LKCM FUNDS
P.O. BOX 701
MILWAUKEE, WI 53201-0701
- -------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
J. Luther King, Jr., CFA Jacqui Brownfield
Chairman of the Board, Secretary & Treasurer
President
Paul W. Greenwell Joseph C. Neuberger
Vice President Assistant Treasurer
H. Kirk Downey Mary S. Kraft
Trustee Assistant Secretary
Earle A. Shields, Jr. Robert Kern
Trustee Assistant Secretary
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
Luther King Capital Management Corporation
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
- -------------------------------------------------------------------------------
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT, SHAREHOLDER SERVICING
AGENT & CUSTODIAN
Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
- -------------------------------------------------------------------------------
LEGAL COUNSEL
Gardere & Wynne
3000 Thanksgiving Tower
Dallas, TX 75201
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, N.W.
2nd Floor
Washington, D.C. 20036-1800
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS
Deloitte & Touche LLP
411 East Wisconsin Avenue
Milwaukee, WI 53202
- -------------------------------------------------------------------------------
DISTRIBUTOR
First Data Distributors, Inc.
4400 Computer Drive
Westboro, MA 01581
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This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
- -------------------------------------------------------------------------------
LKCM
FUNDS
LKCM SMALL CAP EQUITY FUND
LKCM EQUITY FUND
- -------------------------------------------------------------------------------
Annual Report
December 31, 1997
<PAGE>
DEAR FELLOW SHAREHOLDERS:
We are pleased to report the following performance information for the LKCM
Funds:
<TABLE>
<CAPTION>
AVERAGE RUSSELL 2000 S&P 500
ONE YEAR ANNUAL ONE YEAR ONE YEAR
TOTAL TOTAL TOTAL TOTAL
NET ASSET RETURN RETURN RETURN RETURN
INCEPTION VALUE AT ENDED SINCE ENDED ENDED
FUNDS DATES 12/31/97 12/31/97 INCEPTION 12/31/97 12/31/97
- ----- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
LKCM Small Cap Equity Fund 7/14/94 $16.89 23.07% 24.52% 22.36% 33.36%
LKCM Equity Fund 1/3/96 $13.18 23.57% 20.24% N/A 33.36%
</TABLE>
During 1997, the Dow Jones Industrial Average and the Standard &Poor's 500
Composite Stock Price Index, including income, gained 24.7% and 33.4%,
respectively. In the 101-year history of the Dow Jones Industrial Average, the
1995-1997 period was the first time in which the widely-followed Dow Average
gained 20% or more in each of three consecutive years. As inflationary pressures
remained muted, interest rates declined for much of the year. In addition to
falling interest rates, the environment for financial assets enjoyed a
collection of other positive influences such as unexpected strength in corporate
profits, heavy merger and acquisition activity, persistent corporate share
repurchases, and a capital gains tax cut. Finally, the demand for stocks
continued to be supported by an aging population in the U.S. which drove a
further expansion of household investment in financial assets. Over 1997, and
much of the past three years, leadership in the stock market has come from
shares of large "blue chip" companies and the valuation of these stocks has
expanded accordingly.
Despite an environment, over the last few years, that favored the stocks of
large companies, the LKCM Small Cap Equity Fund enjoyed its third consecutive
year of strong 20%+ returns. Perhaps more importantly, the Fund outperformed its
small-stock bogey, The Russell 2000 Index, for the third time in three years. As
of December 31, 1997, important sector concentrations in the Small Cap Equity
Fund included Energy (14.9%), Financial Services (11.2%), Health Care (8.1%),
and Heavy Industry/Transportation (9.0%). While the long-standing hallmark of
the portfolio has been stock selection, a broad-based advance in a specific
sector can be a beneficial tail-wind as was the case for financial services
stocks in 1997. The portfolio's emphasis on energy-related issues added value
through most of the year but resulted in abnormally high levels of volatility in
the Fund during the fourth quarter. We continue to see substantial investment
opportunities in the energy sector and among the stock's of small and mid-sized
companies in general -- especially as we continue our emphasis on niche
companies that possess unique potential to grow their businesses at
above-average returns on invested capital. The total net assets of the portfolio
as of December 31, 1997 were $274,787,277 of which $257,243,610 (93.6%) were
invested in common and preferred stocks with the balance held in cash reserves.
