As filed with the Securities and Exchange Commission on July 21, 2000
33 Act File No. 33-75116
40 Act File No. 811-8352
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [ ]
-----
Post-Effective Amendment No. 12 [ X ]
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and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 12
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(Check appropriate box or boxes.)
LKCM FUNDS
(Exact Name of Registrant)
c/o Luther King Capital Management
301 Commerce Street, Suite 1600
Fort Worth, Texas 76102
(Address of Principal Executive Office)
Registrant's Telephone Number (817) 332-3235
--------------------
c/o Firstar Mutual Fund Services, LLC
615 E. Michigan Street, Milwaukee, WI 53202
(Name and Address of Agent for Service)
Copy to:
ROBERT J. ZUTZ, ESQ.
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
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Approximate Date of Proposed Public Offering September 22, 2000
-------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ X ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485.
Registrant has adopted a master-feeder operating structure for it International
Fund series. This Post-Effective Amendment includes signature pages for the TT
International U.S.A Master Trust, the master trust, and the LKCM Funds, the
feeder trust.
<PAGE>
LKCM FUNDS
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Prospectus for the LKCM Small Cap Equity Fund, LKCM Equity
Fund, LKCM Balanced Fund, LKCM Fixed Income Fund, and LKCM
International Fund
Statement of Additional Information for the LKCM Small Cap
Equity Fund, LKCM Equity Fund, LKCM Balanced Fund, LKCM
Fixed Income Fund, and LKCM International Fund
Part C
Signature Pages
Exhibits
<PAGE>
P R O S P E C T U S
September __, 2000
LKCM FUNDS
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
1-800-688-LKCM
THE LKCM SMALL CAP EQUITY FUND - seeks to maximize long-term capital
appreciation
THE LKCM EQUITY FUND - seeks to maximize long-term capital appreciation
THE LKCM BALANCED FUND - seeks current income and long-term capital appreciation
THE LKCM FIXED INCOME FUND - seeks current income
THE LKCM INTERNATIONAL FUND - seeks a total return in excess of the total return
of the Morgan Stanley Capital International
Europe, Australasia and Far East Index
This Prospectus contains information you should consider before you invest
in the funds. Please read it carefully and keep it for future reference.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OFFERED BY
THIS PROSPECTUS, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY..........................................................3
FEES AND EXPENSES OF THE FUNDS..............................................11
INVESTMENT OBJECTIVES.......................................................13
HOW THE FUNDS INVEST........................................................13
FUND MANAGEMENT.............................................................16
PURCHASE OF SHARES..........................................................18
REDEMPTION OF SHARES........................................................20
VALUATION OF SHARES.........................................................21
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES....................................21
MASTER-FEEDER STRUCTURE.....................................................22
FINANCIAL HIGHLIGHTS........................................................24
In deciding whether to invest in a fund, you should rely on information in
this Prospectus or the Statement of Additional Information (the "SAI"). The
funds have not authorized others to provide additional information. The funds do
not authorize the use of this Prospectus in any state or jurisdiction in which
such offering may not legally be made.
<PAGE>
RISK/RETURN SUMMARY
GOALS OF THE FUNDS
Each fund has its own goal. This goal is sometimes referred to as a fund's
investment objective. The funds are managed by Luther King Capital Management
Corporation (the "Adviser").
THE SMALL CAP EQUITY FUND'S goal is to maximize long-term capital
appreciation. The fund attempts to achieve this goal by primarily choosing
investments that the Adviser believes are likely to have above-average growth in
revenue and/or earnings and potential for above-average capital appreciation.
The fund invests primarily in equity securities of smaller companies (those with
market values at the time of investment of less than $1 billion). These equity
securities include common stocks, preferred stocks, securities convertible into
common stock, rights and warrants.
THE EQUITY FUND'S goal is to maximize long-term capital appreciation. The
fund attempts to achieve this goal by primarily choosing investments that the
Adviser believes are likely to have above-average growth in revenue and/or
earnings, above average returns on shareholders' equity and under-leveraged
balance sheets, and potential for above-average capital appreciation. The fund
invests primarily in equity securities. These equity securities include common
stocks, preferred stocks, securities convertible into common stocks, rights and
warrants.
THE BALANCED FUND'S goal is current income and long-term capital
appreciation. The fund attempts to achieve this goal by investing primarily in a
diversified portfolio of equity and fixed-income securities, including common
stocks, income producing securities convertible into common stocks, fixed-income
securities and cash equivalent securities. The fund's investments in fixed
income securities will consist of investment grade, intermediate-term fixed
income securities.
THE FIXED INCOME FUND'S goal is current income. The fund attempts to
achieve this goal by investing primarily in a diversified portfolio of
investment grade, intermediate-term debt securities and cash equivalent
securities.
THE INTERNATIONAL FUND'S goal is total return in excess of the total
return of the Morgan Stanley Capital International Europe, Australasia and Far
East Index. The fund currently intends to attempt to achieve its goal by
operating under a master-feeder structure. This means that the fund currently
intends to seek its investment objective by investing all of its investable
assets in the TT EAFE Portfolio ("Portfolio"), a series of the TT International
U.S.A. Master Trust (the "Master Trust"). The Portfolio has an identical
investment objective to the Fund. The Portfolio is managed by TT International
Investment Management ("TT International"). Throughout this Prospectus,
statements regarding investments by the International Fund refer to investments
made by the Portfolio. For easier reading, the term "International Fund" is used
throughout the Prospectus to refer to either the International Fund or the
Portfolio, unless stated otherwise.
The INTERNATIONAL FUND attempts to achieve its goal by investing primarily
in equity and equity-related securities in non-U.S. markets that TT
International believes represent value in the form of assets and earnings. These
equity and equity-related securities include securities listed on recognized
exchanges, convertible bonds, warrants, equity and stock index futures contracts
and options and forward currency exchange contracts.
The funds cannot guarantee that they will achieve their goals. For more
information, see "How the Funds Invest."
STRATEGIES OF THE FUNDS
The Adviser's primary strategy in managing the SMALL CAP EQUITY, EQUITY
and BALANCED FUNDS is to identify high quality companies based on various
financial and fundamental criteria such as consistently high profitability,
strong balance sheets and prominent market share positions. The Adviser's
primary strategy in managing the FIXED INCOME FUND is to select debt securities
based on factors such as price, yield and credit quality. For the BALANCED and
3
<PAGE>
FIXED INCOME FUNDS, the Adviser invests in investment grade corporate and
government issues with intermediate effective maturities for the Funds'
portfolios.
The Portfolio in which the INTERNATIONAL FUND invests is advised by TT
International. TT International invests primarily in equity securities listed on
recognized exchanges and uses a top-down and a bottom-up approach in selecting
those securities. TT International analyzes various countries and chooses to
invest in countries that in its view indicate growth potential of their
economies and securities markets, as well as positive currency and taxation
policies. Further, TT International selects those companies within a country
that in its view display fundamental investment value.
RISKS OF INVESTING IN THE FUNDS
The main risks of investing in Small Cap Equity, Equity, Balanced and
International Funds are:
o Stock Market Risk: Funds that invest in equity securities are
subject to stock market risks and significant
fluctuations in value. If the stock market
declines in value, a fund is likely to decline
in value. Decreases in the value of stocks are
generally greater than for bonds or other debt
investments.
o Stock Selection Risk: Value stocks selected by the Adviser may
decline in value or not increase in value when
the stock market in general is rising.
In addition, the SMALL CAP EQUITY FUND is subject to additional risks:
o Small-Cap Risk: Small capitalization companies may not have
the size, resources or other assets of large
capitalization companies. These small
capitalization companies may be subject to
greater market risks and fluctuations in value
than large capitalization companies and may
not correspond to changes in the stock market
in general.
The INTERNATIONAL FUND is also subject to additional risks:
o Foreign Investment Risk: The INTERNATIONAL FUND'S investments in
foreign securities involve risks relating to
adverse political, social and economic
developments abroad, as well as risks resulting
from the differences between the regulations to
which U.S. and foreign issuers and markets are
subject. These risks may include expropriation
of assets, confiscatory taxation, withholding
taxes on dividends and interest paid on fund
investments, fluctuations in currency exchange
rates, currency exchange controls and other
limitations on the use or transfer of assets by
the fund or issuers of securities, and
political or social instability. In addition,
foreign laws and accounting standards typically
are not as strict as they are in the United
States, and there may be less public
information available about foreign companies.
Many foreign securities are less liquid and
their prices are more volatile than comparable
U.S. securities. Also, in certain
circumstances, the fund could realize reduced
or no value in U.S. dollars from its
investments in foreign securities, causing the
fund's shares price to go down. From time to
time foreign securities may be difficult to
liquidate rapidly without adverse price
effects. The costs of foreign investing also
tend to be higher than the costs of investing
in domestic securities. In addition, a number
of European countries have entered into an
economic and monetary union which may have
adverse effects on foreign securities if a
country withdraws from the union or if the
4
<PAGE>
accounting and trading systems used by the fund
do not recognize the new currency adopted in
the union. The use of index future and foreign
currency contracts may present risks unique to
and in addition to the risks discussed above.
o Risk of Derivatives The International Fund's use of derivatives
(such as futures contracts, options and forward
foreign currency exchange contracts) may
represent a significant portion of the fund's
investments and may be risky. This practice
could result in losses that are not offset by
gains on other portfolio assets. Losses would
cause the fund's share price to go down. There
also is the risk that the counterparty may fail
to honor its contract terms. The fund's ability
to use derivatives successfully depends on the
portfolio managers' ability to accurately
predict movements in stock prices, interest
rates and currency exchange rates. If the
portfolio managers' predictions are wrong, the
fund could suffer greater losses than if the
fund had not used derivatives.
o Risk of Investing in Convertible securities, which are debt or
Convertible securities preferred stock that may be converted into
Securities common stock, are subject to the market risk of
stocks, and, like debt securities, also are
subject to interest rate risk and the credit
risk of their issuers. Call provisions may
allow the issuer to repay the debt before it
matures.
o Portfolio Turnover TT International may engage in active trading
Risk: of its portfolio securities to achieve the
fund's investment goals. This practice could
result in the fund experiencing a high turnover
rate (100% or more). High portfolio turnover
rates lead to increased costs, could cause you
to pay higher taxes and could negatively affect
the fund's performance.
The main risks of investing in the FIXED INCOME FUND and additional risks
of the BALANCED FUND and INTERNATIONAL FUND are:
o Interest Rate Risk: The market values of fixed income securities
are inversely related to actual changes in
interest rates. When interest rates rise, the
market value of the funds' fixed-income
securities will decrease. If this occurs, the
funds' net asset values also may decrease.
Moreover, the longer the remaining maturity of
a security, the greater the effect of interest
rate changes on the market value of the
security.
o Credit Risk: If issuers of fixed income securities in which
a fund invests experience unanticipated
financial problems, the issue is likely to
decline in value. In addition, the funds are
subject to the risk that the issuer of a
fixed-income security will fail to make timely
payments of interest or principal.
You should be aware that you may lose money by investing in the funds.
5
<PAGE>
PAST PERFORMANCE
The performance information that follows gives some indication of how each
fund's performance can vary. The bar charts indicate the risks of investing in
the funds by showing the performance of each fund from year to year (on a
calendar year basis). The tables show each fund's average annual returns
compared to a broad-based securities market index. Please remember that a fund's
past performance does not reflect how the fund may perform in the future.
Small Cap Equity Fund
Calendar Year Return as of 12/31
The chart below has the following plot points:
1995 31.81%
1996 25.67%
1997 23.07%
1998 -6.26%
1999 16.83%
BEST AND WORST QUARTERLY RETURNS
15.87% (3rd quarter, 1997)
-18.98% (3rd quarter, 1998)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR 5 YEARS SINCE INCEPTION(1)
------ ------- ---------------
<S> <C> <C> <C>
Small Cap Equity Fund 16.83% 17.43% 16.85%
Russell 2000 Index (2) 21.26% 16.69% 15.71%
S&P 500 Index(3) 21.04% 28.56% 26.42%
</TABLE>
(1) The fund commenced operations on July 14, 1994.
(2) The Russell 2000 Index is comprised of the smallest 2000 companies in
the Russell 3000 Index, representing approximately 8% of the Russell
3000 total market capitalization.
