less than those shown. The
assumption in the Example of a 5% annual return is required by regulations of
the SEC applicable to all mutual funds. The assumed 5% annual return is a not a
prediction of, and does not represent, the projected or actual performance of
any Fund.
PROSPECTUS SUMMARY
THE FUNDS
The Funds are each an individual series of the Trust, which is an
open-end, diversified, management investment company.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund has its own investment objective. See "Investment Objectives
and Policies" and "Description of Securities and Other Investment Policies" of
the Prospectus for a full discussion of the respective investment objectives and
policies.
The Small Cap Equity Fund seeks to maximize capital appreciation. The
Fund invests primarily in equity securities of smaller companies (those with
market values at the time of investment of less than $1 billion) which the
Fund's Adviser believes are likely to have above-average growth in revenue
and/or earnings and potential for above-average capital appreciation.
The Equity Fund seeks to maximize long-term capital appreciation. The
Fund invests primarily in equity securities of companies which the Fund's
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 Fund
invests a portion of the its assets in companies whose public market value is
less than the investment adviser's assessment of the companies' value.
The Balanced Fund seeks current income and capital appreciation. The
Fund invests primarily in a diversified portfolio of equity and fixed-income
securities, including common stocks, income producing securities convertible
into common stocks, fixed-income securities, and cash equivalent securities.
The Fixed Income Fund seeks current income. The Fund invests primarily
in a diversified portfolio of investment grade, intermediate-term debt
securities issued by corporations, the U.S. Government, agencies or
instrumentalities of the U.S. Government, and cash equivalent securities. The
Fund seeks to maintain a dollar-weighted average expected maturity between 3 to
10 years under normal market and economic conditions.
The International Fund seeks a total return in excess of the total
return of the Morgan Stanley Capital International Europe, Australasia, Far East
Index. The Fund invests at least 65% of its total assets in equity and
equity-related securities in non-U.S. markets and, to a limited extent, invests
in U.S. markets through the use of American Depository Receipts and similar
instruments issued by non-U.S. corporations.
INVESTMENT ADVISER
Luther King Capital Management Corporation ("Adviser") serves as the
investment adviser to the Funds. Founded in 1979, the Adviser provides
investment counseling services to employee benefit plans, endowment
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<PAGE>
funds, foundations and high net-worth individuals. As of the date of this
Prospectus, the Adviser had in excess of $5 billion in assets under management.
See "Management--Investment Adviser."
INVESTMENT SUBADVISER
TT International Investment Management, doing business as TT
International ("Subadviser"), is the investment subadviser to the International
Fund. Founded in 1993, the Subadviser offers investment counseling services to
investment companies, pension plans, trusts and charitable organizations. As of
the date of this Prospectus, the Subadviser had in excess of $1.5 billion in
assets under management. See "Management - Investment Subadviser."
HOW TO INVEST
Shares of each Fund are offered directly to investors without a sales
commission at the net asset value of the Fund next determined after receipt of
the order. Share purchases may be made by sending investments directly to the
Fund, subject to acceptance by the Fund. The minimum initial investment is
$10,000 and the minimum for subsequent investments is $1,000. The Trust's
officers are authorized to waive the minimum initial and subsequent investment
requirements. See "Purchase of Shares."
HOW TO REDEEM
Shares of each Fund may be redeemed at any time at the net asset value
of the Fund 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
Firstar Trust Company provides the Funds with administrative, dividend
disbursing, transfer agency and custodial services. See
"Management--Administrator."
RISK FACTORS
The investment policies of each Fund involve certain risks and
considerations of which an investor should be aware. The portfolio securities
held by the Funds and the value of the Funds' shares will fluctuate with market
and other economic conditions, so that investors' shares, when redeemed, may be
worth more or less than their original cost. The market value of fixed income
securities may be inversely related to actual change in interest rates.
Investing in foreign securities involves certain risks that are not typically
associated with investing in U.S. issues. Because the Small Cap Equity Fund
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. For a discussion of these risks, see "Description of Securities
and Other Investment Policies."
FINANCIAL HIGHLIGHTS
The financial highlights relating to the Small Cap Equity Fund and the
Equity Fund have been audited by Deloitte & Touche LLP, independent auditors,
whose unqualified report is incorporated by reference into the Statement of
Additional Information and is contained in the Trust's Annual Report to
Shareholders. Copies of the Trust's Annual Report to Shareholders may be
obtained, without charge, upon request. The Trust's Annual Report to
Shareholders also contains further information about the performance of the
Small Cap Equity Fund and the Equity Fund. The financial information for the
Balanced, Fixed Income and International Funds outstanding during the period
from January 1, 1998 to March 31, 1998 included below has been derived from the
financial records of the Funds without examination by the Funds' independent
auditors, who do not express an opinion thereon.
11
<PAGE>
<TABLE>
<CAPTION>
Small Cap Equity Fund Year ended Year ended May 1, 1995 to July 14, 1994 (1)
December 31, December 31, December 31, to April 30,
1997 1996 1995 1995
<S> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $16.20 $13.84 $11.48 $10.00
---------- ---------- ----------- ----------
Net investment income 0.02 0.05 0.03 0.04
Net realized gain (loss) and unrealized
appreciation (depreciation) 3.38 3.26 2.33 1.44
---------- ---------- ----------- ----------
Total from investment operations 3.40 3.31 2.36 1.48
---------- ---------- ----------- ----------
Dividends from net investment income (0.07) (0.07) --- ---
Distributions from net realized
gain from investment transactions (2.64) (0.88) --- ---
---------- ---------- ----------- ----------
Total distributions (2.71) (0.95) --- ---
---------- ---------- ----------- ----------
Net Asset Value - End of Period $16.89 $16.20 $13.84 $11.48
========== ========== =========== ==========
Total Return 23.07% 25.67% 20.56% (3) 14.80% (3)
Ratios and Supplemental Data:
Net assets, end of period (thousands) $274,787 $199,088 $121,430 $66,736
Ratio of expenses to average net assets 0.95% 1.00% 1.00% (2) 1.00% (2)
Ratio of net investment income to average
net assets 0.22% 0.39% 0.53% (2) 1.15% (2)
Portfolio turnover rate 34% 66% 57% 53%
Average commission rate (4) $0.0567 $0.0564 N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Commencement of Operations.
(2) Annualized.
(3) Not Annualized.
(4) For the fiscal years beginning on or after September 1, 1995, a Fund is
required to disclose the average commission rate
per share it paid for portfolio trades on which commissions were charged.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Equity Fund Year ended January 3, 1996 (1)
December 31, to December 31,
1997 1996
<S> <C> <C>
Net Asset Value - Beginning of Period $11.70 $10.00
-------- ---------
Net investment income 0.10 0.15
Net realized gain (loss) and unrealized
appreciation (depreciation) 2.52 1.55
-------- ---------
Total from investment operations 2.62 1.70
-------- ---------
Dividends from net investment income (0.25) ---
Distributions from net realized gain from
investment transactions (0.89) ---
-------- ---------
Total distributions (1.14) ---
-------- ---------
Net Asset Value - End of Period $13.18 $11.70
======== =========
12
<PAGE>
Total Return 23.57% 17.00% (3)
Ratios and Supplemental Data:
Net assets, end of period (thousands) $52,392 $34,608
Ratio of expenses to average net assets
Before expense reimbursement 1.16% 1.32% (2)
After expense reimbursement 0.80% 0.80% (2)
Ratio of net investment income to average
net assets
Before expense reimbursement 0.57% 0.98% (2)
After expense reimbursement 0.93% 1.50% (2)
Portfolio turnover rate 48% 79%
Average commission rate $0.0601 $0.0611
- --------------------------------------------------------------------------------
<FN>
(1) Commencement of Operations.
(2) Annualized.
(3) Not Annualized.
</FN>
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
January 1, 1998 (1) to March 31, 1998
- -----------------------------------------------------------------------------------------------------
Balanced Fixed Income International
Fund Fund Fund
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value - Beginning of Period $10.00 $10.00 $10.00
-------- -------- --------
Net investment income
Net realized gain (loss) and unrealized
appreciation (depreciation)
Total from investment operations
Dividends from net investment income
Distributions from net realized gain from
investment transactions
Total distributions
Net Asset Value - End of Period $ $ $
======== ======== ========
Total Return % % %
Ratios and Supplemental Data:
Net assets, end of period (thousands) $ $ $
Ratio of expenses to average net assets
Before expense reimbursement % % %
After expense reimbursement % % %
Ratio of net investment income to average
net assets
Before expense reimbursement % % %
After expense reimbursement % % %
Portfolio turnover rate % % %
Average commission rate $ $ $
<FN>
(1) The Funds commenced operations on December 30, 1997. At December 31, 1997
the Funds had no operations other than those relating to organizational matters.
(2) Annualized.
(3) Not Annualized.
</FN>
</TABLE>
PERFORMANCE INFORMATION
TOTAL RETURN
From time to time total return and yield data may be quoted in
advertisements or in communications to shareholders. 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 a Fund from the beginning date of the
measuring period to the end of the measuring period. Such figures reflect
changes in the price of each Fund's shares and assume that any income dividends
and/or other distributions made by the applicable Fund during the period were
reinvested in additional shares of the Fund. 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 Fund's operations). When
considering "average" total return figures for periods longer than one year, it
is important to note that the Fund's annual total return for any one year in the
period might have been greater or less than the average for the entire period.
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<PAGE>
In addition to "average annual" total return, the Funds may also quote a
"cumulative" total return for various periods representing the cumulative change
in value of an investment in each Fund for a specific period (again reflecting
changes in a Fund's share price and assuming reinvestment of dividends and other
distributions).
The average annual total returns below show the actual performance for
the Small Cap Equity Fund and the Equity Fund for the periods ended December 31,
1997 and for the Balanced Fund, the Fixed Income Fund and the International Fund
for the periods ended March 31, 1998. This performance is historical and does
not represent projected future investment performance. Also shown are comparable
figures for the unmanaged S&P 500 Index, a widely used measure of market
performance.
For the period ended December 31, 1997
Inception Since
Fund Date 1 Year Inception
- ------- ------------ -------- ------------
Small Cap Equity Fund 7/14/94 23.07% 24.52%
Equity Fund 1/03/96 23.57% 20.24%
S&P 500 Index 7/14/94 33.36% 28.15%
S&P 500 Index 1/03/96 33.36% 28.06%
For the period ended March 31, 1998
Inception Since
Fund Date Inception
- ------- ------------ ------------
Balanced Fund 12/30/97 %
Fixed Income Fund 12/30/97 %
International Fund 12/30/97
S&P 500 Index
YIELD
Yield is computed based on the net income of the Fixed Income Fund's
shares during a 30-day (or one-month) period, which will be identified in
connection with the particular yield quotation. More specifically, yield of the
Fixed Income Fund is computed by dividing the net income per share of the Fixed
Income Fund during a 30-day (or one-month) period and annualizing the result on
a semiannual basis.
The Fixed Income Fund's annualized yield for the period December 30,
1997 (date of inception) to March 31, 1998 is ___%. THIS PERFORMANCE IS
HISTORICAL AND DOES NOT REPRESENT PROJECTED FUTURE INVESTMENT PERFORMANCE.
PERFORMANCE OF SIMILAR BALANCED FUND
The Adviser has managed a similar fund that has investment objectives,
policies and strategies substantially similar to those of the Balanced Fund
("Similar Balanced Fund"). Below is the actual annualized total return of the
Similar Balanced Fund for the period ended March 31, 1998. THE PERFORMANCE OF
THE SIMILAR BALANCED FUND IS HISTORICAL AND DOES NOT REPRESENT PROJECTED FUTURE
INVESTMENT PERFORMANCE OF THE SIMILAR BALANCED FUND OR THE BALANCED FUND.
<TABLE>
<CAPTION>
For the period ended March 31, 1998
Inception Since
Date 1 Year 3 Years 5 Years Inception
<S> <C> <C> <C> <C> <C>
Similar Balanced Fund 2/28/93
</TABLE>
PERFORMANCE OF SIMILAR INTERNATIONAL ACCOUNTS
15
<PAGE>
The Subadviser also has managed several other private accounts with
investment objectives, policies and strategies substantially similar to those of
the International Fund ("Similar International Accounts"). The actual composite
annualized total return (net of fees) of the Similar International Accounts for
the period from November 1, 1992 (inception) through March 31, 1998 is _____%.
The actual composite annualized total return (net of fees) of the Similar
International Accounts for the one year and five years ended March 31, 1998 is
____% and ____%, respectively. This performance of the Similar International
Accounts is historical and does not represent projected future investment
performance of the Accounts or the International Fund. The composite annualized
total return of the EAFE Index for the period from November 1, 1992 (inception)
through March 31, 1998 is ___%. The actual composite annualized total return of
the EAFE Index for the one year and five years ended March 31, 1998 is ___% and
___%, respectively. Certain investment restrictions that apply to register
investment companies such as the International Fund, and not applicable to the
Similar International Accounts, may have adversely affected the performance
results of the Similar International Accounts composite if these restrictions
had been applicable.
ADVISER'S INVESTMENT PHILOSOPHY
For the Small Cap Equity, Equity, Balanced and Fixed Income Funds the
Adviser follows a long-term investment philosophy grounded in the fundamental
analysis of individual companies. The Adviser's primary approach to
equity-related investing has two distinct but complementary components. First,
the Adviser seeks to identify high quality companies based on various financial
and fundamental criteria. Companies meeting these criteria will exhibit most of
the following characteristics: consistently high profitability levels, strong
balance sheet quality, prominent market share positions, the ability to generate
excess cash flow after capital expenditures, and management with a significant
ownership stake in the company. Second, the Adviser imposes a value discipline
on the selected securities. In making value determinations, the Adviser utilizes
quantitative criteria in conjunction with judgment and experience.
For the Small Cap Equity, Equity, Balanced and Fixed Income Funds the
Adviser also invests in companies whose assets the Adviser has determined are
undervalued in the marketplace. These include companies with tangible assets as
well as companies that own valuable intangible assets. As with the primary
approach described above, both qualitative as well as quantitative factors are
important criteria in the investment analysis.
For the Balanced and Fixed Income Funds the Adviser's fixed-income
approach complements the equity approach by concentrating on high quality
corporate and government issues with intermediate effective maturities. The
Adviser's fixed-income philosophy combines the offensive characteristics of
noncallable bonds with the defensive attributes of callable bonds in an attempt
to enhance returns while controlling the level of risk. The security selection
process for noncallable corporate bonds is heavily credit driven and focuses on
the issuer's earning trends, its competitive positioning and the dynamics of its
industry. A second component of the Adviser's fixed-income philosophy is the
identification of undervalued securities with a combination of high coupons and
early redemption features, including refunding and sinking fund call provisions.
These defensive issues can offer high levels of current income with limited
price volatility and are used as alternatives to traditional short-term
noncallable issues. Maturity decisions are primarily a function of the Adviser's
macroeconomic analysis and are implemented utilizing intermediate maturity,
noncallable securities. Finally, the credit analysis performed by the Adviser on
individual companies, as well as industries, is enhanced by the Adviser's
experience in the equity market. The analytical effort concentrates on market
dominant, consistently profitable, well financed debt issuers.
While the Funds' securities will generally be selected using the
strategies discussed above, the Adviser may also select investments based on
other criteria.
SUBADVISER'S INVESTMENT PHILOSOPHY
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The Subadviser for the International Fund bases its approach to
investment in international equity markets on its assessment of the political
situation and economic fundamentals in the markets in which it invests. To
implement its approach, the Subadviser utilizes a three-part stock selection
process. First, the Subadviser seeks companies that display value in the form of
assets or earnings. Second, the Subadviser seeks to verify its valuation through
the use of various models and information obtained from academic or industrial
experts. Finally, the Subadviser assesses the potential for realizing the value
it has identified. Although the Subadviser seeks to outperform the EAFE Index,
it does not attempt to track the country and sector weightings of the Index.
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The following descriptions are designed to help you choose the Fund that
best fits your investment objective. You may want to pursue more than one
objective by investing in more than one of the Funds. Each Fund's investment
objective is a fundamental policy, which cannot be changed without the approval
of a majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). There can be no
assurance that a Fund's investment objective will be met. For a discussion of
certain risks and additional investment techniques associated with the
investment in the Funds, see "Description of Securities and Other Investment
Policies" below and "Investment Objectives and Policies" and "Investment
Limitations" in the Statement of Additional Information.
THE LKCM SMALL CAP EQUITY FUND
The Small Cap Equity Fund seeks to maximize capital appreciation. The
Fund invests primarily in equity securities of smaller companies (those with
market values at the time of investment of less than $1 billion) which the
Fund's Adviser believes are likely to have above-average growth in revenue
and/or earnings and potential for above-average capital appreciation. Under
normal market conditions, the Fund will invest at least 65% of its total assets
in the equity securities of smaller companies. The equity securities in which
the Fund may invest are: common stocks, preferred stocks, securities convertible
into common stock, rights and warrants. Up to 5% of the Fund's total assets may
be invested in convertible debt securities which at the 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 Fund may be
invested in U.S. Government securities, corporate debt securities which at the
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 Fund 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 Fund may also use derivative instruments, including financial
futures, options, and options on financial futures for hedging purposes and
engage in foreign currency transactions.
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. Small 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.
THE LKCM EQUITY FUND
The Equity Fund seeks to maximize long-term capital appreciation. The
Fund invests primarily in equity securities of companies which the Fund's
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 Fund
invests a portion of its assets in companies whose public market value is less
than the Adviser's assessment of the companies' value. The equity securities in
which the Fund may
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invest are: common stocks, preferred stocks, securities convertible into common
stocks, rights and warrants. The balance of the Fund 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 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 Fund 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 LKCM BALANCED FUND
The Balanced Fund seeks current income and capital appreciation. The
Fund invests primarily in a diversified portfolio of equity and fixed-income
securities, including common stocks, income producing securities convertible
into common stocks, fixed-income securities, and cash equivalent securities. The
Fund primarily invests in equity and debt securities of companies with
established operating histories and strong fundamental characteristics. By
utilizing both equity and fixed-income securities, the Fund will normally
achieve an income yield in excess of the dividend income yield of the Standard &
Poor's 500 Composite Stock Price Index (TM) ("S&P 500"). A minimum of 25% of the
Fund's assets normally are invested in fixed-income senior securities, which
includes debt securities.
In selecting equity and fixed-income securities for the Fund, the
Adviser typically seeks companies which exhibit strong fundamental
characteristics and considers fundamental factors such as cash flow generation,
earnings and dividend growth record and outlook, balance sheet quality, and
profitability levels. However, the Adviser may select securities based on
factors other than those described above. For example, some securities may be
purchased at a discount to the Adviser's perception of fair value. The Adviser's
intention, in such situations, is to identify undervalued securities and to
purchase these securities at a discount to fair value and have the investment
accrue to that value over time. The Fund does not presently intend to invest
more than 20% of its total assets in equity securities that do not pay a
dividend. It is anticipated that a majority of the equity securities in which
the Fund invests will be listed on a national securities exchange or traded on
The Nasdaq Stock Market ("Nasdaq") or in the U.S. over-the-counter markets. The
Fund may increase its cash position when the Adviser determines that investment
opportunities with desirable risk/reward characteristics are unavailable. The
Fund may also invest in U.S. and foreign government securities, corporate bonds
and debentures, high-grade commercial paper, preferred stocks, certificates of
deposit or other securities of U.S. issuers when the Adviser perceives
attractive opportunities from such securities, or so that the Fund may receive a
competitive return on its uninvested cash. The Fund may invest in debt
securities of U.S. and foreign issuers. The Fund may invest up to 10% of its
total assets in foreign securities not publicly traded in the United States. In
addition, the Fund may invest in American Depository Receipts ("ADRs").
Corporate debt securities in which the Fund invests will have a rating within
the four highest grades as determined by Moody's Investor Services, Inc.
("Moody's") or Standard & Poor's (S&P's).
THE LKCM FIXED INCOME FUND
The Fixed Income Fund seeks current income. The Fund invests primarily
in a diversified portfolio of investment grade, intermediate-term debt
securities issued by corporations, the U.S. Government, agencies or
instrumentalities of the U.S. Government, and cash equivalent securities. Under
normal market conditions, at least 65% of its total assets will be invested in
such fixed-income securities. Investment grade debt securities are considered to
be those rated Baa or better by Moody's or BBB or better by S&P's. See
"Description of Securities and Other Investment Policies" for discussion of the
characteristics of securities rated Baa by Moody's or BBB by S&P's.
The Fund seeks to maintain a dollar-weighted average expected maturity
between 3 and 10 years under normal market and economic conditions. The expected
maturity of securities with sinking fund or other early redemption features
shall be estimated by the Adviser, based upon prevailing interest rate trends
and the issuer's financial position. The average expected maturity may be less
than three years if the Adviser believes a temporary defensive posture is
appropriate.
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The Fund may invest in all types of domestic or U.S. dollar denominated
foreign fixed-income securities in any proportion, including bonds, notes,
convertible bonds, mortgage-backed and asset-backed securities, government and
government agency securities, zero coupon bonds, and short-term obligations such
as commercial paper and notes, bank deposits and other financial obligations,
and repurchase agreements. Bonds, notes, and other corporate debt instruments
include obligations of varying maturities within the overall maturity range
noted above over a cross section of industries. The value of a debt security
changes as interest rates fluctuate. The magnitude of the change is dependent
upon the maturity of the security. See "Description of Securities and Other
Investment Policies" for a discussion of interest rate risks. For a description
of temporary investment securities in which the Fund may invest, government and
government agency securities, asset-backed securities, and other investments and
techniques the Fund may use, see "Description of Securities and Other Investment
Policies." In determining whether or not to invest in a particular debt
security, the Adviser considers factors such as the price, coupon, yield to
maturity, the credit quality of the issuer, the issuer's cash flow and related
coverage ratios, the property, if any, securing the obligation and the terms of
the debt instrument, including subordination, default, sinking fund and early
redemption provisions. The Fund invests in securities consistent with its
investment objective, and which meet the quality and maturity characteristics
established for the Fund. In doing so, it will consider the ratings of Moody's
and S&P's assigned to various obligations. The Fund intends to purchase
securities that are rated investment grade subsequent to its purchase, the
rating of an issue of securities may be reduced below the current minimum rating
required for its purchases. This event does not require the sale of such an
issue, but the Adviser will consider such an event in determining whether to
continue to hold the obligation. The Statement of Additional Information
contains a description of Moody's and S&P's ratings.