The LKCM Equity Fund posted a very attractive absolute total return for the
second consecutive year despite being outpaced by its benchmark index, the S&P
500 Index. The S&P 500 Index proved difficult to beat for many investment
managers as the index's performance was driven by a narrow group of very
large-company stocks. In our opinion, the valuation of many of these "super cap"
stocks resides at uncomfortably high levels. During 1997, the LKCM Equity Fund
selectively owned the stocks of a number of large-cap companies but continued to
emphasize the shares of mid-sized companies which appeared to offer a better
reward/risk trade-off. The performance of mid-sized stocks tended to lag that of
the S&P 500 during most of 1997. As was stated in our June 30, 1997 letter to
shareholders, the portfolio's focus on both risk as well as reward, via a
consciousness of valuation extremes, capped some of the portfolio's upside while
having managed the downside risk. Today, the portfolio is well positioned
<PAGE>
between stocks of medium-sized companies with niche growth opportunities and
larger companies with defensible franchises and substantial free cash flow. We
continue to view a strong balance sheet and sustainable profitability as
desirable characteristics across the board. As of December 31, 1997, the
portfolio had overweighted positions in the Energy sector (16.2%) and the Health
Care sector (13.9%) when compared to the S&P 500. Other important sector
weightings included Financial Services (10.3%) and Technology (13.8%). As of
December 31, 1997, the total net assets of the portfolio were $52,391,774 of
which $49,906,963 (95.3%) were invested in common stocks with the balance held
in cash reserves.
During 1997, stock market gains exceeded the expectations of most market
prognosticators and, while we looked forward to a good year at the onset of
1997, we were also surprised by the markets remarkable gains. In anticipating
the U.S. economic environment during the first half of 1998, investors should
focus their concerns on 1) inflationary pressures created by rising labor costs,
2) the impact on our economy of a severe economic downturn in Asia, and 3) the
implications of a strong dollar. In the face of these concerns, the U.S. economy
is likely to slow and a deceleration in the rate of growth in corporate profits
will likely follow. On the other hand, interest rates should remain stable as
the Federal Reserve balances labor cost pressure against a slowing economy.
Consequently, the environment for financial assets in 1998 looks relatively
benign and, while not clearly threatening, is unlikely to produce the level of
stock market gains enjoyed over the past several years. Given the high valuation
levels in many areas of the market and an outlook for continued market
volatility, individual stock selection will be more important than at any time
since 1993. We continue to find the growth prospects and value proposition of
the shares of many small- and medium-sized companies to be compelling. In any
event, the experienced staff at LKCM, armed with a two-decade old philosophy of
security selection, is committed to uncovering investment opportunities that
possess an attractive long-term reward/risk profile.
We are pleased to announce the availability of three new funds to our
clients as of December 31, 1997. The new funds are the LKCM Fixed Income Fund,
the LKCM Balanced Fund and the LCKM International Fund.To request information on
any existing or new funds please call 1-800-688-LKCM.
Regards,
/s/ J. Luther King, Jr., CFA
J. Luther King, Jr., CFA
January 21, 1998
<PAGE>
PERFORMANCE:
The following information illustrates the historical performance of LKCM
Small Cap Equity Fund and LKCM Equity Fund compared to the Fund's representive
market indices: The S&P 500 Index is an unmanaged index of 500 stocks designed
to mimic the overall equity market's industry weightings. Most, but not all,
large capitalization stocks are in the index. The Russell 2000 Index is an
unmanaged index consisting of the 2,000 smallest of the 3,000 largest stocks.
Market capitalization is typically between $57 million and $610 million.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost.
