LKCM
FUNDS
LKCM Small Cap Equity Fund
LKCM Equity Fund
LKCM Balanced Fund
LKCM Fixed Income Fund
LKCM International Fund
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Annual Report
December 31, 1998
<PAGE>
LKCM FUNDS
Dear Fellow Shareholders:
We are pleased to report the following performance information for the LKCM
Funds:
<TABLE>
<CAPTION>
Average
One Year Annual
Total Total
Net Asset Return Return
Inception Value at Ended Since
Funds Dates 12/31/98 12/31/98 Inception
-------- -------- --------- --------
<S> <C> <C> <C> <C>
LKCM Equity Fund 01/03/96 $14.39 13.11% 17.81%
S&P 500 28.58% 28.23%
LKCM Small Cap Equity Fund 07/14/94 15.72 (6.26%) 16.85%
Russell 2000 (2.55%) 14.50%
S&P 500 28.58% 27.65%
LKCM International Fund 12/30/97 11.01 10.10% 10.10%
EAFE Index* 20.00% 20.00%
LKCM Balanced Fund 12/30/97 11.05 12.84% 12.84%
S&P 500 28.58% 28.58%
Lehman Bond Index** 8.44% 8.44%
LKCM Fixed Income Fund 12/30/97 10.25 7.27% 7.27%
Lehman Bond Index** 8.44% 8.44%
* Morgan Stanley Capital International Europe, Australasia, Far East Index
**Lehman Brothers Intermediate Government/Corporate Bond Index
</TABLE>
The past year was an interesting but divergent period for corporate
profits, macro economic growth and the global financial markets, which
experienced an increase in volatility. In aggregate, the rate of earnings growth
at U.S. corporations continued to slow throughout 1998 and by mid-year the
growth rate had turned negative. The stock market turbulence of last summer and
fall was caused in part by realization that, in the face of moderate economic
growth, many companies are experiencing a "profits recession". Of course, a
crisis in the capital markets of many emerging economies added to tensions in
the U.S. stock market. Nevertheless, by year-end the Standard & Poor's 500 Index
(S&P 500) had set a record high for the fourth consecutive year. Concerns about
domestic profits and the global economy were overwhelmed by the liquidity
available for investment in United States financial markets. Three primary and
related factors drove this phenomenon: First, inflation expectations and
interest rates declined more than investors expected at the onset of 1998.
Second, huge cash flows poured into the market from individual investors via
mutual funds and from a "flight to quality" by foreign investors. Third, the
Federal Reserve Bank acknowledged the importance of the global economic crisis
that began with a devaluation of Thailand's currency in July of 1997. Of course,
investment returns in 1998 for U.S. stocks, the stocks of small U.S. companies,
bonds, and foreign stocks influenced the performance of each of LKCM's funds.
The LKCM Equity Fund is managed to provide long-term capital appreciation
via investment primarily in common stocks of mid-sized and large companies. For
the year of 1998, the LKCM Equity Fund achieved an attractive absolute total
return but was outpaced by the strong performance of its benchmark, the S&P 500.
Important strategic aspects of managing the fund, which are key to the fund's
long-term success, impacted performance last year. First, we believe investment
decisions require an evaluation of both reward and risk by employing a valuation
discipline. In 1998, the overall stock market was almost singularly focused on
growth
<PAGE>
(reward), with limited regard for valuation. Second, the fund invested in
a number of large-cap stocks but continued to dedicate a material portion of
fund assets to stocks of mid-sized companies, which, despite more favorable
reward/risk profiles, were generally `out of favor' relative to large company
shares. As of December 31, 1998, the Fund had over-weight positions in the
Energy sector, the Healthcare sector, and the Services sector and an
under-weight position in the Technology sector when compared to the S&P 500. As
of December 31, 1998, the total net assets of the portfolio were $41,069,148
with 93.9% of net assets invested in common stocks and 6.1% in cash reserves net
of liabilities. The Fund's current investments in larger companies with strong
free cash flow and medium-sized companies with niche growth opportunities, with
both groups at reasonable valuations, position the Fund well for 1999.
The LKCM Small Cap Equity Fund is managed to maximize capital appreciation
through investment primarily in common stocks of smaller companies. After three
strong years of exceeding its benchmark, the Russell 2000 Index, and producing
total returns in excess of 20% annually, the LKCM Small Cap Equity Fund
experienced a modest loss for the 1998 calendar year and marginally trailed its
benchmark index. The Fund's return was impacted by very poor investment
sentiment towards the shares of small companies in general. The Fund's
successful investment strategy remains in place with a focus on investing in
shares of reasonably valued, niche companies with above-average return and
growth prospects. For the year, the Fund's over-weight position in the Energy
sector and an under-weight position in the Technology sector impacted investment
performance relative to the Russell 2000 Index. However, performance of
individual stocks, as opposed to relative sector weightings, had the greatest
bearing on the Fund's performance. As of December 31, 1998, total net assets of
the portfolio were $248,017,617 with 84.0% of the portfolio in common and
preferred stocks and 16.0% in cash reserves net of liabilities. The difficult
market for small cap stocks in 1998 has provided an opportunity for the Fund to
invest in a number of excellent companies at compelling prices.
The LKCM International Fund seeks absolute returns. The fund posted a .82%
return for the second half of 1998 versus an MSCI EAFE return of 3.66%.
Attribution analysis shows that significant exposure to Europe (80%) accompanied
by a defensive use of equity index futures for hedging (in 3Q98 versus Europe
and in 4Q98 versus Japan) were important. However, we suffered against the index
due to the dramatic strengthening of the Yen, which contributed about 20% of the
total MSCI EAFE return of 20% for the 4Q98. The portfolio invested in defensive
stocks - telecoms, electric utilities, pharmaceuticals, life assurance and
property casualty. Looking ahead, we remain defensive as economic data,
excluding the U.S., continues to be weak. On the positive side, European merger
and acquisition activity is booming and capital flows and low interest rates are
making equities attractive. Japan seems to be bowing to international pressure
through monetisation, but the road remains long. Asia, ex-Japan, seems to be
bottoming out and there are signs of growth, but this remains dependent upon
developments in the U.S. and Japan.
The LKCM Balanced Fund is managed using a total return approach, which
emphasizes capital appreciation, income generation, and protection against
excessive volatility. In order to attain the desired reward/risk profile, the
Fund invests in a blend of common stocks, convertible securities, government and
corporate bonds, and cash. For the year, the Fund performed as expected with a
total return below that of the S&P 500 (common stocks) and above that of the
Lehman Brothers Government/Corporate Bond Index (bonds). Despite an
exceptionally strong year for the U.S. stock market, both the portfolio's stock
and bond investments contributed meaningfully to the overall total return. The
bond investments also served to temper the Fund's volatility during the stock
markets downdrafts in the second and third quarters. As of December 31, 1998,
total net assets were $3,639,161 with 64.5% invested in common stocks, 1.5% in
convertible preferred stock, 25.3% in corporate bonds, 7.9% in U.S. Treasury
obligations, and 0.8% in cash reserves net of liabilities. The "total return"
philosophy of controlling risk via a blend of asset classes remains an
attractive investment alternative for most market environments.
<PAGE>
The LKCM Fixed Income Fund emphasizes current income and capital
preservation. The Fund's strategy is to invest in a combination of noncallable
bonds for their offensive characteristics and callable bonds as defensive
investments in order to create a high quality, low volatility, intermediate
maturity portfolio. The Fund modestly trailed its bogey, the Lehman Brothers
Intermediate Government/ Corporate Bond Index, during 1998 due to timing issues
related to securities purchases at the inception of the Fund and the difficult
credit market conditions that existed in the fall. We have relied upon our
internal research capabilities in order to identify corporate bonds with strong
credit profiles and attractive yields. The average effective maturity of the
Fund at the end of the year was approximately 4.7 years and the average quality
was A+. As of December 31, 1998, total net assets were $14,556,573 and the asset
mix was 72.1% in corporate bonds, 25.7% in U.S. Treasury Notes, and 2.2% in cash
reserves net of liabilities. The portfolio is well positioned to benefit from
the current environment of low inflation and continued economic growth.
Looking out towards 1999, we expect four general influences to `balance
out' with regard to impacting U.S. financial markets. First, corporate profits
are likely to slow further as global over-capacity in many industries will put
pressure on profit margins and broad economic weakness overseas will reduce
export volumes. Second, these same factors should keep interest rates low and,
ironically, be an offsetting positive for stocks. Third, favorable demographics,
continued merger activity, and a host of other supply/demand factors argue for a
continuation of robust money flows into U.S. financial assets. Fourth, the
geopolitical complexity of today's world invites the potential for event-driven
shocks (President Clinton's impeachment proceeding, Y2K issues, emerging market
financial stress). The current background does not support a severe bear market
but neither does it support the incredible stock market returns of the last four
years. History would suggest that double-digit investment returns are unlikely
in 1999. We continue to focus our investments on companies with high and
sustainable returns on equity, strong and growing cash flows, and high quality
balance sheets. Such companies often have leadership positions in their
respective industries with opportunities to reinvest excess cash flows at
attractive rates of return or reinvest in their existing business by
repurchasing shares. We believe that the reward-risk trade-off of buying shares
in such companies at a reasonable valuation will provide solid long-term
investment results.