(3) The S&P 500 Index is a capitalization-weighted index of 500 stocks.
The Index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
6
<PAGE>
Equity Fund
Calendar Year Returns as of 12/31
The chart below has the following plot points:
1997 23.57%
1998 13.11%
1999 23.07%
BEST AND WORST QUARTERLY RETURNS
17.83% (4th quarter, 1999)
-11.93% (3rd quarter, 1998)
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR SINCE INCEPTION(1)
------ ---------------
Equity Fund 23.07% 19.11%
The S&P 500 Index (2) 21.04% 26.40%
(1) The fund commenced operations on January 3, 1996.
(2) The S&P 500 Index is a capitalization-weighted index of 500 stocks.
The Index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
7
<PAGE>
Balanced Fund
Calendar Year Return as of 12/31
The chart below has the following plot points:
1998 12.84%
1999 13.53%
BEST AND WORST QUARTERLY RETURNS
11.07% (4th quarter, 1998)
-5.39% (3rd quarter, 1999)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR SINCE INCEPTION(1)
------ ------------------
<S> <C> <C>
Balanced Fund 13.53% 13.18%
Lehman Bond Index (2) 0.39% 4.33%
S&P 500 Index (3) 21.04% 24.75%
</TABLE>
(1) The fund commenced operations on December 30, 1997.
(2) 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.
(3) The S&P 500 Index is a capitalization-weighted index of 500 stocks.
The Index is designed to measure performance of the broad domestic
economy through changes in the aggregate market value of 500 stocks
representing all major industries.
8
<PAGE>
Fixed Income Fund
Calendar Year Return as of 12/31
The chart below has the following plot points:
1998 7.27%
1999 -0.34%
BEST AND WORST QUARTERLY RETURNS
4.23% (3rd quarter, 1998)
-0.87% (2nd quarter, 1999)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR SINCE INCEPTION(1)
------ ---------------
<S> <C> <C>
Fixed Income Fund -0.34% 3.40%
Lehman Bond Index(2) 0.39% 4.33%
</TABLE>
(1) The fund commenced operations on December 30, 1997.
(2) 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.
9
<PAGE>
International Fund
Calendar Year Return as of 12/31
The chart below has the following plot points:
1998 10.10%
1999 42.71%
BEST AND WORST QUARTERLY RETURNS
36.27% (4th quarter, 1999)
-12.82% (3rd quarter, 1998)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
1 YEAR SINCE INCEPTION(1)
------ ---------------
<S> <C> <C>
International Fund 42.71% 25.35%
Morgan Stanley Capital International 26.96% 23.43%
Europe, Australasia and Far East Index(2)
</TABLE>
(1) The fund commenced operations on December 30, 1997.
(2) The Morgan Stanley Capital International Europe, Australasia and Far
East Index ("MSCI/EAFE") is an unmanaged index composed of securities
from 20 European and Pacific Basin countries. The MSCI/EAFE Index is
the most recognized international index and is weighted by market
capitalization.
10
<PAGE>
FEES AND EXPENSES OF THE FUNDS
The following table illustrates the fees and expenses that you may pay if
you buy and hold shares of the funds.
SHAREHOLDER FEES (fees paid directly from your investment)
None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)(1)
<TABLE>
<CAPTION>
Small Cap Equity Balanced Fixed Income International
Equity Fund Fund Fund Fund Fund(2)
----------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Management Fees(3) 0.75% 0.70% 0.65% 0.50% 1.00%
Distribution and Service
(12b-1) Fees(4) None None None None None
Other Expenses(3) 0.15% 0.23% 1.30% 0.39% 0.52%
Total Annual Fund
Operating Expenses(3) 0.90% 0.93% 1.95% 0.89% 1.52%
</TABLE>
(1) Fund operating expenses are deducted from fund assets before computing the
daily share price or making distributions. As a result, they will not appear
on your account statement, but instead reduce the amount of total return you
receive.
(2) The expense table and the example below reflect the expenses of both the
International Fund and the Portfolio.
(3) The Adviser has agreed to waive all or a portion of its management fee
and/or reimburse the Small Cap Equity, Equity, Balanced and Fixed Income
Funds' other expenses to limit the total annual operating expenses. With
respect to the International Fund, the Adviser has voluntarily agreed to
waive all or a portion of its advisory fees and/or reimburse the
International Fund's other expenses to limit the total annual operating
expenses. In addition, TT International has contractually agreed that
subject to certain conditions for so long as the International Fund invests
all of its investable assets in the Portfolio, TT International will
reimburse the International Fund's other expenses to limit the total annual
operating expenses. The Adviser may choose to terminate these waivers or
revise the limits on total annual operating expenses at any time. If the
waivers or reimbursements were included in the calculation above,
"Management Fees", "Other Expenses" and "Total Net Annual Operating
Expenses" would be as follows:
<TABLE>
<CAPTION>
Small Cap Fixed
Equity Equity Balanced Income International
Fund Fund Fund Fund Fund
------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Management Fees 0.75% 0.57% 0.00% 0.26% 0.68%
Other Expenses 0.15% 0.23% 0.80% 0.39% 0.52%
Total Net Annual
Fund Operating 0.90% 0.80% 0.80% 0.65% 1.20%
Expenses
</TABLE>
(4) The funds have adopted a Rule 12b-1 Plan under which each fund may pay up to
0.75% of its average daily net assets for distribution and other services.
The funds have not implemented the plan and, thus, are neither accruing nor
paying any fees under the plan.
EXAMPLE
The following Example is intended to help you compare the costs of
investing in a fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in a fund for the time periods indicated
and then redeem all of your shares at the end of those periods. The Example also
assumes that your investment has a 5% return each year, that all dividends and
distributions have been reinvested, and that a fund's operating expenses remain
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be as follows:
11
<PAGE>
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Small Cap Equity Fund $92 $288 $500 $1,110
Equity Fund $95 $297 $515 $1,144
Balanced Fund $198 $612 $1,052 $2,274
Fixed Income Fund $91 $284 $493 $1,096
International Fund $155 $481 $829 $1,812
</TABLE>
12
<PAGE>
INVESTMENT OBJECTIVES
The investment objective of the SMALL CAP EQUITY FUND is to maximize long-term
capital appreciation.
The investment objective of the EQUITY FUND is to maximize long-term capital
appreciation.
The investment objective of the BALANCED FUND is current income and long-term
capital appreciation.
The investment objective of the FIXED INCOME FUND is current income.
The investment objective of the INTERNATIONAL FUND is total return in excess of
the total return of the Morgan Stanley Capital International Europe, Australasia
and Far East Index (MSCI/EAFE).
HOW THE FUNDS INVEST
SMALL CAP EQUITY, EQUITY, BALANCED AND FIXED INCOME FUNDS
The Adviser follows a long-term investment philosophy grounded in the
fundamental analysis of individual companies. The Adviser's primary approach to
equity-related investing has two distinct but complementary components. First,
the Adviser seeks to identify high quality companies based on various financial
and fundamental criteria. Companies meeting these criteria will exhibit most of
the following characteristics:
o Consistently high profitability levels;
o Strong balance sheet quality;
o Prominent market share positions;
o Ability to generate excess cash flow after capital expenditures;
o Management with a significant ownership stake in the company; and
o Under-valuation based upon various quantitative criteria.
The Adviser also invests in companies whose assets the Adviser has
determined are undervalued in the marketplace. These include companies with
tangible assets as well as companies that own valuable intangible assets. As
with the primary approach described above, both qualitative as well as
quantitative factors are important criteria in the investment analysis.
For the BALANCED and FIXED INCOME FUNDS, the Adviser's fixed-income
approach concentrates on investment grade corporate and government issues with
intermediate effective maturities. The Adviser's fixed-income philosophy
combines noncallable bonds with 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 various early
redemption features. These defensive issues can offer high levels of current
income with limited price volatility due to the possibility that they will be
retired by the issuer much sooner than the final maturity. Callable bonds 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.
13
<PAGE>
THE LKCM SMALL CAP EQUITY FUND. THE SMALL CAP EQUITY FUND seeks to achieve
its investment objective by investing primarily in equity securities of smaller
companies which the Adviser believes are likely to have above-average growth in
revenue and/or earnings and potential for above-average capital appreciation.
Smaller companies are those with market values at the time of investment of less
than $1 billion. Under normal market conditions, 65% or more of the fund's total
assets will consist of equity securities of smaller companies. These equity
securities include common stocks, preferred stocks, securities convertible into
common stock, rights and warrants.
THE LKCM EQUITY FUND. THE EQUITY FUND seeks to achieve its investment
objective by investing primarily in equity securities of companies which the
Adviser believes are likely to have above-average growth in revenue and/or
earnings with above average returns on shareholders' equity and under-leveraged
balance sheets, and potential for above-average capital appreciation. The fund
invests a portion of its assets in companies whose public market value is less
than the Adviser's assessment of the companies' value. These equity securities
include common stocks, preferred stocks, securities convertible into common
stocks, rights and warrants.
THE LKCM BALANCED FUND. THE BALANCED FUND seeks to achieve its investment
objective by investing primarily in a diversified portfolio of equity and
fixed-income securities, including common stocks, income producing securities
convertible into common stocks, fixed-income securities and cash equivalent
securities. The fund primarily invests in equity and debt securities of
companies with established operating histories and strong fundamental
characteristics. By utilizing both equity and fixed-income securities, the fund
will normally achieve an income yield in excess of the dividend income yield of
the Standard & Poor's 500 Composite Stock Price Index(TRADEMARK) ("S&P 500").
Under normal circumstances, 25% or more of the fund's total assets will consist
of fixed-income 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 fund does not presently intend to invest more than 20% of its total
assets in equity securities that do not pay a dividend. A majority of the equity
securities in which the fund invests will typically be listed on a national
securities exchange or traded on the Nasdaq National Market ("Nasdaq") or in the
U.S. over-the-counter markets. 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 LKCM FIXED INCOME FUND. THE FIXED INCOME FUND seeks to achieve its
investment objective by investing primarily in a diversified portfolio of
investment grade, intermediate-term debt securities issued by corporations, the
U.S. Government, agencies or instrumentalities of the U.S. Government and cash
equivalent securities. Under normal market conditions, 65% or more of the fund's
total assets will consist of 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.
The fund seeks to maintain a dollar-weighted average expected maturity
between three 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.
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. 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 intends to purchase securities
that are rated investment grade at the time of its purchase. If an issue of
securities is downgraded, the Adviser will consider whether to continue to hold
the obligation.
14
<PAGE>
THE LKCM INTERNATIONAL FUND. The fund currently intends to attempt to
achieve its goal by operating under a master-feeder structure. This means that
the fund currently intends to seek its investment objective by investing all of
its investable assets in the Portfolio, which has an identical investment
objective to the Fund. The Portfolio is advised by TT International.
TT International uses both a "top-down" and a "bottom-up" investment
strategy in managing the fund's investment portfolio. TT International uses a
geopolitical analysis to eliminate countries where TT International believes it
is unsafe to invest and to highlight countries where change is likely to occur.
In conducting the geopolitical analysis, TT International may consider such
factors as the condition and growth potential of the various economies and
securities markets, currency and taxation policies and other pertinent
financial, social, national and political factors. Under certain adverse
investment conditions, the fund may restrict the number of securities markets in
which it invests, although under normal market circumstances the fund's
investments will involve securities principally traded in at least three
different countries. Otherwise, there are no prescribed limits on geographical
asset distribution.
TT International currently intends to focus the fund's investments in
securities of companies located in Denmark, France, Germany, Hong Kong, Italy,
Japan, the Netherlands, Sweden, Switzerland and the United Kingdom. This is a
non-exclusive list of countries in which the fund can invest, and the fund
expects to invest in companies located in other countries as well.
Once TT International has completed the geopolitical analysis, it examines
how it will allocate fund assets among various sectors and industries. There are
no specific limits on sector or industry weightings and no minimum or maximum
guidelines versus any index.
TT International then uses a systematic three-stage process to select
securities in which the fund will invest. First, TT International seeks
companies that display value in the form of assets or earnings. Second, TT
International seeks to verify a security's valuation through the use of various
models and information obtained from industry or academic experts. Finally, TT
International assesses the potential for realizing the value it has identified.