THE LKCM INTERNATIONAL FUND
The International Fund seeks a total return in excess of the total
return of the Morgan Stanley Capital International Europe, Australasia, Far East
Index (the "EAFE Index") The EAFE Index is an unmanaged index representing the
market value weighted price of stocks of approximately 1100 companies screened
for liquidity, cross-ownership, and industry representation and listed on major
stock exchanges in Europe, Australasia and the Far East. The Fund invests at
least 65% of its total assets in equity and equity-related securities in
non-U.S. markets and, to a limited extent, invests in U.S. markets through the
use of ADRs and similar instruments issued by non- U.S. corporations. The Fund
currently intends to focus its investments in securities of issuers located in
Denmark, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Sweden,
Switzerland and the United Kingdom. This is a non-exclusive list of countries in
which the Fund can invest, and the Fund expects to invest in issuers located in
other countries as well.
The Fund invests primarily in equity securities that are listed on
recognized exchanges. The Fund also can invest in equity related securities,
including convertible bonds, warrants, equity and stock index futures contracts
and options and forward currency exchange contracts. In order to generate
additional income, the Fund can lend its portfolio securities to qualified
borrowers. In addition, the Fund can invest in cash and other short-term
investment grade fixed income securities in order to maintain liquidity.
In allocating the Fund's assets among the various securities markets of
the world, the Subadviser will consider such factors as the condition and growth
potential of the various economies and securities markets, currency and taxation
considerations and other pertinent financial, social, national and political
factors. Under certain adverse investment conditions, the Fund may restrict the
number of securities markets in which its assets will be invested, although
under normal market circumstances the Fund's investments will involve securities
principally traded in at least three different countries. Otherwise, there are
no prescribed limits on geographical asset distribution.
DESCRIPTION OF SECURITIES AND OTHER INVESTMENT POLICIES
INTEREST RATES
Each Fund may invest in fixed-income securities, the market value of
which are generally inversely related to actual changes in interest rates, i.e.,
a decline in interest rates produces an increase in market value, while an
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increase in interest rates produces a decrease in market value of these
securities. Moreover, the longer the remaining maturity of a security, the
greater the effect of interest rate changes on the market value of the security.
In addition, changes in the ability of an issuer to make payments of interest
and principal and in the market's perception of an issuer's creditworthiness
affect the market value of the fixed-income securities of that issuer.
RATINGS
Each Fund limits investments in fixed-income securities to those that
are rated at the time of purchase as investment grade by a NRSRO, such as S&P or
Moody's, or, if unrated, are determined to be of equivalent quality by the
Adviser. Investment grade fixed-income securities include:
o U.S. government securities;
o Bonds or bank obligations rated in one of the four highest
categories (such as BBB or higher by S&P);
o Short-term notes rated in one of the two highest categories
(such as SP-2 or higher by S&P);
o Commercial paper or short-term bank obligations rated in one
of the three highest categories (such as A-3 or higher by S&P);
and
o Repurchase agreements involving investment grade fixed-income
securities.
Investment grade fixed-income securities are generally believed to have a lower
degree of credit risk. However, certain investment grade securities with lower
ratings are considered medium quality and may be subject to greater credit risk
than the highest rated securities. If a security's rating falls below that
required at the time of purchase, the Adviser or Subadviser will consider what
action, if any, should be taken consistent with the Fund's investment objective.
Additional information concerning securities ratings is contained in the
Appendix to the SAI.
CORPORATE FIXED-INCOME SECURITIES
Each Fund may invest in corporate fixed-income securities, which include
corporate bonds, debentures, notes and other similar corporate debt instruments,
including convertible securities. Fixed-income securities may be acquired with
warrants attached. Corporate income-producing securities may also include forms
of preferred or preference stock.
TEMPORARY INVESTMENTS
For temporary defensive purposes, the Small Cap Equity, Equity, Balanced
and Fixed Income Funds may invest in the following securities:
(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;
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(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 those securities listed
above.
FOREIGN SECURITIES
The Small Cap Equity, Balanced, Fixed Income and International Funds may
invest in securities of foreign issuers. 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 Funds may temporarily hold
invested reserves in bank deposits in foreign currencies, the Funds 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 Funds permit them to enter
into forward foreign currency exchange contracts in order to hedge the Funds'
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 Funds will endeavor to achieve
most favorable execution costs in their 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 Funds' 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 paid by citizens or corporations operating therein to investors
in other countries. 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 holdings of the Funds.
However, these foreign withholding taxes are not expected to have a significant
impact on the Funds.
AMERICAN DEPOSITORY RECEIPTS ("ADR")
The Balanced, Fixed Income and International Funds may invest in ADRs,
which are receipts issued by an American bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. ADRs may be
listed on a national securities exchange or may trade in the over-the-counter
market. ADR prices are denominated in U.S. dollars; the underlying security is
denominated in a foreign currency.
SECURITIES LENDING
The Small Cap Equity, Balanced, Fixed Income and International Funds may
lend their 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 respective Fund 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 loss of rights in the collateral should the borrower
of the securities fail
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financially. However, loans are made only to borrowers deemed by the Adviser or
Subadviser, as applicable, to be of good standing and when, in the Adviser's or
Subadviser's judgment, as applicable, the income to be earned from the loan
justifies the attendant risks.
MORTGAGE AND ASSET-BACKED SECURITIES
The Balanced and Fixed Income Funds may invest in mortgage-backed
securities. Mortgage-backed securities represent mortgage loans or interests in
such loans secured by real property, and include single- and multi-class
pass-through securities and collateralized mortgage obligations. Mortgage-backed
securities are characterized by monthly payments to the holder of the security,
reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the holders of these securities (such
as a Fund), like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified periods
of time, such as 15 or 30 years, the borrowers can and may pay them off sooner.
Thus, the holders of these securities frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to prepay a mortgage which bears a relatively
high interest rate. This means that in times of declining interest rates, some
of a Fund's higher yielding securities might be converted to cash, and the Fund
will be forced to accept lower interest rates when that cash is used to purchase
additional securities. The increased likelihood of prepayment when interest
rates decline also limits market price appreciation of mortgage-backed
securities. If a Fund buys mortgage-related securities at a premium, mortgage
foreclosures or mortgage prepayments may result in a loss to the Fund of up to
the amount of the premium paid since only timely payment of principal and
interest is guaranteed.
Asset-backed securities have characteristics similar to mortgage-backed
securities. However, the underlying assets are not first-lien mortgage loans or
interests in these loans, but are assets such as motor vehicle installment sales
contracts, other installment loan contracts, home equity loans, leases of
various types of property and receivables from credit card or other revolving
credit arrangements. Similar to mortgage-backed securities, asset-backed
securities are subject to prepayment, which may reduce the overall return to
holders (such as a Fund) of the security. Asset-backed securities may also be
subject to the risks relating to the underlying assets, which may be subject to
the risk of non-payment, depreciation or damage to the underlying collateral
(such as automobiles) or certain other factors. Asset- backed securities may be
supported by non-governmental credit enhancements.
The Funds may invest in stripped mortgage- or asset-backed securities,
which receive differing proportions of the interest and principal payments from
the underlying assets. The market value of such securities generally is more
sensitive to changes in prepayment and interest rates than is the case with
traditional mortgage- and asset-backed securities, and in some cases the market
value may be extremely volatile. With respect to certain stripped securities,
such as interest only ("IO") and principal only ("PO") classes, a rate of
prepayment that is faster or slower than anticipated may result in a Fund
failing to recover all or a portion of its investment, even though the
securities are investment grade.
ZERO-COUPON SECURITIES
The Balanced and Fixed Income Funds may invest in zero-coupon
securities. These securities are debt securities that do not make regular cash
interest payments. Zero-coupon securities are sold at a deep discount to their
face value. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of zero- coupon securities to include in income each year the portion of
the original issue discount (or deemed discount) and other non-cash income on
such securities accruing that year. In order to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended, (the
"Code") and avoid a certain excise tax, each Fund may be required to distribute
a portion of such discount and may be required to dispose of other portfolio
securities, which may occur in periods of adverse market prices, in order to
generate cash to meet these distribution requirements.
REPURCHASE AGREEMENTS
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The Funds may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines established by the Board of Trustees of
the Trust. In a repurchase agreement, a Fund 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 a
Fund to the seller. The Funds always receive 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 Funds might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Funds'
realization upon the collateral may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Small Cap Equity, Balanced and Fixed Income Funds may enter into
reverse repurchase agreements with brokers, dealers, domestic and foreign banks
or other financial institutions. In a reverse repurchase agreement, a Fund sells
a security and agree 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 Fund. The Funds' investment of
the proceeds of a reverse repurchase agreement is the speculative factor known
as leverage. The Funds 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.
WHEN-ISSUED SECURITIES
The Small Cap Equity, Balanced, Fixed Income and International Funds may
purchase securities on a "when- issued" basis. In buying "when-issued"
securities, a Fund 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 Fund in a "when- issued" transaction until the Fund receives payment
or delivery from the other party to the transaction. Although the Fund 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.
FORWARD FOREIGN CURRENCY TRANSACTIONS
The Small Cap Equity, Balanced, Fixed Income and International Funds can
buy and sell foreign currencies, foreign currency futures contracts and forward
contracts in order to adjust the risk/return characteristics of the Fund's
investment portfolio. A forward foreign currency contract is an agreement
between a Fund and a contra party to buy or sell a specified currency at a
specified price and future date. If a decline in the value of a particular
currency relative to the U.S. dollar is anticipated, the Fund may enter into a
futures contract or forward contract to sell that currency as a hedge. If it is
anticipated that the value of a foreign currency will rise, the Fund may
purchase a currency futures contract or forward contract to protect against an
increase in the price of securities denominated in a particular currency that
the Fund intends to purchase. These practices, however, may present risks
different from or in addition to the risks associated with investments in
foreign currencies.
A Fund might not use any of the strategies described above, and there
can be no assurance that any strategy used will succeed. If the Adviser or
Subadviser, as applicable, incorrectly forecasts stock market or currency
exchange rates in utilizing a strategy for a Fund, the Fund would be in a better
position if it had not hedged at all. Although futures contracts and forward
contracts are intended to replicate movements in the cash markets for the
securities and currencies in which a Fund invests without the large cash
investments required for dealing in such markets, they may subject the Fund to
additional risks. The principal risks associated with the use of futures and
forward contracts are: (1) imperfect correlation between movements in the market
price of the portfolio investment or currency (held or intended to be purchased)
being hedged and in the price of the futures contract or forward contract; (2)
possible lack of a liquid secondary market for closing out futures or forward
contract positions; (3) the need for additional portfolio management skills and
techniques; (4) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in losses,
by offsetting favorable
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price movements in hedged investments; and (5) the possible inability of a Fund
to purchase or sell a portfolio security at a time when it would otherwise be
favorable for it to do so, or the possible need for a Fund to sell a security at
a disadvantageous time, due to the need for a Fund to maintain "cover" or to
segregate securities in connection with hedging transactions and the possible
inability of a Fund to close out or liquidate a hedged position.
For a hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security or currency being
hedged. Such equal price changes are not always possible because the investment
underlying the hedging instrument may not be the same investment that is being
hedged. The Adviser or Subadviser, as applicable, will attempt to crease a
closely correlated hedge, but hedging activity may not be completely successful
in eliminating market value fluctuation. The ordinary spreads between prices in
the case and futures markets, due to differences in the nature of those markets,
are subject to distortion. Due to the possibility of distortion, a correct
forecast of currency exchange rate or stock market trends by the Adviser or
Subadviser, as applicable, may still not result in a successful transaction. The
Adviser or Subadviser, as applicable, may be incorrect in its expectations as to
the extent of various currency exchange rate or stock market movements or the
time span within which the movement take place. Although hedging strategies are
intended to reduce fluctuations in Fund net asset value the Fund nonetheless
anticipates that its net asset value will fluctuate.
In connection with these hedging strategies, the Adviser or Subadviser,
as applicable, may seek to hedge a foreign currency using a currency other than
the U.S. dollar. In such instances, the Adviser or Subadviser, as applicable,
may sell the foreign currency in favor of a different foreign currency whose
fundamentals are considered more attractive ("cross-hedging").
ILLIQUID INVESTMENTS
The Small Cap Equity, Balanced, Fixed Income and International Funds may
invest up to 15% and the Equity Fund may invest up to 7% of their 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 of the Fund. If there is a lack
of trading interest in particular Rule 144A securities, a Fund'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
Each Fund may invest a portion of their respective 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 Funds may sustain a loss.
OTHER INVESTMENT COMPANIES
The Funds may invest in other investment companies to the extent
permitted by the 1940 Act. Currently the 1940 Act permits the Funds to invest up
to 10% of their total assets in other investment companies. Not more than 5% of
each Fund's total assets may be invested in the securities of any one investment
company nor may the Funds acquire more than 3% of the voting securities of any
other investment company. In addition to the advisory fees and other expenses
the Funds bear directly in connection with their own operations, as shareholders
of another investment company, the Funds would bear their pro rata portion of
the other investment company's advisory fees and other expenses. As such, the
Funds' shareholders would indirectly bear the expenses of the Funds and the
other investment company, some or all of which would be duplicative.
OTHER INVESTMENTS
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Any remaining assets in the Small Cap Equity, Balanced, Fixed Income or
International Funds 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 Funds 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
Funds will not enter into futures contracts to the extent that the aggregate
initial margin and the premiums required to establish those positions (excluding
the amount by which options are "in-the-money" at the time of purchase) will
exceed 5% of the value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any contracts the Fund has entered
into. (In general, a call option on a futures contract is "in-the-money" if the
value of the underlying futures contract exceeds the strike, i.e., exercise,
price of the call. A put option on a futures contract is "in-the-money" if the
value if the underlying futures contract is exceeded by the strike price of the
put.) This policy does not limit to 5% the percentage of the Fund's assets that
are at risk in options, futures contracts and options on futures. For additional
discussion of derivative instruments, see the Statement of Additional
Information.
PORTFOLIO TURNOVER
Each Fund may sell a portfolio investment soon after its acquisition if
the Adviser of Subadviser believes that such disposition is consistent with
attaining the investment objective of the Fund. Portfolio investments may be
sold for a variety of reasons, such as a more favorable investment opportunity
or other circumstances bearing on the desirability of continuing to hold such
investments. A high rate of portfolio turnover (over 100%) may involve
correspondingly greater brokerage commission expenses and other transaction
costs, which must be borne directly by the Fund and ultimately by its
shareholders. High portfolio turnover may result in the realization of
substantial net capital gains; to the extent net short-term capital gains are
realized, distributions resulting from such gains will be ordinary income for
federal tax purposes. The Small Cap Equity, Equity, Balanced and Fixed Income
Funds' portfolio turnover rate will generally not exceed 100% per year. The
Subadviser estimates that the International Fund's portfolio turnover rate for
1998 will be approximately 200%. The tables set forth in "Financial Highlights"
present the Small Cap Equity, Equity, Balanced, Fixed Income and International
Funds' historical turnover rates.
PURCHASE OF SHARES
Shares of each Fund may be purchased at the net asset value per share
next determined after receipt of the purchase order. Each Fund determines net
asset value as of the close of normal 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."
INITIAL INVESTMENTS
By Mail. Subject to acceptance by the applicable Fund, 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 Funds, by regular mail
to:
LKCM Funds
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
or by express, registered or certified mail to:
LKCM Funds
c/o Firstar Trust Company
615 East Michigan Street, 3rd Floor
Milwaukee, Wisconsin 53202
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<PAGE>
Subject to acceptance by the applicable Fund, payment for the purchase
of shares received by mail will be credited to your account at the net asset
value per share of the Fund next determined after receipt. Such payment need not
be converted into Federal Funds (monies credited to the Fund's Custodian by a
Federal Reserve Bank) before acceptance by the Fund. 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. The
Trust will not accept cash, drafts or third party checks. In the event a check
is not honored by the investor's bank, the investor will be liable for any loss
sustained by the Trust, as well as a service charge imposed by the Transfer
Agent in the amount of $20.
By Wire. Subject to acceptance by the applicable Fund, shares of the
Fund may be purchased by wiring Federal funds ($10,000 minimum) to the Fund's
Custodian. To make an initial purchase by wire, investors should use the
following procedures:
o Telephone the Fund at 800-688-LKCM (option 1) for instructions
and to receive an account number.
o Instruct a Federal Reserve System member bank to wire funds to:
Firstar Bank
ABA #0750-00022
For credit to Firstar Trust Company
Account #112-952-137
For further credit to LKCM Funds
[Name of Fund]
Account #[Shareholder account number]
o Notify the Fund by calling the telephone number listed above prior
to 4:00 P.M. (Eastern Time) on the wire date.
o Promptly complete and mail an Account Registration Form to the
address shown above under purchases by mail.
Federal fund purchases will be accepted only on a day on which the Fund
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 Funds 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
applicable Fund prior to 4:00 P.M. (Eastern Time) on the wire date.
OTHER PURCHASE INFORMATION
Each Fund 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 Fund.
Purchases of each Fund's shares will be made in full and fractional
shares of the Fund 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
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The Automatic Investment Program permits investors who own shares of a
Fund with a value of $10,000 or more, to purchase shares (minimum of $100 per
transaction) at regular intervals selected by the investor. 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. The financial institution must be a member of the Automatic
Clearing House network. There is no charge for this service. A $20 fee will be
charged by the Transfer Agent if there are insufficient funds in the investor's
account at the time of the scheduled transaction. At the investor's option, the
account designated will be debited in the specified amount, and shares will be
purchased on a specified day or days of a month.
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 the Automatic Investment Program, an investor must complete
the appropriate sections of the Account Registration Form. Please call the Trust
at 888-688-LKCM if you have questions. 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: Firstar Trust Company, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701. Notification will be effective three business days
following receipt. The Trust 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 Funds may be redeemed by mail, or, if authorized, by
telephone or wire. No charge is made for redemptions, except with respect to
wire 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 Funds.
BY MAIL
The Funds will redeem their 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
Funds is determined as of the normal close of trading of the NYSE (currently
4:00 P.M. Eastern Time). Redemption requests should be sent to LKCM Funds, c/o
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin, 53201-0701.
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.
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<PAGE>
SIGNATURE GUARANTEES. To protect your account, the Funds, and Firstar
Trust Company from fraud, signature guarantees are required to enable the Funds
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 shareholder(s) or
the registered address, and (2) share transfer requests. Please contact the
Funds 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
Funds 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 Funds' Transfer Agent imposes a $12.00
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 Funds.
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 Funds 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 Funds reserve 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 Funds and their
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 Funds will
use such procedures as are considered reasonable, including recording those
instructions and requesting information as to account registration. To the
extent that the Funds fail to use reasonable procedures as a basis for their
belief, they may be liable for instructions that prove to be fraudulent or
unauthorized.
OTHER REDEMPTION INFORMATION
Payment of the redemption proceeds will 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 Funds
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 Funds
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 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 the account up to at least
$1,000.
The Funds 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 SEC.
The Trust 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 Fund at the
beginning of such period. 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. Investors may incur brokerage charges on the sale of Fund
securities so received in payment of redemptions.
SHAREHOLDER SERVICES
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RETIREMENT PLANS
The Funds make available individual retirement account plans, including
Simplified Employee Pension Plans, Traditional and Roth Individual Retirement
Accounts ("IRA") and IRA "Rollover Accounts", offered by Firstar Trust Company.
Detailed information on these plans is available from the Funds by calling the
Funds 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 Fund shares may be transferred by writing to LKCM
Funds, c/o Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin,
53202-0701. 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 Fund, less any liabilities, by the total
outstanding shares of the Fund. The net asset value per share is determined as
of the close of normal trading on the 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. Options,
futures, 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 at the time of valuation. Unlisted foreign securities are
valued at fair value as determined in accordance with policies established by
the Board of Trustees. Although the International Fund values its assets in U.S.
dollars on a daily basis, it does not intend to covert holdings of foreign
currencies into U.S. dollars on a daily basis.
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 of the Trust.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
The Small Cap Equity, Equity and International Funds intend to declare
and pay income dividends on an annual basis. The Balanced and Fixed Income Funds
intend to declare and pay income dividends on a quarterly basis. The Funds
intend to distribute net capital gains and net gains from foreign currency
transactions, if any, on an annual basis in December. The Funds may make an
additional distribution if necessary, to avoid income or excise tax. Dividends
and other distributions, if any, will automatically be paid in additional shares
of the Funds unless the shareholder elects otherwise. Such election must be made
in writing to the Funds.
TAXES
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<PAGE>
The Funds have qualified or intend to qualify for taxation as "regulated
investment companies" ("RICs") under the Code, so that no Fund will be subject
to federal income tax to the extent it distributes its income and gains to
shareholders. Dividends, whether paid in cash or reinvested in additional
shares, from net investment income, net short-term capital gains and net gains
from certain foreign currency transactions, if any, will be taxable to
shareholders as ordinary income (unless a shareholder is exempt from income tax
or entitled to a tax deferral), and will qualify, in part, for the 70%
dividends-received deduction for corporations, but the portion of a Fund's
dividends so qualified will depend on the aggregate qualifying dividend income
received by the Fund from domestic (U.S.)
sources.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss) are taxable to shareholders as long-term
capital gain, whether paid in cash or additional shares, and regardless of the
length of time the shares have been owned by the shareholder. Under the Taxpayer
Relief Act of 1997 ("Tax Act"), different maximum tax rates apply to net capital
gain depending on the taxpayer's holding period and marginal rate of federal
income tax -- generally, 28% for gain on capital assets held for more than one
year but not more than 18 months and 20% (10% for taxpayers in the 15% marginal
tax bracket) on capital assets held for more than 18 months. The Tax Act,
however, does not address the application of these rules to distributions of net
capital gain by a RIC, including whether those distributions may be treated by
its shareholders in accordance with the RIC's holding period for the assets it
sold that generated the gain. Accordingly, shareholders should consult their tax
advisers as to the effect of the Tax Act on distributions by a Fund to them of
net capital gain. Capital gain distributions are not eligible for the
dividends-received deduction for corporations. Shareholders are notified
annually as to the federal tax status of dividends and other distributions paid
by the Funds. If a shareholder is not required to pay taxes on income, such
shareholder is generally not required to pay federal income tax on the amounts
distributed to him or her.