Regards,
/s/ J. Luther King, Jr., CFA
J. Luther King, Jr., CFA
February 11, 1999
<PAGE>
PERFORMANCE:
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The following information illustrates the historical performance of LKCM Small
Cap Equity Fund and LKCM Equity Fund, compared to the Funds' representative
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.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------------------
PAST PAST SINCE
1 YEAR 3 YEARS INCEPTION(1)
- -----------------------------------------------------------
LKCM Small Cap
Equity Fund (6.26%) 13.18% 16.85%
- -----------------------------------------------------------
Russell 2000 Index (2.55%) 11.58% 14.50%
- -----------------------------------------------------------
S&P 500 Index 28.58% 28.23% 27.65%
- -----------------------------------------------------------
(1) July 14, 1994
A $10,000 Investment in LKCM Small Cap Equity Fund
LKCM Small Cap S&P 500 Rusell 2000
Equity Fund Index Index
07/94 10000 10000 10000
12/94 10500 10268 10267
06/95 12170 12343 11748
12/95 13839 14127 13188
06/96 16157 15554 14554
12/96 17392 17370 15363
06/97 19526 20950 16390
12/97 21404 23167 18798
6/98 22102 27270 19724
12/98 20064 29787 18320
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------
PAST SINCE
1 YEAR INCEPTION(1)
- --------------------------------------------------------
LKCM Equity Fund 13.11% 17.81%
- --------------------------------------------------------
S&P 500 Index 28.58% 28.23%
- --------------------------------------------------------
(1) January 3, 1996
A $10,000 Investment in LKCM Equity Fund
LKCM Equity Fund S&P 500 Index
1/96 10000 10000
6/96 10800 11010
12/96 11700 12296
6/97 13491 14830
12/97 14457 16399
6/98 16179 19303
21/98 16352 21085
<PAGE>
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM
Balanced Fund and LKCM Fixed Income Fund compared to the Funds' representative
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 Lehman Brothers Intermediate Government/Corporate Bond Index is an
unmanaged market value weighted index measuring both the principal price changes
of, and income provided by, the underlying universe of securities that comprise
the index. Securities included in the index must meet the following criteria:
fixed as opposed to variable rate; remaining maturity of one to ten years;
minimum outstanding par value of $100 million; and rated investment grade or
higher by Moody's, Standard &Poor's or Fitch, in that order.
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.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------
PAST SINCE
1 YEAR INCEPTION(1)
- --------------------------------------------------------
LKCM Balanced Fund 12.84% 12.84%
- --------------------------------------------------------
Lehman Bond Index(2) 8.44% 8.44%
- --------------------------------------------------------
S&P 500 Index 28.58% 28.58%
- --------------------------------------------------------
(1) December 30, 1997
(2) Lehman Brothers Intermediate Government/Corporate Bond Index
A $10,000 Investment in LKCM Balanced Fund
LKCM Balanced Fund S&P 500 Index Lehman Bond Index
1/98 10000 10000 10000
3/98 10709 11395 10156
6/98 10694 11771 10347
9/98 10159 10600 10812
12/98 11284 12858 10844
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------
PAST SINCE
1 YEAR INCEPTION(1)
- --------------------------------------------------------
LKCM Fixed
Income Fund 7.27% 7.27%
- --------------------------------------------------------
Lehman Bond Index(2) 8.44% 8.44%
- --------------------------------------------------------
(1) December 30, 1997
(2) Lehman Brothers Intermediate Government/Corporate Bond Index
A $10,000 Investment in LKCM Fixed Income Fund
LKCM Fixed Lehman Bond
Income Fund Index
1/98 10000 10000
3/98 10103 10156
6/98 10309 10347
9/98 10745 10812
12/98 10727 10844
<PAGE>
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM
International Fund compared to the Fund's representative market index.
The Morgan Stanley Capital International Europe Australasia, Far East Index
("MSCI/EAFE") is an unmanaged index composed of 20 European and Pacific Basin
countries. The MSCI/EAFE Index is the most recognized international index and is
weighted by market capitalization.
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.
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------------------------
PAST SINCE
1 YEAR INCEPTION(1)
- --------------------------------------------------------
LKCM International Fund 10.10% 10.10%
- --------------------------------------------------------
EAFE Index(2) 20.00% 20.00%
- --------------------------------------------------------
(1)December 30, 1997
(2)Morgan Stanley Capital International Europe, Australasia, Far East
Index.
A $10,000 Investment in LKCM International Fund
LKCM International EAFE Index
1/98 10000 10000
3/98 10910 11471
6/98 10920 11593
9/98 9520 9945
12/98 11010 12000
<PAGE>
LKCM SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
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COMMON STOCKS - 83.94% Shares Value
- --------------------------------------------------------------------------------
Basic Resources - 0.84%
Reliance Steel & Aluminum
Company 75,000 $ 2,071,875
-----------
Consumer & Commercial Services - 8.17%
Carmike Cinemas, Inc. - Class A # 91,700 1,862,656
Family Golf Centers, Inc. # 90,000 1,777,500
G & K Services Inc. - Class A 75,000 3,993,750
Iron Mountain Incorporated # 80,000 2,885,000
Mac-Gray Corporation # 50,000 568,750
ResortQuest International, Inc. # 70,000 1,023,750
Romac International, Inc. # 196,619 4,374,773
U.S. Filter Corporation # 115,000 2,630,625
Unitog Company 40,000 1,150,000
-----------
20,266,804
-----------
Consumer Durables - 2.45%
Centex Corporation 100,000 4,506,250
International Comfort Products
Corporation # 150,000 1,200,000
Kevco, Inc. # 50,300 364,675
-----------
6,070,925
-----------
Education - 2.85%
Career Education Corporation # 60,000 1,800,000
ITT Educational Services, Inc. # 90,000 3,060,000
Quest Education Corporation # 115,000 1,150,000
Strayer Education, Inc. 30,000 1,057,500
-----------
7,067,500
-----------
Energy - 7.18%
Bayard Drilling
Technologies, Inc. # 200,000 1,000,000
Tom Brown, Inc. # 83,000 832,594
Carbo Ceramics, Inc. 40,000 700,000
Dril-Quip, Inc. # 75,000 1,331,250
Encal Energy Ltd.(1) 487,500 1,809,082
HS Resources, Inc. # 110,000 831,875
ICO, Inc. 549,300 1,098,600
Input/Output, Inc. # 145,000 1,060,313
Noble Affiliates, Inc. 97,000 2,388,625
Snyder Oil Corporation 135,000 1,797,188
Stolt Comex Seaway, S.A. # 100,000 675,000
Superior Services, Inc. 121,000 2,427,562
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Energy - (continued)
Varco International, Inc. # 80,000 $ 620,000
Weatherford International, Inc. # 64,000 1,240,000
-----------
17,812,089
-----------
Financial Services - 12.45%
American Heritage Life
Investment Corporation 50,000 1,221,875
AmerUs Life Holdings, Inc. -
Class A 117,412 2,627,093
E.W. Blanch Holdings, Inc. 124,000 5,882,250
CNA Surety Corporation # 210,000 3,307,500
Chartwell Re Corporation 40,000 950,000
Crawford & Company - Class A 36,300 485,513
Cullen/Frost Bankers, Inc. 81,000 4,444,875
FVNB Corporation 19,000 646,000
First United Bancshares, Inc. 76,000 1,349,000
INSpire Insurance
Solutions, Inc.# 100,000 1,837,500
Investment Technology
Group, Inc. # 19,000 1,179,187
Jefferies Group, Inc. 15,000 744,375
PawnMart, Inc. # 50,000 87,500
Sterling Bancorp 116,000 2,646,250
Texas Regional Bancshares, Inc. 138,000 3,458,625
-----------
30,867,543
-----------
Food, Tobacco & Other - 0.54%
International Home Foods, Inc. # 80,000 1,350,000
-----------
Health Care - 7.97%
Jones Pharma Incorporated 75,000 2,737,500
Maxxim Medical, Inc. # 179,400 5,337,150
Patterson Dental Company # 100,000 4,350,000
Prime Medical Services, Inc. # 178,700 1,306,744
Sybron International
Corporation # 155,000 4,214,063
Teva Pharmaceutical
Industries Ltd. - ADR 45,000 1,830,937
-----------
19,776,394
-----------
Heavy Industry/Transportation - 6.68%
Covenant Transport, Inc.- Class A # 90,000 1,608,750
Genesee & Wyoming, Inc. # 47,200 601,800
Kirby Corporation # 280,000 5,582,500
See notes to the financial statements.
