LKCM BALANCED FUND
LKCM FIXED INCOME FUND
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
FOR INFORMATION CALL 800-688-LKCM
PROSPECTUS
DECEMBER 30, 1997
LKCM Funds (the "Trust") is an open-end, management investment company
having four separate diversified funds (the "Funds"), each of which is treated
as a separate mutual fund. This Prospectus describes two of these Funds: LKCM
Balanced Fund and LKCM Fixed Income Fund (collectively, the "Funds"). LKCM Funds
offers three additional equity funds, the LKCM Small Cap Equity Fund, the LKCM
Equity Fund and the LKCM International Fund, which are described in and offered
through separate prospectuses.
LKCM BALANCED FUND
The Balanced Fund seeks to provide investors with 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.
LKCM FIXED INCOME FUND
The Fixed Income Fund seeks to provide investors with 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 will have a dollar-weighted average expected maturity
between 3 to 10 years under normal market and economic conditions.
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 December 30, 1997
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
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.
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.
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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.
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THERE CAN BE NO ASSURANCE THAT THE INVESTMENT OBJECTIVE OF ANY FUND
WILL BE ACHIEVED.
<PAGE>
FUND EXPENSES
The following table illustrates the various expenses and fees that a
shareholder of each Fund may incur either directly or indirectly. The fees and
expenses are based on estimated amounts for the fiscal year ending December 31,
1998.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
BALANCED FUND FIXED INCOME FUND
<S> <C> <C>
Sales Load Imposed on Purchases.............................. None None
Deferred Sales Load ......................................... None None
Sales Load Imposed on Reinvested Dividends................... None None
Redemption Fees.............................................. None+ None+
Exchange Fees................................................. None None
<FN>
- ----------------
+ The Funds' transfer agent imposes a $12.00 fee for each wire redemption.
See "Redemption of Shares - By Telephone or Wire."
</FN>
<CAPTION>
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
BALANCED FUND FIXED INCOME FUND
Investment Advisory Fee....................................... .65% .50%
12b-1 Fees ................................................... None None
Other Expenses (after expense reimbursement).................. .15% .15%
------ ------
Total Operating Expenses (after expense reimbursement).... .80% .65%
</TABLE>
For the fiscal year ending December 31, 1998, Luther King Capital
Management Corporation, the investment adviser to the Funds (the "Adviser"), has
voluntarily agreed to waive its advisory fees and/or reimburse operating
expenses to the extent necessary to cap "Total Operating Expenses" at .80% for
the Balanced Fund and .65% for the Fixed Income Fund. "Other Expenses" have been
estimated for the 1998 fiscal year because the Funds did not begin operations
prior to the date of this Prospectus, and are presented net of reimbursements.
Absent these reimbursements, "Other Expenses" and "Total Operating Expenses" for
the Balanced Fund are estimated to be 1.03% and 1.68%, respectively, and "Other
Expenses" and "Total Operating Expenses" for the Fixed Income Fund are estimated
to be 1.04% and 1.54%, respectively. In addition to the advisory fee
waiver/expense reimbursement set forth above, the Adviser may from time to time
voluntarily waive all or a portion of any Fund's advisory fee and/or reimburse
expenses for a Fund and, in such case, such waivers and/or reimbursements will
have the effect of increasing returns for such periods. For additional
information, see "Management - Investment Adviser."
EXAMPLE
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:
<TABLE>
<CAPTION>
BALANCED FUND FIXED INCOME FUND
<S> <C> <C>
One Year........................................ $8 $7
Three Years..................................... $26 $21
</TABLE>
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.
<PAGE>
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" below
for a full discussion of the respective investment objectives and policies of
the Balanced Fund and the Fixed Income Fund.
The Balanced Fund seeks to provide investors with 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 to provide investors with 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 will have a dollar-weighted average expected maturity
between 3 to 10 years under normal market and economic conditions.
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 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."
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. For a
discussion of these risks, see "Description of Securities and Other Investment
Policies."
<PAGE>
PERFORMANCE INFORMATION
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 the Funds 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.
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).
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.
ADVISER'S INVESTMENT PHILOSOPHY
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.
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.
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.
<PAGE>
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 or in other Funds of the
Trust. 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."
THE LKCM BALANCED FUND
The Balanced Fund seeks to achieve its investment objective by investing
primarily in a blend of equity and fixed-income securities, including common
stocks, income producing securities convertible into common stocks, and
fixed-income securities. The Fund will primarily invest 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 will be
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 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").
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 15% of its net
assets in illiquid securities.