PRINCIPAL INVESTMENT POLICIES AND STRATEGIES. The International Fund seeks
to achieve its investment objective by investing in a diversified portfolio of
equity securities issued by corporations located outside the United States and
that possess fundamental investment value. Under normal circumstances, 65% or
more of the fund's investments will consist of these securities.
The fund invests primarily in equity securities that are listed on
recognized exchanges. In pursuing its investment objective, the fund may also
invest in U.S. markets through American Depositary Receipts ("ADRs") and similar
instruments. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying foreign security and denominated in U.S.
dollars.
The fund will not participate in initial public offerings or other "hot
issues" unless the market capitalization of the issuer exceeds a minimum
threshold determined by TT International from time to time and TT International
otherwise determines participation to be appropriate.
TT International may use foreign currency contracts to hedge the fund's
currency exposure at its discretion. Hedging is used to protect against price
movements in a security that the fund owns or intends to acquire that are
attributable to changes in the value of the currency in which the security is
denominated. TT International may hedge anywhere from 0% to 100% of the fund's
currency exposure. In determining whether to engage in foreign currency
contracts, TT International carefully considers fundamental macro-economic
factors, as well as the geopolitical factors and capital flows. In addition, TT
International may purchase and sell stock index futures contracts to hedge
against the fund's exposure to the volatility of securities prices in a
particular market or to reallocate the fund's equity market exposure.
15
<PAGE>
TEMPORARY INVESTMENTS
To respond to adverse market, economic, political or other conditions, the
SMALL CAP EQUITY, EQUITY, BALANCED AND FIXED INCOME FUNDS may invest in time
deposits, commercial paper, certificates of deposits, short term corporate and
government obligations, repurchase agreements and bankers' acceptances. To the
extent that a fund engages in a temporary, defensive strategy, the fund may not
achieve its investment objective.
The INTERNATIONAL FUND may, from time to time, take temporary defensive
positions that are not consistent with the fund's principal investment
strategies in attempting to respond to adverse market, political or other
conditions. When doing so, the fund may invest without limit in high quality
debt securities, and may not be pursuing its investment goal.
FUND MANAGEMENT
INVESTMENT ADVISER
Luther King Capital Management Corporation, 301 Commerce Street, Suite
1600, Fort Worth, Texas 76102, serves as the investment adviser to the funds.
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 $__ billion in assets under management.
Under an Investment Advisory Agreement ("Agreement") with the funds, the
funds pay the Adviser an advisory fee set forth below under "Contractual Fee,"
calculated by applying a quarterly rate, equal on an annual basis to the
following numbers shown as a percentage of average daily net assets for the
quarter. However, until further notice, the Adviser has voluntarily agreed to
waive its advisory fees and reimburse expenses to the extent necessary to keep
the total operating expenses from exceeding the respective caps also shown as a
percentage of average daily net assets for the quarter.
The advisory fees for the fiscal year ended December 31, 1999, were as
follows:
Fee Actually
Contractual Fee Charged Cap
--------------- ------------ -----------
Small Cap Equity Fund 0.75% 0.75% 1.00%
Equity Fund 0.70% 0.57% 0.80%
Balanced Fund 0.65% 0.00% 0.80%
Fixed Income Fund 0.50% 0.26% 0.65%
International Fund 1.00% 0.68% 1.20%
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.
To the extent that the International Fund invests all of its investable
assets in the Portfolio, the advisory fee paid to the Adviser is reduced from an
annual rate of 1.00% of the fund's average daily net assets to an annual rate of
0.50% of the fund's average daily net assets. The Adviser has agreed to continue
its voluntary expense limitation on the International Fund's total annual
operating expenses to ensure that the fund's expenses do not exceed 1.20%.
PORTFOLIO ADVISER
TT International, 5 Martin Lane, London, England EC4R ODP, serves as the
adviser to the Portfolio. TT International was founded in 1993 and offers
investment counseling services to investment companies, pension plans, trusts,
charitable organizations and other institutional investors. As of the date of
this Prospectus, TT International had in excess of $6.5 billion in assets under
management. TT International is registered as an investment adviser under the
Investment Advisers Act of 1940 and is authorized to conduct its investment
16
<PAGE>
business in the United Kingdom by the Investment Management Regulatory
Organization Limited (IMRO). TT International also is registered as a commodity
pool operator and commodity trading adviser with the Commodity Futures Trading
Commission.
Pursuant to a Management Agreement ("Management Agreement") entered into
between TT International and the Master Trust on behalf of the Portfolio, the
Portfolio pays TT International a fee, which is accrued daily and paid monthly,
at an annual rate of 0.50% of the Portfolio's average daily net assets on an
annualized basis. With respect to the International Fund, the Adviser has
voluntarily agreed to waive all or a portion of its advisory fees and/or
reimburse the International Fund's other expenses to limit the total annual
operating expenses to 1.20%. In addition, TT International has contractually
agreed that subject to certain conditions for so long as the International Fund
invests all of its investable assets in the Portfolio, TT International will
reimburse the International Fund's other expenses to limit the total annual
operating expenses to 1.20%.
PORTFOLIO MANAGERS
J. LUTHER KING, JR. is primarily responsible for the day-to-day management
of the Small Cap Equity and Equity Funds and has been since the funds'
inception. Mr. King also shares day-to-day management responsibility of the
Balanced Fund and the Fixed Income Fund. Mr. King has been President, Principal
and Portfolio Manager of the Adviser since 1979.
SCOT C. HOLLMANN is primarily responsible for the day-to-day management of
the Balanced Fund together with Mr. King. Mr. Hollmann has been a portfolio
manager of the Adviser since 1983.
ROBERT M. HOLT, JR. is primarily responsible for the day-to-day management
of the Fixed Income Fund together with Mr. King and Joan M. Maynard. Mr. Holt
has been a portfolio manager of the Adviser since 1983.
JOAN M. MAYNARD is primarily responsible for the day-to-day management of
the Fixed Income Fund. Ms. Maynard has been a Portfolio Manager of the Adviser
since 1991 and employed by the Adviser since 1986.
TT International uses a team of individuals who are primarily responsible
for the day-to-day management of the International Fund. The individuals are
described below.
TIMOTHY TACCHI has been the Controlling Partner of TT International since
its formation in 1993. Previously, he was the sole proprietor of TT
International's predecessor firm (1988-1993), and an Investment Manager at
Fidelity International Investment Advisers Ltd. (1983-1988).
MICHAEL BULLOCK has been a Partner, Portfolio Management Country
Selection, at TT International since 1999. Previously, he was employed as Group
Managing Director and Chief Investment Officer at Morgan Grenfell Asset
Management (1990-1998).
NGOR PONG has been an Investment Manager at TT International since 1996.
Previously, she was a Portfolio Manager at Dah Sing M&G Asset Management
(1984-1996).
DISTRIBUTOR
Provident Distributors, Inc., Four Falls Corporate Center, 6th Floor, West
Conshocken, PA 19428, a registered broker-dealer and member of the National
Association of Securities Dealers, Inc., distributes the funds' shares.
17
<PAGE>
DISTRIBUTION PLAN
The funds have adopted a distribution plan under Rule 12b-1 of the
Investment Company Act of 1940 that allows the funds to pay distribution and
service fees for the sale and distribution of their shares and for services
provided to shareholders. The distribution plan allows the funds to finance
activities that promote the sale of the funds' shares such as printing
prospectuses and reports and preparing and distributing advertising material and
sales literature with fund assets.
The funds have not implemented the plan and as a result they are currently
neither accruing nor paying any fees under the plan. If the funds were using the
plan, the fees paid under the plan could, over time, increase the cost of your
investment and could cost you more than paying other types of sales charges.
PURCHASE OF SHARES
You may purchase shares of each fund at the net asset value per share next
determined after receipt of the purchase order. Each fund determines net asset
value as of the close of normal trading of the New York Stock Exchange ("NYSE")
(currently 4:00 P.M. Eastern Time) each day that the NYSE is open for business.
INITIAL INVESTMENTS
THROUGH YOUR FINANCIAL ADVISER. You may invest in shares of a fund by
contacting your financial adviser. Your financial adviser can help you open a
new account and help you review your financial needs and formulate long-term
investment goals and objectives. You may be charged a fee if you effect fund
transactions through a financial adviser.
The funds have authorized certain broker-dealers to receive on their
behalf purchase and redemption orders of fund shares. These broker-dealers may
designate intermediaries to receive fund orders. The funds are deemed to have
received purchase and redemption orders for fund shares when an authorized
broker-dealer or its designee receives such orders. All such orders are executed
at the next net asset value calculated after the order is received by an
authorized broker-dealer or its designee.
BY MAIL. You may open an account by completing and signing an Account
Registration Form, and mailing it, together with a check ($10,000 minimum)
payable to LKCM Funds.
<TABLE>
<CAPTION>
By Regular Mail To: By Express, Registered or Certified Mail To:
------------------- --------------------------------------------
<S> <C>
LKCM Funds LKCM Funds
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 East Michigan Street, 3rd Floor
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
</TABLE>
Once the fund receives and accepts your application in the mail, your
payment for shares will be credited to your account at the net asset value per
share of the fund next determined after receipt. If you purchase shares using a
check and soon after request a redemption, LKCM will honor the redemption
request at the next determined NAV, but will not mail you the proceeds until
your purchase check has cleared (usually within 15 days). The funds will not
accept cash, drafts or third party checks. Payment should be made by check or
money order drawn on a U.S. bank, savings and loan or credit union. If your bank
does not honor your check, you could be liable for any loss sustained by the
funds, as well as a service charge imposed by the fund's transfer agent
("Transfer Agent") in the amount of $25.
BY WIRE. You may purchase shares of the fund by wiring Federal funds
($10,000 minimum) to the funds' custodian. To make an initial purchase by wire,
you should use the following procedures:
o Telephone the funds at 800-688-LKCM (option 1) for instructions and
to receive an account number.
18
<PAGE>
o Instruct a Federal Reserve System member bank to wire funds to:
Firstar Bank, N.A.
ABA #075000022
For credit to Firstar Mutual Fund Services, LLC
Account #112-952-137
For further credit to LKCM Funds
[Name of Fund]
[Shareholder account number]
o Notify the funds by calling the telephone number listed above prior
to 4:00 P.M. (Eastern Time) on the wire date.
o Promptly complete and mail an Account Registration Form to the
address shown above under "Initial Investments - By Mail."
Federal fund purchases will be accepted only on a day on which the funds
and the custodian are open for business. The funds are not responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
system.
SUBSEQUENT INVESTMENTS
BY MAIL OR WIRE. You may make additional investments 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.
BY TELEPHONE. To make additional investments by telephone, you must check
the appropriate box on your Account Registration Form authorizing telephone
purchases. If you have given authorization for telephone transactions and your
account has been open for at least 15 days, you may call the fund toll free at
1-800-688-LKCM to move money from your bank account to your fund account upon
request. Only bank accounts held at U.S. institutions that are Automated
Clearing House ("ACH") members may be used for telephone transactions. For
security reasons, requests by telephone will be recorded.
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. To establish the
Automatic Investment Program, an investor must complete the appropriate sections
of the Account Registration Form. For additional information on the Automatic
Investment Program, please call 1-800-688-LKCM.
RETIREMENT PLANS
The funds make available Individual Retirement Accounts ("IRAs"),
including Simplified Employee Pension Plans, traditional IRAs, Roth IRAs and IRA
"Rollover Accounts," offered by Firstar Mutual Fund Services, LLC. 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.
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.
19
<PAGE>
Purchases of each fund's shares will be made in full and fractional shares
of the fund calculated to three decimal places. In the interest of economy and
convenience, certificates for shares will not be issued except at the written
request of the shareholder. Certificates for fractional shares will not be
issued, however.
REDEMPTION OF SHARES
You may redeem shares of the funds by mail or, if authorized, by telephone
or wire. The funds do not charge a fee for making redemptions, except with
respect to wire redemptions.
BY MAIL. You may redeem your shares by mailing a written request to:
LKCM Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
After your request is in "good order" the fund will redeem your shares at
the next NAV. 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; 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
Mutual Fund Services, LLC 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, (2) share transfer
requests, and (3) any redemption request if a change of address request has been
received by the funds' Transfer Agent within the last 15 days. Please contact
the funds at 800-688-LKCM (option 1) for further details.