<PAGE>
LKCM SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Heavy Industry/Transportation - (continued)
RailAmerica, Inc. # 375,000 $ 3,187,500
Swift Transporation Co., Inc. # 135,000 3,784,219
TJ International, Inc. 70,000 1,798,125
-----------
16,562,894
-----------
Manufacturing - 7.95%
Blount International, Inc. -
Class A 200,000 4,987,500
Chart Industries, Inc. # 139,050 1,060,256
Happy Kids, Inc.# 110,200 1,405,050
Justin Industries, Inc. 320,000 4,200,000
Kaydon Corporation 45,000 1,802,812
Lindsay Manufacturing Company 225,000 3,332,813
Scott Technologies, Inc. # 177,000 2,926,031
-----------
19,714,462
-----------
Publishing & Broadcasting - 3.54%
A.H. Belo Corporation -
Common Series A 80,000 1,595,000
Harte-Hanks, Inc. 170,000 4,845,000
Metro Networks, Inc. # 55,000 2,344,375
-----------
8,784,375
-----------
Real Estate Investment Trusts - 2.59%
Brandywine Realty Trust 85,000 1,519,375
Crescent Real Estate Equities Trust 62,000 1,426,000
Fairfield Communities, Inc. # 90,000 995,625
Prentiss Properties Trust 75,000 1,673,437
Storage USA, Inc. 25,000 807,813
-----------
6,422,250
-----------
Retail - 8.45%
Boise Cascade Office Products
Corporation # 120,000 1,620,000
Borders Group, Inc. # 140,000 3,491,250
MSC Industrial
Direct Co., Inc. - Class A # 100,000 2,262,500
Party City Corporation # 100,000 1,443,750
PETsMART, Inc. # 120,000 1,320,000
Pier 1 Imports, Inc. 257,500 2,494,531
Play By Play Toy &
Novelties, Inc. # 215,000 1,505,000
Saks Incorporated # 40,000 1,262,500
Taco Cabana, Inc. - Class A # 190,100 1,473,275
Tractor Supply Company # 115,000 2,760,000
White Cap Industries, Inc. # 87,500 1,334,375
-----------
20,967,181
-----------
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Technology - 5.30%
Bell & Howell Company # 60,000 $ 2,268,750
Dallas Semiconductor Corporation 77,500 3,158,125
Data General Corporation # 30,300 498,056
Dunn Computer Corporation # 114,000 470,250
Intellicall, Inc. # 100,000 225,000
Intelligent Polymers Limited # 150,000 4,200,000
RadiSys Corporation # 30,000 900,000
UCAR International Inc. # 80,000 1,425,000
-----------
13,145,181
-----------
Telecommunications - 6.98%
Crown Castle International
Corporation # 250,000 5,875,000
Global Crossing Limited # 50,000 2,256,250
ITC DeltaCom, Inc.# 120,000 1,830,000
Metrocall, Inc. # 252,450 1,104,469
MetroNet Communications
Corporation - Class B # 85,000 2,847,500
OmniAmerica, Inc. # 22,000 704,000
Sinclair Broadcast Group, Inc. -
Class A # 137,500 2,689,844
-----------
17,307,063
-----------
Total common stock
(cost $165,556,409) 208,186,536
-----------
- --------------------------------------------------------------------------------
PREFERRED STOCK - 0.10% Shares Value
- --------------------------------------------------------------------------------
Financial Services - 0.10%
Atlantic Gulf Communities
Corporation #@*(2) 4,221 42,210
Atlantic Gulf Communities
Corporation #@* 21,796 215,344
-------
Total preferred stock
(cost $295,233) 257,554
-------
See notes to the financial statements.
<PAGE>
LKCM SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
WARRANTS - 0.01% Shares Value
- --------------------------------------------------------------------------------
Financial Services - 0.01%
Atlantic Gulf Communities
Corporation - Class A #@* 17,345 $ 1,041
Atlantic Gulf Communities
Corporation - Class B #@* 17,345 1,041
Atlantic Gulf Communities
Corporation - Class C #@* 17,345 1,041
PawnMart, Inc. - Class A,
expires 3/11/2003 # 50,000 15,625
PawnMart, Inc. - Class B,
expires 3/11/2004 # 50,000 13,281
-------------
Total warrants
(cost $10,848) 32,029
-------------
- --------------------------------------------------------------------------------
CASH EQUIVALENT - 16.28% Principal Value
- --------------------------------------------------------------------------------
Short Term Investments - 16.28%
Firstar Bank Repo., 3.50%
dated 12/31/1998,
due 1/4/99 $ 28,500,000 28,500,000
Firstar Bank Demand Note,
5.38% due 12/31/2031 11,871,597 11,871,597
-------------
Total short term investments
(cost $40,371,597) 40,371,597
-------------
Total Investments - 100.33%
(cost $206,234,087) 248,847,716
-------------
Liabilities, less Other Assets - (0.33%) (830,099)
-------------
Total Net Assets - 100.00% $ 248,017,617
=============
# - Non-income producing security.
(1) - Foreign Security.
(2) - Each share represents one share of preferred stock and warrants to
purchase two shares of common stock.
@ - 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.
ADR - American Depository Receipts.
See notes to the financial statements.
<PAGE>
LKCM EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 93.94% Shares Value
- --------------------------------------------------------------------------------
Basic Resources - 1.81%
du Pont (E.I.) de Nemours
& Company 14,000 $ 742,875
----------
Beverage & Personal Products - 6.68%
Colgate-Palmolive Company 9,000 835,875
Kimberly-Clark Corporation 20,000 1,090,000
PepsiCo, Inc. 20,000 818,750
----------
2,744,625
----------
Consumer & Commercial Services - 12.82%
H&R Block, Inc. 12,000 540,000
Browning-Ferris Industries, Inc. 46,100 1,310,969
Emerson Electric Company 11,000 665,500
General Electric Company 10,000 1,020,625
Sherwin-Williams Company 26,000 763,750
Waste Management, Inc. 20,675 963,972
----------
5,264,816
----------
Energy - 10.06%
Burlington Resources, Inc. 16,000 573,000
Exxon Corporation 18,000 1,316,250
Halliburton Company 17,000 503,625
Mobil Corporation 12,000 1,045,500
Schlumberger, Limited 15,000 691,875
----------
4,130,250
----------
Financial Services - 12.52%
American General Corporation 17,000 1,326,000
Associates First Capital
Corporation 16,000 678,000
C.I.T. Group, Inc. - Class A 26,900 855,756
Cullen/Frost Bankers, Inc. 11,000 603,625
The MONY Group, Inc. # 25,600 801,600
Wells Fargo Company 22,000 878,625
----------
5,143,606
----------
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Food, Tobacco & Other - 2.00%
H.J. Heinz Company 14,500 $ 821,062
----------
Health Care - 16.01%
Cardinal Health, Inc. 21,375 1,621,828
Merck & Company, Inc. 5,000 738,437
Pfizer, Inc. 7,000 878,063
Schering-Plough Corporation 28,000 1,547,000
SmithKline Beecham PLC ADR 14,000 973,000
Sybron International Corporation # 30,000 815,625
----------
6,573,953
----------
Manufacturing - 2.43%
Blount International, Inc. -
Class A 40,000 997,500
----------
Publishing & Broadcasting - 5.72%
Gannett Company, Inc. 22,000 1,419,000
Infinity Broadcasting Corporation 34,000 930,750
----------
2,349,750
----------
Real Estate Investment Trusts - 0.67%
Crescent Real Estate
Equities Company 11,900 273,700
----------
Retail - 5.67%
Home Depot, Inc. 28,000 1,713,250
Tandy Corporation 15,000 617,812
----------
2,331,062
----------
Technology - 10.81%
Cisco Systems, Inc. # 15,000 1,392,187
Diebold, Inc. 11,000 392,563
Hewlett-Packard Company 16,000 1,093,000
Motorola, Inc. 15,000 915,938
Oracle Corporation 15,000 646,875
----------
4,440,563
----------
See notes to the financial statements.
<PAGE>
LKCM EQUITY FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Telecommunications - 6.74%
ALLTEL Corporation 17,500 $ 1,046,719
MCI WorldCom, Inc. # 24,000 1,722,000
------------
2,768,719
------------
Total common stock
(cost $25,861,406) 38,582,481
------------
- --------------------------------------------------------------------------------
CASH EQUIVALENT - 6.58% Principal Value
- --------------------------------------------------------------------------------
Short Term Investments - 6.58%
Firstar Bank Repo, 3.00%
dated 12/31/1998,
due 1/4/1999 $ 700,000 $ 700,000
Firstar Bank Demand Note
5.38% due 12/31/2031 2,001,268 2,001,268
------------
Total short term investments
(cost $2,701,268) 2,701,268
------------
TOTAL INVESTMENTS - 100.52%
(cost $28,562,674) 41,283,749
------------
Liabilities, less Other Assets - (0.52%) (214,601)
------------
Total net assets - 100.00% $ 41,069,148
============
# - Non-income producing security
ADR - American Depository Receipts.