An index is a fictitious unmanaged portfolio and does not trade or incur
any expenses. One can not invest in an unmanaged index.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------------
PAST PAST SINCE
1 YEAR 3 YEARS INCEPTION(1)
- ---------------------------------------------------------
<S> <C> <C> <C>
LKCM SMALL CAP
EQUITY FUND 23.07% 26.80% 24.52%
- ---------------------------------------------------------
S&P 500 Index 33.36% 31.16% 28.15%
- ---------------------------------------------------------
Russell 2000 Index 22.36% 22.34% 20.70%
- ---------------------------------------------------------
<FN>
(1) July 14, 1994
</FN>
</TABLE>
LINE CHART:
A $10,000 Investment in LKCM Small Cap Equity Fund
LKCM Small Cap S&P 500 Rusell 2000
Equity Fund Index Index
$21,411 $23,660 $19,217
07/94 10000 10000 10000
04/95 11479 11846 11222
06/95 12169 12605 12007
12/95 13839 14427 13480
06/96 16158 15882 14877
12/96 17395 17739 15705
06/97 19531 21394 17307
12/97 21411 23660 19217
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
- ---------------------------------------------------------
PAST SINCE
1 YEAR INCEPTION(1)
- ---------------------------------------------------------
<S> <C> <C>
LKCM EQUITY FUND 23.57% 20.24%
- ---------------------------------------------------------
S&P 500 Index 33.36% 28.06%
- ---------------------------------------------------------
<FN>
(1) January 3, 1996
</FN>
</TABLE>
LINE CHART:
A $10,000 Investment in LKCM Equity Fund
LKCM Equity S&P 500
Fund Index
$14,456 $16,400
01/96 10000 10000
06/96 10800 11009
12/96 11700 12296
06/97 13491 14829
12/97 14456 16400
<PAGE>
<TABLE>
LKCM Small Cap Equity Fund
Schedule of Investments
December 31, 1997
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS - 93.54% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
BASIC RESOURCES - 3.28%
Lawter International, Inc. 140,000 $ 1,522,500
Longview Fibre Company 174,500 2,650,219
Reliance Steel &
Aluminum Company 75,000 2,231,250
Titanium Metals Corporation # 90,000 2,598,750
-----------
9,002,719
-----------
BEVERAGE & PERSONAL PRODUCTS - 1.07%
Kimberly-Clark Corporation 59,682 2,943,069
-----------
CONSUMER & COMMERCIAL SERVICES - 7.15%
CapStar Hotel Company # 75,000 2,573,438
Carmike Cinemas, Inc. Class A # 91,700 2,630,645
Fairfield Communities, Inc. # 35,000 1,544,375
G & K Services Inc. - Class A 25,000 1,050,000
La Quinta Inns, Inc. 200,000 3,862,500
Mac-Gray Corporation # 50,000 781,250
Norwood Promotional
Products, Inc. # 20,000 305,000
Rock of Ages Corporation # 85,000 1,317,500
Romac International, Inc. # 100,000 2,443,750
Servico, Inc. # 100,000 1,687,500
Source Services Corporation # 67,500 1,459,688
-----------
19,655,646
-----------
CONSUMER DURABLES - 3.48%
Centex Corporation 50,000 3,146,875
Dal-Tile International, Inc. # 140,000 1,715,000
International Comfort
Products Corporation # 106,900 895,287
Kevco, Inc. # 50,300 829,950
Lawson Products, Inc. 78,500 2,335,375
RDO Equipment Company -
Class A # 35,000 640,938
-----------
9,563,425
-----------
ENERGY - 14.94%
Bayard Drilling Technologies,
Inc. # 100,000 1,625,000
Tom Brown, Inc. # 93,000 1,790,250
Carbo Ceramics, Inc. 40,000 1,280,000
Chieftain International, Inc. # 32,200 684,250
Daniel Industries 15,000 288,750
Diamond Offshore Drilling, Inc. 80,000 3,850,000
<PAGE>
<CAPTION>
- -------------------------------------------------------
COMMON STOCKS SHARES VALUE
- -------------------------------------------------------
<S> <C> <C>
ENERGY - (CONTINUED)
Dril-Quip, Inc. # 36,000 $ 1,264,500
Encal Energy Ltd. # (1) 487,500 1,601,131
HS Resources, Inc. # 110,000 1,519,375
ICO, Inc. 549,300 3,364,462
Input/Output, Inc. # 95,000 2,820,312
IRI International Corporation #100,000 1,400,000
Meridian Resource Corporation #114,480 1,094,715
Noble Affiliates, Inc. 97,000 3,419,250
Pioneer Natural Resources
Company 75,000 2,170,312
Seagull Energy Corporation # 65,000 1,340,625
Snyder Oil Corporation 110,000 2,007,500
Tidewater, Inc. 46,133 2,543,082
Titan Exploration, Inc. # 70,500 669,750
Trico Marine Services, Inc. # 115,000 3,378,125
United Meridian Corporation # 25,000 703,125