BY TELEPHONE OR WIRE. If you indicated on your Account Registration Form,
or have subsequently arranged in writing to do so, you may redeem shares by
calling the funds and requesting that the redemption proceeds be mailed to the
primary registration address or wired directly to your bank. 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 will be paid to the same
bank and account as designated on the Account Registration Form or in written
instructions subsequently received by the funds. No telephone redemptions may be
made within 15 days of any address change.
If you would like to arrange for redemption by wire or telephone or change
the bank or account designated to receive redemption proceeds, you must send a
written request to the funds at the address listed above under "Redemption of
Shares--By Mail." The investor must sign such requests, with signatures
guaranteed. 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 the 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
20
<PAGE>
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."
Redemption proceeds for shares of the funds purchased by check may not be
distributed until payment for the purchase has been collected, which may take up
to fifteen business days. Such funds are invested and earn dividends during this
holding period. Shareholders can avoid this delay by utilizing the wire purchase
option.
Due to the relatively high cost of maintaining small accounts, the funds
reserve the right to redeem shares in any account for their then-current value
(which will be promptly paid to the investor) if at any time, due to redemption
by the investor, the shares in the account do not have a value of at least
$1,000. You 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 funds have reserved the right to redeem in kind (i.e., in securities)
any redemption request during any 90-day period in excess of the lesser of: (i)
$250,000 or (ii) 1% of a fund's net asset value being redeemed.
TRANSFER OF REGISTRATION
The registration of fund shares may be transferred by writing to LKCM
Funds, c/o Firstar Mutual Fund Services, LLC, P.O. Box 701, Milwaukee,
Wisconsin, 53202-0701. As in the case of redemptions, the written request must
be received in "good order."
VALUATION OF SHARES
Net asset value per share is computed by dividing the total value of the
investments and other assets of a fund, less any liabilities, by the total
outstanding shares of the fund. The net asset value per share is determined as
of the close of normal trading on the NYSE (currently 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business. Net asset value is not determined
on days the NYSE is closed. The price at which a purchase order or redemption
request is effected is based on the next calculation of net asset value after
the order is received by the fund. A fund's net asset value may not be
calculated on days during which the fund receives no orders to purchase shares
and no shares are tendered for redemption. Because the International Fund
invests in securities that are primarily listed on foreign exchanges that trade
on weekends or other days when the International Fund does not price its shares,
the net asset value of the International Fund may change on days when
shareholders will not be able to purchase or redeem shares of the International
Fund. In determining net asset value, expenses are accrued and applied daily and
investments for which market values are readily available are valued at market
value.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
DIVIDENDS AND OTHER DISTRIBUTIONS
The Small Cap Equity, Equity and International Funds intend to declare and
pay income dividends on an annual basis. The Balanced and Fixed Income Funds
intend to declare and pay income dividends on a quarterly basis. The funds
intend to distribute net capital gains and net gains from foreign currency
transactions, if any, on an annual basis in December. The funds may make an
additional distribution if necessary, to avoid income or excise taxes. Dividends
21
<PAGE>
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
GENERAL. Dividends, whether paid in cash or reinvested in additional
shares, from net investment income, net realized 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). Distributions of net realized long-term capital
gains in excess of net realized short-term capital losses, whether paid in cash
or reinvested in additional shares, will be taxable as long-term capital gain.
The character of a capital gain distribution (and the applicable tax rate) is
determined by the length of time that a fund has held the securities that
generated the gain and not the length of time you have held shares in the fund.
Shareholders are notified annually as to the federal tax status of dividends and
other distributions paid by the funds.
Any dividends and other distributions declared by a fund in December to
shareholders of record on a date in that month will be deemed to have been paid
by the fund and received by those shareholders on December 31 if the
distributions are paid before February 1 of the following year. If you purchase
shares of a fund shortly before a distribution, you will be subject to income
tax on the distribution, even though the value of your investment (plus cash
received, if any) remains the same.
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 30 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.
Each fund is required by federal law to withhold 31% of reportable
payments (which includes dividends, capital gain distributions, and redemption
proceeds) payable to individuals and certain other non-corporate shareholders
who have not complied with certain federal tax law requirements. To avoid this
withholding, 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
redemption proceeds 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.
MASTER-FEEDER STRUCTURE
Under a master-feeder structure, the functions of a traditional mutual
fund are divided into two parts - a master fund and one or more feeder funds.
The master fund performs the portfolio management, fund accounting and custodial
functions. The feeder fund performs the distribution, shareholder servicing and
transfer agent functions. With respect to the INTERNATIONAL FUND, the
International Fund is a "feeder" fund that invests all of its investable assets
in a "master" fund with the same investment objective. The "master" fund
purchases securities for investment. The master-feeder structure works as
follows:
-------------------
Investor
-------------------
PURCHASES SHARES OF
-------------------
Feeder Fund
-------------------
22
<PAGE>
WHICH INVESTS IN
-------------------
Master Fund
-------------------
WHICH BUYS
-------------------
Investment
Securities
-------------------
The International Fund can withdraw its investment in the Portfolio at any
time if the Board determines that it is in the best interest of the
International Fund and its shareholders to do so. If this happens, the fund's
assets will be invested according to the investment policies and restrictions
described in this Prospectus.
23
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables set forth below are intended to help you
understand the funds' financial performance for their periods of operations.
Certain information reflects financial results for a single fund share. The
total returns in the tables represent the rates that an investor would have
earned (or lost) on an investment in a fund (assuming reinvestment of all
dividends and distributions). The 1999 information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the funds' financial
statements, are included in the funds' annual report, which is available upon
request. The information for periods prior to 1999 has been audited by other
independent accountants who expressed an unqualified opinion on such financial
highlights. The information for the six-month period ended June 30, 2000 is
unaudited.
<TABLE>
<CAPTION>
Six-Month Year Year Year Year May 1, July 14,
Period ended ended ended ended 1995 to 1994 (1)
ended December December December December December to April
June 30, 31, 31, 31, 31, 31, 30,
2000(5) 1999 1998 1997 1996 1995(2) 1995(2)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $___ $15.72 $16.89 $16.20 $13.84 $11.48 $10.00
---- ------ ------ ------ ------ ------ ------
Net investment income 0.03 0.05 0.02 0.05 0.03 0.04
Net realized gain (loss) and unrealized
appreciation (depreciation) ___ 2.61 (1.10) 3.38 3.26 2.33 1.44
---- ---- ------ ---- ---- ---- ----
Total from investment operations ___ 2.64 (1.05) 3.40 3.31 2.36 1.48
---- ---- ------ ---- ---- ---- ----
Dividends from net investment income (0.03) (0.07) (0.07) (0.07) -- --
Distributions from net realized
gain from investment transactions ___ (0.25) (0.05) (2.64) (0.88) -- --
---- ------ ------ ------ ------
Total distributions ___ (0.28) (0.12) (2.71) (0.95) -- --
---- ------ ------ ------ ------
Net Asset Value - End of Period $___ $18.08 $15.72 $16.89 $16.20 $13.84 $11.48
===== ====== ===== ===== ===== ===== =====
TOTAL RETURN ___% 16.83% (6.26)% 23.07% 25.67% 20.56% (3) 14.80% (3)
Ratios and Supplemental Data:
Net assets, end of period (thousands) $___ $230,164 $284,018 $274,787 $199,088 $121,430 $66,736
Ratio of expenses to average net assets: ___% 0.90% 0.91% 0.95% 1.00% 1.00% (4) 1.00% (4)
Ratio of net investment income to
average net assets: ___% 0.16% 0.35% 0.22% 0.39% 0.53% (4) 1.15% (4)
Portfolio turnover rate ___% 48% 35% 34% 66% 57% 53%
</TABLE>
(1) Commencement of Operations.
(2) Effective April 30, 1995, the fund changed its fiscal year end to December
31.
(3) Not Annualized.
(4) Annualized.
(5) Unaudited.
24
<PAGE>
EQUITY FUND
<TABLE>
<CAPTION>
Six-Month Year Year Year January 3,
Period ended ended ended 1996 (1)
ended December December December to
June 30, 31, 31, 31, December 31,
2000(5) 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $___ $14.39 $13.18 $11.70 $10.00
---- ------ ------ ------ ------
Net investment income () 0.10(2) 0.10 0.10 0.15
Net realized gain and unrealized
appreciation ___ 2.97 1.63 2.52 1.55
--- ---- ---- ---- ----
Total from investment operations ___ 3.07 1.73 2.62 1.70
--- ---- ---- ---- ----
Dividends from net investment income (0.15) (0.10) (0.25) --
Distributions from net realized gain from
investment transactions ___ (2.40) (0.42) (0.89) --
--- ------ ------ ------
Total distributions ___ (2.55) (0.52) (1.14) --
--- ------ ------ ------
Net Asset Value - End of Period $___ $14.91 $14.39 $13.18 $11.70
==== ====== ====== ====== ======
Total Return ___% 23.07% 13.11% 23.57% 17.00% (3)
Ratios and Supplemental Data:
Net assets, end of period (thousands) $___ $27,492 $41,069 $52,392 $34,608
Ratio of expenses to average net assets:
Before expense reimbursement ___% 0.93% 1.02% 1.16% 1.32% (4)
After expense reimbursement ___% 0.80% 0.80% 0.80% 0.80% (4)
Ratio of net investment income to average net
assets:
Before expense reimbursement ___% 0.56% 0.49% 0.57% 0.98% (4)
After expense reimbursement ___% 0.69% 0.71% 0.93% 1.50% (4)
Portfolio turnover rate ___% 59% 45% 48% 79%
</TABLE>
(1) Commencement of Operations.
(2) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the year.
(3) Not Annualized.
(4) Annualized.
(5) Unaudited.
25
<PAGE>
<TABLE>
<CAPTION>
FIXED FIXED FIXED
BALANCED BALANCED BALANCED INCOME INCOME INCOME
FUND FUND FUND FUND FUND FUND
Six-Month Year Year Six-Month Year Year
Period Ended Ended Ended Period Ended Ended Ended
June December December June December December
30, 31, 31, 30, 31, 31,
2000(2) 1999 1998 2000(2) 1999 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value - Beginning of Period $___ $11.05 $10.00 $___ $10.25 $10.00
---- ------ ------ ---- ------ ------
Net investment income 0.22 0.22 0.52 0.54(1)
Net realized gain (loss) and
unrealized appreciation
(depreciation) ___ 1.26 1.05 ___ (0.55) 0.17
--- ---- ---- --- ------ ----
Total from investment operations ___ 1.48 1.27 ___ (0.03) 0.71
---- ---- ------ ----
Dividends from net investment income
(0.22) (0.22) (0.52) (0.46)
Distributions from net realized gain
from investment transactions ___ (0.01) -- ___ (0.01) --
--- ------ --- ------
Total distributions ___ (0.23) (0.22) ___ (0.53) (0.46)
--- ------ ------ --- ------ ------
Net Asset Value - End of Period $___ $12.30 $11.05 $___ $9.69 $10.25
==== ====== ====== ==== ===== ======
Total Return ___% 13.53% 12.84% ___% (0.34)% 7.27%
Ratios and Supplemental Data:
Net assets, end of period (thousands)
$___ $6,851 $3,639 $___ $26,016 $14,557
Ratio of expenses to average net assets:
Before expense reimbursement ___% 1.95% 4.59% ___% 0.89% 1.28%
After expense reimbursement ___% 0.80% 0.80% ___% 0.65% 0.65%
Ratio of net investment income to
average net assets:
Before expense reimbursement ___% 0.81% (1.38)% ___% 5.34% 4.66%
After expense reimbursement ___% 1.96% 2.41% ___% 5.58% 5.29%
Portfolio turnover rate ___% 47% 39% ___% 68% 82%
</TABLE>
(1) Net investment income per share represents net investment income divided by
the average shares outstanding through the year.
(2) Unaudited.