See notes to the financial statements.
<PAGE>
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS - 64.50% Shares Value
- --------------------------------------------------------------------------------
Basic/Diversified Industrial - 3.17%
General Electric Company 400 $ 40,825
St. Joe Corporation 600 14,062
Tyco International Limited 800 60,350
--------
115,237
--------
Beverage & Personal Products - 7.43%
Colgate-Palmolive Company 600 55,725
Estee Lauder Companies - TRACES 500 38,750
Gillette Company 1,000 48,312
Kimberly-Clark Corporation 600 32,700
PepsiCo, Inc. 1,200 49,125
Procter & Gamble Company 500 45,656
--------
270,268
--------
Consumer & Commercial Services - 5.51%
H&R Block, Inc. 700 31,500
Harte-Hanks, Inc. 2,000 57,000
Sherwin-Williams Company 500 14,687
U.S. Filter Corporaton # 1,200 27,450
Waste Management, Inc. 1,500 69,938
--------
200,575
--------
Education - 0.93%
ITT Educational Services, Inc. 1,000 34,000
--------
Energy - 4.97%
Atlantic Richfield Company 1,100 71,775
Exxon Corporation 600 43,875
Mobil Corporation 350 30,494
Schlumberger Limited 750 34,594
--------
180,738
--------
Financial Services - 9.98%
AEGON N.V 201 24,572
American General Corporation 500 39,000
American International Group, Inc. 500 48,312
Associates First Capital Corporation 1,400 59,325
E.W. Blanch Holdings, Inc. 800 37,950
C.I.T. Group, Inc., Class A 1,200 38,175
--------
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Financial Services - (continued)
Compass Bancshares, Inc. 800 $ 30,450
Cullen/Frost Bankers, Inc. 800 43,900
First United Bancshares, Inc. 800 14,200
Mellon Bank Corporation 400 27,500
--------
363,384
--------
Food, Tobacco & Other - 3.34%
H.J. Heinz Company 1,010 57,191
Phillip Morris Companies, Inc. 1,200 64,200
--------
121,391
--------
Health Care - 11.51%
American Home Products
Corporation 800 45,050
Cardinal Health, Inc. 427 32,399
Covance, Inc. 1,730 50,386
Monsanto Company ACES # 1,500 73,500
Pharmacia & Upjohn, Inc. 600 33,975
Schering-Plough Corporation 600 33,150
SmithKline Beecham PLC ADR 600 41,700
Sybron International Corporation # 2,500 67,969
Teva Pharmaceutical
Industries Ltd. - ADR 1,000 40,687
--------
418,816
--------
Publishing & Broadcasting - 2.82%
A.H. Belo Corporation,
Common Series A 1,700 33,894
CBS Corporation 2,100 68,775
--------
102,669
--------
Real Estate Investment Trusts - 1.94%
Crescent Real Estate
Equities Company 1,400 32,200
Starwood Hotels & Resorts
Worldwide, Inc. 1,700 38,569
--------
70,769
--------
Retail - 2.17%
Saks, Inc. # 1,460 46,081
Tandy Corporation 800 32,950
--------
79,031
--------
See notes to the financial statements.
<PAGE>
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCKS Shares Value
- --------------------------------------------------------------------------------
Technology - 6.90%
BMC Software, Inc. # 600 $ 26,737
Cisco Systems, Inc. 450 41,766
Hewlett-Packard Company 600 40,988
Microsoft Corporation 300 41,606
Motorola, Inc. 1,000 61,063
Oracle Corporation 900 38,813
----------
250,973
----------
Telecommunications - 3.83%
ALLTEL Corporation 1,200 71,775
MCI WorldCom, Inc. # 944 67,732
----------
139,507
----------
Total common stock
(cost $2,058,629) 2,347,358
----------
- --------------------------------------------------------------------------------
CORPORATE BONDS - 25.29% Principal Value
- --------------------------------------------------------------------------------
Basic/Diversified Industrial - 0.70%
Tyco International Group(1),
6.375%, 6/15/2005 $ 25,000 25,587
----------
Consumer & Commercial Services - 0.70%
WMX Technologies,
6.70%, 5/01/2001 25,000 25,452
----------
Electric - 0.62%
Old Domin Electric,
Callable 12/01/2003
7.48%, 12/01/2013 20,000 22,526
----------
Energy - 0.94%
Nabors Industries, Inc.,
Callable 5/15/99,
5.00%, 5/15/2006 35,000 34,212
----------
Financial Services - 11.82%
Associates Corp N.A.,
6.25%, 9/15/2000 50,000 50,665
American General Corporation,
6.75%, 6/15/2005 50,000 52,218
Block Financial Corporation,
6.75%, 11/01/2004 75,000 78,771
- --------------------------------------------------------------------------------
CORPORATE BONDS Principal Value
- --------------------------------------------------------------------------------
Financial Services - (continued)
Chartwell Re Corporation,
Callable 3/1/1999,
10.25%, 3/01/2004 $ 25,000 $ 25,875
Morgan Stanley Group,
6.875%, 3/01/2007 65,000 69,109
Norwest Corporation,
6.625%, 3/15/2003 75,000 77,633
Sears Roebuck
Acceptance Corporation,
6.00%, 3/20/2003 75,000 75,821
----------
430,092
----------
Food, Tobacco & Other - 2.19%
Phillip Morris Companies Inc.,
7.50%, 1/15/2002 25,000 26,319
Phillip Morris Companies Inc.,
7.00%, 07/15/2005 50,000 53,367
----------
79,686
----------
Heavy Industry/Transportation - 0.72%
Union Pacific Railroad Corporation,
Callable 3/08/1999
8.50%, 1/15/2017 25,000 26,103
----------
Manufacturing - 0.70%
Thomas & Betts Corporation,
6.50%, 1/15/2006 25,000 25,508
----------
Real Estate Investment Trust - 1.38%
Bay Apartment Communities,
6.25%, 1/15/2003 25,000 25,094
Prologis Trust,
7.05%, 7/15/2006 25,000 24,944
------
50,038
------
Retail - 1.66%
Tandy Corporation,
6.95%, 9/01/2007 50,000 52,893
Toys R Us,
Callable 7/31/1998
8.25%, 2/01/2017 7,000 7,633
------
60,526
------
See notes to the financial statements.
<PAGE>
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
CORPORATE BONDS Principal Value
- --------------------------------------------------------------------------------
Technology - 2.00%
Kent Electronics, Convertible,
Callable 9/06/2000,
4.50%, 9/01/2004 $ 60,000 $ 46,800
Oracle Corporation,
6.91%, 2/15/2007 25,000 26,082
-----------
72,882
-----------
Telecommunications - 1.86%
MCI WorldCom, Inc.
7.75%, 4/01/2007 60,000 67,790
-----------
Total corporate bonds
(cost $910,414) 920,402
-----------
- --------------------------------------------------------------------------------
CONVERTIBLE-PREFERRED
STOCK - 1.51% Shares Value
- --------------------------------------------------------------------------------
Publishing & Broadcasting - 1.51%
Sinclair Broadcast Group, Inc.# 1,100 54,862
-----------
Total convertible preferred stock
(cost $55,152) 54,862
-----------
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS - 7.93% Principal Value
- --------------------------------------------------------------------------------
U.S. Treasury Notes - 6.49%:
6.50%, 5/31/2002 $ 25,000 26,406
6.375%, 1/15/2000 75,000 76,313
5.75%, 8/15/2003 25,000 26,102
6.50%, 8/15/2005 25,000 27,477
6.375%, 9/30/2001 50,000 52,188
6.50%, 10/15/2006 25,000 27,758
-----------
236,244
-----------
U.S. Treasury Bonds - 1.44%:
6.25%, 2/28/2002 50,000 52,266
-----------
Total U.S. Treasury obligations
(cost $283,515) 288,510
-----------
- --------------------------------------------------------------------------------
CASH EQUIVALENT-2.86% Principal Value
- --------------------------------------------------------------------------------
Short Term Investments - 2.86%
Firstar Bank Demand Note, 5.38%
due 12/31/2031
(cost $104,232) $ 104,232 $ 104,232
-----------
TOTAL INVESTMENTS - 102.09%
(cost $3,411,942) 3,715,364
Liabilities, less Other Assets - (2.09%) (76,203)
-----------
Total net assets - 100.00% $ 3,639,161
===========
# - Non-income producing security.
ADR - American Depository Receipts.
(1) - Foreign Security.
See notes to the financial statements.