Varco International, Inc. # 64,000 1,372,000
Weatherford Enterra, Inc. # 20,000 875,000
-----------
41,061,514
-----------
ENVIRONMENT - 0.83%
U.S. Filter Corporation # 76,000 2,275,250
-----------
FINANCIAL SERVICES - 11.23%
Amerus Life Holdings, Inc. -
Class A 87,412 3,223,317
Atlantic Gulf Communities
Corporation # 128,983 603,639
E.W. Blanch Holdings, Inc. 99,500 3,426,531
Chartwell Re Corporation 40,000 1,350,000
CNA Surety Corporation # 230,000 3,550,625
Crescent Operating, Inc. # 6,200 151,900
Cullen/Frost Bankers, Inc. 110,000 6,675,625
First Colorado Bancorp, Inc. 150,000 3,562,500
First United Bancshares, Inc. 38,000 1,596,000
First Victoria National Bank 19,000 729,125
Sterling Bancorp 116,000 2,784,000
Texas Regional Bancshares, Inc.105,000 3,202,500
-----------
30,855,762
-----------
FOOD, TOBACCO & OTHER - 2.62%
American Italian Pasta Company # 103,200 2,580,000
Authentic Specialty Foods, Inc. #120,000 1,635,000
Suiza Foods Corporation # 50,000 2,978,125
-----------
7,193,125
-----------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
HEALTH CARE - 8.11%
Cholestech Corporation # 80,000 $ 1,000,000
Diagnostic Health
Services, Inc. # 116,700 1,378,519
Jones Medical Industries, Inc. 60,000 2,295,000
Maxxim Medical, Inc. # 129,400 2,814,450
Patterson Dental Company # 83,500 3,778,375
Prime Medical Services, Inc. # 110,000 1,519,375
ProMedCo Management
Company # 50,000 506,250
Protein Design Labs, Inc. # 35,000 1,400,000
R.P. Scherer Corporation # 45,300 2,763,300
Sybron International
Corporation # 77,500 3,637,656
Warner Chilcott Laboratories
ADR # 96,000 1,188,000
-----------
22,280,925
-----------
HEAVY INDUSTRY/TRANSPORTATION - 8.97%
Airnet Systems, Inc. # 123,700 2,659,550
CTB International Corporation # 55,000 783,750
Covenant Transport, Inc. -
Class A # 90,000 1,372,500
Genesee & Wyoming, Inc. # 70,500 1,647,937
Kirby Corporation # 280,000 5,407,500
MTL, Inc. # 93,000 2,377,312
N.L. Industries, Inc. # 41,000 558,625
RailAmerica, Inc. # 375,000 2,414,063
RailTex, Inc. # 90,000 1,288,125
Simon Transportation
Services, Inc. # 44,000 1,056,000
Swift Transportation Co., Inc. #90,000 2,913,750
TJ International, Inc. 70,000 1,732,500
U.S. Xpress Enterprises, Inc. -
Class A 20,000 442,500
-----------
24,654,112
-----------
MANUFACTURING - 6.70%
Blount International, Inc. -
Class A 200,000 5,337,500
Chart Industries, Inc. 103,000 2,349,687
Figgie International, Inc. -
Class A # 118,500 1,555,312
Justin Industries 320,000 4,360,000
Lindsay Manufacturing Company 110,000 4,771,250
-----------
18,373,749
-----------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
PUBLISHING & BROADCASTING - 3.01%
A.H. Belo Corporation - Common
Series A 80,000 $ 4,490,000
Harte-Hanks Communications, Inc.85,000 3,155,625
Saga Communications, Inc. 30,000 637,500
-----------
8,283,125
-----------
REAL ESTATE INVESTMENT TRUSTS - 5.78%
Boykin Lodging Company 77,000 2,035,687
Brandywine Realty Trust 75,000 1,884,375
Crescent Real Estate Equities
Company 62,000 2,441,250
Imperial Credit Commercial
Mortgage Investment
Corporation 77,000 1,126,125
Prentiss Properties Trust 75,000 2,095,312
Prime Group Realty Trust 48,000 972,000
Starwood Hotels & Resorts Trust 75,000 4,340,625
Storage USA, Inc. 25,000 998,438
-----------
15,893,812
-----------
RETAIL - 8.34%
Boise Cascade Office Products
Corporation # 115,000 1,717,813
The Bombay Company, Inc. # 150,000 693,750
Borders Group, Inc. # 140,000 4,383,750
Coleman Company, Inc. # 160,000 2,570,000
International Home Foods, Inc. # 7,300 204,400
Lone Star Steakhouse &
Saloon, Inc. # 92,500 1,618,750
Party City Corporation # 40,000 1,290,000
Pier 1 Imports, Inc. 165,000 3,733,125
Play By Play Toy &
Novelties, Inc. # 150,000 2,728,125
Proffitt's, Inc. # 40,000 1,137,500
Taco Cabana, Inc. - Class A # 190,100 902,975
Tractor Supply Company # 100,500 1,482,375
White Cap Industries, Inc. # 25,000 465,625
-----------
22,928,188
-----------
TECHNOLOGY - 5.48%
Bell & Howell Company # 100,000 2,418,750
Dallas Semiconductor
Corporation 52,500 2,139,375
Danka Business Systems Plc ADR 50,000 796,875
Intellicall, Inc. # 100,000 512,500
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
TECHNOLOGY - (CONTINUED)