26
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL FUND INTERNATIONAL FUND INTERNATIONAL FUND
Six-Month Period Year Year
Ended Ended Ended
June 30, 2000(2) December 31, 1999 December 31, 1998
------------- ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value - Beginning of Period $___ $11.01 $10.00
---- ------ ------
Net investment income 0.00 0.04 (1)
Net realized gain (loss) and unrealized
appreciation (depreciation) ___ 4.70 0.97
--- ---- ----
Total from investment operations ___ 4.70 1.01
---- ----
Dividends from net investment income -- --
Distributions from net realized gain from
investment transactions ___ (0.27) --
------
Total distributions ___ (0.27) ____
--- ------
Net Asset Value - End of Period $___ $15.44 $11.01
==== ====== ======
Total Return ___% 42.71% 10.10%
Ratios and Supplemental Data:
Net assets, end of period (thousands) $___ $83,892 $56,985
Ratio of expenses to average net assets:
Before expense reimbursement ___% 1.52% 1.40%
After expense reimbursement ___% 1.20% 1.20%
Ratio of net investment income to average net
assets:
Before expense reimbursement ___% (0.28)% 0.34%
After expense reimbursement ___% 0.04% 0.54%
Portfolio turnover rate ___% 205% 196%
</TABLE>
(1) Net investment income per share is calculated using the ending balance of
undistributed net investment income prior to consideration of adjustments
for permanent book and tax differences.
(2) Unaudited.
27
<PAGE>
LKCM FUNDS
FOR MORE INFORMATION
YOU MAY OBTAIN THE FOLLOWING AND OTHER INFORMATION ON THE LKCM FUNDS FREE OF
CHARGE:
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The annual and semi-annual reports provide the funds' most recent financial
reports and portfolio listings. The annual report contains a discussion of the
market conditions and investment strategies that affected the funds' performance
during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED SEPTEMBER __, 2000
The SAI is incorporated into this prospectus by reference (i.e., legally made a
part of this prospectus). The SAI provides more details about the funds'
policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS OR MAKE INQUIRIES TO THE FUNDS:
BY TELEPHONE:
1-800-688-LKCM
BY MAIL:
LKCM Funds
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
ON THE INTERNET:
Text only versions of fund documents can be viewed online or downloaded from the
EDGAR database on the SEC's Internet site at: http://www.sec.gov
FROM THE SEC:
You may write to the SEC Public Reference Room at the regular mailing address or
the e-mail address below and ask them to mail you information about the funds,
including the SAI. They will charge you a fee for this duplicating service. You
can also visit the SEC Public Reference Room and copy documents while you are
there. For more information about the operation of the Public Reference Room,
call the SEC at the telephone number below.
Public Reference Section
Securities and Exchange Commission
Washington, D.C. 20549-0102
[email protected]
1-202-942-8090
Investment Company Act File # 811-8352
28
<PAGE>
LKCM FUNDS
LKCM SMALL CAP EQUITY FUND
LKCM EQUITY FUND
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
301 COMMERCE STREET, SUITE 1600
FORT WORTH, TEXAS 76102
STATEMENT OF ADDITIONAL INFORMATION
September __, 2000
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus of the LKCM Funds dated September __,
2000, as such Prospectus may be supplemented or revised from time to time. A
copy of the Prospectus may be obtained without charge by calling the LKCM Funds
at (800) 688-LKCM.
The LKCM Funds' audited financial statements for the year ended December
31, 1999 are incorporated herein by reference to the Funds' 1999 Annual Report.
A copy of the Annual Report may be obtained without charge by calling the LKCM
Funds at (800) 688-LKCM.
<PAGE>
TABLE OF CONTENTS
PAGE
FUND ORGANIZATION............................................................3
INVESTMENT LIMITATIONS.......................................................4
INVESTMENT OBJECTIVES AND POLICIES...........................................6
TRUSTEES AND OFFICERS OF THE LKCM FUNDS.....................................21
TRUSTEES AND OFFICERS OF THE MASTER TRUST...................................22
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS..................................23
INVESTMENT ADVISER..........................................................27
ADVISER TO PORTFOLIO........................................................27
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................28
CUSTODIAN...................................................................30
ADMINISTRATOR...............................................................30
TRANSFER AGENT AND DIVIDEND- DISBURSING AGENT...............................31
DISTRIBUTOR.................................................................31
DISTRIBUTION PLAN...........................................................31
CODE OF ETHICS..............................................................31
PURCHASE AND PRICING OF SHARES..............................................31
REDEMPTIONS IN KIND.........................................................33
TAXATION OF THE FUNDS.......................................................33
PERFORMANCE INFORMATION.....................................................36
AUDITORS....................................................................38
FINANCIAL STATEMENTS........................................................38
APPENDIX....................................................................39
In deciding whether to invest in the Funds, you should rely on information
in this Statement of Additional Information and the Prospectus. The Funds have
not authorized others to provide additional information in any state or
jurisdiction in which such offering may not legally be made.
<PAGE>
FUND ORGANIZATION
DESCRIPTION OF SHARES AND VOTING RIGHTS
The LKCM Funds (the "Trust") is an open-end, diversified, management
investment company commonly referred to as a mutual fund. Each Fund is a series
of the Trust, a Delaware business trust that was established by a Declaration of
Trust dated February 10, 1994. Prior to February 10, 1998 the LKCM Funds was
known as the LKCM Fund. The Declaration of Trust permits the Trustees of the
Trust to issue an unlimited number of shares of beneficial interest, without par
value, from an unlimited number of series ("Funds") of shares. Currently, the
Trust offers five series - Small Cap Equity Fund, Equity Fund, Balanced Fund,
Fixed Income Fund and International Fund. Pursuant to the Declaration of Trust,
the Trustees may also authorize the creation of additional series of shares (the
proceeds of which would be invested in separate, independently managed Funds
with distinct investment objectives and policies and share purchase, redemption
and net asset valuation procedures) with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. All
consideration received by the Trust for shares of any additional series, and all
assets in which such consideration is invested, would belong to that series and
would be subject to the liabilities related thereto.
The International Fund seeks its investment objective by investing all of
its investable assets in the TT EAFE Portfolio ("Portfolio"), a series of the TT
International U.S.A. Master Trust ("Master Trust"). The Portfolio is managed by
TT International Investment Management ("TT International").
The Trustees, in their discretion, may authorize the division of shares of
the Funds into different classes permitting shares of different classes to be
distributed by different methods. Although shareholders of different classes
would have an interest in the same Fund of assets, shareholders of different
classes may bear different expenses in connection with different methods of
distribution. The Trustees have no present intention of taking the action
necessary to effect the division of shares into separate classes nor of changing
the method of distribution of shares of the Funds.
When issued, the shares of the Funds are fully paid and non-assessable,
have no preemptive or subscription rights and are fully transferable. There are
no conversion rights. Each share of a Fund is entitled to participate equally in
dividends and capital gains distributions and in the assets of the Fund in the
event of liquidation. The shares of the Funds have non-cumulative voting rights,
which means that the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the Trustees if they choose to do so. A
shareholder is entitled to one vote for each full share held (and a fractional
vote for each fractional share held), then standing in his name on the books of
a Fund.
The Funds are not required, and do not intend, to hold regular annual
shareholder meetings. The Funds may hold special meetings for consideration of
proposals requiring shareholder approval, such as changing fundamental policies,
or upon the written request of 10% of the Trust's shares to replace their
Trustees. The Funds will assist in shareholder communication in such matters to
the extent required by law.
SHAREHOLDER AND TRUSTEE LIABILITY
The Trust's Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust and requires that
notice of such disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Trust or the Trustees, but this disclaimer may
not be effective in some jurisdictions or as to certain types of claims. The
Declaration of Trust further provides for indemnification out of the Trust's
property of any shareholder held personally liable for the obligations of the
Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim made against any shareholder for any
act or obligation of the Trust and satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
3
<PAGE>
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of the
office.
INVESTMENT LIMITATIONS
FOR ALL FUNDS
In addition to the Funds' investment objectives as set forth in the
Prospectus, the Funds are subject to the following restrictions, which are
fundamental policies and may not be changed without the approval of a majority
of a Fund's outstanding voting securities. As used herein, a "majority of a
Fund's outstanding voting securities" means the lesser of: (1) at least 67% of
the voting securities of a Fund present at a meeting if the holders of more than
50% of the outstanding voting securities of the Fund are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of a Fund.
As a matter of fundamental policy, each Fund will not:
(1) invest in physical commodities or contracts on physical
commodities;
(2) purchase or sell real estate, although it may purchase and sell
securities of companies that deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities that
are secured by interests in real estate;
(3) make loans except: (i) by purchasing debt securities in accordance
with its investment objective and policies or entering into repurchase
agreements; or (ii) with respect to the Small Cap Equity, Balanced, Fixed
Income and International Funds, by lending their portfolio securities to
banks, brokers, dealers and other financial institutions, so long as such
loans are not inconsistent with the Investment Company Act of 1940, as
amended (the "1940 Act"), or the rules and regulations or interpretations
of the SEC thereunder;
(4) with respect to 75% of its assets, purchase more than 10% of any class
of the outstanding voting securities of any issuer;
(5) with respect to 75% of its assets, invest more than 5% of its total
assets in the securities of any single issuer (other than obligations
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities);
(6) borrow money, except (i) from banks and as a temporary measure for
extraordinary or emergency purposes (not for leveraging or investment) or
(ii) with respect to the Small Cap Equity, Balanced, Fixed Income and
International Funds in connection with reverse repurchase agreements
provided that (i) and (ii) in combination do not exceed 33 1/3% of the
Fund's total assets (including the amount borrowed) less liabilities
(exclusive of borrowings); and the Small Cap Equity and Equity Funds
cannot buy additional securities if they borrow more than 5% of their
total assets;
(7) underwrite the securities of other issuers (except to the extent that
the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933, as amended (the "Securities Act") in the
disposition of restricted securities);
(8) acquire any securities of companies within one industry if, as a
result of such acquisition, more than 25% of the Fund's total assets would
be invested in securities of companies within such industry; provided,
however, that there shall be no limitation on the purchase of obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and
4
<PAGE>
(9) 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.
The Funds are also subject to the following restrictions, which are
non-fundamental policies and may be changed by the Board of Trustees without
shareholder approval. As a matter of non-fundamental policy, each Fund will not:
(a) purchase securities on margin, except for use of short-term credit as
may be necessary for the clearance of purchases and sales of securities,
but it may make margin deposits in connection with transactions in
options, futures, and options on futures; or sell securities short unless,
by virtue of its ownership of other securities, it has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions.
Transactions in futures contracts, options and options on futures are not
deemed to constitute selling securities short;
(b) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 33 1/3% of its total assets at fair market value;
(c) invest more than an aggregate of 15% of the net assets of the Small
Cap Equity, Balanced, Fixed Income and International Funds or an aggregate
of 7% of the net assets of the Equity Fund in securities deemed to be
illiquid, including securities which are not readily marketable, the
disposition of which is restricted (excluding securities that are not
registered under the Securities Act but which can be sold to qualified
institutional investors in accordance with Rule 144A under the Securities
Act and commercial paper sold in reliance on Section 4(2) of the
Securities Act), repurchase agreements having maturities of more than
seven days and certain over-the-counter options ("OTC Options");
(d) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions
or in connection with mergers, acquisitions of assets or consolidations
and except as may otherwise be permitted by the 1940 Act; and
(e) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
With the exception of fundamental investment limitation (6), if a
percentage limitation on the investment or utilization of assets as set forth
above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of a Fund's assets
will not require the sale of securities.
FOR THE INTERNATIONAL FUND
The International Fund has the following additional fundamental investment
policy that enables it to invest all of its investable assets in the Portfolio:
Notwithstanding any other limitation, the International Fund may invest
all of its investable assets in an open-end management investment company
with a substantially identical investment objective and substantially
similar investment policies as the fund. For this purpose, "all of the
fund's investable assets" means that the only investment securities that
will be held by the fund will be the fund's interest in the investment
company.
All other fundamental investment policies and the non-fundamental policies
of the International Fund discussed above and those of the Portfolio are
identical. Therefore, although the policies described for all funds above
discuss the investment policies of the International Fund and the Trust, they
apply equally to the Portfolio.
Whenever the International Fund is requested to vote on a change in the
investment restrictions of the Portfolio, the fund will hold a meeting of its
shareholders and will cast its votes as instructed by its shareholders. The
5
<PAGE>
percentage of the fund's votes representing the fund's shareholders not voting
will be voted by the Board in the same proportion as those fund shareholders who
do, in fact, vote.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of the Funds are described in
detail in the Prospectus under the captions "Investment Objectives" and "How the
Funds Invest." Additional information about those policies is provided below.
EQUITY SECURITIES
The equity securities in which the Funds may invest include common stocks,
preferred stocks, warrants and rights, and debt securities convertible into or
exchangeable for common stock or other equity securities.