<PAGE>
LKCM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
CORPORATE BONDS-72.10% Principal Value
- --------------------------------------------------------------------------------
Basic/Diversified Industrial - 3.52%
Tyco International Group(1),
6.375%, 6/15/2005 $500,000 $511,746
--------
Chemicals - 2.21%
M.A. Hanna Company,
9.375%, 9/15/2003 40,000 45,319
Solutia, Inc.,
6.50%, 10/15/2002 275,000 276,033
--------
321,352
--------
Consumer & Commercial Services - 3.50%
WMX Technologies,
6.70%, 5/01/2001 500,000 509,039
--------
Electric - 2.88%
Interstate Power Company,
Callable 2/08/1999,
8.625%, 9/15/2021 50,000 53,331
Old Domin Electric,
Callable 12/01/2003
7.48%, 12/01/2013 325,000 366,048
--------
419,379
--------
Energy - 0.37%
Southwest Gas Corporation,
7.50%, 8/01/2006 50,000 54,179
--------
Financial Services - 32.95%
American General Finance,
6.875%, 1/15/2000 100,000 101,340
Associates Corp N.A.,
6.25%, 9/15/2000 150,000 151,995
Banc One Corporation,
7.00%, 7/15/2005 150,000 160,055
Banc One Corporation,
7.60%, 5/01/2007 500,000 559,460
Block Financial Corporation,
6.75%, 11/01/2004 500,000 525,139
C.I.T. Group,
6.625%, 6/15/2005 500,000 520,505
Chartwell Re Holdings Corporation,
Callable 3/1/99,
10.25%, 3/01/2004 500,000 517,500
- --------------------------------------------------------------------------------
CORPORATE BONDS Principal Value
- --------------------------------------------------------------------------------
Financial Services - (continued)
Morgan Stanley Group,
6.875%, 3/01/2007 $ 500,000 $ 531,611
Norwest Corporation,
6.625%, 3/15/2003 500,000 517,556
Sears Roebuck
Acceptance Corporation,
6.00%, 3/20/2003 500,000 505,473
State Street Boston Corporation,
5.95%, 9/15/2003 450,000 445,960
Wilmington Trust Corporation,
6.625%, 5/01/2008 250,000 259,473
----------
4,796,067
----------
Food, Tobacco & Other - 3.62%
Philip Morris Companies, Inc.,
7.50%, 1/15/2002 500,000 526,377
----------
Heavy Industry/Transportation - 2.15%
Union Pacific Railroad Corporation,
Callable 2/8/99,
8.50%, 1/15/2017 300,000 313,235
----------
Manufacturing - 1.05%
Thomas & Betts Corporation,
6.50%, 1/15/2006 150,000 153,048
----------
Real Estate Investment Trust - 5.58%
Bay Apartment Communities,
6.25%, 1/15/2003 150,000 150,567
Camden Property Trust,
7.00%, 11/15/2006 300,000 287,239
Prologis Trust,
7.05%, 7/15/2006 375,000 374,154
----------
811,960
----------
Retail - 4.31%
Tandy Corporation,
6.95%, 9/01/2007 500,000 528,925
Toys R Us,
Callable 7/31/98,
8.25%, 2/01/2017 91,000 99,224
----------
628,149
----------
See notes to the financial statements.
<PAGE>
LKCM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
CORPORATE BONDS Principal Value
- --------------------------------------------------------------------------------
Technology - 1.25%
Oracle Corporation,
6.91%, 2/15/2007 $ 175,000 $ 182,572
-----------
Telecommunications - 8.71%
ALLTEL Corporation,
7.25%, 4/01/2004 500,000 538,125
GTE Hawaiian Telephone
7.375%, 9/01/2006 150,000 165,612
MCI WorldCom, Inc.,
7.75%, 4/01/2007 500,000 564,918
-----------
1,268,655
-----------
Total corporate bonds
(cost $10,367,921) 10,495,758
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 25.73%
- --------------------------------------------------------------------------------
U.S. Treasury Notes:
6.00%, 8/15/2000 900,000 918,844
5.625%, 10/31/1999 150,000 151,219
5.75%, 11/30/2002 1,000,000 1,037,188
5.50%, 2/28/2003 600,000 618,000
5.625%, 2/28/2001 1,000,000 1,020,625
-----------
Total U.S. Treasury obligations
(cost $3,662,518) 3,745,876
-----------
- --------------------------------------------------------------------------------
CASH EQUIVALENT - 0.80% Principal Value
- --------------------------------------------------------------------------------
Short Term Investments - 0.80%
Firstar Bank Demand Note, 5.38%
due 12/31/2031
(cost $115,905) $ 115,905 $ 115,905
-----------
Total Investments - 98.63%
(cost $14,146,344) 14,357,539
-----------
Other Assets in excess of liabilities - 1.37 % 199,034
-----------
Total net assets - 100.00% $14,556,573
===========
(1) - Foreign Security
See notes to the financial statements.
<PAGE>
LKCM INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCK-92.14% Shares Value
- --------------------------------------------------------------------------------
AUSTRALIA - 0.79%
- --------------------------------------------------------------------------------
Financial Services - 0.79%
AMP Limited # 35,372 $ 448,605
----------
Total Australia 448,605
----------
- --------------------------------------------------------------------------------
BRAZIL - 1.29%
- --------------------------------------------------------------------------------
Telecommunication - 1.29%
Tele Norte Leste Participacoes
S.A. ADR # 40,222 500,261
Telesp Celular Participacoes
S.A. ADR # 8,407 147,122
Tele Sudeste Celular Participacoes
S.A. ADR # 4,163 86,122
----------
Total Brazil 733,505
- --------------------------------------------------------------------------------
CANADA - 1.39%
- --------------------------------------------------------------------------------
Healthcare - 1.39%
BioChem Pharma Inc. # 27,632 790,966
----------
Total Canada 790,966
----------
- --------------------------------------------------------------------------------
DENMARK - 4.41%
- --------------------------------------------------------------------------------
Telecommunication - 4.41%
Tele Danmark A/S 18,640 2,515,792
----------
Total Denmark 2,515,792
----------
- --------------------------------------------------------------------------------
FRANCE - 25.10%
- --------------------------------------------------------------------------------
Consumer & Commercial Services - 4.81%
Essilor International SA 4,712 1,854,696
Vivendi 3,410 884,641
----------
2,739,337
----------
Energy - 4.26%
Primagaz Cie 15,769 1,495,288
Total SA - Class B 9,209 932,553
----------
2,427,841
----------
Financial Services - 0.54%
Axa 2,109 305,637
----------
Food, Tobacco & Other - 3.35%
Etablissements Economiques du
Casino Guichard-Perrachon SA 4,495 468,056
Promodes 391 284,299
Sodexho Alliance 5,184 1,159,364
----------
1,911,719
----------
- --------------------------------------------------------------------------------
COMMON STOCK Shares Value
- --------------------------------------------------------------------------------
FRANCE - (continued)
- --------------------------------------------------------------------------------
Health Care - 4.53%
Sanofi SA 15,676 $2,580,286
----------
Manufacturing - 2.96%
Societe BIC SA 30,472 1,690,081
----------
Miscellaneous - 3.66%
Lagardere S.C.A 2,061 87,576
Suez Lyonnaise des Eaux 9,721 1,996,630
----------
2,084,206
----------
Retail - 0.99%
Castorama Dubois Investisse 2,467 562,761
----------
Total France 14,301,868
----------
- --------------------------------------------------------------------------------
FINLAND - 1.83%
- --------------------------------------------------------------------------------
Telecommunication - 1.83%
Nokia Oyj 8,539 1,044,994
----------
Total Finland 1,044,994
----------
- --------------------------------------------------------------------------------
GERMANY - 3.15%
- --------------------------------------------------------------------------------
Chemicals - 1.40%
Bayer AG 5,935 247,689
Schering AG 4,395 551,840
----------
799,529
----------
Consumer & Commercial Services - 1.75%
Berliner Kraft und Licht AG 36,850 995,036
----------
Total Germany 1,794,565
----------
- --------------------------------------------------------------------------------
HONG KONG - 1.23%
- --------------------------------------------------------------------------------
Diversified Operations - 0.52%
Hutchison Whampoa Limited 42,000 296,813
----------
Real Estate Investment Trusts - 0.48%
Cheung Kong Limited 38,000 273,450
----------
Telecommunication - 0.23%
China Telecom 74,000 127,993
----------
Total Hong Kong 698,256
----------
See notes to the financial statements.