Intelligent Polymers Limited # 150,000 $ 3,318,750
Interphase Corporation # 48,500 278,875
Kent Electronics Corporation # 165,000 4,145,625
Physician Computer
Network, Inc. # 115,000 460,000
Tekelec # 32,000 976,000
-----------
15,046,750
-----------
TELECOMMUNICATIONS - 2.55%
ITC DeltaCom, Inc. # 60,000 990,000
IXC Communication, Inc. # 55,000 1,725,625
Metrocall, Inc. # 252,450 1,246,472
MetroNet Communications
Corporation - Class B # 85,000 1,476,875
Pagemart Wireless, Inc. -
Class A # 200,000 1,575,000
-----------
7,013,972
-----------
TOTAL COMMON STOCK
(cost $195,715,759 ) 257,025,143
-----------
- -------------------------------------------------------
PREFERRED STOCK - 0.08%
- -------------------------------------------------------
FINANCIAL SERVICES - 0.08%
Atlantic Gulf Communities
Corporation #@* 21,796 215,344
-----------
- -------------------------------------------------------
WARRANTS - 0.00%
- -------------------------------------------------------
FINANCIAL SERVICES - 0.00%
Atlantic Gulf Communities
Corporation - Class A, expiring
6/24/04 #@* 17,345 1,041
Atlantic Gulf Communities
Corporation - Class B, expiring
6/24/04 #@* 17,345 1,041
Atlantic Gulf Communities
Corporation - Class C, expiring
6/24/04 #@* 17,344 1,041
-----------
Total warrants
(cost $1,473) 3,123
-----------
<PAGE>
<CAPTION>
- -------------------------------------------------------
CASH EQUIVALENT - 6.38% PRINCIPAL VALUE
- -------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT - 6.38%
Firstar Bank, 4.25%, dated
12/31/97, due 01/02/98, to be
repurchased at $17,543,000
collateralized by $17,515,000
U.S. Treasury Note 6.50%,
due 4/30/99, valued
at $17,895,076
(cost $17,543,000) $17,543,000 $ 17,543,000
-----------
TOTAL INVESTMENTS - 100.00%
(cost $213,513,235) 274,786,610
Other assets in excess
of liabilities - 0.00% 667
-----------
Total net assets - 100.00% $274,787,277
===========
<FN>
# - Non-income producing security.
ADR - American Depository Receipts.
(1) Foreign Security.
@ - Security issued as a private placement and is illiquid by virtue of the
absence of a readily available market.
* - Security valued at fair value - See Note A to the financial statements.
</FN>
See notes to the financial statements.
</TABLE>
<PAGE>
LKCM Equity Fund
Schedule of Investments
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS - 95.26% SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
BASIC RESOURCES - 7.20%
ARCO Chemical Company 12,000 $ 560,250
Du Pont (E.I.) De Nemours
& Company 16,000 961,000
Longview Fibre Company 45,000 683,438
Morton International, Inc. 25,000 859,375
Willamette Industries, Inc. 22,000 708,125
-----------
3,772,188
-----------
BERVERAGE & PERSONAL PRODUCTS - 5.94%
Colgate-Palmolive Company 18,000 1,323,000
Kimberly Clark Corporation 20,000 986,250
PepsiCo, Inc. 22,000 801,625
-----------
3,110,875
-----------
CONSUMER & COMMERCIAL SERVICES - 6.52%
Dollar Thrifty Automotive
Group, Inc. # 15,000 307,500
General Electric Company 12,000 880,500
Hilton Hotels Corporation 15,000 446,250
La Quinta Inns, Inc. 55,000 1,062,187
Sherwin-Williams Company 26,000 721,500
-----------
3,417,937
-----------
ENERGY - 16.21%
Bayard Drilling Technologies,
Inc. # 25,000 406,250
Exxon Corporation 22,000 1,346,125
Mobil Corporation 12,000 866,250
Noble Affiliates, Inc. 26,000 916,500
Nuevo Energy Company # 20,000 815,000
Petroleum Geo-Services ADR # 4,400 284,900
Pioneer Natural Resources
Company 28,000 810,250
Schlumberger, Ltd. 17,000 1,368,500
Tidewater, Inc. 17,000 937,125
Western Atlas, Inc. # 10,000 740,000
-----------
8,490,900
-----------
ENVIRONMENT - 1.71%
U.S. Filter Corporation # 30,000 898,125
-----------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
FINANCIAL SERVICES - 10.29%
<S> <C> <C>
American General Corporation 22,000 $ 1,189,375
C.I.T. Group, Inc. - Class A # 35,000 1,128,750
Cullen/Frost Bankers, Inc. 18,000 1,092,375
H&R Block, Inc. 20,000 896,250
Norwest Corporation 28,000 1,081,500
-----------
5,388,250
-----------
FOOD, TOBACCO & OTHER - 2.22%
Nabisco Holdings Corporation -
Class A 24,000 1,162,500
-----------
HEALTH CARE - 13.93%
Merck & Company, Inc. 10,000 1,062,500
Pfizer, Inc. 20,000 1,491,250
R.P. Scherer Corporation # 15,000 915,000
Schering-Plough Corporation 25,000 1,553,125
SmithKline Beecham PLC ADR 26,000 1,337,375
Sybron International
Corporation # 20,000 938,750
-----------
7,298,000
-----------
HEAVY INDUSTRY / TRANSPORTATION - 3.34%
Union Pacific Corporation 15,000 936,563
Kirby Corporation # 42,000 811,125
-----------
1,747,688
-----------
MANUFACTURING - 4.07%
Blount International,
Inc. - Class A 34,000 907,375
Corning, Inc. 33,000 1,225,125
-----------
2,132,500
-----------
PUBLISHING & BROADCASTING - 4.62%
A.H. Belo Corporation - Common
Series A 20,000 1,122,500
Gannett Company, Inc. 21,000 1,298,062
-----------
2,420,562
-----------
REAL ESTATE INVESTMENT TRUSTS - 1.20%
Imperial Credit Commercial
Mortgage Investment Corporation43,000 628,875
-----------
<PAGE>
<CAPTION>
- ------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ------------------------------------------------------
<S> <C> <C>
RETAIL - 4.21%
Home Depot, Inc. 23,400 $ 1,377,675
Saks Holdings, Inc. # 40,000 827,500
-----------
2,205,175
-----------
TECHNOLOGY - 13.80%
Alltel Corporation 20,000 821,250
Cisco Systems, Inc. # 21,000 1,170,750
Danka Business Systems PLC ADR 20,000 318,750