PREFERRED STOCK. Preferred stock offers a stated dividend rate payable
from the corporation's earnings. These preferred stock dividends may be
cumulative or non-cumulative, participating, or auction rate. If interest rates
rise, the fixed dividend on preferred stocks may be less attractive, causing the
price of preferred stocks to decline. Preferred stock may have mandatory sinking
fund provisions, as well as call/redemption provisions prior to maturity, a
negative feature when interest rates decline. The rights of preferred stocks are
generally subordinate to rights associated with a corporation's debt securities.
Dividends on some preferred stock may be "cumulative" if stated dividends from
prior periods have not been paid. Preferred stock also generally has a
preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks are generally subordinate to
rights associated with a corporation's debt securities.
WARRANTS AND RIGHTS. Warrants are options to purchase equity securities at
specific prices valid for a specific period of time. Their prices do not
necessarily move parallel to the prices of the underlying securities. Rights are
similar to warrants but normally have a short duration and are distributed by
the issuer to its shareholders. Warrants and rights have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note
or other security that entitles the holder to acquire common stock or other
equity securities of the same or a different issuer. A convertible security
generally entitles the holder to receive interest paid or accrued until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities have characteristics similar to
nonconvertible debt securities. Convertible securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk that the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security. A convertible
security may be subject to redemption at the option of the issuer at a
predetermined price. If a convertible security held by a Fund is called for
redemption, the Fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock, or would sell the
convertible security to a third party.
SECURITIES SUBJECT TO REORGANIZATION. The Funds may invest in equity
securities for which a tender or exchange offer has been made or announced and
in securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of Luther King
Capital Management Corporation, the investment adviser to the Funds (the
"Adviser"), there is a reasonable prospect of capital appreciation significantly
greater than the brokerage and other transaction expenses involved. Generally,
securities which are the subject of such an offer or proposal sell at a premium
to their historic market price immediately prior to the announcement of the
offer or may also discount what the stated or appraised value of the security
would be if the contemplated transaction were approved or consummated. Such
investments may be advantageous when the discount significantly overstates the
risk of the contingencies involved, significantly undervalues the securities,
assets or cash to be received by shareholders of the target company as a result
of the contemplated transaction, or fails adequately to recognize the
possibility that the offer or proposal may be replaced or superseded by an offer
6
<PAGE>
or proposal of greater value. The evaluation of such contingencies requires
broad knowledge and experience on the part of the Adviser which must appraise
not only the value of the issuer and its component businesses as well as the
assets or securities to be received as a result of the contemplated transaction
but also the financial resources and business motivation of the offeror and the
dynamics and business climate when the offer or proposal is in process. Since
such investments are ordinarily short-term in nature, they will tend to increase
the turnover ratio of a Fund thereby increasing its brokerage and other
transaction expenses. The Adviser intends to select investments of the type
described which, in its view, have a reasonable prospect of capital appreciation
which is significant in relation to both the risk involved and the potential of
available alternate investments.
FOREIGN SECURITIES
The Funds may invest in securities of foreign issuers. The Balanced Fund
may invest up to 10% of its total assets in foreign securities. Investing in
foreign issuers involves certain special considerations that 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 that could affect
U.S. investments in those countries. Although the Funds will endeavor to achieve
most favorable execution costs in their portfolio transactions, fixed
commissions on many foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. In addition, it is expected that the expenses for
custodian arrangements of the Funds' foreign securities will be somewhat greater
than the expenses for the custodian arrangements for handling the U.S.
securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income paid by citizens or corporations operating therein to investors
in other countries. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the holdings of the Funds.
However, these foreign withholding taxes are not expected to have a significant
impact on the Funds.
AMERICAN DEPOSITORY RECEIPTS ("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.
FIXED-INCOME SECURITIES
The fixed-income securities in which the Balanced and Fixed Income Funds
may invest include U.S. Government securities, corporate debt, mortgage-backed
securities and asset-backed securities. The Fixed Income Fund invests at least
65% of its total assets in these types of securities under normal market
conditions. The fixed-income securities in which the Small Cap Equity, Equity
and International Funds may invest include U.S. Government securities and
corporate debt securities.
7
<PAGE>
RATINGS. The International Fund and Equity Fund each limit investments in
fixed-income securities to those that are rated at the time of purchase as
investment grade by a NRSRO, such as Standard & Poor's ("S&P") or Moody's
Investor Services Inc. ("Moody's"), or, if unrated, are determined to be of
equivalent quality by the Adviser or TT International. Investment grade
fixed-income securities include:
o U.S. government securities;
o Bonds or bank obligations rated in one of the four highest
categories (such as BBB or higher by S&P);
o Short-term notes rated in one of the two highest categories (such as
SP-2 or higher by S&P);
o Commercial paper or short-term bank obligations rated in one of the
three highest categories (such as A-3 or higher by S&P); and
o Repurchase agreements involving investment grade fixed-income
securities.
Investment grade fixed-income securities are generally believed to have a
lower degree of credit risk. However, certain investment grade securities with
lower ratings are considered medium quality and may be subject to greater credit
risk than the highest rated securities. If a security's rating falls below that
required at the time of purchase, the Adviser or TT International 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.
U.S. GOVERNMENT SECURITIES. U.S. Government agencies or
instrumentalities that issue or guarantee securities include, but are not
limited to, the Fannie Mae, Government National Mortgage Association
("GNMA"), Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Tennessee
Valley Authority, Inter-American Development Bank, Asian Development Bank,
Student Loan Marketing Association ("SLMA") and the International Bank for
Reconstruction and Development.
Except for U.S. Treasury securities, obligations of U.S. Government
agencies and instrumentalities may or may not be supported by the full faith and
credit of the United States. Some are backed by the right of the issuer to
borrow from the Treasury; others by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others, such as
the SLMA, are supported only by the credit of the instrumentality. In the case
of securities not backed by the full faith and credit of the United States, the
investor must look principally to the agency or instrumentality issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States itself in the event the agency or
instrumentality does not meet its commitment. Each Fund will invest in
securities of such agencies or instrumentalities only when the Adviser is
satisfied that the credit risk is acceptable.
The Funds may invest in component parts of U.S. Treasury notes or bonds,
namely either the corpus (principal) of such Treasury obligations or one of the
interest payments scheduled to be paid on such obligations. These obligations
may take the form of: (1) Treasury obligations from which the interest coupons
have been stripped; (2) the interest coupons that are stripped; (3) book-entries
at a Federal Reserve member bank representing ownership of Treasury obligation
components; or (4) receipts evidencing the component parts (corpus or coupons)
of Treasury obligations that have not actually been stripped. Such receipts
evidence ownership of component parts of Treasury obligations (corpus or
coupons) purchased by a third party (typically an investment banking firm) and
held on behalf of the third party in physical or book-entry form by a major
commercial bank or trust company pursuant to a custody agreement with the third
party. These custodial receipts are known by various names, including "Treasury
Receipts," "Treasury Investment Growth Receipts" ("TIGRs") and "Certificates of
Accrual on Treasury Securities" ("CATs"), and are not issued by the U.S.
Treasury; therefore they are not U.S. Government securities, although the
underlying bonds represented by these receipts are debt obligations of the U.S.
Treasury.
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NON-INVESTMENT GRADE DEBT SECURITIES. The Small Cap Equity, Balanced and
Fixed Income Funds' assets each may be invested in non-investment grade debt
securities. The Small Cap Equity Fund and Balanced Fund each may invest up to 5%
of the respective Fund's assets in non-investment grade debt securities. The
market values of these securities tend to be less sensitive to changes in
prevailing interest rates than high-quality securities, but more sensitive to
individual corporate developments than higher-quality securities. Such
securities also tend to be more sensitive to economic conditions than are
higher-quality securities. Accordingly, these securities are considered
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher-quality
categories.
Even securities rated Baa or BBB by Moody's and S&P, respectively, which
ratings are considered investment grade, possess some speculative
characteristics. There are risks involved in applying credit ratings as a method
for evaluating high yield obligations in that credit ratings evaluate the safety
of principal and interest payments, not market value risk. In addition, credit
rating agencies may not change credit ratings on a timely basis to reflect
changes in economic or company conditions that affect a security's market value.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case for
higher grade bonds.
The Funds will rely on the judgment, analysis and experience of the
Adviser or TT International, the adviser to the Portfolio, in evaluating the
creditworthiness of an issuer. In this evaluation, the Adviser or TT
International, as applicable, will take into consideration, among other things,
the issuer's financial resources and ability to cover its interest and fixed
charges, factors relating to the issuer's industry and its sensitivity to
economic conditions and trends, its operating history, the quality of the
issuer's management and regulatory matters.
The risk of loss due to default by the issuer is significantly greater for
the holders of lower quality securities because such securities are generally
unsecured and are often subordinated to other obligations of the issuer. During
an economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of lower quality securities may experience financial stress
and may not have sufficient revenues to meet their interest payment obligations.
An issuer's ability to service its debt obligations may also be adversely
affected by specific corporate developments, its inability to meet specific
projected business forecasts, or the unavailability of additional financing.
Factors adversely affecting the market value of securities will adversely
affect a Fund's net asset value. In addition, a Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal of or interest on its portfolio holdings.
The secondary trading market for lower-quality fixed-income securities is
generally not as liquid as the secondary market for higher-quality securities
and is very thin for some securities. The relative lack of an active secondary
market may have an adverse impact on market price and a Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The relative lack of an active secondary market
for certain securities may also make it more difficult for the Fund to obtain
accurate market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. During such times, the responsibility of the Trust's
Board of Trustees or its Adviser to value the securities becomes more difficult
and judgment plays a greater role in valuation because there is less reliable,
objective data available.
CORPORATE DEBT SECURITIES. A Fund's investments in U.S. dollar or foreign
currency-denominated corporate debt securities of domestic or foreign issuers
are limited to investment grade corporate debt securities (corporate bonds,
debentures, notes and other similar corporate debt instruments); provided,
however, that the Small Cap Equity Fund and the Balanced Fund may each invest up
to 5% of its total assets in non-investment grade securities. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
MORTGAGE-RELATED SECURITIES. The Balanced and Fixed Income Funds may
invest in residential or commercial mortgage-related securities, including
mortgage pass-through securities, collateralized mortgage obligations ("CMO"),
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adjustable rate mortgage securities, CMO residuals, stripped mortgage-related
securities, floating and inverse floating rate securities and tiered index
bonds.
MORTGAGE PASS-THROUGH SECURITIES. Mortgage pass-through securities
represent interests in pools of mortgages in which payments of both principal
and interest on the securities are generally made monthly, in effect "passing
through" monthly payments made by borrowers in the residential or commercial
mortgage loans which underlie the securities (net of any fees paid to the issuer
or guarantor of the securities). Mortgage pass-through securities differ from
other forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to the sale of underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also, if
a security subject to repayment has been purchased at a premium, in the event of
prepayment, the value of the premium would be lost.
There are currently three types of mortgage pass-through securities: (1)
those issued by the U.S. Government or one of its agencies or instrumentalities,
such as GNMA, FNMA, and FHLMC; (2) those issued by private issuers that
represent an interest in or are collateralized by pass-through securities issued
or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (3) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but usually having some form of
private credit enhancement.
GNMA is authorized to guarantee, with the full faith and credit of the
U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage banks), and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Obligations of FNMA and FHLMC are not backed by the full faith and credit
of the U.S. Government. In the case of obligations not backed by the full faith
and credit of the U.S. Government, the Fund must look principally to the agency
issuing or guaranteeing the obligation for ultimate repayment. FNMA and FHLMC
may borrow from the U.S. Treasury to meet their obligations, but the U.S.
Treasury is under no obligation to lend to FNMA or FHLMC.
Private mortgage pass-through securities are structured similarly to GNMA,
FNMA, and FHLMC mortgage pass-through securities and are issued by originators
of and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the private pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or insured by governmental
entities, private insurers and the mortgage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS. CMOs are debt obligations
collateralized by residential or commercial mortgage loans or residential or
commercial mortgage pass-through securities. Interest and prepaid principal are
generally paid monthly. CMOs may be collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. The issuer of a
series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC"). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral, which is ordinarily unrelated to the stated
maturity date. CMOs often provide for a modified form of call protection through
a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the
pool of underlying mortgages, including prepayments, is first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been
retired. An investor may be partially protected against a sooner than desired
return of principal because of the sequential payments.