Any dividends and capital gain distributions declared in December to
shareholders of record on a date in that month will be deemed to have been paid
by the Funds and received by shareholders on December 31 if the distributions
are paid before February 1 of the following year.
When a shareholder redeems shares of a Fund, the redemption may result
in a taxable gain or loss, depending on whether the redemption proceeds are more
or less than the shareholder's adjusted basis for the shares. In addition, if
Fund shares are bought within thirty days before or after selling other Fund
shares at a loss, all or a portion of the loss will not be deductible and will
increase the basis of the newly purchased shares. Capital gain on redeemed
shares held for more than one year will be long-term capital gain, in which
event it will be subject to federal income tax at the rates indicated above.
Each Fund is required by federal law to withhold 31% of reportable
payments (which includes dividends, capital gain distributions, and redemptions)
payable to individual and certain other non-corporate shareholders who have not
complied with certain Internal Revenue Service ("IRS") regulations. In order to
avoid this withholding requirement, you must certify on the Account Registration
Form that your Social Security or other 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 other distributions declared by each Fund, as well as
redemptions of shares, may also be subject to state and local taxes.
The foregoing summarizes some of the important income tax considerations
generally affecting each Fund and its shareholders. POTENTIAL INVESTORS IN THE
FUNDS SHOULD CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR OWN TAX
SITUATION.
MANAGEMENT
INVESTMENT ADVISER
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Luther King Capital Management Corporation (the "Adviser"), 301 Commerce
Street, Suite 1600, Fort Worth, Texas, 76102, serves as the investment adviser
to the Trust. The Adviser was founded in 1979 and provides investment counseling
services to employee benefit plans, endowment funds, foundations, common trust
funds, and high net-worth individuals. As of the date of this Prospectus, the
Adviser had in excess of $5 billion in assets under management. J. Luther King,
Jr. is the controlling shareholder of the Adviser.
Under an Investment Advisory Agreement ("Agreement") with the Funds, the
Adviser, subject to the control and supervision of the Board of Trustees of the
Trust and in conformance with the stated investment objective and policies of
the Funds, manages the investment and reinvestment of the assets of the Funds.
In this regard, it is the responsibility of the Adviser to make investment
decisions for the Funds and to place the Funds' purchase and sale orders. In
addition, subject to any approvals required by the 1940 Act, the Adviser may
delegate its duty to make investment decisions and to place purchase and sales
orders to one or more investment subadvisers with respect to some or all of the
International Fund's assets. In the event of such a delegation, the Adviser is
obligated to monitor the activities of the subadvisers, review the activities of
the subadvisers to ensure compliance with applicable investment objectives and
guidelines, render such reports to the Board of Trustees as may be requested and
provide to the subadvisers such advice as they may reasonably request. As
described below, the Adviser has exercised its authority to delegate certain
duties with respect to all of the International Fund's assets to a subadviser.
As compensation for the services rendered by the Adviser under the
Agreement, the Funds pay the Adviser an advisory fee calculated by applying a
quarterly rate, equal on an annual basis to 0.75%, 0.70%, 0.65% , 0.50% and
1.00% of average daily net assets for the quarter for the Small Cap Equity Fund,
Equity Fund, Balanced Fund, Fixed Income Fund, and International Fund,
respectively. 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 expense from exceeding 1.00%, 0.80%, 0.80%, 0.65% and
1.20% of average daily net assets for the quarter for the Small Cap Equity Fund,
Equity Fund, Balanced Fund, Fixed Income Fund, and International Fund,
respectively. Any waivers or reimbursements will have the effect of lowering the
overall expense ratio for the applicable Fund and increasing its overall return
to investors at the time any such amounts were waived and/or reimbursed.
Certain managed account clients of the Adviser may purchase shares of
the Funds. 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 Funds.
INVESTMENT SUBADVISER
TT International Investment Management, doing business as TT
International, 5 Martin Lane, London, England EC4R ODP, serves as the investment
subadviser to the International Fund. The Subadviser was founded in 1993 and
offers investment counseling services to investment companies, pension plans,
trusts and charitable organizations. As of the date of this Prospectus, the
Subadviser had in excess of $1.5 billion in assets under management. The
Subadviser is a partnership controlled by Timothy A. Tacchi, who owns 67% of the
partnership's participation interests. The Subadviser is registered as an
investment adviser under the Investment Advisers Act of 1940 and is authorized
to conduct its investment business in the United Kingdom by the Investment
Management Regulatory Organization Limited (IMRO).
Pursuant to an Investment Subadvisory Agreement ("Subadvisory
Agreement") entered into between the Adviser and the Subadviser, the Subadviser
is responsible for making investment decisions for the International Fund and
placing purchase and sale orders. These responsibilities are subject to the
control and supervision of the Board of Trustees and the Adviser and must be in
accordance with the Fund's stated investment objective and policies. As
compensation for services rendered by the Subadviser, the Adviser -- and not the
Fund -- pays the Subadviser a subadvisory fee calculated by applying a quarterly
rate, equal on an annual basis to .50% of the Fund's average daily net assets
for the quarter. To the extent that the advisory fee received by the Adviser is
reduced pursuant to the fee waiver and/or expense reimbursement arrangements
described above, the subadvisory fee to be paid to the Subadviser will be
reduced proportionately. However, the Subadviser will have no obligation to
otherwise reimburse the Fund in order to maintain the operating expense
limitations described above.
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PORTFOLIO MANAGERS
J. Luther King, Jr. is primarily responsible for the day-to-day
management of the Small Cap Equity and Equity Funds and has been since
the Funds' inception.
J. Luther King, Jr. and Scot C. Hollmann are primarily responsible for
the day-to-day management of the Balanced Fund.
J. Luther King, Jr., Robert M. Holt, Jr. and Joan M. Maynard are
primarily responsible for the day-to-day management of the Fixed Income Fund.
Timothy Alexander Tacchi, James Elliot Tonner, Duncan Neil Robertson and
Pauline Sau Ngor Pong are primarily responsible for the day-to-day management of
the International Fund.
Mr. King has been President, Principal, and Portfolio Manager of the
Adviser since 1979. Mr. Hollmann and Mr. Holt have been Portfolio Managers of
the Adviser since 1983. Ms. Maynard has been a Portfolio Manager of the Adviser
since 1991 and employed by the Adviser since 1986. Timothy Alexander Tacchi
has been the Controlling Partner of the Subadviser since its formation in 1993.
Previously, he was the sole proprietor of the Subadviser's predecessor firm
(1988-1993), and an Investment Manager at Fidelity International Investment
Advisers Ltd. (1983-1988). James Elliot Tonner has been a Partner and
Investment Manager at the Subadviser since 1993. Previously, he was an
Investment Manager at Chemical Investment Group (1989-90) and President of
Fidelity International Investment Advisers Ltd. (1976-1988). Duncan Neil
Robertson has been an Investment Manager at the Subadviser since 1996.
Previously he was Chief Executive Officer of Dah Sing M&G Asset Management
(1995-96) and Director of M&G Investment Management (1972-1995). Pauline
Sau Ngor Pong has been an Investment Manager at the Subadviser since 1996.
Previously, she was a Portfolio Manager at Dah Sing M&G Asset Management
(1984-1996).
ADMINISTRATOR
Firstar Trust Company (the "Administrator") provides each Fund with
administrative and fund accounting and dividend services pursuant to a Fund
Administration Agreement and a Fund Accounting Service Agreement. The services
under these Agreements are subject to the supervision of the Board of Trustees
of the Trust and officers, and include day-to-day administration of matters
necessary to the Funds' operations, maintenance of their records, preparation of
reports, compliance testing of the Funds' activities, and preparation of
periodic updates of the registration statement under federal and state laws. For
administration services, the Administrator receives from each Fund a fee,
calculated daily and paid monthly. The fee for the Small Cap Equity, Equity,
Balanced and Fixed Income Funds is 0.06% of the Fund's first $200 million of
average daily net assets, plus 0.05% of the Fund's next $500 million of average
daily net assets, plus 0.03% of the Fund's average daily net assets in excess of
$700 million, subject to annual minimums. The fee for the International Fund is
0.07% of the Fund's first $200 million of average daily net assets, plus 0.05%
of the Fund's next $300 million of average daily net assets, plus 0.04% of the
Fund's next $500 million of average daily net assets, plus 0.03% of the Fund's
average daily net assets in excess of $1 billion, subject to an annual minimum.
The Administrator is located at 615 East Michigan Street, Milwaukee, Wisconsin,
53202. From time to time, subject to review by the Board of Trustees of the
Trust, the Administrator may make certain adjustments to the fees it is entitled
to receive from each Fund pursuant to the Fund Administration Agreement.
TRUSTEES
The Board of Trustees of the Trust has overall responsibility for the
management of the Funds. The officers of the Trust 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 Trust's officers and employees are paid by the Adviser or the
Administrator.
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The following is a list of the Trustees of the Trust and a brief
statement of their present positions and principal occupations during the past
five years:
J. Luther King, Jr., Chairman of the Board of Trustees and President
and Manager of the Trust; President, Luther King Capital Management Corporation.
H. Kirk Downey, Trustee; Dean, M. J. Neeley School of Business, Texas
Christian University Business School.
Earle A. Shields, Jr., Trustee; Consultant; and formerly Consultant
for NASDAQ Corp. and Vice President of Merrill Lynch & Co., Inc.
DISTRIBUTOR
Shares of the Funds are distributed through First Data Distributor,
Inc. (the "Distributor"), 4400 Computer Drive, Westboro, Massachusetts, 01581,
a registered broker-dealer.
FUND EXPENSES
Each Fund is responsible for its own expenses, including: interest
charges; taxes; brokerage commissions; organizational expenses; expenses of the
registering or qualifying shares for sale with the states and the SEC; expenses
of issue, sale, repurchase, or redemption of shares; expenses of printing and
distributing reports and prospectuses to existing shareholders; charges of
custodians; expenses for accounting, administrative, audit, and legal services;
fees for outside directors; expenses of fidelity bond coverage and other
insurance; expenses of indemnification; extraordinary expenses; and costs of
shareholder and director meetings.
FUND TRANSACTIONS
The Investment Advisory Agreement and the Investment Subadvisory
Agreement authorize the Adviser and Subadviser to select the brokers or dealers
that will execute the purchases and sales of investment securities for each Fund
and direct the Adviser and Subadviser to use its best efforts to obtain the best
available price and most favorable execution with respect to all transactions
for each Fund.
It is not the Adviser's or Subadviser'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 and Subadviser may place
orders with qualified broker-dealers who recommend the Funds or who act as
agents in the purchase of shares of the Funds for their clients.
Some securities considered for investment by each Fund may also be
appropriate for other clients served by the Adviser or Subadviser. If the
purchase or sale of securities consistent with the investment policies of the
Funds and one or more of these other clients served by the Adviser or Subadviser
is considered at or about the same time, transactions in such securities will be
allocated among the Funds and clients in a manner deemed fair and reasonable by
the Adviser or Subadviser. The various allocation methods used by the Adviser or
Subadviser, and the results of such allocations, are subject to periodic review
by the Board of Trustees of the Funds.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
Each Fund is a series of the LKCM Funds, which was established as a
Delaware business trust by a Declaration of Trust dated February 10, 1994. The
Trust 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 Trust offers five series. The shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the shares
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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 Funds.
The Funds are not required, and do not intend, to hold regular annual
shareholder meetings. The Funds 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 Trust's shares to replace their
Trustees. The Funds 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 1940 Act requires the affirmative
vote of at least a majority of the outstanding voting securities of the affected
Fund or Funds at a meeting called for the purpose of considering such approval.
A majority of a Fund'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
Firstar Trust Company serves as Custodian of the Trust's assets.
SUBCUSTODIAN
The Chase Manhattan Bank serves as the subcustodian of the International
Fund's assets.
DIVIDEND DISBURSING AND TRANSFER AGENT
Firstar Trust Company, 615 East Michigan Street, Milwaukee, Wisconsin,
53202, acts as Dividend Disbursing and Transfer Agent for the Funds.
REPORTS
Shareholders receive semi-annual and annual financial statements. Annual
financial statements are audited by Deloitte & Touche LLP, independent auditors,
411 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
YEAR 2000 COMPLIANCE
The Adviser and Subadviser have taken steps they believe are reasonably
designed to address the potential failure of computer programs used by the
Adviser, Subadviser and the Trust's service providers to address the Year 2000
issue. There can be no assurance that these steps will be sufficient to avoid
any adverse impact.
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LKCM Funds
The LKCM Small Cap Equity Fund
The LKCM Equity Fund
The LKCM Balanced Fund
The LKCM Fixed Income Fund
The LKCM International Fund
INVESTMENT ADVISER
Luther King Capital Management
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
800-688-LKCM
PROSPECTUS
MAY 1, 1998
INVESTMENT ADVISER
Luther King Capital Management Corporation
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
TABLE OF CONTENTS
Page Page
------ ------
Fund Expenses 3 Purchase of Shares 16
Financial Highlights 3 Redemption of Shares 17
Prospectus Summary 3 Shareholder Services 18
Performance Information 6 Valuation of Shares 19
Adviser's Investment Dividends, Other
Philosophy 7 Distributions and Taxes 19
Subadviser's Investment
Philosophy 7 Management 20
Investment Objectives
and Policies 8 Fund Transactions 22
Description of Securities
and Other Investment
Policies 10 General Information 23
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 NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE FUNDS OR THE DISTRIBUTOR IN
ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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36
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LKCM FUNDS
LKCM SMALL CAP EQUITY FUND
LKCM EQUITY FUND
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
301 COMMERCE STREET, SUITE 1600
Fort Worth, Texas 76102
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus dated May 1, 1998, as such Prospectus may be
supplemented or revised from time to time. A copy of the Prospectus may be
obtained without charge by calling the LKCM Funds at (800) 688-LKCM (option 1).
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES B-1
Equity Securities B-1
Preferred Stock B-1
Warrants and Rights B-1
Convertible Securities B-1
Securities Subject to Reorganization B-2
Fixed-Income Securities B-3
U.S. Government Securities B-3
Corporate Debt Securities B-3
Mortgage-Related Securities B-4
Asset-Backed Securities B-7
Risk Factors Relating to Investing in
Mortgage-Related and Asset-Backed Securities B-7
Temporary Investments B-7
Derivative Instruments B-8
Options B-9
Options on Foreign Currencies B-10
Futures Contracts B-11
Forward Foreign Currency Exchange Contracts B-11
Risk Factors in Futures Transactions B-12
Risks of Options on Futures, Forward Contracts,
and Options on Foreign Currencies B-13
Combined Transactions B-13
Asset Coverage for Futures and Options Positions B-14
Illiquid Investments, Restricted Securities and
Private Placement Offerings B-14
Illiquid Investments B-14
Restricted Securities B-14
Private Placement Offerings B-14
Securities Lending B-15
INVESTMENT LIMITATIONS B-15
MANAGEMENT B-17
Investment Adviser B-17
Investment Subadviser B-17
Custodian B-17
Subcustodian B-17
Distributor B-17
Trustees and Officers B-17
Control Persons and 5% 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
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DIVIDENDS, OTHER DISTRIBUTIONS, AND TAXES B-21
General B-21
Taxes - Investments in Foreign Securities B-22
PERFORMANCE INFORMATION B-23
Total Return B-23
Yield B-24
Other Information B-24
Comparison of Fund Performance B-24
GENERAL INFORMATION B-25
Description of Shares and Voting Rights B-25
Shareholder and Trustee Liability B-25
Auditors B-26
Code of Ethics B-26
FINANCIAL STATEMENTS B-26
APPENDIX B-32
Description of Bond Ratings B-32
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THESE CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION AND THE PROSPECTUS DATED MAY 1, 1998, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE FUNDS. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE AN
OFFER TO SELL SECURITIES.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of the Small Cap Equity, Equity,
Balanced, Fixed Income and International Funds (the "Funds") are described in
detail in the Prospectus under the captions "Investment Objectives and Policies"
and "Description of Securities and Other Investment Policies." Additional
information about those policies is provided below.
EQUITY SECURITIES
The equity securities in which the Funds may invest include common
stocks, preferred stocks, warrants and rights, and debt securities convertible
into or exchangeable for common stock or other equity securities.
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. (These are also included in the category of
"Corporate Fixed-Income Securities" in the Prospectus.) 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 Fund is called for
redemption, the Fund 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.
The Small Cap Equity and Balanced Funds' assets may be invested in
non-investment grade debt securities. The Small Cap Equity Fund may invest up to
5% of the Fund's assets in non-investment grade debt securities. The market
values of these 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 securities also tend
to be more sensitive to economic conditions than are higher-quality securities.
Accordingly, these 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.
Even securities rated Baa or BBB by Moody's Investor Services Inc.
("Moody's") and Standard & Poor's ("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
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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 Funds will rely on the judgment, analysis and experience of Luther
King Capital Management Corporation, the investment adviser to the Funds (the
"Adviser") or TT International Investment Management, the investment subadviser
to the International Fund (the "Subadviser"), in evaluating the creditworthiness
of an issuer. In this evaluation, the Adviser or Subadviser, as applicable, 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 Fund's net asset value. In addition, a Fund 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.
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 a Fund's ability to
dispose of particular issues when necessary to meet the Fund'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 Fund to obtain
accurate market quotations for purposes of valuing the Fund'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 Trust's
Board of Trustees or its Adviser 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 Small Cap Equity, Equity,
Balanced and Fixed Income Funds may invest in equity 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 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 target 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 a Fund thereby increasing its brokerage and other transaction expenses. The
Adviser intends to select investments of the type described which, in
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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.
FIXED-INCOME SECURITIES
The fixed-income securities in which the Balanced and Fixed Income Funds
may invest include U.S. Government securities, corporate debt, mortgage-backed
securities and asset-backed securities. The fixed-income securities in which the
Small Cap Equity, Equity and International Funds may invest include U.S.
Government securities and corporate debt securities.
U.S. Government Securities. U.S. Government agencies or
instrumentalities that issue or guarantee securities include, but are not
limited to, the Fannie Mae, Government National Mortgage Association ("GNMA"),
Federal Home Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks, Tennessee Valley
Authority, Inter-American Development Bank, Asian Development Bank, Student
Loan Marketing Association ("SLMA") and the International Bank for
Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the SLMA, are supported only by the credit of the instrumentality. In the case
of securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitment. Each Fund will invest in
securities of such agencies or instrumentalities only when the Adviser is
satisfied that the credit risk is acceptable.
The Funds may invest in component parts of U.S. Treasury notes or bonds,
namely either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of: (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations ( corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATs"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.
CORPORATE DEBT SECURITIES. A Fund's investments in U.S. dollar or
foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to investment grade corporate debt securities (corporate
bonds, debentures, notes and other similar corporate debt instruments);
provided, however, that the Small Cap Equity and the Balanced Funds may invest
up to 5% of its total assets in non-investment grade securities. The rate of
return or return of principal on some debt obligations may be linked or indexed
to the level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
MORTGAGE-RELATED SECURITIES. The Balanced and Fixed Income Funds may
invest in residential or commercial mortgage-related securities, including
mortgage pass-through securities, collateralized mortgage obligations ("CMO"),
adjustable rate mortgage securities, CMO residuals, stripped mortgage-related
securities, floating and inverse floating rate securities and tiered index
bonds.
Mortgage Pass-Through Securities. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers in the residential or commercial
mortgage loans which underlie the
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securities (net of any fees paid to the issuer or guarantor of the securities).
Mortgage pass-through securities differ form other forms of debt securities,
which normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Early repayment of
principal on mortgage pass-through securities (arising form prepayments of
principal due to the sale of underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose a Fund to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
repayment has been purchased at a premium, in the event of prepayment, the value
of the premium would be lost.
There are currently three types of mortgage pass-through securities: (1)
those issued by the U.S. Government or one of its agencies or instrumentalities,
such as the GNMA, the Fannie Mae, and the FHLMC; (2) those issued by private
issuers that represent an interest in or are collateralized by pass-through
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is authorized to guarantee, with the full faith and credit of the
U.S. Government, the timely payment of principal and interest on securities
issued the institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Obligations of Fannie Mae and FHLMC are not backed by the full faith and
credit of the U.S. Government. In the case of obligations not backed by the full
faith and credit of the U.S. Government , the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. Fannie Mae
and FHLMC may borrow form the U.S. Treasury to meet its obligations, but the
U.S. Treasury is under no obligation to lend to Fannie Mae or FHLMC.
Private mortgage pass-through securities are structured similarly to
GNMA, Fannie Mae, and FHLMC mortgage pass-through securities and are issued by
originators of and investors in mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or insured by governmental
entities, private insurers and the mortgage poolers.
Collateralized Mortgage Obligations. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or Fannie Mae. The issuer of
a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call protection
through a de facto breakdown of the underlying pool of mortgages according to
how quickly the loans are repaid. Monthly payment of principal received form the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant
to a rule adopted by the Securities and Exchange Commission ("SEC"), and the
Funds may invest in the securities of such issuers without the limitations
imposed by the Investment Company Act of 1940 ("1940 Act), as investments by the
Funds in other investment companies. In addition, in reliance on earlier SEC
interpretations, the Funds' investments in certain
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other qualifying CMOs, which cannot or do not rely on the rule, are also not
subject to the limitation of the 1940 Act on acquiring interests in other
investment companies. In order to be able to rely on the SEC's interpretation,
these CMOs must be unmanaged, fixed assets issuers, that: (1) invest primarily
in mortgage-backed securities; (2) do not issue redeemable securities; (3)
operate under general exemptive orders exempting them form all provisions of the
1940 Act; and (4) are not registered or regulated under the 1940 Act as
investment companies. To the extent that the Balanced and Fixed Income Funds
select CMOs that cannot rely on the rule or do not meet the above requirements,
the Funds may not invest more than 10% of their total assets in all such
entities. In addition, not more than 5% of each Fund's total assets may be
invested in the securities of any one investment company nor may either Fund
acquire more than 3% of the voting securities of any single such entity.