Hewlett-Packard Company 23,000 1,437,500
Intel Corporation 4,800 337,200
Kent Electronics Corporation # 40,000 1,005,000
Motorola, Inc. 19,000 1,084,188
WorldCom, Inc. # 35,000 1,058,750
-----------
7,233,388
-----------
TOTAL COMMON STOCK
(cost $41,532,663) 49,906,963
-----------
<PAGE>
<CAPTION>
- -------------------------------------------------------
CASH EQUIVALENT - 5.20% PRINCIPAL VALUE
- -------------------------------------------------------
REPURCHASE AGREEMENT - 5.20%
Firstar Bank, 4.25%, dated
12/31/97, due 01/02/98, to
be repurchased at $2,726,000
collateralized by $2,735,000
U.S. Treasury Note 6.00%,
due 10/15/99, valued at
$2,738,683
(cost $2,726,000) $2,726,000 $ 2,726,000
-----------
TOTAL INVESTMENTS - 100.46%
(cost $44,258,663) 52,632,963
Liabilities in excess of other
assets - (0.46)% (241,189)
-----------
Total net assets - 100.00% $ 52,391,774
===========
<FN>
# - Non-income producing security.
ADR - American Depository Receipts.
</FN>
See notes to the financial statements.
</TABLE>
<PAGE>
Statements of Assets and Liabilities
December 31, 1997
<TABLE>
<CAPTION>
LKCM
SMALL CAP LKCM
EQUITY FUND EQUITY FUND
<S> <C> <C>
ASSETS:
Investments, at value.................................................. $274,786,610 $52,632,963
(cost $213,513,235 and $44,258,663, respectively)
Cash .................................................................. 0 89
Receivable for investments sold........................................ 2,785,320 87,447
Dividends and interest receivable...................................... 255,573 71,071
Prepaid expenses....................................................... 32,435 11,370
------------ -----------
Total assets...................................................... 277,859,938 52,802,940
------------ -----------
LIABILITIES:
Bank overdraft......................................................... 14,855 0
Payable for investments purchased...................................... 1,391,122 0
Payable for investment advisory fees................................... 532,498 69,809
Dividends payable...................................................... 992,978 298,988
Accrued expenses and other liabilities................................. 141,208 42,369
------------ -----------
Total liabilities................................................. 3,072,661 411,166
------------ -----------
NET ASSETS............................................................. $274,787,277 $52,391,774
============ ===========
NET ASSETS CONSIST OF:
Paid in capital........................................................ $212,791,993 $43,399,672
Undistributed net realized gain on securities.......................... 721,909 617,802
Net unrealized appreciation of securities.............................. 61,273,375 8,374,300
------------ -----------
NET ASSETS............................................................. $274,787,277 $52,391,774
============ ===========
Shares of beneficial interest outstanding (unlimited shares of no
par value authorized)............................................... 16,270,255 3,976,192
Net asset value per share (offering and redemption price).............. $ 16.89 $ 13.18
============ ===========
See notes to financial statements.
</TABLE>
<PAGE>
Statements of Operations
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
LKCM
SMALL CAP LKCM
EQUITY FUND EQUITY FUND
<S> <C> <C>
INVESTMENT INCOME:
Dividend income (net of foreign taxes withheld of $1,290
and $540, respectively)............................................. $ 1,824,827 $ 554,248
Interest............................................................... 1,004,687 124,447
---------- ----------
Total income...................................................... 2,829,514 678,695
---------- ----------
EXPENSES:
Investment advisory fees .............................................. 1,813,278 274,166
Administrative fees.................................................... 350,914 125,290
Federal and state registration......................................... 34,558 18,406
Professional fees...................................................... 26,616 11,650
Trustees' fees......................................................... 15,519 3,211
Amortization of deferred charges....................................... 10,753 0
Reports to shareholders................................................ 8,214 18,892
Other ................................................................. 32,462 5,128
---------- ----------
Total expenses.................................................... 2,292,314 456,743
Less, expense reimbursement....................................... 0 (143,411)
---------- ----------
Net expenses........................................................... 2,292,314 313,332
---------- ----------
NET INVESTMENT INCOME.................................................. 537,200 365,363
---------- ----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments....................................... 20,905,657 2,403,120
Net change in unrealized appreciation.................................. 27,753,447 5,155,823
---------- ----------
NET GAIN ON INVESTMENTS................................................ 48,659,104 7,558,943
---------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $49,196,304 $7,924,306
========== ==========
See notes to the financial statements.