<PAGE>
LKCM INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCK Shares Value
- --------------------------------------------------------------------------------
ITALY - 14.22%
- --------------------------------------------------------------------------------
Financial Services - 5.37%
Alleanza Assicurazioni 47,484 $ 672,030
Banca Intesa SpA 234,560 1,409,616
Istituto Bancario San Paolo
di Torino 55,359 979,773
-----------
3,061,419
-----------
Telecommunication - 8.85%
Telecom Italia Mobile SpA 55,402 409,675
Telecom Italia Mobile SpA RNC 457,108 2,155,523
Telecom Italia SpA 59,467 508,217
Telecom Italia SpA RNC 311,906 1,966,126
-----------
5,039,541
-----------
Total Italy 8,100,960
-----------
- --------------------------------------------------------------------------------
JAPAN-10.21%
- --------------------------------------------------------------------------------
Consumer & Commercial Services - 1.94%
Daiwa House Industry Co.,
Limited 65,000 693,219
Secom Co., Limited 5,000 414,894
-----------
1,108,113
-----------
Financial Services - 0.88%
The Nomura Securities Co.,
Limited 25,000 218,307
Takefuji Corporation 3,900 285,240
-----------
503,547
-----------
Manufacturing - 1.05%
Tostem Corporation 30,000 595,745
-----------
Technology - 0.52%
NIDEC Corporation 2,400 294,256
-----------
Telecommunication - 5.82%
Matsushita Communication
Industrial Co., Limited 7,000 330,763
NTT Mobile Communication
Network, Inc. 43 1,772,608
Nippon Telegraph &
Telephone Corporation 157 1,213,689
-----------
3,317,060
-----------
Total Japan 5,818,721
-----------
- --------------------------------------------------------------------------------
COMMON STOCK Shares Value
- --------------------------------------------------------------------------------
NETHERLANDS - 5.21%
- --------------------------------------------------------------------------------
Financial Services - 0.90%
AEGON N.V. 4,177 $ 512,967
-----------
Beverages - 2.41%
Heineken NV 22,804 1,372,319
-----------
Telecommunication - 1.90%
KPN NV 21,705 1,086,559
-----------
Total Netherlands 2,971,845
-----------
- --------------------------------------------------------------------------------
NORWAY-1.43%
- --------------------------------------------------------------------------------
Financial Services - 1.43%
Storebrand ASA # 108,067 815,573
-----------
Total Norway 815,573
-----------
- --------------------------------------------------------------------------------
SWEDEN - 0.80
- --------------------------------------------------------------------------------
Telecommunication - 0.80%
Telefonaktiebolaget LM Ericsson 19,191 456,940
-----------
Total Sweden 456,940
-----------
- --------------------------------------------------------------------------------
SWITZERLAND-10.27%
- --------------------------------------------------------------------------------
Basic Resources - 3.06%
Holderbank Financiere Glarus AG 1,473 1,743,792
-----------
Chemicals - 3.08%
Novartis 594 1,167,674
Roche Holding AG 48 585,715
-----------
1,753,389
-----------
Financial Services - 1.65%
Baloise Holding Limited 905 938,933
-----------
Telecommunication - 2.48%
Swisscom AG # 3,377 1,413,742
-----------
Total Switzerland 5,849,856
-----------
- --------------------------------------------------------------------------------
UNITED KINGDOM-10.81%
- --------------------------------------------------------------------------------
Aerospace - 1.74%
British Aerospace PLC 28,513 242,194
Rolls Royce PLC 181,890 747,535
-----------
989,729
-----------
See notes to the financial statements.
<PAGE>
LKCM INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
COMMON STOCK Shares Value
- --------------------------------------------------------------------------------
UNITED KINGDOM - (continued)
- --------------------------------------------------------------------------------
Energy - 1.78%
Burmah Castrol PLC 70,498 $ 1,012,896
-----------
Financial Services - 2.98%
Barclays PLC 11,559 248,682
Britannic Assurance PLC 66,358 1,451,926
-----------
1,700,608
-----------
Healthcare - 0.20%
Scotia Holdings PLC 111,321 115,766
-----------
Retail - 0.88%
Signet Group PLC # 960,571 499,465
-----------
Telecommunication - 3.23%
British Telecommunications PLC 56,260 846,708
Vodafone Group PLC 61,538 997,305
-----------
1,844,013
-----------
Total United Kingdom 6,162,477
-----------
Total common stock
-----------
(cost $48,683,169) 52,504,923
-----------
- --------------------------------------------------------------------------------
PREFERRED STOCK - 1.88% Shares Value
- --------------------------------------------------------------------------------
ITALY - 1.88%
- --------------------------------------------------------------------------------
Consumer & Commercial Services - 1.88%
IFI Istituto Finanziario 58,320 $ 1,074,596
-----------
Total Italy 1,074,596
-----------
Total preferred stock
(cost $1,484,998) 1,074,596
-----------
- --------------------------------------------------------------------------------
MONEY MARKET FUNDS - 2.19% Value
- --------------------------------------------------------------------------------
Chase United States, 3.9062%
(cost $1,247,643) 1,247,643
-----------
Total Investments - 96.21%
(cost $51,415,810) 54,827,162
Short Sales - (13.21%)
(Proceeds - $7,401,270)* (7,530,563)
Variation margin on
futures contracts - 0.28%** 162,144
Other assets in excess
of liabilities - 16.72% 9,526,479
-----------
Total net assets - 100.00% $56,985,222
===========
# - Non-income producing security.
ADR - American Depository Receipts.
*Schedule of Foreign Currencies Sold Short
December 31, 1998
- --------------------------------------------------------------------------------
Foreign Currency Value
- --------------------------------------------------------------------------------
Australian Dollars $ (460,066)
Hong Kong Dollars (864,818)
Japanese Yen (6,205,679)
-----------
Total Foreign Currencies Sold Short $(7,530,563)
===========
**Futures Contracts Purchased and Outstanding as of December 31, 1998
- --------------------------------------------------------------------------------
Number of Contracts Issue Exchange Expiration Date Value
- --------------------------------------------------------------------------------
850 Nikkei 225 OSAKA March 1999 $5,171,215
---------
Total Futures contracts purchased and outstanding
(Total contract price - $5,333,359) $5,171,215
=========
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1998
<TABLE>
<CAPTION>
LKCM LKCM LKCM LKCM
Small Cap LKCM Balanced Fixed Income International
Equity Fund Equity Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Assets:
Investments, at value*.................. $248,847,716 $41,283,749 $3,715,364 $14,357,539 $54,827,162
Cash ................................... 14,986 0 0 0 604,739
Foreign currency**...................... 0 0 0 0 1,534,007
Dividends and interest receivable....... 202,047 66,307 26,508 250,780 91,957
Receivable from Adviser................. 0 0 10,376 6,047 0
Receivable for investments sold......... 0 0 0 0 7,919,852
Organizational expenses,
net of accumulated amortization........ 5,680 0 13,028 13,028 23,848
Prepaid expenses........................ 21,090 2,698 2,896 2,016 6,893
---------- ---------- ---------- ---------- ----------
Total assets.......................... 249,091,519 41,352,754 3,768,172 14,629,410 65,008,458
---------- ---------- ---------- ---------- ----------
Liabilities:
Payable for foreign currency contracts
(proceeds received of $0, $0, $0, $0,
$7,401,270)............................ 0 0 0 0 7,530,563
Payable for investments purchased....... 431,250 0 102,755 0 296,487
Payable for investment advisory fees.... 430,383 58,307 0 0 114,016
Accrued expenses and other liabilities.. 212,269 225,299 26,256 72,837 82,170
---------- ---------- ---------- ---------- ----------
Total liabilities.................... 1,073,902 283,606 129,011 72,837 8,023,236
---------- ---------- ---------- ---------- ----------
Net assets $248,017,617 $41,069,148 $3,639,161 $14,556,573 $56,985,222
========== ========== ========== ========== ==========
Net assets consist of:
Paid in capital......................... $206,019,377 $28,253,194 $3,355,194 $14,323,487 $53,862,658
Undistributed net investment income (loss) 193 0 2 0 (125,614)
Undistributed net realized gain (loss) on
securities and foreign currency transactions (615,582) 94,879 (19,458) 21,891 (216,825)
Net unrealized appreciation of securities
and foreign currency transactions......... 42,613,629 12,721,075 303,423 211,195 3,465,003
---------- ---------- ---------- ---------- ----------
Net assets.............................. $248,017,617 $41,069,148 $3,639,161 $14,556,573 $56,985,222
========== ========== ========== ========== ==========
Shares of beneficial interest outstanding
(unlimited shares of
no par value authorized) 15,779,442 2,854,255 329,232 1,419,508 5,174,196
Net asset value per share
(offering and redemption price)........ $ 15.72 $ 14.39 $ 11.05 $ 10.25 $ 11.01
========== ========== ========== ========== ==========
* Cost of Investments.................. $206,234,087 $28,562,674 $3,411,941 $14,146,344 $51,415,810
========== ========== ========== ========== ==========
** Cost of Foreign Currency............ $ 0 $ 0 $ 0 $ 0 $ 1,519,780
========== ========== ========== ========== ==========
See notes to the financial statements.