The Balanced and Fixed Income Funds may also invest in, among other
things, parallel pay CMOs, Planned Amortization Class CMOs ("PAC bonds"),
sequential pay CMOs, floating rate CMOs. Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
bonds generally require payments of a specified amount of principal on each
payment date. Sequential pay CMOs generally pay principal to only one class
while paying interest to several classes. Floating rate CMOs are securities
whose coupon rate fluctuates according to some formula related to an existing
marketing index or rate. Typical indices would include the eleventh district
cost-of-funds index ("COFI"), the London Interbank Offered Rate ("LIBOR"),
one-year U.S. Treasury yields, and ten-year U.S. Treasury yields.
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise to levels above that of the ARMs
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely fall.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayments experience on the mortgage assets.
In part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
included a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the
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level of the index upon which interest rate adjustments are based. As described
below with respect to stripped mortgage-related securities, in certain
circumstances a Fund may fail to recoup fully its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally completed only after
careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"). CMO residuals, whether or not registered under the Securities Act, may be
subject to certain restrictions on transferability, and may therefore be deemed
"illiquid" and subject to Funds' limitations on investment in illiquid
securities as discussed herein.
Stripped Mortgage-Related Securities. Stripped mortgage-related
securities ("SMRS") are derivative multi-class mortgage securities. SMRS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
SMRS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMRS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all or the principal (the PO class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity form these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rated categories of investment-grade securities.
Although SMRS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to the Funds' limitations on investment in illiquid
securities as discussed herein.
Inverse Floaters. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction to the
interest rate on another security or index level. Changes in the interest rate
on the other security or index inversely affect the residual interest rate paid
on the inverse floater, with result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
Tiered Index Bonds. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.
ASSET-BACKED SECURITIES. The Balanced and Fixed Income Funds may invest
in various types of asset- backed securities. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structure similar
to the CMO structure. Investments in these and other types of asset- backed
securities must be consistent with the investment objectives and policies of the
Funds.
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RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have opposite effect of increasing yield to
maturity. Alternatively, if the Fund purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce, yield to maturity. The Adviser will seek to manage
these risks (and potential benefits) by diversifying its investments in such
securities and through hedging techniques.
During periods of declining interest rates, prepayment of
mortgage-related securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in higher-yielding mortgage-related securities
will be affected by reductions in the principal amount of such securities
resulting form such prepayments, and its ability to reinvest the returns of
principal at comparable yields is subject to generally prevailing interest rates
at that time. Conversely, slower than expected prepayments may effectively
change a security that was considered short or intermediate-term at the time of
purchase into a long-term security. Long-term securities tend to fluctuate more
in response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the benefit of a security interest in the
related collateral. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds form repossessed collateral may not always be
sufficient to support payment on these securities.
TEMPORARY INVESTMENTS
The temporary investments that the Small Cap Equity, Equity, Balanced
and Fixed Income Funds 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 Funds. 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 Small Cap Equity Fund 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 Small Cap Equity Fund does
not limit the amount of its 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 Funds 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
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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 and (ii) in the
case of U.S. banks, it is a member of the Federal Deposit Insurance Corporation.
(2) Commercial paper which at the time of purchase is rated in the
highest rating category by a Nationally Recognized Statistical Rating
Organization ("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;
(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, Fannie
Mae, Federal Financing Bank, the Tennessee Valley Authority, and others; and
(6) Repurchase agreements collateralized by those securities listed
above.
DERIVATIVE INSTRUMENTS
In pursuing their respective investment objectives, the Small Cap
Equity, Balanced, Fixed Income and International Funds may 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 and enter into forward
foreign currency exchange 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 instrument 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
instrument. Options on indices are settled in cash and gain or loss depends on
changes in the index in question rather than on price movement in individual
securities.
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 a Fund
seeks to close out an option position. If the Fund 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 Fund
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 Fund
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 a Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
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Each Fund 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 between the parties. A Fund will
only sell OTC Options that are subject to a buy-back provision permitting the
Fund to require the Counterparty to sell the option back to the Fund at a
formula price within seven days. The Funds expect generally to enter into OTC
Options that have cash settlement provisions, although they are not required to
do so.
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 a
Fund or fails to make a cash settlement payment due in accordance with the terms
of the option, the Fund 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 Funds 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 S&P's or "P-1" from Moody's or an equivalent rating from
any other NRSRO.
OPTIONS ON FOREIGN CURRENCIES. The Funds 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, a Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund 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, a Fund may purchase call options on the currency
involved. 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 Fund 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 Fund 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 Funds may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund 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, a Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund 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 exchange rates move
in the expected direction. If this does not occur, the option may be exercised
and the Fund 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, a Fund 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.
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The Funds may write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund 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 Funds'
custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
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 Fund in cash, or liquid assets in
a segregated account with the custodian.
The Funds 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 Fund 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 Fund will collateralize
the option by maintaining in a segregated account with the custodian, cash or
liquid assets 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
currency on index 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").
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currency, 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 contracts on indices are settled in cash.
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. 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.
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 variation margin, resulting in a
repayment of excess variation margin to the contract holder. Variation margin
payments are made to and from the futures broker for as long as the contract
remains open.
Regulations of the CFTC applicable to the Funds require that they use
futures contracts and options on futures contracts only for bona fide hedging
purposes, or to the extent that a Fund's futures and options on futures
positions are for other than bona fide hedging purposes, as described by the
CFTC, the aggregate initial margins and premiums required to establish such
non-bona fide hedging positions other than the "in-the-money" amount in the case
of options that are "in-the-money" at the time of purchase, may not exceed 5% of
the Fund's net assets. Adherence to these guidelines does not limit a Fund's
risk to 5% of the Fund's assets. A Fund will only sell futures contracts to
protect securities owned by it 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 intent, the Funds expect that approximately 75% of
the futures contracts purchased will be "completed;" that is, equivalent amounts
of related securities will have been purchased or in the process of being
purchased by a Fund upon sale of open futures contracts. Although techniques
other than the sale and purchase of futures contracts could be used to control a
Fund's exposure to market fluctuations, the use of futures contracts may be a
more effective means of hedging this
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exposure. While the Funds will incur commission expenses in both opening and
closing out futures positions, these costs may be lower than transaction costs
incurred in the purchase and sale of the underlying securities.
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 large commercial banks, and their
customers. The Funds 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
Funds may use.
In connection with purchases and sales of securities denominated in
foreign currencies, the Funds 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 Funds may also use Forward Contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund 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 Fund
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 Funds' custodian will place cash or other liquid assets in a
separate account having a value equal to the aggregate amount of the Funds'
commitments under Forward Contracts entered into with respect to position hedges
and proxy-hedges. If the value of the assets placed in a segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will equal the amount of the Funds'
commitments with respect to such contracts. Alternatively, a Fund may purchase a
call option permitting the Fund 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 a Fund may purchase a put option permitting the Fund 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 Funds than if they had not
entered into such contracts.
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, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund 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, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge. The Funds will minimize
the risk that they 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 trading. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to a Fund. 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
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to 150% 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.
Utilization of futures transactions by the Funds involves the risk of
imperfect or no correlation where the securities underlying futures contracts
are different than the portfolio securities being hedged. It is also possible
that a Fund 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
a Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option on a futures contract.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract and options prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract or option on
a future 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
and options 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.
RISKS OF OPTIONS ON FUTURES, FORWARD CONTRACTS, AND OPTIONS ON FOREIGN
CURRENCIES. Options on currencies may be traded over-the-counter and forward
currency contracts are always traded in the over-the-counter market. 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. When a Fund enters into a forward currency
contract or purchases an over-the-counter option, it relies on its counterparty
to perform. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction.
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 Fund'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.
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. 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.
COMBINED TRANSACTIONS. The Funds may enter into multiple
transactions, including multiple options transactions, multiple futures
transactions, multiple foreign currency transactions (including Forward
Contracts) and
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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 or Subadviser, as applicable, it is in the best interest
of the Funds 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 Funds will comply
with guidelines established by the SEC with respect to coverage of options,
futures and forward contracts 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, option or forward contract strategy is outstanding,
unless they are replaced with other suitable assets. Consequently, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
ILLIQUID INVESTMENTS, RESTRICTED SECURITIES AND PRIVATE PLACEMENT OFFERINGS.
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 or Subadviser, as applicable, determines the
liquidity of a Fund's investments and, through reports from the Adviser or
Subadviser, as applicable, and the Funds' administrator, the Board monitors
investments in illiquid securities. In determining the liquidity of the Funds'
investments, the Adviser or Subadviser, as applicable, 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 Funds 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 (the "1933 Act") and commercial paper sold in reliance on
Section 4(2) of the Securities Act). With respect to over-the-counter ("OTC")
options that a Fund writes, 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 Fund may have to close out the option
before expiration. The Funds will treat as illiquid an amount of assets used to
cover written OTC options, equal to the formula price at which the Funds 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 the Adviser or Subadviser, as applicable, under the supervision of
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
Funds to sell them promptly at an acceptable price. If through a change in
values, net assets, or other circumstances, any of the Small Cap Equity,
Balanced, Fixed Income and International Funds were in a position where more
than 15% of its net assets were invested in illiquid securities, the Fund would
take appropriate steps to protect liquidity; for the Equity Fund, 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 or in a registered public offering. Where registration
is required, the Fund(s) 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 Fund(s) may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed at the time it decided to seek registration of the
security.
PRIVATE PLACEMENT OFFERINGS. The Small Cap Equity, Balanced and Fixed
Income Funds may invest in private placement offerings. Investments in private
placement offerings are made in reliance on the "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act, and resold to
qualified institutional buyers under Rule 144A under the 1933 Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities law and generally are sold to institutional investors such as
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the Funds that agree they are purchasing the securities for investment and not
with an intention to distribute to the public.
SECURITIES LENDING
The Small Cap Equity, Balanced, Fixed Income and International Funds may
lend securities to qualified brokers, dealers, banks and other financial
institutions. Securities lending allows the Fund 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 or Subadviser, if applicable, to be of
good standing. In addition, they will only be made if, in the Adviser's or
Subadviser's, if applicable, 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 Fund exceed one-third of the value of
its total assets.
It is the Funds' understanding that the current view of the staff of the
SEC is that a Fund may engage in loan transactions only under the following
conditions: (1) the Fund 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 Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on the loan (which
may include the Fund 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 Fund 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.
INVESTMENT LIMITATIONS
The Funds are subject to the following restrictions which are
fundamental policies and may not be changed without the approval of the lesser
of: (1) at least 67% of the voting securities of a Fund present at a meeting if
the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy, or (2) more than 50% of the outstanding
voting securities of a Fund.
As a matter of fundamental policy, each Fund will not:
(1) invest in physical commodities or contracts on physical commodities;
(2) purchase or sell real estate, although it 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; or (ii) with respect to the Small Cap Equity, Balanced, Fixed Income
and International Funds, by lending their portfolio securities to banks,
brokers, dealers and other financial institutions, so long as such loans are not
inconsistent with the 1940 Act or the rules and regulations or interpretations
of the SEC thereunder;
(4) with respect to 75% of its assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, 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);
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(6) borrow money, except (i) from banks and as a temporary measure for
extraordinary or emergency purposes (not for leveraging or investment) or (ii)
with respect to the Small Cap Equity, Balanced, Fixed Income and International
Funds in connection with reverse repurchase agreements provided that (i) and
(ii) in combination do not exceed 331/3% of the Fund's total assets (including
the amount borrowed) less liabilities (exclusive of borrowings); and the Small
Cap Equity and Equity Funds can not buy additional securities if they borrow
more than 5% of their total assets;
(7) underwrite the securities of other issuers (except to the extent
that the Fund may be deemed to be an underwriter within the meaning of the
Securities Act 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 Fund'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; and
(9) issue senior securities, except that this limitation shall not apply
to: (i) evidence indebtedness which the Fund is permitted to incur; (ii) shares
of the separate classes or series of the Trust; or (iii) collateral arrangements
with respect to currency-related contracts, futures contracts, options or other
permitted investments, including deposits of initial and variation margin.
The Funds 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, each Fund will not:
(a) purchase securities 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 securities 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,
options and options on futures are not deemed to constitute selling securities
short;
(b) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value;
(c) invest more than an aggregate of 15% of the net assets of the Small
Cap Equity, Balanced, Fixed Income and International Funds or an aggregate of 7%
of the net assets of the Equity Fund 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 but which can be sold to qualified institutional investors in accordance
with Rule 144A under the Securities Act and commercial paper sold in reliance on
Section 4(2) of the Securities Act), repurchase agreements having maturities of
more than seven days and certain OTC options;
(d) 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; and
(e) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
With the exception of fundamental investment limitation (6), 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 value or total cost of a Fund's assets
will not require the sale of securities.
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MANAGEMENT
INVESTMENT ADVISER
The investment adviser to the Funds is Luther King Capital Management
Corporation. The Adviser is a corporation of which J. Luther King, Jr. is a
"controlling person" (as that term is defined in the rules and regulations of
the SEC). As compensation for the services rendered by the Adviser under the
Investment Advisory Agreement, for the period May 1, 1995 through December 31,
1995, and the years ended December 31, 1996 and 1997, the Small Cap Equity Fund
paid $433,920, $1,229,534 and $1,813,278, respectively. For the period January
3, 1996 through December 31, 1996 and the year ended December 31, 1997, the
Equity Fund paid $53,353 and $130,755, respectively. As a result of its
agreement to limit Fund expenses, the Adviser waived a portion of its fee for
the period January 3, 1996 (inception) through December 31, 1996 and the year
ended December 31, 1997, with respect to the Equity Fund in the amount of
$156,207 and $143,411, respectively.
INVESTMENT SUBADVISER
The investment subadviser to the International Fund is TT International
Investment Management, doing business as TT International. The Adviser and the
Subadviser have entered into an Investment Subadvisory Agreement ("Subadvisory
Agreement") dated December 30, 1997. The Subadviser is a partnership controlled
by Timothy A. Tacchi, who owns 67% of the partnership's participation interests.
The Subadviser is registered as an investment adviser under the Investment
Advisers Act of 1940 and is authorized to conduct its investment business in the
United Kingdom by the Investment Management Regulatory Organization Limited
(IMRO).
CUSTODIAN
As custodian of the Small Cap Equity, Equity, Balanced and Fixed Income
Funds' assets, Firstar Trust Company, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, has custody of all securities and cash of the Funds, delivers
and receives payment for securities sold, receives and pays for securities
purchased, collects income from investments, and performs other duties, all as
directed by the officers of the Trust.
SUBCUSTODIAN
As custodian of the International Fund's assets, The Chase Manhattan
Bank, 4 Chase MetroTech Center, Brooklyn, NY 11245, has custody of all
securities and cash of the International Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments, and performs other duties, all as directed by the officers of
the Trust.
DISTRIBUTOR
Shares of the Funds are distributed through First Data Distributor Inc.
(the "Distributor"), 4400 Computer Drive, Westboro, Massachusetts 01581, a
registered broker-dealer. Jacqui Brownfield, an employee of the Adviser and an
officer of the Trust, is a registered representative of the Distributor.
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their ages, their business
addresses and principal occupations during the past five years are as follows:
J. LUTHER KING, JR. *; 57; 301 Commerce Street, Fort Worth, Texas 76102;
Chairman of the Board of Trustees, President, Chief Executive Officer and
Manager of the Trust; President, Luther King Capital Management Corporation.
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H. KIRK DOWNEY; 55; 2900 Lubbock Street, Fort Worth, Texas 76109;
Trustee of the Trust; Dean, M.J. Neeley School of Business, Texas Christian
University Business School.
EARLE A. SHIELDS, JR.; 77; 53 Westover Terrace, Fort Worth, Texas 76107;
Trustee of the Trust; Consultant; formerly Consultant for NASDAQ Corp. and Vice
President, Merrill Lynch & Co., Inc.
PAUL W. GREENWELL; 47; 301 Commerce Street, Fort Worth, Texas 76102;
Vice President of the Trust; Vice President, Luther King Capital Management.
JACQUI BROWNFIELD; 37; 301 Commerce Street, Fort Worth, Texas 76102;
Secretary and Treasurer of the Trust; Fund Administrator, Luther King Capital
Management.
* Trustee Mr. King is an "interested person" of the Trust (as defined in the
1940 Act), because of his affiliation with the Adviser.
The table below sets forth the compensation paid by the Trust to each of
the Trustees of the Corporation during the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or Total
Retirement Compensation
Aggregate Benefits Accrued Estimated Annual from Trust and
Compensation As Part of Fund Benefits Upon Fund Complex
Name of Person from Trust Expenses Retirement Paid to Trustees
- ----------------- --------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
J. Luther King, Jr.* $0 $0 $0 $0
H. Kirk Downey $9,500 $0 $0 $9,500
Earle A. Shields, Jr. $9,500 $0 $0 $9,500
</TABLE>
Trustees other than those who are officers or affiliated with the
Adviser will receive an annual fee of $8,000 plus a meeting fee of $1,000 for
each meeting attended and are reimbursed for expenses incurred in attending
Board meetings. Trustees who are also officers or affiliated persons receive no
remuneration for their services as Trustees. The Trust's officers and
employees are paid by the Adviser or the Administrator.
CONTROL PERSONS AND 5% SHAREHOLDERS
The following persons may be deemed to control the Equity Fund by virtue
of their ownership of record or beneficially, of more than 25% of the
outstanding shares of the Equity Fund, as of March 31, 1998:
As of March 31, 1998, the following persons owned of record or
beneficially 5% or more of the shares of the Small Cap Equity Fund:
As of March 31, 1998, the following persons owned of record or
beneficially 5% or more of the shares of the Balanced Fund:
As of March 31, 1998, the following persons owned of record or
beneficially 5% or more of the shares of the Fixed Income Fund:
As of March 31, 1998, the following persons owned of record or
beneficially 5% or more of the shares of the International Fund:
As of March 31, 1998, all Trustees and officers as a group owned
beneficially (as the term is defined in Section 13(d) under the Securities and
Exchange Act of 1934) ________ shares, or ___% , _____
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shares, or ___%, _____ shares, or ___%, _____ shares, or ___% and ____ shares,
or ___% of the shares of the Small Cap Equity Fund, Equity Fund, Balanced Fund,
Fixed Income Fund and International Fund, respectively, outstanding on such
date.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Agreement and Subadvisory Agreement authorizes the Adviser and
Subadviser to select the brokers or dealers that will execute the purchases and
sales of investment securities for the Funds and directs the Adviser and
Subadviser to use its best efforts to obtain the best execution with respect to
all transactions for the Funds. As permitted by Section 28(e) of the Securities
Exchange Act of 1934, as amended, the Adviser or Subadviser may cause the Funds
to pay higher commission rates than the lowest available when the Adviser or
Subadviser 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 of
Subadviser in advising various clients, including the Funds, although not all of
these services are necessarily useful and of value in managing the Funds.
It is not the Adviser's or Subadviser's practice to allocate brokerage
or principal business on the basis of sales of shares which may be made through
intermediary brokers or dealers. However, the Adviser or Subadviser may place
orders with qualified broker-dealers who recommend the Funds or who act as
agents in the purchase of shares of the Funds for their clients.
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Adviser or Subadviser. If purchases
or sales of securities consistent with the investment policies of the Funds and
one or more of these other clients serviced by the Adviser or Subadviser is
considered at or about the same time, transactions in such securities will be
allocated among the Funds and clients in a manner deemed fair and reasonable by
the Adviser or Subadviser. Although there is no specified formula for allocating
such transactions, the various allocation methods used by the Adviser or
Subadviser, and the results of such allocations, are subject to periodic review
by the Board of Trustees.
The Adviser and Subadviser manage the Funds without regard generally to
restrictions on Fund turnover. The use of futures contracts and other derivative
instruments with relatively short maturities may tend to exaggerate the Fund
turnover rate for a Fund. 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 Fund
turnover of a Fund, the higher these transaction costs borne by a Fund generally
will be.
The turnover rate of a Fund is calculated by dividing (i) the lesser of
purchases or sales of securities for the particular fiscal year by (ii) the
monthly average of the value of the securities owned by the Fund during the
particular fiscal year. In calculating the rate of Fund 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.
PURCHASE, REDEMPTION, AND PRICING OF SHARES
PURCHASE OF SHARES
Certain managed account clients of the Adviser may purchase shares of
the Funds. 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 Fund.
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Certain clients of the Adviser may, subject to the approval of the
Trust, purchase shares of the Funds with liquid securities that are eligible for
purchase by a Fund (consistent with the Fund'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 The Nasdaq Stock
Market. These transactions will be effected only if the Adviser intends to
retain the security in the Funds as an investment. Assets so purchased by the
Funds will be valued in generally the same manner as they would be valued for
purposes of pricing a Fund's shares, if such assets were included in the Fund's
assets at the time of purchase.
Shares of the Funds are not qualified or registered for sale in all
states. Shares of the Funds 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 Trust reserves the right in its sole discretion (i) to suspend the
offering of Fund shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Funds, (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 Fund's shares. The officers of
the Trust may from time to time waive the minimum initial and subsequent
investment requirements in connection with investments in a Fund by employees of
the Adviser.
REDEMPTION OF SHARES
The Trust may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange (the "Exchange")
is closed, or trading on the Exchange is restricted as determined by the 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 Fund 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 Trust 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 Fund 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 applicable Fund. 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 Fund
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.
Due to the relatively high cost of maintaining smaller accounts, the
Trust 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
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 Trust to redeem shares under certain other
circumstances as may be specified by the Board of Trustees.
No fee is charged by the Trust 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 Fund.