</TABLE>
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
LKCM
SMALL CAP EQUITY FUND LKCM EQUITY FUND
Period From
Year ended Year ended Year ended January 3, 1996(1) to
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.................... $ 537,200 $ 631,886 $ 365,363 $ 450,324
Net realized gain on investments......... 20,905,657 16,081,149 2,403,120 1,245,994
Net change in unrealized appreciation.... 27,753,447 19,407,252 5,155,823 3,218,477
----------- ----------- ---------- ----------
Net increase in net assets
resulting from operations......... 49,196,304 36,120,287 7,924,306 4,914,795
----------- ----------- ---------- ----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS
Net investment income.................... (923,766) (596,495) (815,908) 0
Net realized gain on investments......... (36,263,585) (7,691,095) (3,031,073) 0
----------- ----------- ---------- ----------
Total dividends and distributions... (37,187,351) (8,287,590) (3,846,981) 0
----------- ----------- ---------- ----------
FUND SHARE TRANSACTIONS:
Net proceeds from shares sold............ 42,633,318 59,310,732 21,410,408 34,492,749
Shares issued in connection with payment
of dividends and distributions........ 35,233,556 7,948,741 2,945,834 0
Capital contributions.................... 0 72,187 0 0
Cost of shares redeemed.................. (14,176,437) (17,506,494) (10,649,681) (4,799,656)
----------- ----------- ---------- ----------
Net increase in net asset from
Fund share transactions........... 63,690,437 49,825,166 13,706,561 29,693,093
----------- ----------- ---------- ----------
Total increase........................... 75,699,390 77,657,863 17,783,886 34,607,888
NET ASSETS:
Beginning of period...................... 199,087,887 121,430,024 34,607,888 0
----------- ----------- ---------- ----------
End of period*........................... $274,787,277 $199,087,887 $52,391,774 $34,607,888
----------- ----------- ---------- ----------
*Including undistributed net
investment income of:................. $ 0 $ 642,526 $ 0 $ 450,305
=========== =========== ========== ===========
CHANGES IN SHARES OUTSTANDING:
Shares sold.............................. 2,573,250 4,161,147 1,614,397 3,403,217
Shares issued in connection with payment
of dividends and distributions........ 2,228,307 619,542 240,087 0
Shares redeemed.......................... (820,506) (1,263,264) (836,931) (444,578)
----------- ----------- ---------- ----------
Net increase ............................ 3,981,051 3,517,425 1,017,553 2,958,639
=========== =========== ========== ==========
<FN>
(1) Commencement of Operations.
</FN>
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
Financial Highlights
Selected Data For Each Share of Capital Stock Outstanding
<CAPTION>
LKCM SMALL CAP EQUITY FUND
Year ended Year ended May 1, 1995 to July 14, 1994(1) to
December 31, 1997 December 31, 1996 December 31, 1995 April 30, 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>
See notes to financial statements.
<PAGE>
Financial Highlights
Selected Data for Each Share of Capital Stock Outstanding
<TABLE>
<CAPTION>
LKCM EQUITY FUND
Period from
January 3, 1996(1)
Year ended to
December 31, 1997 December 31, 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
====== ======
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>
See notes to financial statements.
<PAGE>
LCKM FUNDS
Notes to the Financial Statements
A. ACCOUNTING POLICIES. 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, the assets of which are invested in separate, independently
managed portfolios. The accompanying financial statements exclude financial
information for the LKCM Balanced Fund, the LKCM Fixed Income Fund and the LKCM
International 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 Small Cap Equity Fund seeks to maximize capital
appreciation. The LKCM Equity Fund seeks to maximize long-term capital
appreciation. The following is a summary of significant accounting policies
followed by the LKCM Small Cap Equity Fund and the LKCM Equity Fund
(collectively, the "Funds") in preparation of the financial statements.
1. SECURITY VALUATION: Securities listed on a U.S. securities exchange or
the Nasdaq Stock Market for which market quotations are readily available
are valued at the last quoted sale price on the day the valuation is made.
Price information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted U.S. securities and listed U.S.
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean of the most recent quoted bid and
asked price. Securities listed on a foreign exchange for which market
quotations are readily available are valued at the last quoted sales price
available before the time when assets are valued. Fixed-income securities
(other than obligations having a maturity of 60 days or less) are normally
valued on the basis of quotes obtained from pricing services. Fixed-income
securities purchased with remaining maturities of 60 days or less are valued
at amortized cost if it reflects fair value. Other assets and securities for
which no quotations are readily available (including restricted securities)
will be valued in good faith at fair value using methods determined by the
Board of Trustees.