<PAGE>
STATEMENTS OF OPERATIONS
December 31, 1998
LKCM LKCM LKCM LKCM
Small Cap LKCM Balanced Fixed Income International
Equity Fund Equity Fund Fund Fund Fund
Investment Income:
Dividend income*........................ $1,784,268 $ 441,561 $ 19,079 $ 0 $ 515,064
Interest................................ 1,542,158 161,481 43,148 623,933 174,765
---------- ---------- ---------- ---------- ----------
Total income.......................... 3,326,426 603,042 62,227 623,933 689,829
---------- ---------- ---------- ---------- ----------
Expenses:
Investment advisory fees ............... 1,977,956 281,873 12,623 52,488 396,641
Administrative fees..................... 156,396 26,410 17,929 19,354 35,920
Custody fees and expenses............... 24,631 14,637 8,104 5,472 34,936
Accounting and transfer
agent fees and expenses............... 88,446 40,078 36,594 38,697 46,062
Federal and state registration.......... 31,919 19,541 1,043 4,313 17,012
Professional fees....................... 35,565 12,619 8,312 8,734 12,285
Trustees' fees ......................... 19,800 2,980 100 400 1,000
Amortization of deferred charges........ 10,753 0 3,268 3,268 5,957
Reports to shareholders................. 21,694 678 628 928 2,505
Other .................................. 24,892 6,489 229 603 1,738
---------- ---------- ---------- ---------- ----------
Total expenses....................... 2,392,052 405,305 88,830 134,257 554,056
Less, expense reimbursement.......... 0 (86,983) (73,294) (65,831) (78,087)
---------- ---------- ---------- ---------- ----------
Net expenses......................... 2,392,052 318,322 15,536 68,426 475,969
---------- ---------- ---------- ---------- ----------
Net investment income................... 934,374 284,720 46,691 555,507 213,860
---------- ---------- ---------- ---------- ----------
Realized and Unrealized Gain on Investments:
Net realized gain (loss) on:
Investments........................... (630,210) 627,597 (19,531) 28,673 (216,824)
Foreign currency...................... 0 0 0 0 (2,387,996)
---------- ---------- ---------- ---------- ----------
(630,210) 627,597 (19,531) 28,673 (2,604,820)
---------- ---------- ---------- ---------- ----------
Net change in unrealized appreciation
(depreciation) of:
Investments........................... (18,659,746) 4,346,775 303,423 211,195 (108,492)
Foreign currency...................... 0 0 0 0 3,573,495
---------- ---------- ---------- ----------- ----------
(18,659,746) 4,346,775 303,423 211,195 3,465,003
---------- ---------- ---------- ----------- ----------
Net Gain (Loss) on Investments.......... (19,289,956) 4,974,372 283,892 239,868 860,183
---------- ---------- ---------- ----------- ----------
Net Increase (Decrease) in Net Assets
Resulting from Operations............. ($18,355,582) $5,259,092 $330,583 $795,375 $1,074,043
========== ========== ========== ========== ==========
* Net of Foreign Taxes Withheld......... $ 0 $ 0 $ 127 $ 0 $ 154,267
========== ========== ========== ========== ==========
</TABLE>
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
LKCM
Small Cap Equity Fund LKCM Equity Fund
Year ended Year ended Year ended Year ended
December 31, 1998 December 31, 1997 December 31, 1998 December 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operations:
Net investment income.................... $ 934,374 $ 537,200 $ 284,720 $ 365,363
Net realized gain (loss) on investments
and foreign currency transactions...... (630,210) 20,905,657 627,597 2,403,120
Net change in unrealized appreciation of
securities and foreign currency
transactions........................... (18,659,746) 27,753,447 4,346,775 5,155,823
----------- ----------- ---------- ----------
Net increase in net assets
resulting from operations ......... (18,355,582) 49,196,304 5,259,092 7,924,306
----------- ----------- ---------- ----------
Dividends and Distributions
to Shareholders:
Net investment income.................... (1,034,445) (923,766) (284,136) (815,908)
Net realized gain on investments......... (730,451) (36,263,585) (1,148,795) (3,031,073)
----------- ----------- ---------- ----------
Total dividends and distributions.... (1,764,896) (37,187,351) (1,432,931) (3,846,981)
----------- ----------- ---------- ----------
Fund Share Transactions:
Net proceeds from shares sold............ 22,128,815 42,633,318 6,668,985 21,410,408
Shares issued in connection with payment
of dividends and distributions......... 1,643,267 35,233,556 1,238,620 2,945,834
Cost of shares redeemed.................. (30,421,264) (14,176,437) (23,056,392) (10,649,681)
----------- ----------- ---------- ----------
Net increase (decrease) in net asset
from Fund share transactions....... (6,649,182) 63,690,437 (15,148,787) 13,706,561
----------- ----------- ---------- ----------
Total increase (decrease)................ (26,769,660) 75,699,390 (11,322,626) 17,783,886
Net Assets:
Beginning of period...................... 274,787,277 199,087,887 52,391,774 34,607,888
----------- ----------- ---------- ----------
End of period*........................... $248,017,617 $274,787,277 $41,069,148 $52,391,774
=========== =========== ========== ==========
*Including undistributed net
investment income of:.................. $ 193 $ 0 $ 0 $ 0
=========== =========== ========== ==========
Changes in Shares Outstanding:
Shares sold.............................. 1,329,026 2,573,250 482,978 1,614,397
Shares issued in connection with payment
of dividends and distributions......... 104,533 2,228,307 86,075 240,087
Shares redeemed.......................... (1,924,372) (820,506) (1,690,990) (836,931)
----------- ----------- ---------- ----------
(490,813) 3,981,051 (1,121,937) 1,017,553
=========== =========== ========== ==========
</TABLE>
See notes to the financial statements.
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
LKCM LKCM LKCM
Balanced Fixed Income International
Fund Fund Fund
Year ended (1) Year ended (1) Year ended (1)
December 31, 1998 December 31, 1998 December 31, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Operations:
Net investment income...................................... $ 46,691 $ 555,507 $ 213,860
Net realized gain (loss) on investments and
foreign currency transactions............................ (19,531) 28,673 (2,604,820)
Net change in unrealized appreciation of
securities and foreign currency transactions............. 303,423 211,195 3,465,003
---------- ---------- ----------
Net increase in net assets resulting from operations .. 330,583 795,375 1,074,043
---------- ---------- ----------
Dividends and Distributions
to Shareholders:
Net investment income...................................... (48,212) (558,872) 0
Net realized gain on investments........................... 0 (5,476) 0
---------- ---------- ----------
Total dividends and distributions...................... (48,212) (564,348) 0
---------- ---------- ----------
Fund Share Transactions:
Net proceeds from shares sold.............................. 3,312,403 14,242,524 61,462,930
Shares issued in connection with payment
of dividends and distributions........................... 48,212 489,910 0
Cost of shares redeemed.................................... (3,835) (406,898) (5,551,761)
---------- ---------- ----------
Net increase in net asset from Fund share transactions. 3,356,780 14,325,536 55,911,169
---------- ---------- ----------
Total increase............................................. 3,639,151 14,556,563 56,985,212
Net Assets:
Beginning of period........................................ 10 10 10
---------- ---------- ----------
End of period*............................................. $3,639,161 $14,556,573 $56,985,222
========== ========== ==========
*Including undistributed net investment income of:......... $ 2 $ 0 ($ 125,614)
========== ========== ==========
Changes in Shares Outstanding:
Shares sold................................................ 325,041 1,411,297 5,709,472
Shares issued in connection with payment
of dividends and distributions........................... 4,558 47,820 0
Shares redeemed............................................ (367) (39,609) (535,276)
---------- ---------- ----------
329,232 1,419,508 5,174,196
========== ========== ==========
</TABLE>
(1) The Funds commenced operations on December 30, 1997. At December 31, 1997
the Funds had no operations other than those relating to organizational
matters.
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM Small Cap Equity Fund
Year ended Year ended Year ended May 1, 1995 to July 14, 1994(1) to
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 April 30, 1995
------------ -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value --
Beginning of Period............ $16.89 $16.20 $13.84 $11.48 $10.00
------ ------ ------ ------ ------
Net investment income............ 0.05 0.02 0.05 0.03 0.04
Net realized gain (loss) and
unrealized appreciation
(depreciation).... (1.10) 3.38 3.26 2.33 1.44
------ ------ ------ ------ ------
Total from investment
operations................. (1.05) 3.40 3.31 2.36 1.48
------ ------ ------ ------ ------
Dividends from net investment
income......................... (0.07) (0.07) (0.07) 0.00 0.00
------ ------ ------ ------ ------
Distributions from net realized gain
from investment transactions... (0.05) (2.64) (0.88) 0.00 0.00
------ ------ ------ ------ ------
Total distributions.......... (0.12) (2.71) (0.95) 0.00 0.00
------ ------ ------ ------ ------
Net Asset Value-- End of Period.. $15.72 $16.89 $16.20 $13.84 $11.48
====== ====== ====== ====== ======
Total Return..................... -6.26% 23.07% 25.67% 20.56%(2) 14.80%(2)
Ratios and Supplemental Data:
Net assets, end of period (thousands) $284,018 $274,787 $199,088 $121,430 $66,736
Ratio of expenses to average net assets 0.91% 0.95% 1.00% 1.00%(3) 1.00%(3)
Ratio of net investment income to
average net assets............. 0.35% 0.22% 0.39% 0.53%(3) 1.15%(3)
Portfolio turnover rate.......... 35% 34% 66% 57% 53%
</TABLE>
(1) Commencement of Operations
(2) Not Annualized
(3) Annualized
See notes to the financial statements.