PRICING OF SHARES
As indicated under "Valuation of Shares" in the Prospectus, a Fund's net
asset value per share for the purpose of pricing purchase and redemption orders
is determined at the close of normal trading (currently 4:00 p.m. Eastern Time)
on each day the Exchange is open for trading. Net asset value will not be
determined on the following
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holidays: New Year's Day, Martin Luther King's Birthday, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
DIVIDENDS, OTHER DISTRIBUTIONS, AND TAXES
GENERAL
It is the policy of each Fund to distribute all of its net investment income, if
any, together with any net realized capital gains in the amount and at the times
that will avoid both federal income tax on it and the imposition of the federal
excise tax on certain undistributed income and capital gain. To avoid federal
income tax on income and gains that are distributed, a Fund (each of which is
treated as a separate corporation for federal income tax purposes) must qualify
for the special tax treatment afforded a regulated investment company ("RIC")
under the Internal Revenue Code of 1986, as amended. To qualify for that
treatment, a Fund must distribute to its shareholders for each taxable year at
least 90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gains, and net gains from certain
foreign currency transactions) and must meet several additional requirements.
For each Fund, these requirements include the following: (1) the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other disposition of securities or foreign currencies, or other income
(including gains from options, futures, and Forward Contracts) derived with
respect to its business of investing in securities or those currencies; and (2)
at the close of each quarter of the Fund's taxable year, (i) at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs, and other securities, with
these other securities limited, in respect of any one issuer, to an amount that
does not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's voting securities, and (ii) not more
than 25% of the value of its total assets may be invested in securities (other
than U.S. Government securities or the securities of other RICs) of any one
issuer.
Any use of hedging strategies, such as writing (selling) and purchasing
options and futures and entering into Forward Contracts, involves complex rules
that will determine for income tax purposes the amount, character, and timing of
recognition of the gains and losses it realizes in connection therewith.
The Funds also intend to declare and pay dividends and capital gain
distributions so as to avoid imposition of federal excise tax.
Undistributed net investment income is included in each Fund's 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 and other
distributions paid shortly after the purchase of shares by an investor, although
in effect a return of capital, are taxable to the investor.
As stated in the Prospectus, unless the shareholder elects otherwise in
writing, all dividends and other distributions are automatically paid in
additional Fund shares at net asset value (as of the business day following the
record date). This will remain in effect until a Fund 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 other distributions in
additional shares at net asset value) or the Cash Option (both income dividends
and other distributions in cash) has been elected. An account statement is sent
to shareholders whenever an income dividend or other distribution is paid.
TAXES - INVESTMENTS IN FOREIGN SECURITIES
Dividends and interest received by a Fund, and gains realized thereby,
may be subject to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions ("foreign taxes") that would reduce the yield
and/or total return on its securities. Tax conventions between certain countries
and the United States may reduce or eliminate foreign taxes, however, and many
foreign countries do not impose taxes on capital gains in respect of investments
by foreign investors. If more than 50% of the value of the Fund's total assets
at the close of any taxable year consists of securities of foreign corporations,
it will be eligible to, and may, file an election with the Internal Revenue
Service that will enable its shareholders, in effect, to receive the benefit of
the foreign tax credit with respect to any foreign taxes paid by it. Pursuant to
any such election, the Fund would treat those taxes as
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dividends paid to its shareholders and each shareholder would be required to (1)
include in gross income, and treat as paid by the shareholder, the shareholder's
proportionate share of those taxes, (2) treat the shareholder's share of those
taxes and of any dividend paid by the Fund that represents income from foreign
or U.S. possessions sources as the shareholder's own income from those sources,
and (3) either deduct the taxes deemed paid by the shareholder in computing the
shareholder's taxable income or, alternatively, use the foregoing information in
calculating the foreign tax credit against the shareholder's federal income tax.
The Fund will report to its shareholders shortly after each taxable year their
respective shares of its income from sources within, and taxes paid to, foreign
countries and U.S. possessions if it makes this election. Pursuant to the
Taxpayer Relief Act of 1997, individuals who have no more than $300 ($600 for
married persons filing jointly) of creditable foreign taxes included on Forms
1099 and have no foreign sources non-passive income will be able to claim a
foreign tax credit without having to file the detailed Form 1116 that otherwise
is required. Because the Funds do not currently anticipate that securities of
foreign issuers will constitute more than 10% of the Small Cap Equity Fund total
assets, 10% of the Balanced Fund's total assets and 10% of the Fixed Income
Fund's total assets at the end of their fiscal year, shareholders of those Funds
should not expect to claim a foreign tax credit or deduction on their federal
income tax returns with respect to foreign taxes withheld.
The Funds may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation -- other than a "controlled foreign
corporation" (i.e., a foreign corporation in which, on any day during its
taxable year, more than 50% of the total voting power of all voting stock
therein or the total value of all stock therein is owned, directly, indirectly,
or constructively, by "U.S. shareholders," defined as U.S. persons that
individually own, directly, indirectly, or constructively, at least 10% of that
voting power) as to which a Fund is a U.S. shareholder -- that, in general,
meets either of the following tests: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for
the production of, passive income. Under certain circumstances, a Fund will be
subject to federal income tax on a portion of any "excess distribution" received
on the stock of a PFIC or of any gain on the disposition of the stock
(collectively "PFIC income"), plus interest thereon, even if the Fund
distributes the PFIC income as a taxable dividend to its shareholders. The
balance of the PFIC income will be included in the Fund's investment company
taxable income and, accordingly, will not be taxable to it to the extent that
income is distributed to its shareholders. If a Fund invests in a PFIC and
elects to treat the PFIC as a "qualified electing fund" ("QEF"), then in lieu of
the foregoing tax and interest obligation, the Fund would be required to include
in income each year its pro rata share of the QEF's annual ordinary earnings and
net capital gain (the excess of net long-term capital gain over net short-term
capital loss) -- which probably would have to be distributed by the Funds to its
shareholders -- even if those earnings and gain were not distributed to the Fund
by the QEF. In most instances it will be very difficult, if not impossible, to
make this election because of certain requirements thereof.
Each Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market," in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the PFIC's stock
over a Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, a Fund also will be allowed to deduct (as an ordinary, not capital,
loss) the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the taxable year-end, but only to the extent of any
net mark-to-market gains with respect to that stock included by the Fund for
prior taxable years. A Fund's adjusted basis in each PFIC's stock with respect
to which it makes this election will be adjusted to reflect the amounts of
income included and deductions taken under the election.
Gains or losses (1) from the disposition of foreign currencies, (2) on
the disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time a
Fund accrues interest, dividends, or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time it actually
collects the receivables or pays the liabilities, generally are treated as
ordinary income or loss. These gains or losses may increase or decrease the
amount of investment company taxable income available to a Fund for distribution
to its shareholders.
60
<PAGE>
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Funds' advertising
and promotional materials are calculated according to the following formula:
P(1+T)n = ERV
where P equals a hypothetical initial payment of $1,000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1,000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions. For
performance see "Performance Information" in the Prospectus.
CUMULATIVE TOTAL RETURN. A Fund 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
The cumulative total return for the Small Cap Equity Fund from inception
on July 14, 1994 to December 31, 1997 is 114.06%. The cumulative total return
for the Equity Fund from inception on January 3, 1996 to December 31, 1997 is
44.58%.
YIELD
Annualized yield quotations used in a Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:
YIELD = 2 [ ( a-b +1)6 - 1]
--------
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and "d" equals the maximum offering price per share on the
last day of the period.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonable can be expected to be called or, if none, the maturity
date.
OTHER INFORMATION
61
<PAGE>
Each Fund's performance data quoted in advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return and principal value of an investment in a Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount.
If permitted by applicable law, the Funds may advertise the performance
of registered investment companies or private accounts that have investment
objectives, policies and strategies substantially similar to those of the Funds.
COMPARISON OF FUND PERFORMANCE
The performance of a Fund 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 its ranking in each applicable universe. In addition, the Funds 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 Funds may from time to time use the following unmanaged indices for
performance comparison purposes:
S&P 500 - The S&P 500 is a Fund 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. There are
always 500 issuers in the S&P 500. Changes are made by Standard &
Poor's as needed.
Lehman Brothers Government/Corporate Index ("LB Govt/Corp") - The LB
Govt/Corp is a weighted index comprised of publicly-traded intermediate
and long-term government and corporate debt with an average maturity
of 11 years.
Russell 2000 - The Russell 2000 is composed of the 2,000 smallest
stocks in the Russell 3000, a market value weighted index of the
3,000 largest U.S. publicly-traded companies.
EAFE Index - The EAFE Index is an unmanaged index representing the
market value weighted price of stocks of approximately 1100 companies
screened for liquidity, cross-ownership and industry representation and
listed on major stock exchanges in Europe, Australasia and the Far East.
The Index is compiled by Morgan Stanley Capital International.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
Each Fund is a series of the LKCM Funds which was established under
Delaware law by a Declaration of Trust dated February 10, 1994. Prior to
___________ the LKCM Funds was known as the LKCM Fund. The Declaration of Trust
permits the Trustees of the Trust to issue an unlimited number of shares of
beneficial interest, without par value, from an unlimited number of series
("Funds") of shares. Currently, the Trust offers four series. 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 Funds 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 Trust 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 Funds into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different
62
<PAGE>
classes would have an interest in the same Fund 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 nor of
changing the method of distribution of shares of the Funds.
When issued, the shares of the Funds 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 Funds 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 name on the books of
a Fund.
SHAREHOLDER AND TRUSTEE LIABILITY
The Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation, or instrument entered into or
executed by the Trust 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 Trust's property of any
shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust 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 Trust 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.
AUDITORS
Deloitte & Touche LLP, 411 East Wisconsin Avenue, Milwaukee, Wisconsin,
serves as the Funds' independent auditors, whose services include examination of
the Funds' financial statements and the performance of other related audit and
tax services.
CODE OF ETHICS
The Trust has adopted a Code of Ethics which restricts to a certain
extent personal transactions by access persons of the Trust and imposes certain
disclosure and reporting obligations.
FINANCIAL STATEMENTS
The following financial statements for the Small Cap Equity and Equity
Funds are incorporated by reference to the Annual Report, dated December 31,
1997 (File 801-14458), as filed with the Securities and Exchange Commission on
February 25, 1998:
* Schedule of Investments as of December 31, 1997
* Statement of Assets and Liabilities as of December 31,
* Statement of Changes in Net Assets for the Years Ended
December 31, 1997 and 1996 for the Small Cap Equity Fund and for the Year Ended
December 31, 1997 and the Period from January 3, 1996 (Commencement of
Operations) to December 31, 1996 for the Equity Fund
* Statement of Operations for the Year Ended December 31, 1997
63
<PAGE>
* Financial Highlights
* Notes to the Financial Statements
* Independent Auditors' Report
The following audited financial statement for the Balanced, Fixed Income
and International Funds is attached hereto:
* Statement of Assets and Liabilities as of December 31, 1997
* Notes to the Financial Statement
* Independent Auditors' Report
The following unaudited financial statements for the Balanced, Fixed
Income and International Funds are attached hereto:
* Schedule of Investments as of March 31, 1998
* Statement of Assets and Liabilities as of March 31, 1998
* Statement of Changes in Net Assets for the Period from
January 1, 1998 to March 31, 1998
* Statement of Operations for the Period from January 1, 1998
to March 31, 1998
* Financial Highlights
* Notes to the Financial Statements
64
<PAGE>
LKCM Funds
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
LKCM Balanced LKCM Fixed Income LKCM International
Fund Fund Fund
------------- ----------------- ------------------
<S> <C> <C> <C>
ASSETS
Cash $ 10 $ 10 $ 10
Unamortized organizational costs 16,186 16,186 28,995
Prepaid initial registration expenses 110 110 810
------- -------- --------
Total Assets 16,306 16,306 29,815
------- -------- --------
LIABILITIES
Payable to Adviser 16,296 16,296 29,805
------- -------- --------
Total Liabilities 16,296 16,296 29,805
------- -------- --------
NET ASSETS $ 10 $ 10 $ 10
======= ======== ========
Capital shares, no par value;
unlimited shares of beneficial
interest authorized 1 1 1
Net asset value, offering and
redemption price per share
(net assets/shares of beneficial
interest outstanding) $ 10.00 $ 10.00 $ 10.00
======= ======== ========
</TABLE>
The accompanying notes to the financial statement are an integral part of this
statement.
65
<PAGE>
LKCM Funds
Notes to the Financial Statement
December 31, 1997
1. Organization
LKCM Funds (the "Trust") is registered under the Investment Company Act
as a diversified open-end, management company. The Trust was organized as a
Delaware business trust on February 10, 1994 and consists of five series of
shares comprising the LKCM Small Cap Equity Fund, the LKCM Equity Fund, the LKCM
Balanced Fund, the LKCM Fixed Income Fund and the LKCM International Fund
(collectively, the "Funds"), the assets of which are invested in separate,
independently managed portfolios. The accompanying financial statement exclude
financial information for the LKCM Small Cap Equity Fund and the LKCM Equity
Fund; financial statements for those Funds are reported separately. Investment
operations of the Funds began on July 14, 1994 (the LKCM Small Cap Equity Fund),
January 3, 1996 (the LKCM Equity Fund), and December 30, 1997 (the LKCM Balanced
Fund, the LKCM Fixed Income Fund and the LKCM International Fund). The LKCM
Balanced Fund, the LKCM Fixed Income Fund and the LKCM International Fund have
had no operations other than those relating to organizational matters, including
the sale of one share of each Fund for cash in the amount of $10 to capitalize
the Funds, which were sold to Luther King Capital Management Corporation (the
"Adviser") on December 30, 1997.
2. Significant Accounting Policies
(a) Organization Costs
Costs incurred by the Funds in connection with the organization,
registration and the initial public offering of shares, are being
deferred and amortized over the period of benefit, but not to exceed
sixty months from the Funds' commencement of operations. These costs
were advanced by the Adviser and will be reimbursed by the Funds.
(b) Federal Income Taxes
Each Fund intends to comply with the requirements of the
Internal Revenue Code necessary to qualify as a regulated investment
company and to make the requisite distributions of income and capital
gains to their shareholders sufficient to relieve it from all or
substantially all Federal income taxes.
3. Investment Advisory and Other Agreements
The Trust has an agreement with the Adviser, with whom certain officers
and Trustees of the Trust are affiliated, to furnish investment advisory
services to the Funds. Under the terms of this agreement, the Adviser is
entitled to receive a fee, calculated daily and payable quarterly, at
the annual rates presented below as applied to each Fund's daily net
assets. The Adviser entered into a Subadvisory Agreement with TTI
International Investment Management (the "Sub-Adviser") for the LKCM
International Fund. Pursuant to its Subadvisory Agreement with the
Adviser, the Sub- Adviser is entitled to receive a fee from the
Adviser, calculated daily and payable quarterly, at the annual rate
below as applied to the LKCM International Fund's daily net assets.
<TABLE>
<CAPTION>
LKCM Balanced LKCM Fixed Income LKCM International
Fund Fund Fund
<S> <C> <C> <C>
Annual Advisory Rate 0.65% 0.50% (1) (2)
Annual Cap on Expenses 0.80% 0.65% 1.20%
</TABLE>
(1) The Adviser is entitled to receive a fee, calculated daily and
payable quarterly, at the annual rate of 1.00% of the Fund's average
daily net assets.
(2) Pursuant to its Subadvisory Agreement with the Adviser, the
Sub-Adviser is entitled to receive a fee from the Adviser, calculated
daily and payable quarterly, at the annual rate of 0.50%.
66
<PAGE>
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly
held bank holding company, serves as custodian, transfer agent, administrator
and accounting services agent for the Trust.
Distribution services are performed pursuant to distribution contracts
with First Data Distributors, Inc., the Trust's principal underwriter, and other
broker-dealers.
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<PAGE>
To the Trustees and Shareholders of the LKCM Funds:
We have audited the accompanying statements of assets and liabilities of the
LKCM Balanced Fund, the LKCM Fixed Income Fund and the LKCM International Fund
(the "Funds") as of December 31, 1997. These financial statements are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 present fairly, in all material
respects, the financial positions of the LKCM Balanced Fund, the LKCM Fixed
Income Fund and the LKCM International Fund as of December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
January 23, 1998
68
<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 rated
69
<PAGE>
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.
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<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.
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<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Included in Part A:
Financial Highlights for the Small Cap Equity Fund for the
years ended December 31, 1997 and December 31, 1996, the
period May 1, 1995 to December 31, 1995 and the period from
commencement of operations (July 14, 1994) to April 30, 1995.
Financial Highlights for the Equity Fund for the year ended
December 31, 1997 and the period from commencement of
operations (January 3, 1996) to December 31, 1996.
Financial Highlights for the Balanced Fund, Fixed Income
Fund and International Fund for the period from January 1,
1998 to March 31, 1998. (To be filed by subsequent amendment.)
(2) Included in Part B:
Statement of Assets and Liabilities - December 31, 1997 -
Balanced Fund, Fixed Income Fund and International Fund.
Notes to Financial Statement - December 31, 1997 - Balanced
Fund, Fixed Income Fund and International Fund.
Independent Auditors' Report - January 23, 1998 - Balanced
Fund, Fixed Income Fund and International Fund.
Incorporated by reference into the Statement of Additional
Information for the Small Cap Equity Fund and Equity Fund:
Independent Auditors' Report - January 23, 1998 - Small Cap
Equity Fund and Equity Fund.
Statement of Assets and Liabilities - December 31, 1997 -
Small Cap Equity Fund and Equity Fund.
Schedule of Investments - December 31, 1997 - Small Cap
Equity Fund and Equity Fund.
Statement of Operations for the year ended December 31,
1997 - Small Cap Equity Fund and Equity Fund.
Statement of Changes in Net Assets for the years ended
December 31, 1997 and 1996 Small Cap Equity Fund.
Statement of Changes in Net Assets for the year ended
December 31, 1997 and for the period of commencement of
operations (January 3, 1996) to December 31,1996 - Equity
Fund.
Financial Highlights for the Small Cap Equity Fund for the
years ended December 31, 1997 and December 1996, the period
May 1, 1995 to December 31, 1995 and the period from
commencement of operations (July 14, 1994) to April 30, 1995.
Financial Highlights for the Equity Fund for the year ended
December 31, 1997 and the period from commencement of
operations (January 3, 1996) to December 31, 1996.
Notes to Financial Statements - Year ended December 31,
1997 - Small Cap Equity Fund and Equity Fund.
(b) Exhibits
1. Agreement and Declaration of Trust *
2. By-Laws *
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<PAGE>
3. None
4. To be filed by subsequent amendment.
5. (a) Investment Advisory Agreement dated June 21, 1994 *
(b) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the Small Cap Equity Fund dated
June 21, 1994 *
(c) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Equity Fund dated December
5, 1995 *
(d) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Balanced Fund dated
December 30, 1997 (filed herewith)
(e) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Fixed Income Fund dated
December 30, 1997 (filed herewith)
(f) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
for the LKCM International Fund dated December 30, 1997
(filed herewith)
(g) Subadvisory Agreement Between Luther King Capital
Management Corporation and TT International Management
for the LKCM International Fund dated December 30, 1997
(filed herewith)
6. (a) Distribution Agreement between LKCM Funds and First
Data Distributors, Inc. dated September 1, 1997 *
(b) Consulting Agreement between Luther King Capital
Management and First Data Distributors, Inc. dated
September 1, 1997 *
7. None
8. (a) Custodian Servicing Agreement between LKCM Funds and
Firstar Trust Company dated July 10, 1997 *
(b) Fee Schedule to the Custodian Servicing Agreement with
respect to the LKCM Balanced Fund and LKCM Fixed Income
Fund dated December 30, 1997 (filed herewith)
(c) Global Custody Agreement between The Chase Manhattan
Bank, Firstar Trust Company and LKCM Fund on behalf of
its LKCM International Fund dated December 31, 1997
(filed herewith)
9. (a)(i) Fund Administration Servicing Agreement between LKCM
Funds and Firstar Trust Company dated July 10, 1997 *
(a)(ii) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM Balanced Fund and
LKCM Fixed Income Fund dated December 30, 1997 (included
herewith)
(a)(iii)Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM International Fund
dated December 30, 1997 (filed herewith)
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<PAGE>
(b)(i) Fund Accounting Servicing Agreement between LKCM Funds
and Firstar Trust Company dated July 10, 1997 *
(b)(ii) Fee Schedule to the Fund Accounting Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (filed herewith)
(c)(i) Transfer Agent Servicing Agreement between LKCM Funds
and Firstar Trust Company dated July 10, 1997 *
(c)(ii) Fee Schedule to the Transfer Agent Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (filed herewith)
10. Opinion of Kirkpatrick & Lockhart, LLP dated February 26, 1998
(filed herewith)
11. Consent of Deloitte & Touche, LLP (filed herewith)
12. None
13. Purchase Agreement dated June 6, 1994 *
14. None
15. LKCM Fund Distribution Plan *
16. (a) Schedule of Computation of Performance Quotations -
Balanced Fund (To be filed by subsequent amendment.)
(b) Schedule of Computation of Performance Quotations -
Fixed Income Fund (To be filed by subsequent amendment.)
(c) Schedule of Computation of Performance Quotations -
International Fund (To be filed by subsequent
amendment.)
17. Financial Data Schedules (filed herewith)
18. None
- -----------------------
* Incorporated by reference from Post Effective Amendment No. 6 to the
Registration Statement of the Trust, SEC File No. 33-75116, filed previously
by EDGAR on Oct. 14, 1997, Accession No. 0000891804-97-000346.
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
-------------------------------
Number of Record Holders
Title of Class or Series January 31, 1998
- -------------------------- ------------------------
LKCM Small Cap Equity Fund 897
LKCM Equity Fund 131
LKCM Balanced Fund 8
LKCM Fixed Income Fund 9
LKCM International Fund 14
Item 27. Indemnification
74
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Reference is made to Article VI of the Registrant's Declaration of Trust,
incorporated by reference as Exhibit 1 hereto. 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" and "Investment
Subadviser" in the Prospectus constituting Part A of this Registration Statement
and Part B of this Registration Statement. The information required by this Item
28 with respect to 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 ("SEC") (File No. 801-14458). The
information required by this Item 28 with respect to TT International Investment
Management ("TTI") is incorporated by reference to the Form ADV filed by TTI
with the SEC (File No. 801-45435).