2. FEDERAL INCOME TAXES: It is each Fund's policy to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies
and each Fund intends to distribute investment company net taxable income
and net capital gains to shareholders. Therefore, no federal income tax
provision is required.
3. REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements
with broker-dealers or banks that meet the credit guidelines established by
the Board of Trustees. In connection with transactions in repurchase
agreements, it is the Fund's policy that the custodian take possession of
the underlying collateral securities, the value of which exceeds the
principal amount of the repurchase transaction, including accrued interest.
If the seller defaults, and the value of the collateral declines,
realization of the collateral by the Funds may be delayed or limited.
4. DISTRIBUTIONS TO SHAREHOLDERS: The Funds intend to pay dividends and net
capital gains distributions, if any, on an annual basis.
<PAGE>
5. FOREIGN SECURITIES: Investing in securities of foreign companies and
foreign governments involves special risks and considerations not typically
associated with investing in U.S. companies and the U.S. government. These
risks include revaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices
more volatile than those of securities of comparable U.S. companies and the
U.S. government.
6. FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency transactions are translated
into U.S. dollars on the following basis: (i) market value of investment
securities, assets and liabilities at the daily rates of exchange, and (ii)
purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions. For financial reporting purposes, the Fund does
not isolate changes in the exchange rate of investment securities from the
fluctuations arising from changes in the market prices of securities.
However, for federal income tax purposes the Fund does isolate and treat as
ordinary income the effect of changes in foreign exchange rates on realized
gain or loss from the sale of investment securities and payables and
receivables arising from trade date and settlement date differences.
7. EXPENSE ALLOCATION: Common expenses incurred by the Funds are allocated
among the Funds based upon (i) relative average net assets, (ii) as
incurred on a specific identification basis, or (iii) evenly among the
Funds, depending on the nature of the expenditure.
8. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
9. OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recognized on the accrual basis. Generally accepted accounting principles
required that permanent financial reporting and tax differences relating to
shareholder distributions be reclassified to paid in capital.
B. INVESTMENT ADVISORY AND OTHER AGREEMENTS: Luther King Capital Management
Corporation (the "Adviser"), serves as the investment adviser to the Funds under
an Investment Advisory Agreement (the "Agreement"). The Adviser receives a fee,
computed daily and payable quarterly, at the annual rates presented below as
applied to each Fund's daily net assets. The Adviser has voluntarily agreed to
pay operating expenses in excess of the annual rates presented below as applied
to each Fund's daily net assets. For the year ended December 31, 1997 the
Adviser waived the following fees:
<TABLE>
<CAPTION>
LKCM SMALL CAP LKCM EQUITY
EQUITY FUND FUND
<S> <C> <C>
Annual Advisory Rate 0.75% 0.70%
Annual Cap on Expenses 1.00% 0.80%
Fees Waived -- $143,411
</TABLE>
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.
<PAGE>
C. SECURITY TRANSACTIONS: Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
<S> <C> <C>
LKCM Small Cap Equity Fund $119,157,459 $76,654,407
LKCM Equity Fund 34,395,229 17,701,997
</TABLE>
There were no purchases or sales of long-term U.S. Government securities
for the Funds.
At December 31, 1997, cost and unrealized appreciation (depreciation) of
investments for Federal income tax purposes were:
<TABLE>
<CAPTION>
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
<S> <C> <C> <C> <C>
LKCM Small Cap Equity Fund 213,513,235 73,681,645 (12,408,270) 61,273,375
LKCM Equity Fund 44,258,663 10,242,048 (1,867,748) 8,374,300
</TABLE>
D. DISTRIBUTIONS: For the year ended December 31, 1997, the following
percent of ordinary distributions paid qualifies for the dividend received
deduction available to corporate stockholders: LKCM Small Cap Equity Fund 100%
and LKCM Equity Fund 100%.
E. OTHER: At December 31, 1997, the percentage of total shares outstanding and
the number of record shareholders owning 10% or greater of the Funds were
as follows:
<TABLE>
<CAPTION>
NO. OF %
SHAREHOLDERS OWNERSHIP
<S> <C> <C>
LKCM Small Cap Equity Fund 1 13.62%
LKCM Equity Fund 3 68.46%
</TABLE>
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of the LKCM Funds:
We have audited the accompanying statements of assets and liabilities of
the LKCM Small Cap Equity Fund and the LKCM Equity Fund (the "Funds"), including
the schedules of investments, as of December 31, 1997, and the related
statements of operations, the statements of changes in net assets, and the
financial highlights for each of the respective periods presented. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of the LKCM Small Cap
Equity Fund and the LKCM Equity Fund as of December 31, 1997, the results of
their operations, the changes in their net assets, and their financial
highlights for the respective periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Milwaukee, Wisconsin
January 23, 1998
<PAGE>