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 investment objective of the Fixed Income Fund is to provide investors
with current income. The Fund invests primarily in a diversified portfolio of
investment grade, intermediate-term debt securities providing current income.
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. There is
no assurance that the Fund will meet its objective.
The Fund will have 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.
<PAGE>
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 will invest 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.
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
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
The Funds will limit investments in fixed-income securities to those that
are rated at the time of purchase as investment grade by a national rating
organization, 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 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.
<PAGE>
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, each Fund 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 Nationally
Recognized Statistical Rating Organization ("NRSRO") at time of purchase or, if
not rated, issued by a corporation having an outstanding unsecured debt issue
that meets such rating requirement;
(3) Short-term corporate obligations rated in the highest rating category
by a NRSRO at time of purchase;
(4) U.S. Government obligations, including bills, notes, bonds and other
debt securities issued by the U.S. Treasury. These are direct obligations of
the U.S. Government and differ mainly in interest rates, maturities and dates
of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These include
securities issued by the Federal Home Loan Banks, Federal Land Bank, Farmers
Home Administration, Farm Credit Banks, Federal Intermediate Credit Bank,
Federal National Mortgage Association, Federal Financing Bank, the Tennessee
Valley Authority, and others; and
(6) Repurchase agreements collateralized by those securities listed above.
FOREIGN SECURITIES
Each Fund may invest to a limited degree 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. 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.
<PAGE>
ADRS
The 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 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 financially.
However, loans are made only to borrowers deemed by the Adviser to be of good
standing and when, in the Adviser's judgment, the income to be earned from the
loan justifies the attendant risks.
MORTGAGE AND ASSET-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 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
<PAGE>
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
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 Fund. 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 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. The
Funds will maintain with Firstar Trust Company (the "Custodian") a separate
account with a segregated portfolio of cash or liquid securities having an
aggregate value, measured on a daily basis, at least equal to their purchase
obligations under these agreements.
WHEN-ISSUED SECURITIES
The 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. The Funds will
maintain with the Custodian a separate account with the segregated portfolio of
cash or liquid securities having an aggregate value, measured on a daily basis,
at least equal to the amount of their outstanding forward commitments.
ILLIQUID INVESTMENTS
The Funds may invest up to 15% 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 Trust. 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
The Funds 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.
<PAGE>
OTHER INVESTMENT COMPANIES
The Funds may 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
Any remaining assets not invested as described above may be invested in
securities or obligations, including derivative securities. Options, futures and
options on futures are derivative securities in which the 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 their outstanding
obligations to purchase securities under these contracts in combination with
their outstanding obligations with respect to options transactions would exceed
5% of each Fund's total assets. 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 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 Funds' portfolio turnover rate will generally not
exceed 100% per year.
INVESTMENT LIMITATIONS
Each Fund has adopted certain limitations designed to reduce its exposure
to specific situations. Specifically, among other restrictions, neither Fund
may:
(a) 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);
(b) with respect to 75% of its assets, purchase more than 10% of any
class of the outstanding voting securities of any issuer;
(c) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the value 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;
(d) make loans except (i) by purchasing debt securities in accordance
with its investment objective and policies or entering into repurchase
agreements; or (ii) by lending its 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;
(e) borrow money, except (i) from banks as a temporary measure for
extraordinary or emergency purposes (not for leveraging or investment) or
(ii) in connection with reverse repurchase agreements provided that (i) and
(ii) in combination do not exceed 33 1/3% of the Fund's total assets
(including the amount borrowed) less liabilities (exclusive of borrowings);
(f) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of their total assets at fair market value;
<PAGE>
(g) 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
(h) issue senior securities, except that this limitation shall not
apply to: (i) evidence of 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.
Limitations (a), (b), (c), (d), (e) and (h) and certain other limitations
described in the Statement of Additional Information are fundamental and may be
changed only with the approval of the holders of a majority of the outstanding
voting securities of the respective Fund (see "General Information--Shareholder
Approval"). The other investment limitations described here and in the Statement
of Additional Information are not fundamental policies and the Board of Trustees
of the Trust may change them without shareholder approval. With the exception of
(e), if a percentage limitation on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the Fund's
assets will not require the sale of securities.
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 normal close of trading of the New York Stock Exchange ("NYSE")
(currently 4:00 P.M. Eastern Time) each day that the NYSE is open for business.
See "Valuation of Shares."
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
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 Firstar Trust
Company, 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:
Telephone the Fund at 800-688-LKCM (option 1) for instructions and to
receive an account number.