<PAGE>
Financial Highlights
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
<TABLE>
<CAPTION>
LKCM Equity Fund
January 3,
Year ended Year ended 1996(1) to
December 31, December 31, December 31,
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net Asset Value-- Beginning of Period............................ $13.18 $11.70 $10.00
------ ------ ------
Net investment income............................................ 0.10 0.10 0.15
Net realized gain and unrealized
appreciation .................................................. 1.63 2.52 1.55
------ ------ ------
Total from investment operations............................. 1.73 2.62 1.70
------ ------ ------
Dividends from net investment income............................. (0.10) (0.25) 0.00
Distributions from net realized gain from
investment transactions...................................... (0.42) (0.89) 0.00
------ ------ ------
Total distributions.......................................... (0.52) (1.14) 0.00
------ ------ ------
Net Asset Value-- End of Period.................................. $14.39 $13.18 $11.70
====== ====== ======
Total Return..................................................... 13.11% 23.57% 17.00%(2)
Ratios and Supplemental Data:
Net assets, end of period (thousands)............................ $41,069 $52,392 $34,608
Ratio of expenses to average net assets:
Before expense reimbursement................................... 1.02% 1.16% 1.32%(3)
After expense reimbursement.................................... 0.80% 0.80% 0.80%(3)
Ratio of net investment income to average net assets:
Before expense reimbursement................................... 0.49% 0.57% 0.98%(3)
After expense reimbursement.................................... 0.71% 0.93% 1.50%(3)
Portfolio turnover rate.......................................... 45% 48% 79%
(1) Commencement of Operations
(2) Not Annualized
(3) Annualized
</TABLE>
See notes to the financial statements.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM LKCM LKCM
Balanced Fixed Income International
Fund Fund Fund
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1998 1998
------------ ------------- -------------
<S> <C> <C> <C>
Net Asset Value-- Beginning of Period............................ $10.00 $10.00 $10.00
------ ------ ------
Net investment income............................................ 0.22 0.54 (1) 0.04 (2)
Net realized gain and unrealized
appreciation................................................... 1.05 0.17 0.97
------ ------ ------
Total from investment operations............................. 1.27 0.71 1.01
------ ------ ------
Dividends from net investment income............................. (0.22) (0.46) 0.00
------ ------ ------
Net Asset Value-- End of Period.................................. $11.05 $10.25 $11.01
====== ====== ======
Total Return..................................................... 12.84% 7.27% 10.10%
Ratios and Supplemental Data:
Net assets, end of period (thousands)............................ $3,639 $14,557 $56,985
Ratio of expenses to average net assets:
Before expense reimbursement................................... 4.59% 1.28% 1.40%
After expense reimbursement.................................... 0.80% 0.65% 1.20%
Ratio of net investment income to average net assets:
Before expense reimbursement................................... -1.38% 4.66% 0.34%
After expense reimbursement.................................... 2.41% 5.29% 0.54%
Portfolio turnover rate.......................................... 39% 82% 196%
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(2) Net investment income per share is calculated using the ending balance of
undistributed net investment income prior to considerations of adjustments
for permanent book and tax differences.
</TABLE>
See notes to the financial statements.
<PAGE>
LKCM Funds
Notes to the Financial Statements (Unaudited)
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 (collectively, the "Funds"), the assets of which are invested
in separate, independently managed portfolios. 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 LKCM Balanced Fund seeks to provide
investors with current income and capital appreciation. The LKCM Fixed Income
Fund seeks to provide investors with current income. The LKCM International Fund
seeks to provide investors with a total return in excess of the Morgan Stanley
Capital International EAFE Index. The following is a summary of significant
accounting policies followed by 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. Generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. These reclassifications
have no effect on net assets or net asset values per share.
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 Small Cap Equity, Equity and
International Funds intend to pay dividends and net capital gains
distributions, if any, on an annual basis. The Balanced and Fixed Income
Funds intend to pay dividends on a quarterly basis and net capital gain
distributions, if any, on an annual basis.
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 securities of the U.S.
<PAGE>
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 comparable securities
of U.S. companies and securities of the U.S. government.
6. Foreign Currency Translations: The books and records of the Funds 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 Funds do
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 Funds do 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. Forward Currency Options and Futures: The LKCM International Fund may
purchase or sell listed or over-the-counter foreign currency options,
foreign currency futures and related options on foreign currency futures as
a short or long hedge against possible variations in foreign exchange
rates. Such transactions may be effected with respect to hedges on non-US
dollar denominated securities owned by the Fund, sold by the Fund but not
yet delivered, or committed or anticipated to be purchased by the Fund.
8. 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.
9. 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.
10. 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 entered into a Subadvisory
Agreement with TT International Investment Management (the "Sub-Adviser") for
the LKCMInternational Fund. Pursuant to its Subadvisory Agreement with the
Adviser, the Sub-Adviser is entitled to recevice a fee from the Adviser,
calculated daily and payable quarterly, at the annual rate below as applied to
the LKCM International Fund's daily net assets. 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, 1998
the Adviser waived the following fees:
<TABLE>
<CAPTION>
LKCM LKCM LKCM LKCM LKCM
Small Cap Equity Equity Balanced Fixed Income International
Fund Fund Fund Fund Fund
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Annual Advisory Rate 0.75% 0.70% 0.65% 0.50% (1)(2)
Annual Cap on Expenses 1.00% 0.80% 0.80% 0.65% 1.20%
Fees Waived -- $86,983 $73,294 $65,831 $78,087
</TABLE>
(1) The Adviser is entitled to receive a fee, calculated daily and payable
quarterly, at the annual rate of 1.00% of the Fund's average daily net assets.
(2) Pursuant to its Subadvisory Agreement with the Adviser, the Sub-Adviser is
entitled to receive a fee from the Adviser, calculated daily and payable
quarterly, at the annual rate of 0.50%.
Firstar Trust Mutual Fund Services, LLC 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.
C. Security Transactions: Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Purchases Sales
U.S. Government Other U.S. Government Other
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
LKCM Small Cap Equity Fund -- $81,367,062 -- $110,835,450
LKCM Equity Fund -- 16,723,094 -- 33,021,947
LKCM Balanced Fund $ 334,387 3,636,195 $ 50,199 590,096
LKCM Fixed Income Fund 10,061,528 12,026,329 6,439,320 1,612,410
LKCM International Fund -- 117,725,127 -- 66,017,240
At December 31, 1998, cost and unrealized appreciation (depreciation) of
investments for Federal income tax purposes were:
Net
Cost Appreciation (Depreciation) Appreciation
------------- ------------- ------------- -------------
LKCM Small Cap Equity Fund $206,234,087 $57,719,404 $(15,105,775) $42,613,629
LKCM Equity Fund 28,562,674 13,218,990 (497,915) 12,721,075
LKCM Balanced Fund 3,411,941 378,420 (77,997) 303,423
LKCM Fixed Income Fund 14,146,895 242,886 (32,242) 210,649
LKCM International Fund 53,439,860 6,702,325 3,747,477 2,954,848
</TABLE>
The LKCM Small Cap Equity Fund and LKCM Balanced Fund realized, on a tax basis,
capital loss carryforwards of $609,640 and $19,458 which expire at December 31,
2006, respectively. These losses are available to offset future capital gains
prior to distribution.
D. Other: At December 31, 1998, the percentage of total shares outstanding and
the number of record shareholders owning 10% or greater of
the Funds were as follows:
No. of %
Shareholders Ownership
------------- -------------
LKCM Small Cap Equity Fund 1 14.14%
LKCM Equity Fund 2 44.11%
LKCM Balanced Fund 4 70.14%
LKCM Fixed Income Fund 2 29.77%
LKCM International Fund 2 63.22%
<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, the LKCM Equity Fund, the LKCM Balanced Fund, the
LKCM Fixed Income Fund and the LKCM International Fund (collectively, the
"Funds"), including the schedules of investments, as of December 31, 1998, 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, 1998 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of the
LKCM Small Cap Equity Fund, the LKCM Equity Fund, the LKCM Balanced Fund, the
LKCM Fixed Income Fund and the LKCM International Fund as of December 31, 1998,
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
February 12, 1999
<PAGE>
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 Victoria A. Kampa
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 Mutual Fund Services, LLC
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
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