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The Balanced and Fixed Income Funds may also invest in, among other
things, parallel pay CMOs, Planned Amortization Class CMOs ("PAC bonds"),
sequential pay CMOs and floating rate CMOs. Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. PAC
bonds generally require payments of a specified amount of principal on each
payment date. Sequential pay CMOs generally pay principal to only one class
while paying interest to several classes. Floating rate CMOs are securities
whose coupon rate fluctuates according to some formula related to an existing
marketing index or rate. Typical indices would include the eleventh district
cost-of-funds index ("COFI"), the London Interbank Offered Rate ("LIBOR"),
one-year U.S. Treasury yields, and ten-year U.S. Treasury yields.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMs") are pass-through securities collateralized by mortgages with adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six, or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
The ARMs contain maximum and minimum rates beyond which the mortgage
interest rate may not vary over the lifetime of the security. In addition,
certain ARMs provide for additional limitations on the maximum amount by which
the mortgage interest rate may adjust for any single adjustment period. In the
event that market rates of interest rise to levels above that of the ARMs
maximum rate, the ARM's coupon may represent a below market rate of interest. In
these circumstances, the market value of the ARM security will likely fall.
Certain ARMs contain limitations on changes in the required monthly
payment. In the event that a monthly payment is not sufficient to pay the
interest accruing on an ARM, any such excess interest is added to the principal
balance of the mortgage loan, which is repaid through future monthly payments.
If the monthly payment for such an instrument exceeds the sum of the interest
accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the
remaining term of the loan, the excess is then utilized to reduce the
outstanding principal balance of the ARM.
CMO RESIDUALS. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayments experience on the mortgage assets.
In part, the yield to maturity on the CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-related securities. See
"Stripped Mortgage-Related Securities" below. In addition, if a series of a CMO
included a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-related securities, in certain
circumstances a Fund may fail to recoup fully its initial investment in a CMO
residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has recently developed and CMO residuals currently may not have
the liquidity of other more established securities trading in other markets.
Transactions in CMO residuals are generally completed only after careful review
of the characteristics of the securities in question. In addition, CMO residuals
may or, pursuant to an exemption therefrom, may not have been registered under
the Securities. CMO residuals, whether or not registered under the Securities
Act, may be subject to certain restrictions on transferability, and may
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therefore be deemed "illiquid" and subject to Funds' limitations on investment
in illiquid securities as discussed herein.
STRIPPED MORTGAGE-RELATED SECURITIES. Stripped mortgage-related securities
("SMRS") are derivative multi-class mortgage securities. SMRS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks, and special purpose entities
of the foregoing.
SMRS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMRS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the PO class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on a Fund's yield
to maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rated categories of investment-grade securities.
Although SMRS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently introduced. As a result, established trading markets have not
yet been fully developed and accordingly, these securities may be deemed
"illiquid" and subject to the Funds' limitations on investment in illiquid
securities as discussed herein.
INVERSE FLOATERS. An inverse floater is a debt instrument with a floating
or variable interest rate that moves in the opposite direction to the interest
rate on another security or index level. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. Inverse floaters may
experience gains when interest rates fall and may suffer losses in periods of
rising interest rates. The market for inverse floaters is relatively new.
TIERED INDEX BONDS. Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to
a specified index or market rate. So long as this index or market rate is below
a predetermined "strike" rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the
"strike" rate, the interest rate of the tiered index bond will decrease. Thus,
under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest
rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.
ASSET-BACKED SECURITIES. The Balanced and Fixed Income Funds may invest in
various types of asset-backed securities. Through the use of trusts and special
purpose corporations, various types of assets, primarily automobile and credit
card receivables and home equity loans, are being securitized in pass-through
structures similar to the mortgage pass-through CMO structure. Investments in
these and other types of asset-backed securities must be consistent with the
investment objectives and policies of the Funds.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-RELATED AND ASSET-BACKED
SECURITIES. The yield characteristics of mortgage-related and asset-backed
securities differ from traditional debt securities. Among the major differences
are that interest and principal payments are made more frequently, usually
monthly, and that principal may be prepaid at any time because the underlying
mortgage loans or other assets generally may be prepaid at any time. As a
result, if a Fund purchases such a security at a premium, a prepayment rate that
is faster than expected will reduce yield to maturity, while a prepayment rate
that is slower than expected will have the opposite effect of increasing yield
to maturity. Alternatively, if the Fund purchases these securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity. The Adviser will seek to
manage these risks (and potential benefits) by diversifying its investments in
such securities and through hedging techniques.
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During periods of declining interest rates, prepayment of mortgage-related
securities can be expected to accelerate. Accordingly, a Fund's ability to
maintain positions in higher-yielding mortgage-related securities will be
affected by reductions in the principal amount of such securities resulting from
such prepayments, and its ability to reinvest the returns of principal at
comparable yields is subject to generally prevailing interest rates at that
time. Conversely, slower than expected prepayments may effectively change a
security that was considered short or intermediate-term at the time of purchase
into a long-term security. Long-term securities tend to fluctuate more in
response to interest rate changes, leading to increased net asset value
volatility. Prepayments may also result in the realization of capital losses
with respect to higher yielding securities that had been bought at a premium or
the loss of opportunity to realize capital gains in the future from possible
future appreciation.
Asset-backed securities involve certain risks that are not posed by
mortgage-related securities, resulting mainly from the fact that asset-backed
securities do not usually contain the benefit of a security interest in the
related collateral. For example, credit card receivables generally are unsecured
and the debtors are entitled to the protection of a number of state and federal
consumer credit laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payment on these securities.
TEMPORARY INVESTMENTS
The temporary investments that the Funds may make include:
(1) Time deposits, certificates of deposit (including marketable variable
rate certificates of deposit) and bankers' acceptances issued by a
commercial bank or savings and loan association. Time deposits are
non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits maturing
in more than seven days will not be purchased by the Funds. Certificates
of deposit are negotiable short-term obligations issued by commercial
banks or savings and loan associations against funds deposited in the
issuing institution. Variable rate certificates of deposit are
certificates of deposit on which the interest rate is periodically
adjusted prior to their stated maturity based upon a specified market
rate. A bankers' acceptance is a time draft drawn on a commercial bank by
a borrower usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods).
The Small Cap Equity Fund may invest in obligations of U.S. banks, foreign
branches of U.S. banks (Eurodollars), and U.S. branches of foreign banks
(Yankee dollars). Euro and Yankee dollar investments will involve the same
risks of investing in international securities that are discussed under
"Investment Objective and Policies-Foreign Securities." Although the
Adviser carefully considers these factors when making investments, the
Small Cap Equity Fund does not limit the amount of its assets which can be
invested in any one type of instrument or in any foreign country in which
a branch of a U.S. bank or the parent of a U.S. branch is located.
The Funds will not invest in any security issued by a commercial bank
unless (i) the bank has total assets of at least $1 billion, or the
equivalent in other currencies, or, in the case of domestic banks which do
not have total assets of at least $1 billion, the aggregate investment
made in any one such bank is limited to $100,000 and the principal amount
of such investment is insured in full by the Federal Deposit Insurance
Corporation and (ii) in the case of U.S. banks, it is a member of the
Federal Deposit Insurance Corporation.
(2) Commercial paper which at the time of purchase is rated in the highest
rating category by a Nationally Recognized Statistical Rating Organization
("NRSRO") or, if not rated, issued by a corporation having an outstanding
unsecured debt issue that meets such rating requirement at time of
purchase;
(3) Short-term corporate obligations rated in the highest rating
category by a NRSRO at time of purchase;
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(4) U.S. Government obligations, including bills, notes, bonds and
other debt securities issued by the U.S. Treasury. These are direct
obligations of the U.S. Government and differ mainly in interest rates,
maturities and dates of issue;
(5) U.S. Government agency securities issued or guaranteed by U.S.
Government sponsored instrumentalities and Federal agencies. These
include securities issued by the Federal Home Loan Banks, Federal Land
Bank, Farmers Home Administration, Farm Credit Banks, Federal
Intermediate Credit Bank, Fannie Mae, Federal Financing Bank, the
Tennessee Valley Authority, and others; and
(6) Repurchase agreements collateralized by those securities listed
above.
ZERO-COUPON SECURITIES
The Balanced and Fixed Income Funds may invest in zero-coupon securities.
These securities are debt securities that do not make regular cash interest
payments. Zero-coupon securities are sold at a deep discount to their face
value. Because these securities do not pay current cash income, their price can
be volatile when interest rates fluctuate. While these securities do not pay
current cash income, federal income tax law requires the holders of them to
include in income each year the portion of the original issue discount (or
deemed discount) on the securities accruing that year. 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 that discount and may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, 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 Trust. In a repurchase agreement, a Fund buys a security from a seller that
has agreed to repurchase it at a mutually agreed upon date and price, reflecting
the interest rate effective for the term of the agreement. The term of these
agreements is usually from overnight to one week and never exceeds one year. A
repurchase agreement may be viewed as a fully collateralized loan of money by a
Fund to the seller. The Funds always receive securities as collateral with a
market value at least equal to the purchase price, including accrued interest,
and this value is maintained during the term of the agreement. If the seller
defaults and the collateral value declines, the Funds might incur a loss. If
bankruptcy proceedings are commenced with respect to the seller, the Funds'
realization upon the collateral may be delayed or limited.
REVERSE REPURCHASE AGREEMENTS
The Small Cap Equity, Balanced, Fixed Income and International 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 agrees to repurchase it at a mutually
agreed upon date and price, reflecting the interest rate effective for the term
of the agreement. It may also be viewed as the borrowing of money by the Fund.
The Funds' investment of the proceeds of a reverse repurchase agreement is the
speculative factor known as leverage. The Funds may enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is greater than the interest expense of the transaction and the proceeds are
invested for a period no longer than the term of the agreement.
WHEN-ISSUED SECURITIES
The Small Cap Equity, Balanced, Fixed Income and International Funds may
purchase securities on a "when-issued" basis. In buying "when-issued"
securities, a Fund commits to buy securities at a certain price even though the
securities may not be delivered for up to 120 days. No payment or delivery is
made by the Fund in a "when-issued" transaction until the Fund receives payment
or delivery from the other party to the transaction. Although the Fund receives
no income from the above-described securities prior to delivery, the market
value of such securities is still subject to change. As a consequence, it is
possible that the market price of the securities at the time of delivery may be
higher or lower than the purchase price.
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DERIVATIVE INSTRUMENTS
In pursuing their respective investment objectives, the Small Cap Equity,
Balanced, Fixed Income and International Funds may purchase and sell (write)
options on securities, securities indices, and foreign currencies and enter into
interest rate, foreign currency and index futures contracts and purchase and
sell options on such futures contracts and enter into forward foreign currency
exchange contracts for hedging purposes.
OPTIONS. An option is a legal contract that gives the holder the right to
buy or sell a specified amount of the underlying instrument at a fixed or
determinable price upon the exercise of the option. A call option conveys the
right to buy, in return for a premium paid, and a put option conveys the right,
in return for a premium, to sell a specified quantity of the underlying
instrument. Options on indices are settled in cash and gain or loss depends on
changes in the index in question rather than on price movement in individual
securities.
There are certain risks associated with transactions in options on
securities and on indices. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when, and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
foregoes, during the life of the option, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund, the Fund would
not be able to close out the option. If restrictions on exercise were imposed,
the Fund might be unable to exercise an option it had purchased. Except to the
extent that a call option on an index written by the Fund is covered by an
option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.
Each Fund is authorized to purchase and sell OTC Options in addition to
exchange listed options. OTC Options are purchased from or sold to securities
dealers, financial institutions or other parties ("Counterparties") through
direct bilateral agreement with the Counterparty. In contrast to exchange listed
options, which generally have standardized terms and performance mechanics, all
the terms of an OTC Option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are set by negotiation between
the parties. A Fund will only sell OTC Options that are subject to a buy-back
provision permitting the Fund to require the Counterparty to sell the option
back to the Fund at a formula price within seven days. The Funds expect
generally to enter into OTC Options that have cash settlement provisions,
although they are not required to do so.