Instruct a Federal Reserve System member bank to wire funds to:
Firstar Bank
ABA #0750-00022
<PAGE>
For credit to Firstar Trust Company
Account #112-952-137
For further credit to LKCM Funds
[Name of Fund]
Account #[Shareholder account number]
Notify the Fund by calling the telephone number listed above prior
to 4:00 P.M. (Eastern Time) on the wire date.
Promptly complete and mail an Account Registration Form to the
address shown above under purchases by mail.
Federal 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 may 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
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 supplemental application contained in this Prospectus and mail it to Firstar
Trust Company. 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.
<PAGE>
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.
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.
<PAGE>
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
RETIREMENT PLANS
The Funds make available individual retirement account plans, including
Simplified Employee Pension Plans, 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 normal close of 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.
Unlisted foreign securities are valued at fair value as determined in accordance
with policies established by the Board of Trustees.
Fixed-income securities (other than obligations having a maturity of 60
days or less) are normally valued on the basis of quotes obtained from pricing
services, which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Fixed-income securities purchased with remaining maturities of 60 days or
less are valued at amortized cost if it reflects fair value. In the event that
amortized cost does not reflect market, market prices as determined above will
be used. Other assets and securities for which no quotations are readily
available (including restricted securities) will be valued in good faith at fair
value using methods determined by the Board of Trustees of the Trust.
<PAGE>
DIVIDENDS, OTHER DISTRIBUTIONS, AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
The 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 taxes.
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
The Funds intend to qualify for taxation as "regulated investment
companies" ("RICs") under the Code, so that neither 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.
<PAGE>
MANAGEMENT
INVESTMENT ADVISER
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 sales orders. 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 .65% of the Balanced Fund's average daily net assets
for the quarter and to .50% of the Fixed Income Fund's average daily net assets
for the quarter. For the fiscal year ending December 31, 1998, the Adviser has
voluntarily agreed to waive its advisory fee and/or reimburse operating expenses
to the extend necessary to keep total operating expenses at .80% for the
Balanced Fund and .65% for the Fixed Income Fund. Thereafter, the Adviser may
from time to time waive advisory fees and/or reimburse expenses for a portfolio.
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.
PORTFOLIO MANAGERS
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.
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 1986.
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
the foregoing, the Administrator receives from each Fund a fee, paid monthly at
an annual rate of 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.
Notwithstanding the foregoing, the minimum annual fee payable to the
Administrator by the Trust is $20,000 per Fund subject to a 10% discount in the
first year or until the Fund reaches $10 million in net assets, whichever comes
first. 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
<PAGE>
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.
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. Jacqui Brownfield, an employee of the Adviser and an
officer of the LKCM Funds, is a registered representative of the Distributor.
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 authorizes the Adviser to select the
brokers or dealers that will execute the purchases and sales of investment
securities for each Fund and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution with respect to all
transactions for each Fund.
It is not Adviser's practice to allocate brokerage or principal business on
the basis of sales of shares which may be made through intermediary
broker-dealers. However, the Adviser may place 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. 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 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. The various
allocation methods used by the Adviser, and the results of such allocations, are
subject to periodic review by the Board of Trustees.
GENERAL INFORMATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
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, which include the Balanced Fund and the
Fixed Income Fund. The shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the election of Trustees
can elect 100% of the Trustees if they choose to do so. A shareholder is
entitled to one vote for each full share held (and a fractional vote for each
fractional share held), then standing in his or her name on the books of the
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
<PAGE>
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.
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.
<PAGE>
LKCM FUNDS
THE LKCM BALANCED FUND
THE LKCM FIXED INCOME FUND
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LUTHER KING CAPITAL MANAGEMENT
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
800-688-LKCM
PROSPECTUS
DECEMBER 30, 1997
INVESTMENT ADVISER
LUTHER KING CAPITAL MANAGEMENT CORPORATION
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
TABLE OF CONTENTS
PAGE
Fund Expenses.................................. 2
Prospectus Summary............................. 3
Performance Information........................ 4
Adviser's Investment Philosophy................ 4
Investment Objectives and Policies............. 5
Description of Securities and Other
Investment Policies......................... 6
Investment Limitations......................... 10
Purchase of Shares............................. 11
PAGE
Redemption of Shares........................... 13
Shareholder Services........................... 14
Valuation of Shares............................ 14
Dividends, Other Distributions,
and Taxes ................................ 15
Management..................................... 16
Fund Transactions.............................. 17
General Information............................ 17
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.