Item 29. Principal Underwriters
(a) First Data Distributor, Inc., is the general distributor of the
Registrant's shares.
(b) The information contained in the registration on Form BD of Fund
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)
Firstar Trust Company
615 East Michigan Street
Milwaukee, Wisconsin 53202
(records relating to its function as custodian,
administrator, transfer agent and dividend disbursing agent)
Item 31. Management Services
Not applicable.
Item 32. Undertakings
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.
75
<PAGE>
76
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(a) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort Worth
and State of Texas on the 27 th day of February, 1998.
By: J. Luther King, Jr.*
----------------------
J. Luther King, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 8 to the Registration Statement of the Registrant has been signed
below by the following persons in the capacities and on the date(s) indicated.
Name Title Date
J. Luther King, Jr. * Trustee, President and February 27, 1998
- --------------------- Chief Executive Officer
J. Luther King, Jr.
H. Kirk Downey * Trustee February 27, 1998
- ---------------------
H. Kirk Downey
Earle A. Shields, Jr. * Trustee February 27, 1998
- ---------------------
Earle A. Shields, Jr.
Jacqui Brownfield * Treasurer and Secretary February 27, 1998
- ---------------------
Jacqui Brownfield
*By /s/ Mary S. Kraft February 27, 1998
- ---------------------
Mary S. Kraft
Attorney-in-fact
77
<PAGE>
POWER OF ATTORNEY
Each of the undersigned trustees of the LKCM Fund (the "Trust") hereby
severally constitutes and appoints Jacqui Brownfield, Joseph C. Neuberger and
Mary Kraft, and each of them singly, our true and lawful attorneys, with full
power to sign for each of us our names and in the capacities indicated below,
any and all instruments and filings of the Trust, and all instruments necessary
or desirable in connection therewith, filed with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by said attorneys to any and all said instruments.
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this instrument has been signed below by the
following persons in the capacities and dates indicated:
Signature Title Date
/s/ J. Luther King, Jr. Trustee, Chairman of the February 25, 1998
- ----------------------- Board of Trustees (President,
J. Luther King, Jr. Chief Executive Officer and
Manger)
/s/ H. Kirk Downey Trustee February 25, 1998
- -----------------------
H. Kirk Downey
Earle A. Shields Trustee February 25, 1998
- -----------------------
Earle A. Shields
78
EXHIBIT LIST
1. Agreement and Declaration of Trust *
2. By-Laws *
3. None
4. To be filed by subsequent amendment.
5.1 Investment Advisory Agreement dated June 21, 1994 *
5.2 Fee Schedule to the Investment Advisory Agreement Between LKCM Funds
and Luther King Capital Management Corporation for the Small Cap
Equity Fund dated June 21, 1994 *
5.3 Fee Schedule to the Investment Advisory Agreement Between LKCM Funds
and Luther King Capital Management Corporation for the LKCM Equity Fund
dated December 5, 1995 *
5.4 Fee Schedule to the Investment Advisory Agreement Between LKCM Funds
and Luther King Capital Management Corporation for the LKCM Balanced
Fund dated December 30, 1997 (filed herewith)
5.5 Fee Schedule to the Investment Advisory Agreement Between LKCM Funds and
Luther King Capital Management Corporation for the LKCM Fixed Income
Fund dated December 30, 1997 (filed herewith)
5.6 Fee Schedule to the Investment Advisory Agreement Between LKCM Funds
and Luther King Capital Management for the LKCM International Fund
dated December 30, 1997 (filed herewith)
5.7 Subadvisory Agreement Between Luther King Capital Management
Corporation and TT International Management for the LKCM International
Fund dated December 30, 1997 (filed herewith)
6.1 Distribution Agreement between LKCM Funds and First Data Distributors,
Inc. dated September 1, 1997 *
6.2 Consulting Agreement between Luther King Capital Management and First
Data Distributors, Inc. dated September 1, 1997 *
7 None
8.1 Custodian Servicing Agreement between LKCM Funds and Firstar Trust
Company dated July 10, 1997 *
8.2 Fee Schedule to the Custodian Servicing Agreement with respect to the
LKCM Balanced Fund and LKCM Fixed Income Fund dated December 30, 1997
(filed herewith)
8.3 Global Custody Agreement between The Chase Manhattan Bank, Firstar Trust
Company and LKCM Fund on behalf of its LKCM International Fund dated
December 31, 1997 (filed herewith)
9.1A Fund Administration Servicing Agreement between LKCM Funds and Firstar
Trust Company dated July 10, 1997 *
9.1B Fee Schedule to the Fund Administration Servicing Agreement with respect
to the LKCM Balanced Fund and LKCM Fixed Income Fund dated December 30,
1997 (filed herewith)
9.1C Fee Schedule to the Fund Administration Servicing Agreement with respect
to the LKCM International Fund dated December 30, 1997 (filed herewith)
9.2A Fund Accounting Servicing Agreement between LKCM Funds and Firstar
Trust Company dated July 10, 1997 *
9.2B Fee Schedule to the Fund Accounting Servicing Agreement with respect to
the LKCM Balanced Fund, LKCM Fixed Income Fund and LKCM International
Fund dated December 30, 1997 (filed herewith)
79
<PAGE>
9.3A Transfer Agent Servicing Agreement between LKCM Funds and Firstar
Trust Company dated July 10, 1997 *
9.3B Fee Schedule to the Transfer Agent Servicing Agreement with respect to
the LKCM Balanced Fund, LKCM Fixed Income Fund and LKCM International
Fund dated December 30, 1997 (filed herewith)
10 Opinion of Kirkpatrick & Lockhart, LLP dated February 26, 1998
(filed herewith)
11 Consent of Deloitte & Touche LLP (filed herewith)
12 None
13 Purchase Agreement dated June 6, 1994 *
14 None
15 LKCM Fund Distribution Plan *
16.1 Schedule of Computation of Performance Quotations - Balanced Fund
(To be filed by subsequent amendment.)
16.2 Schedule of Computation of Performance Quotations - Fixed Income
Fund (To be filed by subsequent amendment.)
16.3 Schedule of Computation of Performance Quotations - International
Fund (To be filed by subsequent amendment.)
17 Financial Data Schedules (filed herewith)
18 None
- ---------------
* Incorporated by reference from Post Effective Amendment No. 6 to the
Registration Statement of the Trust, SEC File No. 33-75116, filed
previously by EDGAR on Oct. 14, 1997, Accession No. 0000891804-97-000346.
80
Exhibit 5.4
FEE SCHEDULE
TO THE
INVESTMENT ADVISORY AGREEMENT
Between
LKCM FUND ("Trust")
and
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Adviser")
which is Dated as of June 21, 1994
1. For the services provided and the expenses assumed pursuant to the
captioned Investment Advisory Agreement, the LKCM Balanced Fund of the Trust
(the "Trust") will pay the Adviser a fee, computed by applying a quarterly rate,
equal on an annual basis to 0.65% of the Fund's average daily net assets for the
quarter.
2. This Fee Schedule shall be attached to and made a part of the
captioned Investment Advisory Agreement and is subject to all of its terms and
conditions.
IN WITNESS WHEREOF, the parties hereto have caused the Fee Schedule to
be executed by their designated officers as of December 30, 1997.
LKCM BALANCED FUND
By: /s/ Jacqui Brownfield
---------------------
LUTHER KING CAPITAL MANAGEMENT CORPORATION
By: /s/ Luther King
---------------------
81
Exhibit 5.5
FEE SCHEDULE
TO THE
INVESTMENT ADVISORY AGREEMENT
Between
LKCM FUND ("Trust")
and
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Adviser")
which is Dated as of June 21, 1994
1. For the services provided and the expenses assumed pursuant to the
captioned Investment Advisory Agreement, the LKCM Fixed Income Fund of the Trust
(the "Fund") will pay the Adviser a fee, computed by applying a quarterly rate,
equal on an annual basis to 0.50% of the Fund's average daily net assets for the
quarter.
2. This Fee Schedule shall be attached to and made a part of the
captioned Investment Advisory Agreement and is subject to all of its terms and
conditions.
IN WITNESS WHEREOF, the parties hereto have caused the Fee Schedule to
be executed by their designated officers as of December 30, 1997.
LKCM FIXED INCOME FUND
By: /s/ Jacqui Brownfield
---------------------
LUTHER KING CAPITAL MANAGEMENT CORPORATION
By: /s/ Luther King
---------------------
82
Exhibit 5.6
FEE SCHEDULE
TO THE
INVESTMENT ADVISORY AGREEMENT
Between
LKCM FUND ("Trust")
and
LUTHER KING CAPITAL MANAGEMENT CORPORATION ("Adviser")
which is Dated as of June 21, 1994
1. For the services provided and the expenses assumed pursuant to the
captioned Investment Advisory Agreement, the LKCM International Fund of the
Trust (the "Fund") will pay the Adviser a fee, computed by applying a quarterly
rate, equal on an annual basis to 1.00% of the Fund's average daily net assets
for the quarter.
2. This Fee Schedule shall be attached to and made a part of the
captioned Investment Advisory Agreement and is subject to all of its terms and
conditions.
3. Pursuant to Section 13 of the Agreement, the Agreement is hereby
supplemented and amended with respect to the Fund as follows: Adviser is
authorized to delegate some or all of its duties under the Agreement to one or
more other parties, subject to (a) applicable requirements of the Investment
Company Act of 1940, as amended, and (b) the Adviser's ongoing duty to supervise
and oversee the activities of such other parties and make periodic reports to
the Trust's Board of Trustees.
IN WITNESS WHEREOF, the parties hereto have caused the Fee Schedule to
be executed by their designated officers as of December 30, 1997.
LKCM INTERNATIONAL FUND
By: /s/ Jacqui Brownfield
---------------------
LUTHER KING CAPITAL MANAGEMENT CORPORATION
By: /s/ Luther King
---------------------
83
Exhibit 5.7
LKCM FUNDS SUBADVISORY AGREEMENT
This Subadvisory Agreement is made as of December 30, 1997, between
Luther King Capital Management Corporation, a Delaware corporation (the
"Adviser"), and TT International Investment Management, a partnership organized
under the laws of England (the "Subadviser").
WHEREAS, the Adviser has agreed by separate contract to serve as the
investment adviser to the LKCM International Fund ("Fund"), an investment
portfolio of LKCM Funds ("Trust"), a Delaware business trust registered under
the Investment Company Act of 1940, as amended ("1940 Act"), as an open-end
diversified management investment company consisting of one or more investment
series of shares, each having its own assets and investment policies;
WHEREAS, the Adviser's contract with the Fund allows the Adviser to
delegate certain investment advisory services on behalf of the Fund to other
parties; and
WHEREAS, the Adviser desires to retain the Subadviser to perform certain
investment subadvisory services for the Trust with respect to the Fund, and the
Subadviser is willing to perform such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. SERVICES TO BE RENDERED BY THE SUBADVISER TO THE TRUST
(a) INVESTMENT PROGRAM. Subject to the control and supervision
of the Adviser and the Board of Trustees of the Trust, the Subadviser shall, at
its expense, continuously furnish to the Fund an investment program for such
portion, if any, of Fund assets that is allocated to it by the Adviser from time
to time. With respect to such assets, the Subadviser will make investment
decisions and will place all orders for the purchase and sale of portfolio
securities. In the performance of its duties, the Subadviser will act in the
best interests of the Fund and will comply with (i) applicable laws and
regulations, including, but not limited to, the 1940 Act, (ii) the terms of this
Agreement, (iii) the stated investment objectives, policies and restrictions of
the Fund, as stated in the then-current Registration Statement of the Trust, and
(iv) such other guidelines as the Trustees or Adviser may establish. The Adviser
shall be responsible for providing the Subadviser with current copies of the
materials and guidelines specified in Subsections (a) (iii) and (iv) of this
Section 1.
(b) AVAILABILITY OF PERSONNEL. The Subadviser, at its expense,
will make available to the Trustees and the Adviser at reasonable times its
portfolio managers and other appropriate personnel in order to review investment
policies of the Fund and to consult with the Trustees and the Adviser regarding
the investment affairs of the Fund, including economic, statistical and
investment matters relevant to the Subadviser's duties hereunder, and will
provide periodic reports to the Adviser relating to the portfolio strategies it
employs.
(c) SALARIES AND FACILITIES. The Subadviser, at its expense,
will pay for all salaries of personnel and facilities required for it to execute
its duties under this Agreement.
(d) COMPLIANCE REPORTS. The Subadviser, at its expense, will
provide the Adviser with such compliance reports relating to its duties under
this Agreement as may reasonably be necessary for the Adviser to fulfill its
compliance obligations.
(e) VALUATION. The Subadviser, at its expense, will provide the
Trust with market price information which may be reasonably requested by the
Adviser relating to the assets of the Fund.
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<PAGE>
(f) EXECUTING PORTFOLIO TRANSACTIONS. The Subadviser will place
all orders pursuant to its investment determinations for the Fund either
directly with the issuer or through broker-dealers selected by Subadviser; and,
in connection therewith, the Subadviser is authorized as the agent of the Fund
to give instructions to the Custodian of the Fund as to the deliveries of
securities and payments of cash for the account of the Fund. In the selection of
broker-dealers and the placement of orders for the purchase and sale of
portfolio investments for the Fund, the Subadviser shall use its best efforts to
obtain for the Fund the most favorable price and execution available, except to
the extent it may be permitted to pay higher brokerage commissions for brokerage
and research services as described below. In using its best efforts to obtain
the most favorable price and execution available, the Subadviser, bearing in
mind the Fund's best interests at all times, shall consider all factors it deems
relevant, including by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission and
dealer's spread or mark-up, the timing of the transaction taking into account
market prices and trends, the reputation, experience and financial stability of
the broker-dealer involved, the general execution and operational facilities of
the broker-dealer and the quality of service rendered by the broker-dealer in
other transactions. Subject to such policies as the Board of Trustees may
determine, the Subadviser shall not be deemed to have acted unlawfully or to
have breached any duty created by this Agreement or otherwise solely by reason
of its having caused the Fund to pay a broker-dealer that provides brokerage and
research services to the Subadviser an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction if the
Subadviser determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Subadviser's overall responsibilities with respect to the
Trust and to other clients of the Subadviser as to which the Subadviser
exercises investment discretion. The Adviser recognizes that all research
services and research that the Subadviser receives or generates are available
for all clients of the Subadviser and its affiliates, and that the Fund and
other clients of the Subadviser and its affiliates may benefit thereby. In no
instance will portfolio securities of the Fund be purchased from or sold to the
Subadviser or any affiliated person of the Subadviser.
(g) EXPENSES. The Subadviser shall not be obligated to pay any
expenses of or for the Trust or the Fund not expressly assumed by the Subadviser
pursuant to this Agreement.
(h) LIMITATION OF SERVICES. Except as otherwise agreed between
the parties and as provided in this Agreement, the Subadviser shall not be
responsible for compliance monitoring, reporting or testing or for preparing or
maintaining books and records for the Fund or the Trust or otherwise providing
accounting services to the Fund or the Trust (including portfolio pricing
services) and such services shall be provided by others retained by the Trust.
However, nothing herein shall be construed to limit the Subadviser's duty to
ensure that it complies with (1) applicable laws and regulations, including the
1940 Act, (2) the terms of this Agreement, (3) the investment objectives,
policies and restrictions of the Fund, as stated in the then current
registration statement of the Trust, and (4) such other reasonable guidelines as
the Trustees or Adviser may establish with respect to the Subadviser's service
hereunder. The Subadviser shall have access to such reports and records to
assist it in performing its services hereunder.
2. BOOKS AND RECORDS. Pursuant to Rule 31a-3 under the 1940 Act, the
Subadviser agrees that: (a) all records it maintains for the Trust are the
property of the Trust; (b) it will surrender promptly to the Trust or the
Adviser any such records upon the Trust's or Adviser's request; (c) it will
maintain for the Trust the records that the Trust is required to maintain
pursuant to Rule 31a-1 insofar as such records relate to the investment affairs
of the Fund; and (d) it will preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records it maintains for the Trust.
3. OTHER AGREEMENTS. The Adviser understands that Subadviser now acts,
or may in the future act, as an investment adviser to fiduciary and other
managed accounts, and as investment adviser or Subadviser to other investment
companies. Adviser has no objection to Subadviser acting in such capacities,
provided that whenever the Fund and one or more other investment advisory
clients of Subadviser have available funds for investment, investments suitable
and appropriate for each will be allocated in a manner believed by Subadviser to
be equitable to each, but Subadviser cannot assure, and assumes no
responsibility for equality among all accounts and customers. Subadviser shall
be permitted to bunch or aggregate orders for the Fund with orders for other
funds and accounts in a manner
85
<PAGE>
deemed equitable to all. Adviser recognizes that in some cases this procedure
may adversely affect the size of the position or price that the participating
Fund may obtain in a particular security. In addition, Adviser understands that
the persons employed by Subadviser to assist in Subadviser's duties under this
Agreement will not devote their full time to such service and nothing contained
in this Agreement will be deemed to limit or restrict the right of Subadviser or
any of its affiliates to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
4. COMPENSATION. The Adviser will pay to the Subadviser as compensation
for the Subadviser's services rendered pursuant to this Agreement a subadvisory
fee equal to an annual rate of 0.50% of the average daily net assets of the Fund
allocated to the Subadviser's management by the Adviser, which fee is to be
calculated daily and paid quarterly. However, if the Adviser's fee is reduced
due to fee waivers by the Adviser in order to comply with expense limitations
described in the Fund's prospectus, the Subadviser's compensation shall be
reduced by a proportionate amount; provided that in no event shall the
Subadviser be obligated to reimburse the Fund in order to satisfy such expense
limitations. If the Subadviser shall serve for less than the whole of a calendar
quarter, the compensation as specified herein shall be prorated.
5. AMENDMENT OF AGREEMENT. This Agreement shall not be materially
amended unless such amendment is approved by the affirmative vote of a majority
of the outstanding shares of the Fund, and by the vote, cast in person at a
meeting called for the purpose of voting on such approval, of a majority of the
members of the Board of Trustees who are not interested persons of the Trust,
the Adviser or the Subadviser (the "Independent Trustees"). The Subadviser
agrees to notify the Adviser of any anticipated change in control of the
Subadviser as soon as such change is anticipated and, in any event, prior to
such change.
6. DURATION AND TERMINATION OF THE AGREEMENT. This Agreement shall
become effective upon its execution; provided, however, that this Agreement
shall not become effective unless it has first been approved (a) by a vote of
the Independent Trustees, cast in person at a meeting called for the purpose of
voting on such approval, and (b) by an affirmative vote of a majority of the
outstanding voting shares of the Fund. This Agreement shall remain in full force
and effect continuously thereafter, except as follows:
(a) By vote of a majority of the (i) Independent Trustees, or
(ii) outstanding voting shares of the Fund, the Trust may at any time terminate
this Agreement, without the payment of any penalty, by providing not more than
60 days' written notice delivered or mailed by registered mail, postage prepaid,
to the Adviser and the Subadviser.
(b) This Agreement will terminate automatically, without the
payment of any penalty, unless within two years after its initial effectiveness
and at least annually thereafter, the continuance of the Agreement is
specifically approved by (i) the Board of Trustees or the shareholders of the
Fund by the affirmative vote of a majority of the outstanding shares of the
Fund, and (ii) a majority of the Independent Trustees, by vote cast in person at
a meeting called for the purpose of voting on such approval. If the continuance
of this Agreement is submitted to the shareholders of the Fund for their
approval and such shareholders fail to approve such continuance as provided
herein, the Subadviser may continue to serve hereunder in a manner consistent
with the 1940 Act and the rules and regulations thereunder.
(c) The Adviser may at any time terminate this Agreement,
without the payment of any penalty, by not less than 60 days' written notice
delivered or mailed by registered mail, postage prepaid, to the Subadviser, and
the Subadviser may at any time, without the payment of any penalty, terminate
this Agreement by not less than 90 days' written notice delivered or mailed by
registered mail, postage prepaid, to the Adviser.
(d) This Agreement automatically and immediately shall
terminate, without the payment of any penalty, in the event of its assignment or
if the investment advisory agreement between the Adviser and the Trust with
respect to the Fund shall terminate for any reason.
86
<PAGE>
(e) Any notice of termination served on the Subadviser by the
Adviser shall be without prejudice to the obligation of the Subadviser to
complete transactions already initiated or acted upon with respect to the Fund.
Upon termination of this Agreement, the duties of the Adviser delegated
to the Subadviser under this Agreement automatically shall revert to the
Adviser.
7. NOTIFICATION OF THE ADVISER. The Subadviser promptly shall notify the
Adviser in writing of the occurrence of any of the following events:
(a) the Subadviser shall fail to be registered as an investment
adviser under the Investment Advisers Act of 1940, as amended, and under the
laws of any jurisdiction in which the Subadviser is required to be registered as
an investment adviser in order to perform its obligations under this Agreement;
(b) the Subadviser shall have been served or otherwise have
notice of any action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board or body, involving the affairs of
the Trust or the Fund;
(c) the Subadviser shall have any change in the membership of
its partnership; or
(d) any other occurrence that might affect the ability of the
Subadviser to provide the services provided for under this Agreement.
8. DEFINITIONS. For the purposes of this Agreement, the terms "vote of a
majority of the outstanding shares," "affiliated person, "control," "interested
person" and "assignment" shall have their respective meanings as defined in the
1940 Act and the rules and regulations thereunder subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission under
said Act; and references to annual approvals by the Board of Trustees shall be
construed in a manner consistent with the 1940 Act and the rules and regulations
thereunder.
9. INDEMNIFICATION BY SUBADVISER. The Subadviser agrees to indemnify and
hold harmless the Adviser, the Fund, the Trust and their directors, trustees,
officers or shareholders against any losses, expenses, claims, damages or
liabilities (or actions or proceedings in respect thereof), including reasonable
attorney's fees, to which they may become subject arising out of or based on the
breach or alleged breach by the Subadviser of applicable laws or of any
provisions of this Agreement; provided, however, that the Subadviser shall not
be liable under this paragraph in respect of any loss, expense, claim, damage or
liability to the extent that a court having jurisdiction shall have determined
by a final judgment, or independent counsel agreed upon by the Adviser and the
Subadviser shall have concluded in a written opinion, that such loss, expense,
claim, damage or liability resulted primarily from the Adviser's willful
misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by the Adviser of its duties. The foregoing indemnification shall be
in addition to any rights that the Adviser, the Fund, the Trust and their
directors, trustees, officers or shareholders may have at common law or
otherwise. The Subadviser's agreements in this paragraph shall, upon the same
terms and conditions, extend to and inure to the benefit of each person who may
be deemed to control the Adviser, be controlled by the Adviser or be under
common control with the Adviser and its affiliates, directors, officers,
employees and agents. The Subadviser's agreements in this paragraph shall also
extend to any of the Adviser's successors or the successors of the
aforementioned affiliates, directors, officers, employees or agents.
10. INDEMNIFICATION BY THE ADVISER. The Adviser agrees to indemnify and
hold harmless the Subadviser and its partners against any losses, expenses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
including reasonable attorney's fees, to which the Subadviser may become subject
arising out of or based on the breach or alleged breach by the Adviser of
applicable laws or of any provisions of this Agreement or the Adviser's
agreement with the Trust, or any wrongful action or alleged wrongful action by
the Adviser or its affiliates in the distribution of the Fund's shares, or any
wrongful action or alleged wrongful action by the Fund or the Trust other than
wrongful action or alleged wrongful action that was caused by the breach by the
Subadviser of the provisions of this Agreement; provided, however, that the
Adviser shall not be liable under this paragraph in respect of any loss,
expense, claim, damage or liability to the extent that a court having
jurisdiction shall have determined by a final
87
<PAGE>
judgment, or independent counsel agreed upon by the Adviser and the Subadviser
shall have concluded in a written opinion, that such loss, expense, claim,
damage or liability resulted primarily from the Subadviser's willful
misfeasance, bad faith or gross negligence or by reason of the reckless
disregard by the Subadviser of its duties. The foregoing indemnification shall
be in addition to any rights that the Subadviser or its partners may have at
common law or otherwise. The Adviser's agreements in this paragraph shall, upon
the same terms and conditions, extend to and inure to the benefit of each person
who may be deemed to control the Subadviser, be controlled by the Subadviser or
be under common control with the Subadviser and to each of the Subadviser's and
each such person's respective affiliates, directors, officers, employees and
agents. The Adviser's agreements in this paragraph shall also extend to any of
the Subadviser's successors or the successors of the aforementioned affiliates,
directors, officers, employees or agents.
11. LIABILITY OF TRUSTEES AND SHAREHOLDERS. Any obligations of the Trust
and the Fund under this Agreement are not binding upon the Trustees or the
shareholders of the Trust or the Fund individually, but are binding only upon
the assets and property of the Fund.
12. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Texas, without giving effect to the conflicts of laws
principles thereof, and in accordance with the 1940 Act. To the extent that the
applicable laws of the State of Texas conflict with the applicable provisions of
the 1940 Act, the latter shall control.
13. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
14. MISCELLANEOUS. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. Where the
effect of a requirement of the 1940 Act reflected in any provision of this
Agreement is made less restrictive by a rule, regulation or order of the
Securities and Exchange Commission, whether of special or general application,
such provision shall be deemed to incorporate the effect of such rule,
regulation or order. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original.
IN WITNESS WHEREOF, Luther King Capital Management Corporation and TT
International Investment Management have each caused this instrument to be
signed in duplicate on its behalf by its duly authorized representative, all as
of the day and year first above written.
TT INTERNATIONAL INVESTMENT LUTHER KING CAPITAL MANAGEMENT
MANAGEMENT CORPORATION
By: _____________________________ By: _____________________________
Attest: Attest:
By: _____________________________ By: _____________________________
88
Exhibit 8.2
ADDITION OF THE
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
TO THE
CUSTODIAN SERVICING AGREEMENT
Between
LKCM FUND
and
FIRSTAR TRUST COMPANY
which is Dated as of July 10, 1997
WHEREAS, the above parties have entered into a Custodian Servicing Agreement
(the "Agreement") whereby Firstar Trust Company ("FTC") has agreed to provide
custody services to LKCM Fund (the "Trust"); and
WHEREAS, the parties would like to add the LKCM Balanced Fund and the LKCM Fixed
Income Fund, collectively the Funds, to the Agreement;
NOW THEREFORE, the Trust and FTC agree to add the Funds to the agreement and
compensation for the addition of the Funds will be determined in accordance with
the original fee schedule subject to a 10% discount for the Funds' first year of
operations or until the respective Fund's assets reach $10 million, whichever
comes first.
Dated this 30 day of December, 1997
LKCM FUND FIRSTAR TRUST COMPANY
BY: /s/ Jacqui Brownfield BY: /s/ Joseph Neuberger
--------------------- ---------------------
89
Exhibit 8.3
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective December 31, 1997, and is among THE CHASE
MANHATTAN BANK ("Bank"), FIRSTAR TRUST COMPANY ("Customer') and LKCM FUND
("Company") on behalf of its LKCM INTERNATIONAL FUND ("Fund").
1. CUSTOMER ACCOUNTS.
Bank, acting as "Securities Intermediary" (as defined in Section 15(g)
hereof) shall establish and maintain the following accounts ("Accounts"): (a) a
Custody Account (as defined in Section 15(b) hereof) in the name of Customer on
behalf of Fund for any and all Financial Assets, which shall, except as modified
by Section 15(d) hereof, mean stocks, shares, bonds, debentures, notes,
mortgages or other obligations for the payment of money, bullion, coin and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase or subscribe for the same or evidencing or representing any
other rights or interests therein and other similar property whether
certificated or uncertificated as may be received by Bank or its Subcustodian
(as defined in Section 3 hereof) for the account of Customer on behalf of Fund,
including as an "Entitlement Holder" as defined in Section 15(c) hereof); and
(b) an account in the name of Customer ("Deposit Account") for any and
all cash in any currency received by Bank or its Subcustodian for the account of
Customer on behalf of Fund, which cash shall not be subject to withdrawal by
draft or check.
Customer warrants its authority to: 1) deposit the cash and Financial
Assets (collectively "Assets") received in the Accounts and 2) give Instructions
(as defined in Section 11 hereof) concerning the Accounts. Bank may deliver
Financial Assets of the same class in place of those deposited in the Custody
Account.
Upon written agreement among Bank, Company and Customer, additional
Accounts may be established and separately accounted for as additional Accounts
hereunder.
2. MAINTENANCE OF FINANCIAL ASSETS AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Financial Assets shall be held in the country or other jurisdiction
in which the principal trading market for such Financial Assets is located,
where such Financial Assets are to be presented for payment or where such
Financial Assets are acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer on behalf of Fund with itself or one of its "Affiliates" at such
reasonable rates of interest as may from time to time be paid on such accounts,
or in non-interest bearing accounts as Customer on behalf of Fund may direct, if
acceptable to Bank.
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For purposes hereof, the term "Affiliate" shall mean an entity controlling,
controlled by, or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank, Customer and Company.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer and Company authorize Bank to hold Assets in the
Accounts in accounts which Bank has established with one or more of its branches
or Subcustodians. Bank and Subcustodians are authorized to hold any of Financial
Assets in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer and Company shall be given reasonable notice by Bank of any amendment
to Schedule A. Upon request by Customer or Company, Bank shall identify the
name, address and principal place of business of any Subcustodian of Company's
Assets and the name and address of the governmental agency or other regulatory
authority that supervises or regulates such Subcustodian.
4. USE OF SUBCUSTODIAN.
(a) Bank shall identify the Assets on its books as belonging to Customer
on behalf of Fund.
(b) A Subcustodian shall hold such Assets together with assets belonging
to other customers of Bank in accounts identified on such Subcustodian's books
as custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Financial Assets held in a
securities depository for the account of a Subcustodian shall be subject only to
the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject to
any right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration, or, in the case of
cash deposits, except for liens or rights in favor of creditors of the
Subcustodian arising under bankruptcy, insolvency or similar laws. Where
Securities are deposited by a Subcustodian with a securities depository, Bank
shall cause the Subcustodian to identify on its books as belonging to Bank, as
agent, the Securities shown on the Subcustodian's account on the books of such
securities depository. The foregoing shall not apply to the extent of any
special agreement or arrangement made by Customer with any particular
Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
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(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion, may
advance Company such excess amount which shall be deemed a loan payable on
demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Company shall promptly
return any such amount upon oral or written notification: (i) that such amount
has not been received in the ordinary course of business or (ii) that such
amount was incorrectly credited. If Company does not promptly return any amount
upon such notification, Bank shall be entitled, upon oral or written
notification to Company, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank shall advise Customer, Company or an
Authorized Person regarding default in the payment of principal or income on
Securities; provided that, failure to give such advice shall not render Bank
liable for any such amount. Bank or its Subcustodian shall have no duty or
obligation to institute legal proceedings, file a claim or a proof of claim in
any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer and Company on behalf of Fund.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Financial Assets shall be transferred, exchanged or delivered by
Bank or its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Financial Assets
received for, and delivery of Financial Assets out of, the Custody Account may
be made in accordance with the customary or established securities trading or
securities processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation, delivery of
Financial Assets to a purchaser, dealer or their agents against a receipt with
the expectation of receiving later payment and free delivery. Delivery of
Financial Assets out of the Custody Account may also be made in any manner
specifically required by Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Financial Assets with respect to any
sale, exchange or purchase of Financial Assets. Otherwise, such transactions
shall be credited or debited to the Accounts on the date cash or Financial
Assets are actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a reasonable
period, determined by Bank in its discretion, after the contractual settlement
date for the related transaction.
(ii) If any Financial Assets delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and debits of
the particular transaction at any time.
7. ACTIONS OF BANK.
Bank shall follow Instructions received regarding Assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(a) Present for payment any Financial Assets which are called, redeemed
or retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
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(b) Execute in the name of Company such ownership and other certificates
as may be required to obtain payments in respect of Financial Assets.
(c) Exchange interim receipts or temporary Financial Assets for
definitive Financial Assets.
(d) Appoint brokers and agents for any transaction involving the
Financial Assets, including, without limitation, Affiliates of Bank or any
Subcustodian.
(e) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within ninety (90) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts on behalf of the Fund
were parties.
All collections of funds or other property paid or distributed in
respect of Financial Assets in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in the
actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Financial Assets in the Custody
Account in respect of which Bank has agreed to take any action hereunder.
8. CORPORATE ACTIONS; PROXIES; TAX RECLAIMS.
(a) Corporate Actions. Whenever Bank receives information concerning the
Financial Assets which requires discretionary action by the beneficial owner of
the Financial Assets (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate Actions"),
Bank shall: (1) give Customer prompt notice of such Corporate Actions to the
extent that Bank's central corporate actions department has actual knowledge of
a Corporate Action in time to afford timely notice its customers; and (2) take
such steps as may reasonably be necessary to secure or otherwise prevent the
loss of rights relating to any Securities; provided that the timely monitoring
of publications typically used by custodians to monitor such actions, together
with the giving of the prompt notice referred to herein, shall fulfill Bank's
obligations under this Section 8(a).
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person (as defined in Section 10
hereof), but if Instructions are not received in time for Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
Instructions, Bank is authorized to sell such rights entitlement or fractional
interest and to credit the Deposit Account with the proceeds or take any other
action it deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by
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Bank or, in whole or in part, by one or more third parties appointed by Bank
(which may be Affiliates of Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a reduction
of withholding tax and any refund of any tax paid or tax credits which apply in
each applicable market in respect of income payments on Financial Assets for the
benefit of Customer and Company which Bank believes may be available to such
Customer.
(ii) The provision of tax reclaim services by Bank is conditional upon
Bank receiving from the beneficial owner of Financial Assets (A) a declaration
of its identity and place of residence and (B) certain other documentation (pro
forma copies of which are available from Bank). Customer and Company acknowledge
that, if Bank does not receive such declarations, documentation and information,
additional United Kingdom taxation shall be deducted from all income received in
respect of Financial Assets issued outside the United Kingdom and that U.S.
non-resident alien tax or U.S. backup withholding tax shall be deducted from
U.S. source income. Customer and Company shall provide to Bank such
documentation and information as it may require in connection with taxation, and
warrants that, when given, this information shall be true and correct in every
respect, not misleading in any way, and contain all material information.
Customer undertakes to notify Bank immediately if any such information requires
updating or amendment.
(iii) Bank shall not be liable to Customer, the Company or any third
party for any taxes, fines or penalties payable by Bank, Company or Customer,
and shall be indemnified by the appropriate party to this Agreement accordingly,
whether these result from the inaccurate completion of documents by Customer,
Company or any third party acting as agent for Customer or Company, or as a
result of the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer, Company or
any other third party, or as a result of any delay of any revenue authority or
any other matter beyond the control of Bank.
(iv) Customer and Company confirm that Bank is authorized to deduct from
any cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in respect
of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to Customer
from time to time and Bank may, by notification in writing, at its absolute
discretion, supplement or amend the markets in which the tax reclaim services
are offered. Other than as expressly provided in this sub-clause, Bank shall
have no responsibility with regard to Customer's and Company's tax position or
status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Customer or the Financial Assets and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be Affiliates of
Bank); provided that Bank shall be liable for the performance of any such third
party to the same extent as Bank would have been if it performed such services
itself.
9. NOMINEES.
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Financial Assets which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository, as
the case may be. Bank may without notice to Customer or Company cause any such
Financial Assets to cease to be registered in the name of any such nominee and
to be registered in the name of Company on behalf of Fund. In the event that any
Financial Assets registered in a nominee name are called for partial redemption
by the issuer, Bank may allot the called portion to the respective beneficial
holders of such class of security in any manner Bank deems to be fair and
equitable. Customer shall hold Bank, Subcustodians, and their respective
nominees harmless from any liability arising directly or indirectly from their
status as a mere record holder of Financial Assets in the Custody Account.
10. AUTHORIZED PERSONS.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or Company or their respective designated agents to act on behalf of
Customer or Company on behalf of the Fund. Such persons shall continue to be
Authorized Persons until such time as Bank receives Instructions from Customer
or Company or their respective designated agent that any such employee or agent
is no longer an Authorized Person.
11. INSTRUCTIONS.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded. The term "Instructions" includes, without
limitation, instructions to sell, assign, transfer, deliver, purchase or receive
for the Custody Account, any and all stocks, bonds and other Financial Assets or
to transfer funds in the Cash Account.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer and Company shall
hold Bank harmless for the failure of an Authorized Person to send such
confirmation in writing, the failure of such confirmation to conform to the
telephone instructions received or Bank's failure to produce such confirmation
at any subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. STANDARD OF CARE; LIABILITIES.
(a) Bank shall be responsible for the performance of only such duties as
are set forth herein or expressly contained in Instructions which are consistent
with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its obligations
hereunder and the safekeeping of Assets. The Bank shall be liable to the
Customer for any loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to the safekeeping of such
Assets to the same extent that the Bank would be liable to the Customer if the
Bank were holding such Assets in New York. In the event of any loss to Customer
by reason of the failure of Bank or its Subcustodian to utilize reasonable care,
Bank shall be liable to Customer only to the extent of Customer's direct
damages, to be determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without reference
to any special conditions
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or circumstances. Bank shall have no liability whatsoever for any consequential,
special, indirect or speculative loss or damages (including, but not limited to,
lost profits) suffered by Customer or Company, as appropriate, in connection
with the transactions contemplated hereby and the relationship established
hereby even if Bank has been advised as to the possibility of the same and
regardless of the form of the action.
(ii) Subject to Bank having selected a Subcustodian with reasonable care
and Bank's duty to use reasonable care in the monitoring of a Subcustodian's
financial condition as reflected in its published financial statements and other
publicly available financial information, Bank shall not be responsible for the
insolvency of any Subcustodian which is not a branch or Affiliate of Bank. Bank
shall not be responsible for any act, omission, default or the solvency of any
broker or agent which it or a Subcustodian appoints unless such appointment was
made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to Customer or
Company for any action taken or omitted by Bank whether pursuant to Instructions
or otherwise within the scope hereof if such act or omission was in good faith,
without negligence. In performing its obligations hereunder, Bank may rely on
the genuineness of any document which it believes in good faith to have been
validly executed.
(iv) Company shall pay for and hold Bank harmless from any liability or
loss resulting from the imposition or assessment of any taxes or other
governmental charges, and any related expenses with respect to income from or
Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Customer and/or Company) on all matters and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
(vi) Bank need not maintain any insurance for the benefit of Customer
and Company.
(vii) Without limiting the foregoing, Bank shall not be liable for any
loss which results from: 1) the general risk of investing, or 2) investing or
holding Assets in a particular country including, but not limited to, losses
resulting from malfunction, interruption of or error in the transmission of
information caused by any machines or system or interruption of communication
facilities, abnormal operating conditions, nationalization, expropriation or
other governmental actions; regulation of the banking or securities industry;
currency restrictions, devaluations or fluctuations; and market conditions which
prevent the orderly execution of securities transactions or affect the value of
Assets; except that, with respect to the failure of machines, systems,
interruption of communication facilities or abnormal operating conditions on
Bank or a Subcustodian's premises or otherwise within the control of Bank or a
Subcustodian, Bank shall not be so excused to the extent that such failure was
on account of Bank's or the Subcustodian's (as the case may be) negligence.
(viii) No party shall be liable to the others for any loss due to forces
beyond its control including, but not limited to strikes or work stoppages, acts
of war (whether declared or undeclared) or terrorism, insurrection, revolution,
nuclear fusion, fission or radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer,
Company, or an Authorized Person regarding such Instructions;
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(ii) supervise or make recommendations with respect to investments or
the retention of Financial Assets;
(iii) evaluate or report to Customer or an Authorized Person regarding
the financial condition of any broker, agent or other party to which Financial
Assets are delivered or payments are made pursuant hereto, except for brokers
appointed to dispose of fractional shares; and
(iv) review or reconcile trade confirmations received from brokers.
Customer, Company or its Authorized Persons issuing Instructions shall bear any
responsibility to review such confirmations against Instructions issued to and
statements issued by Bank.
(c) Customer and Company authorize Bank to act hereunder notwithstanding
that Bank or any of its divisions or Affiliates may have a material interest in
a transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Financial Assets, act as a lender to the issuer of Financial Assets,
act in the same transaction as agent for more than one customer, have a material
interest in the issue of Financial Assets, or earn profits from any of the
activities listed herein.
13. FEES AND EXPENSES.
Customer on behalf of Fund shall pay Bank for its services hereunder the
fees set forth in Schedule B hereto or such other amounts as may be agreed upon
in writing, together with Bank's reasonable out-of-pocket or incidental
expenses, including, but not limited to, legal fees. Bank shall have a lien on
and is authorized to charge any Accounts of Customer opened on behalf of Fund
for any amount owing by Customer on behalf of Fund to Bank under any provision
hereof
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the administration of
Customer's trading and investment activity on behalf of Fund, Bank is authorized
to enter into spot or forward foreign exchange contracts with Company or an
Authorized Person for Company and may also provide foreign exchange through its
subsidiaries, Affiliates or Subcustodians. Instructions, including standing
instructions, may be issued with respect to such contracts but Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where Bank, its subsidiaries, Affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of Bank, its
subsidiary, Affiliate or Subcustodian and, to the extent not inconsistent, this
Agreement shall apply to such transaction.
(b) Certification of Residency, etc. Customer and Company each certifies
that it is a resident of the United States and shall notify Bank of any changes
in residency. Bank may rely upon this certification or the certification of such
other facts as may be required to administer Bank's obligations hereunder.
Customer or Company, as appropriate, shall indemnify Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.
(c) Access to Records. Bank shall allow Customer's and Fund's
independent public accountant reasonable access to the records of Bank relating
to the Assets as is required in connection with their examination of books and
records pertaining to Customer's and Company's affairs. Subject to restrictions
under applicable law, Bank shall also obtain an undertaking to permit Customer's
and Company's independent
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public accountants reasonable access to the records of any Subcustodian which
has physical possession of any Assets as may be required in connection with the
examination of Customer's and Company's books and records.
(d) Governing Law; Successors and Assigns, Captions THIS AGREEMENT SHALL
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED IN NEW YORK and shall not be assignable by any party, but
shall bind the successors in interest of Customer, Company and Bank. The
captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer and Company each
represent that the Assets deposited in the Accounts are (Check one):
X Investment Company assets subject to certain U.S. Securities and
--- Exchange Commission rules and regulations;
--- Other (specify)
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s) [Check
applicable rider(s)]:
x INVESTMENT COMPANY
--
PROXY VOTING
--
SPECIAL TERMS AND CONDITIONS
--
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on
the part of either party in exercising any power or right hereunder operates as
a waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Financial Assets and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement constitutes
its legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer and Company that: (A)
it has the full power and authority to perform its obligations hereunder, (B)
this Agreement constitutes its legal, valid and binding obligation; enforceable
in accordance with its terms; and (C) that it has taken all necessary action to
authorize the execution and delivery hereof. (iii) Company hereby represents and
warrants to Bank that: (A) it has the full power and authority to perform its
obligations hereunder,
98
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(B) this Agreement constitutes its legal, valid and binding obligation;
enforceable in accordance with its terms; and (C) that it has taken all
necessary action to authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, N.Y. 11245, Attention:
Global Investor Services, Investment Management Group; and (b) Customer: Firstar
Trust Company, 615 East Michigan Street, Milwaukee, WI 53202, att: Joseph
Neuberger; (c) Fund LKCM Fund: LKCM International Fund, 301 Commerce St, (Suite
1600), Fort Worth, TX 76102, att: Jacqui Brownfield.
(j) Termination. This Agreement may be terminated by Customer, Company
or Bank by giving sixty (60) days written notice to the other, provided that
such notice to Bank shall specify the names of the persons to whom Bank shall
deliver the Assets in the Accounts. If notice of termination is given by Bank,
Customer, on behalf of Fund, shall, within sixty (60) days following receipt of
the notice, deliver to Bank Instructions specifying the names of the persons to
whom Bank shall deliver the Assets. In either case Bank shall deliver the Assets
to the persons so specified, after deducting any amounts which Bank determines
in good faith to be owed to it under Section 13. If within sixty (60) days
following receipt of a notice of termination by Bank, Bank does not receive
Instructions from Customer specifying the names of the persons to whom Bank
shall deliver the Assets, Bank, at its election, may deliver the Assets to a
bank or trust company doing business in the State of New York to be held and
disposed of pursuant to the provisions hereof, or to Authorized Persons, or may
continue to hold the Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held by
any person by imputation or information of which Bank is not aware by virtue of
a "Chinese Wall" arrangement. If Bank becomes aware of confidential information
which in good faith it feels inhibits it from effecting a transaction hereunder
Bank may refrain from effecting it.
(m) Separate Portfolio. The parties acknowledge that the Fund is a
separate investment portfolio of the Company. All obligations of the Company
hereunder are limited to the Fund and any amount owed by the Company hereunder
shall be paid only out of the assets and property of the Fund.
(n) Business Trust. A copy of the Certificate of Trust of the Company is
on file with the Secretary of the State of Delaware and notice is hereby given
that this Agreement is not binding upon any of the trustees, officers or
shareholders of the Company individually, but are binding only upon the assets
and property of Fund. Bank agrees that no shareholder, trustee or officer of
Company or Fund may be held personally liable or responsible for any obligation
of Fund arising hereunder.
15. DEFINITIONS.
As used herein, the following terms shall have the meaning hereinafter
stated:
99
<PAGE>
a) "Certificated Security" shall mean a security that is represented
by a certificate.
b) "Custody Account" means each Securities custody account on Bank's records to
which Financial Assets are or may be credited pursuant hereto.
c) "Entitlement Holder" shall mean the person on the records of a Securities
Intermediary as the person having a Securities Entitlement against the
Securities Intermediary.
d) "Financial Asset" shall mean, as the context requires, either the asset
itself or the means by which a person's claim to it is evidenced, including a
Certificated Security or Uncertificated Security, a security certificate, or a
Securities Entitlement.
e) "Securities" means stocks, bonds, rights, warrants and other negotiable and
non-negotiable paper whether issued as Certificated Securities or Uncertificated
Securities and commonly traded or dealt in on securities exchanges or financial
markets, and other obligations of an issuer, or shares, participations and
interests in an issuer recognized in an area in which it is issued or dealt in
as a medium for investment and any other property as shall be acceptable to Bank
for the Custody Account.
f) "Securities Entitlement" shall mean the rights and property interest of an
Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of
the Uniform Commercial Code.
g) "Securities Intermediary" shall mean Bank, a Subcustodian, a securities
depository, and any other financial institution which in the ordinary course of
business maintains custody accounts for others and acts in that capacity.
h) "Uncertificated Security" shall mean a security that is not represented
by a certificate.
i) "Uniform Commercial Code" means Article 8 of the Uniform Commercial Code of
the State of New York, as the same may be amended from time to time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
LKCM FUND on behalf of the LKCM INTERNATIONAL FUND
By: /s/ Jacqui Brownfield
Title: Secretary and Treasurer
Date: 1/5/98
FIRSTAR TRUST COMPANY
By: /s/ Joe Redwine
Title: Sr. Vice President
Date: January 2, 1998
THE CHASE MANHATTAN BANK
Edward G. Mc Gann
Vice President
January 8, 1998
100
<PAGE>
Investment Company Rider to Global Custody Agreement
among THE CHASE MANHATTAN BANK,
FIRSTAR TRUST COMPANY, and LKCM FUND
on behalf of its LKCM INTERNATIONAL FUND
effective December 31, 1997
The following modifications are made to the Agreement:
A. Add a new Section 16 to the Agreement as follows:
"16. Compliance with SEC rule 17f-5.
(a) Company's board of directors (or equivalent body) (hereinafter
`Board') hereby delegates to Bank, and, except as to the country or countries as
to which Bank may, from time to time, advise Company that it does not accept
such delegation, Bank hereby accepts the delegation to it, of the obligation to
perform as Company's `Foreign Custody Manager' (as that term is defined in SEC
rule 17f-5(a)(2)), both for the purpose of selecting Eligible Foreign Custodians
(as that term is defined in SEC rule 17f-5(a)(1), and as the same may be amended
from time to time, or that have otherwise been made exempt pursuant to an SEC
exemptive order) to hold Assets and of evaluating the contractual arrangements
with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2));
provided that, the term Eligible Foreign Custodian shall not include any
`Compulsory Depository.' A Compulsory Depository shall mean a securities
depository or clearing agency the use of which is compulsory because: (1) its
use is required by law or regulation, (2) securities cannot be withdrawn from
the depository, or (3) maintaining securities outside the depository is not
consistent with prevailing custodial practices in the country which the
depository serves. Compulsory Depositories used by Chase as of the date hereof
are set forth in Appendix 1-A hereto, and as the same may be amended on notice
to Company from time to time.
(b) In connection with the foregoing, Bank shall:
(i) provide written reports notifying Company's Board of the placement of Assets
with particular Eligible Foreign Custodians and of any material change in the
arrangements with such Eligible Foreign Custodians, with such reports to be
provided to Company's Board at such times as the Board deems reasonable and
appropriate based on the circumstances of Company's foreign custody arrangements
(and until further notice from Company such reports shall be provided not less
than quarterly with respect to the placement of Assets with particular Eligible
Foreign Custodians and with reasonable promptness upon the occurrence of any
material change in the arrangements with such Eligible Foreign Custodians);
(ii) exercise such reasonable care, prudence and diligence in performing as
Company's Foreign Custody Manager as a person having responsibility for the
safekeeping of Assets would exercise;
(iii) in selecting an Eligible Foreign Custodian, first have determined that
Assets placed and maintained in the safekeeping of such Eligible Foreign
Custodian shall be subject to reasonable care, based on the standards applicable
to custodians in the relevant market, after having considered all factors
relevant to the safekeeping of such Assets, including, without limitation, those
factors set forth in SEC rule 17f-5(c)(1)(i)-(iv);
(iv) determine that the written contract with the Eligible Foreign Custodian
(or, in the case of an Eligible Foreign Custodians that is a securities
depository or clearing agency, such contract, the rules or established practices
or procedures of the depository, or any combination of the foregoing)
101
<PAGE>
requires that the Eligible Foreign Custodian will provide reasonable care for
Assets based on the standards applicable to custodians in the relevant market.
In making this determination, Bank shall consider the provisions of Rule
17f-5(c)(2), together with whether Bank shall be liable to Company for any loss
which shall occur as the result of the failure of the Eligible Foreign Custodian
to exercise reasonable care with respect to the safekeeping of such Assets to
the same extent that Bank would be liable to Company if Bank were holding such
Assets in New York; and
(v) have established a system to monitor the continued appropriateness of
maintaining Assets with particular Eligible Foreign Custodians and of the
governing contractual arrangements; it being understood, however, that in the
event that Bank shall have determined that the existing Eligible Foreign
Custodian in a given country would no longer afford Assets reasonable care and
that no other Eligible Foreign Custodian in that country would afford reasonable
care, Bank shall promptly so advise Company and shall then act in accordance
with the Instructions of Company with respect to the disposition of the affected
Assets.
Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain
Assets on behalf of Company with Eligible Foreign Custodians pursuant to a
written contract deemed appropriate by Bank.
(c) Except as expressly provided herein, Customer and Company shall be
solely responsible to assure that the maintenance of Assets hereunder complies
with the rules, regulations, interpretations and exemptive orders promulgated by
or under the authority of the SEC.
(d) Bank represents to Company that it is a U.S. Bank as defined in Rule
17f-5(a)(7). Company represents to Bank that: (1) the Assets being placed and
maintained in Bank's custody are subject to the Investment Company Act of 1940,
as amended (the `1940 Act'), as the same may be amended from time to time; (2)
its Board: (i) has determined that it is reasonable to rely on Bank to perform
as Company's Foreign Custody Manager (ii) or its Foreign Custody Manager (other
than Bank) shall have determined that Company may maintain Assets in each
country in which Company's Assets shall be held hereunder and determined to
accept the risks arising therefrom (including, but not limited to, a country's
financial infrastructure (and including any Compulsory Depository operating in
such country), prevailing custody and settlement practices, laws applicable to
the safekeeping and recovery of Assets held in custody, and the likelihood of
nationalization, currency controls and the like)."
B. Add the following after the first sentence of Section 3 of the
Agreement: "At the request of Customer, Bank may, but need not, add to Schedule
A an Eligible Foreign Custodian that is either a bank or a non-Compulsory
Depository where Bank has not acted as Foreign Custody Manager with respect to
the selection thereof. Bank shall notify Customer in the event that it elects
not to add any such entity."
C. Add the following language to the end of Section 3 of the Agreement:
"The term Subcustodian as used herein shall mean the following:
(a) a `U.S. Bank,' which shall mean a U.S. bank as defined in SEC
rule 17f-5(a)(7);
(b) an `Eligible Foreign Custodian,' which shall mean (i) a banking
institution or trust company, incorporated or organized under the laws of a
country other than the United States, that is regulated as such by that
country's government or an agency thereof, (ii) a majority-owned direct or
indirect subsidiary of a U.S. bank or bank holding company which subsidiary is
incorporated or organized under the laws of a country other than the United
States; (iii) a securities depository or clearing agency, incorporated or
organized under the laws of a country other than the United States, that acts as
102
<PAGE>
a system for the central handling of securities or equivalent book-entries in
that country and that is regulated by a foreign financial regulatory authority
as defined under section 2(a)(50) of the 1940 Act, (iv) a securities depository
or clearing agency organized under the laws of a country other than the United
States to the extent acting as a transnational system for the central handling
of securities or equivalent book-entries, and (v) any other entity that shall
have been so qualified by exemptive order, rule or other appropriate action of
the SEC.
For purposes of clarity, it is agreed that as used in Section 12(a)(i), the term
Subcustodian shall include neither any Eligible Foreign Custodian as to which
Bank has not acted as Foreign Custody Manager nor any Compulsory Depository."
103
<PAGE>
Appendix 1-A
COMPULSORY DEPOSITORIES
104
Exhibit 9.1B
ADDITION OF THE
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
TO THE
ADMINISTRATION SERVICING AGREEMENT
Between
LKCM FUND
and
FIRSTAR TRUST COMPANY
which is Dated as of July 10, 1997
WHEREAS, the above parties have entered into a Administration Servicing
Agreement (the "Agreement") whereby Firstar Trust Company ("FTC") has agreed to
provide administration services to LKCM Fund (the "Trust"); and
WHEREAS, the parties would like to add the LKCM Balanced Fund and the LKCM Fixed
Income Fund, collectively the Funds, to the Agreement;
NOW THEREFORE, the Trust and FTC agree to add the Funds to the agreement and
compensation for the addition of the Funds will be determined in accordance with
the original fee schedule subject to a 10% discount for the first year or until
the respective Fund's assets reach $10 million, whichever comes first.
Dated this 30 day of December, 1997
LKCM FUND FIRSTAR TRUST COMPANY
BY: /s/ Jacqui Brownfield BY: /s/ Joseph Neuberger
--------------------- --------------------
105
Exhibit 9.1C
ADDITION OF THE
LKCM INTERNATIONAL FUND
TO THE
ADMINISTRATION SERVICING AGREEMENT
Between
LKCM FUND
and
FIRSTAR TRUST COMPANY
which is Dated as of July 10, 1997
WHEREAS, the above parties have entered into a Administration Servicing
Agreement (the "Agreement") whereby Firstar Trust Company ("FTC") has agreed to
provide administration services to LKCM Fund (the "Trust"); and
WHEREAS, the parties would like to add the LKCM International Fund to the
Agreement;
NOW THEREFORE, the Trust and FTC agree to add the Fund to the agreement and
compensation for the addition of the Fund will be determined as follows:
7 basis points on the first $200 million
5 basis points on the next $300 million
4 basis points on the next $500 million
3 basis points on the balance
Subject to an annual minimum fee of $35,000
Subject to a 10% discount for the first year or until the Fund's
assets reach $10 million, whichever comes first.
Dated this 30 day of December, 1997
LKCM FUND FIRSTAR TRUST COMPANY
BY: /s/ Jacqui Brownfield BY: /s/ Joseph Neuberger
--------------------- --------------------
106
Exhibit 9.2B
ADDITION OF THE
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
TO THE
FUND ACCOUNTING SERVICING AGREEMENT
Between
LKCM FUND
and
FIRSTAR TRUST COMPANY
which is Dated as of July 10, 1997
WHEREAS, the above parties have entered into a Fund Accounting Servicing
Agreement (the "Agreement") whereby Firstar Trust Company ("FTC") has agreement
to provide fund accounting services to LKCM Fund (the "Trust"); and
WHEREAS, the parties would like to add the LKCM Balanced Fund, the LKCM Fixed
Income Fund and the LKCM International Fund, collective the Funds, to the
Agreement;
NOW THEREFORE, the Trust and FTC agree to add the Funds to the agreement and
compensation for the addition of the Funds will be determined as follows:
LKCM Balanced Fund
$23,500 for the first $40 million
1.5 basis points in the next $200 million
1 basis point on the balance
LKCM Fixed Income Fund and LKCM International Fund
$25,000 for the first $40 million
2 basis points on the next $200 million
1 basis point on the balance
Subject to a 10% discount for the first year or until the respective Fund's
assets reach $10 million, whichever comes first.
Dated this 30 day of December, 1997
LKCM FUND FIRSTAR TRUST COMPANY
BY: /s/ Jacqui Brownfield BY: /s/ Joseph Neuberger
--------------------- --------------------
107
Exhibit 9.3B
ADDITION OF THE
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
TO THE
TRANSFER AGENT SERVICING AGREEMENT
Between
LKCM FUND
and
FIRSTAR TRUST COMPANY
which is Dated as of July 10, 1997
WHEREAS, the above parties have entered into a Transfer Agent Servicing
Agreement (the "Agreement") whereby Firstar Trust Company ("FTC") has agreement
to provide transfer agent services to LKCM Fund (the "Trust"); and
WHEREAS, the parties would like to add the LKCM Balanced Fund, the LKCM Fixed
Income Fund and the LKCM International Fund, collective the Funds, to the
Agreement;
NOW THEREFORE, the Trust and FTC agree to add the Funds to the agreement and
compensation for the addition of the Funds will be determined in accordance with
the original fee schedule subject to a 10% discount for the Funds' first year of
operations or until the respective Fund's assets reach $10 million, whichever
comes first.
Dated this 30 day of December, 1997
LKCM FUND FIRSTAR TRUST COMPANY
BY: /s/ Jacqui Brownfield BY: /s/ Joseph Neuberger
--------------------- --------------------
108
Exhibit 10
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
Washington, D. C. 20036-1800
Telephone 202-778-9000
February 26, 1998
LKCM Fund
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
Ladies and Gentlemen:
You have requested our opinion, as counsel to the LKCM Fund ("Trust"),
as to certain matters regarding the issuance of Shares of the Trust. As used in
this letter, the term "Shares" means the shares of beneficial interest of the
LKCM Small Cap Equity Fund, the LKCM Equity Fund, the LKCM Balanced Fund, the
LKCM Fixed Income Fund and the LKCM International Fund, each a series of the
Trust, during the time that Post-Effective Amendment No. 8 to the Trust's
Registration Statement on Form N-1A ("PEA") is effective and has not been
superseded by another post-effective amendment.
As such counsel, we have examined certified or other copies, believed by
us to be genuine, of the Trust's Agreement and Declaration of Trust and By-Laws
and such resolutions and minutes of meetings of the Trust's Board of Trustees as
we have deemed relevant to our opinion, as set forth herein. Our opinion is
limited to the laws and facts in existence on the date hereof, and it is further
limited to the laws (other than the conflict of law rules) in the State of
Delaware that in our experience are normally applicable to the issuance of
shares by business trusts and to the Securities Act of 1933 ("1933 Act"), the
Investment Company Act of 1940 ("1940 Act") and the regulations of the
Securities and Exchange Commission ("SEC") thereunder.
Based on the foregoing, we are of the opinion that the issuance of the
Shares has been duly authorized by the Trust and that, when sold in accordance
with the terms contemplated by the PEA, including receipt by the Trust of full
payment for the Shares and compliance with the 1933 Act and the 1940 Act, the
Shares will have been validly issued, fully paid and non-assessable.
We note, however, that the Trust is a business trust established
pursuant to the Delaware Business Trust Act ("Delaware Act"). The Delaware Act
provides that a shareholder of the Trust is entitled to the same limitation of
personal liability extended to shareholders of for-profit corporations. To the
extent that the Trust or any of its shareholders becomes subject to the
jurisdiction of courts in states that do not have statutory or other authority
limiting the liability of business trust shareholders, such courts might not
apply the Delaware Act and, thus, might subject Trust shareholders to liability.
To guard against this risk, the Declaration of Trust: (1) requires that every
written obligation of the Trust contain a statement that such obligation may be
enforced only against the assets of the Trust and (2) provides for
indemnification out of Trust property of any shareholder held personally liable,
solely by reason of being a shareholder, for the obligations of the Trust. Thus,
the risk of a Trust shareholder incurring financial loss beyond the
shareholder's investment because of shareholder liability is limited to
circumstances in which a court refuses to apply Delaware law, no contractual
limitation of liability was in effect, and the Trust itself would be unable to
meet its obligations.
We hereby consent to this opinion accompanying the PEA when it is filed
with the SEC and to the reference to our firm in the statement of additional
information that is being filed as part of the PEA.
Very truly yours,
KIRKPATRICK & LOCKHART LLP
109
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the reference to us under the headings "Financial
Highlights" and "Reports" in the Prospectus, and under the heading "General
Information - Auditors" and to the incorporation by reference of our report
dated January 23, 1998 on the financial statements and financial highlights of
the LKCM Small Cap Equity Fund and the LKCM Equity Fund for the periods
presented and to the use of our report dated January 23, 1998 on the statements
of assets and liabilities as of December 31, 1997 of the LKCM Balanced Fund, the
LKCM Fixed Income Fund and the LKCM International Fund, in the Statement of
Additional Information constituting part of this Post-Effective Amendment No. 8
to the LKCM Funds registration statement on Form N-1A.
Deloitte & Touche LLP
Milwaukee, Wisconsin
February 27, 1998
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<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUNDS
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<NUMBER> 01
<NAME> SMALL CAP EQUITY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 213,514
<INVESTMENTS-AT-VALUE> 274,787
<RECEIVABLES> 3,041
<ASSETS-OTHER> 32
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 277,860
<PAYABLE-FOR-SECURITIES> 1,391
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,682
<TOTAL-LIABILITIES> 3,073
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<PAID-IN-CAPITAL-COMMON> 212,792
<SHARES-COMMON-STOCK> 16,270
<SHARES-COMMON-PRIOR> 12,289
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 722
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 61,273
<NET-ASSETS> 274,787
<DIVIDEND-INCOME> 1,004
<INTEREST-INCOME> 1,825
<OTHER-INCOME> 0
<EXPENSES-NET> 2,292
<NET-INVESTMENT-INCOME> 537
<REALIZED-GAINS-CURRENT> 20,906
<APPREC-INCREASE-CURRENT> 27,753
<NET-CHANGE-FROM-OPS> 49,196
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 924
<DISTRIBUTIONS-OF-GAINS> 36,264
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,573
<NUMBER-OF-SHARES-REDEEMED> 820
<SHARES-REINVESTED> 2,228
<NET-CHANGE-IN-ASSETS> 75,699
<ACCUMULATED-NII-PRIOR> 643
<ACCUMULATED-GAINS-PRIOR> 16,045
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,813
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,292
<AVERAGE-NET-ASSETS> 241,798
<PER-SHARE-NAV-BEGIN> 16.20
<PER-SHARE-NII> 0.02
<PER-SHARE-GAIN-APPREC> 3.38
<PER-SHARE-DIVIDEND> 0.07
<PER-SHARE-DISTRIBUTIONS> 2.64
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.89
<EXPENSE-RATIO> 0.95
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUNDS
<SERIES>
<NUMBER> 02
<NAME> EQUITY FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-01-1997
<INVESTMENTS-AT-COST> 44,259
<INVESTMENTS-AT-VALUE> 52,633
<RECEIVABLES> 159
<ASSETS-OTHER> 11
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 52,803
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 411
<TOTAL-LIABILITIES> 411
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,400
<SHARES-COMMON-STOCK> 3,976
<SHARES-COMMON-PRIOR> 2,959
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 618
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8,374
<NET-ASSETS> 52,392
<DIVIDEND-INCOME> 124
<INTEREST-INCOME> 554
<OTHER-INCOME> 0
<EXPENSES-NET> 313
<NET-INVESTMENT-INCOME> 365
<REALIZED-GAINS-CURRENT> 2,403
<APPREC-INCREASE-CURRENT> 5,156
<NET-CHANGE-FROM-OPS> 7,924
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 816
<DISTRIBUTIONS-OF-GAINS> 3,031
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,614
<NUMBER-OF-SHARES-REDEEMED> 837
<SHARES-REINVESTED> 240
<NET-CHANGE-IN-ASSETS> 17,784
<ACCUMULATED-NII-PRIOR> 450
<ACCUMULATED-GAINS-PRIOR> 1,246
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 274
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 456
<AVERAGE-NET-ASSETS> 39,249
<PER-SHARE-NAV-BEGIN> 11.70
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 2.52
<PER-SHARE-DIVIDEND> 0.25
<PER-SHARE-DISTRIBUTIONS> 0.89
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.18
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUNDS
<SERIES>
<NUMBER> 03
<NAME> BALANCED FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-30-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 16
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 16
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 16
<TOTAL-LIABILITIES> 16
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUNDS
<SERIES>
<NUMBER> 04
<NAME> FIXED INCOME FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000918942
<NAME> LKCM FUNDS
<SERIES>
<NUMBER> 05
<NAME> INTERNATIONAL FUND
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-30-1997
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</TABLE>