There is no central clearing or guaranty function in an OTC Option. As a
result, if the Counterparty fails to make or take delivery of the security,
currency or other instrument underlying an OTC Option it has entered into with a
Fund or fails to make a cash settlement payment due in accordance with the terms
of the option, the Fund will lose any premium it paid for the option as well as
any anticipated benefit of the transaction. Accordingly, the Adviser must assess
the creditworthiness of each such Counterparty or any guarantor of credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC Option will be satisfied. The Funds will engage in OTC Option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of "A-1" from S&P's or "P-1" from Moody's or an equivalent rating from
any other NRSRO.
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OPTIONS ON FOREIGN CURRENCIES. The Funds may purchase and write options on
foreign currencies for hedging purposes. For example, a decline in the dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in the
value of portfolio securities, a Fund may purchase put options on the foreign
currency. If the value of the currency does decline, the Fund will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise
would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options on the currency
involved. The purchase of such options could offset, at least partially, the
effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Fund deriving from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Fund could sustain
losses on transactions in foreign currency options which would require it to
forego a portion or all of the benefits of advantageous changes in such rates.
The Funds may write options on foreign currencies for the same types of
hedging purposes. For example, where a Fund anticipates a decline in the dollar
value of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the anticipated decline occurs, the option will
most likely not be exercised, and the diminution in value of portfolio
securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to hedge such
increased cost up to the amount of the premium. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if exchange rates move
in the expected direction. If this does not occur, the option may be exercised
and the Fund would be required to purchase or sell the underlying currency at a
loss, which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Fund also may be required to forego all or a
portion of the benefits that might otherwise have been obtained from favorable
movements in exchange rates.
The Funds may write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by the Funds'
custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is maintained by the Fund in cash, or liquid assets in
a segregated account with the custodian.
The Funds also may write call options on foreign currencies for
cross-hedging purposes. A call option on a foreign currency is for cross-hedging
purposes if it is designed to provide a hedge against a decline in the U.S.
dollar value of a security which the Fund owns or has the right to acquire and
which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, the Fund will collateralize
the option by maintaining in a segregated account with the custodian, cash or
liquid assets in an amount not less than the value of the underlying foreign
currency in U.S. dollars marked-to-market daily.
FUTURES CONTRACTS. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific
security, currency or index at a specified future time and at a specified price.
Futures contracts, which are standardized as to maturity date and underlying
financial instrument, are traded on national futures exchanges. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission ("CFTC").
16
<PAGE>
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currency, in most cases the contracts
are closed out before the settlement date without the making or taking of
delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold. Futures contracts on indices are settled in cash.
Futures traders are required to make a good faith margin deposit in cash
or acceptable securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying securities)
if it is not terminated prior to the specified delivery date. Initial margin
requirements are established by the futures exchange and may be changed. Brokers
may establish deposit requirements that are higher than the exchange minimums.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required variation margin, resulting in a
repayment of excess variation margin to the contract holder. Variation margin
payments are made to and from the futures broker for as long as the contract
remains open.
Regulations of the CFTC applicable to the Funds require that they use
futures contracts and options on futures contracts only for bona fide hedging
purposes, or to the extent that a Fund's futures and options on futures
positions are for other than bona fide hedging purposes, as described by the
CFTC, the aggregate initial margins and premiums required to establish such
non-bona fide hedging positions other than the "in-the-money" amount in the case
of options that are "in-the-money" at the time of purchase, may not exceed 5% of
the Fund's net assets. Adherence to these guidelines does not limit a Fund's
risk to 5% of the Fund's assets. A Fund will only sell futures contracts to
protect securities owned by it against price declines or purchase contracts to
protect against an increase in the price of securities it intends to purchase.
As evidence of this hedging intent, the Funds expect that approximately 75% of
the futures contracts purchased will be "completed;" that is, equivalent amounts
of related securities will have been purchased or in the process of being
purchased by a Fund upon sale of open futures contracts. Although techniques
other than the sale and purchase of futures contracts could be used to control a
Fund's exposure to market fluctuations, the use of futures contracts may be a
more effective means of hedging this exposure. While the Funds will incur
commission expenses in both opening and closing out futures positions, these
costs may be lower than transaction costs incurred in the purchase and sale of
the underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract ("Forward Contract") is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders, usually large commercial banks, and their
customers. The Funds may use Forward Contracts to manage currency risks and to
facilitate transactions in foreign securities. The following discussion
summarizes the principal currency management strategies involving Forward
Contracts that the Funds may use.
In connection with purchases and sales of securities denominated in
foreign currencies, the Funds may enter into Forward Contracts to fix a definite
price for the purchase or sale in advance of the trade's settlement date
("transaction hedge" or "settlement hedge").
The Funds may also use Forward Contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example, if a
Fund owned securities denominated in pounds sterling, it could enter into a
forward contract to sell pounds sterling in return for U.S. dollars to hedge
against possible declines in the pound's value ("position hedge"). A position
hedge would tend to offset both positive and negative currency fluctuations, but
would not offset changes in security values caused by other factors. The Fund
could also hedge the position by selling another currency expected to perform
similarly to the pound sterling ("proxy hedge"). A proxy hedge could offer
advantages in terms of cost, yield or efficiency, but generally would not hedge
currency exposure as effectively as a simple hedge into U. S. dollars. Proxy
hedges may result in losses if the currency used to hedge does not perform
similarly to the currency in which the hedged securities are denominated.
17
<PAGE>
The Funds' custodian will place cash or other liquid assets in a separate
account having a value equal to the aggregate amount of the Funds' commitments
under Forward Contracts entered into with respect to position hedges and
proxy-hedges. If the value of the assets placed in a segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will equal the amount of the Funds'
commitments with respect to such contracts. Alternatively, a Fund may purchase a
call option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the Forward Contract
price or a Fund may purchase a put option permitting the Fund to sell the amount
of foreign currency subject to a forward purchase contract at a price as high or
higher than the Forward Contract price. Unanticipated changes in currency prices
may result in poorer overall performance for the Funds than if they had not
entered into such contracts.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an exchange that provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on a Fund's ability to effectively hedge. The Funds will minimize
the risk that they will be unable to close out a futures contract by only
entering into futures which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures trading. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to a Fund. For example, if at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract.
Utilization of futures transactions by the Funds involves the risk of
imperfect or no correlation where the securities underlying futures contracts
are different than the portfolio securities being hedged. It is also possible
that a Fund could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
a Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or option on a futures contract.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract and options prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract or option on
a future contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
and options prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
RISKS OF OPTIONS ON FUTURES, FORWARD CONTRACTS, AND OPTIONS ON FOREIGN
CURRENCIES. Options on currencies may be traded over-the-counter and forward
currency contracts are always traded in the over-the-counter market. In an
over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchase of an option
cannot lose more than the amount of the premium plus related transaction costs,
this entire amount could be lost. When a Fund enters into a forward currency
18
<PAGE>
contract or purchases an over-the-counter option, it relies on its counterparty
to perform. Failure by the counterparty to do so would result in the loss of any
expected benefit of the transaction.
Futures contracts, options on futures contracts, Forward Contracts, and
options on foreign currencies may be traded on foreign exchanges. Such
transactions are subject to the risk of governmental actions affecting trading
in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. The purchase and sale of
exchange-traded foreign currency options, however, is subject to the risks of
the availability of a liquid secondary market described above, as well as the
risks regarding adverse market movements, margining of options written, the
nature of the foreign currency market, possible intervention by governmental
authorities and the effect of other political and economic events. In addition,
exchange-traded options of foreign currencies involve certain risks not
presented by the over-the-counter market. For example, exercise and settlement
of such options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
COMBINED TRANSACTIONS. The Funds may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
foreign currency transactions (including Forward Contracts) and any combination
of futures, options, and foreign currency transactions, instead of a single
transaction, as part of a single hedging strategy when, in the opinion of the
Adviser or TT International, as applicable, it is in the best interest of the
Funds to do so. A combined transaction, while part of a single hedging strategy,
may contain elements of risk that are present in each of its component
transactions.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Funds will comply
with guidelines established by the SEC with respect to coverage of options,
futures and forward contracts strategies by mutual funds, and if the guidelines
so require will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account cannot
be sold while the futures, option or forward contract strategy is outstanding,
unless they are replaced with other suitable assets. Consequently, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
ILLIQUID INVESTMENTS, RESTRICTED SECURITIES AND PRIVATE PLACEMENT OFFERINGS
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be
sold or disposed of within seven days in the ordinary course of business at
approximately the prices at which they are valued. Under the supervision of the
Board of Trustees, the Adviser or TT International, as applicable, determines
the liquidity of a Fund's investments and, through reports from the Adviser or
TT International, as applicable, and the Funds' administrator, the Board
monitors investments in illiquid securities. In determining the liquidity of the
Funds' investments, the Adviser or TT International, as applicable, may consider
various factors, including the frequency of trades and quotations, the number of
dealers and prospective purchasers in the marketplace, dealer undertakings to
make a market, the nature of the security, and the nature of the marketplace for
trades. Investments currently considered by the Funds to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, certain over-the-counter options, and restricted
securities (other than restricted securities pursuant to Rule 144A under the
Securities Act and commercial paper sold in reliance on Section 4(2) of the
19
<PAGE>
Securities Act). With respect to over-the-counter ("OTC") options that a Fund
writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. The Funds will treat as illiquid an amount of assets used to cover
written OTC options, equal to the formula price at which the Funds would have
the absolute right to purchase the option less the amount by which the option is
"in-the-money." The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. When no market quotations are
available, illiquid investments are priced at fair value as determined in good
faith by the Adviser or TT International, as applicable, under the supervision
of the Board of Trustees. Disposing of these investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Funds to sell them promptly at an acceptable price. If
through a change in values, net assets, or other circumstances, any of the Small
Cap Equity, Balanced, Fixed Income and International Funds were in a position
where more than 15% of its net assets were invested in illiquid securities, the
Fund would take appropriate steps to protect liquidity; for the Equity Fund, if
more than 7% of its net assets were invested in illiquid securities, it would
take appropriate steps to protect liquidity.
RESTRICTED SECURITIES. Restricted securities can generally be sold in
privately negotiated transactions, pursuant to an exemption from registration
under the Securities Act or in a registered public offering. Where registration
is required, the Fund(s) may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it or they decide
to seek registration and the time the Fund(s) may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, a Fund might obtain a less favorable
price than prevailed at the time it decided to seek registration of the
security.
PRIVATE PLACEMENT OFFERINGS. The Small Cap Equity, Balanced and Fixed
Income Funds may invest in private placement offerings. Investments in private
placement offerings are made in reliance on the "private placement" exemption
from registration afforded by Section 4(2) of the Securities Act, and resold to
qualified institutional buyers under the Securities Act ("Section 4(2)
securities"). Section 4(2) securities are restricted as to disposition under the
federal securities law and generally are sold to institutional investors such as
the Funds that agree they are purchasing the securities for investment and not
with an intention to distribute to the public.
OTHER INVESTMENT COMPANIES
The Funds may invest in other investment companies to the extent permitted
by the 1940 Act. Currently the 1940 Act permits the Funds to invest up to 10% of
their total assets in other investment companies. Not more than 5% of each
Fund's total assets may be invested in the securities of any one investment
company nor may the Funds acquire more than 3% of the voting securities of any
other investment company, other than the International Fund's investment in the
Portfolio. 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.
SECURITIES LENDING
The Small Cap Equity, Balanced, Fixed Income and International Funds may
lend securities to qualified brokers, dealers, banks and other financial
institutions. Securities lending allows the Fund to retain ownership of the
securities loaned and, at the same time, to earn additional income. Since there
may be delays in the recovery of loaned securities, or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Adviser or TT International, if applicable, to be
of good standing. In addition, they will only be made if, in the Adviser's or TT
International's, if applicable, judgment, the consideration to be earned from
such loans would justify the risk. Such loans will not be made if, as a result,
the aggregate of all outstanding loans of a Fund exceed one-third of the value
of its total assets.
It is the Funds' understanding that the current view of the staff of the
SEC is that a Fund may engage in loan transactions only under the following
conditions: (1) the Fund must receive 100% collateral in the form of cash or
cash equivalents (i.e., U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
20
<PAGE>
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on the loan (which
may include the Fund investing any cash collateral in interest bearing
short-term investments) or a flat fee from the borrower, as well as amounts
equivalent to any dividends, interest, or other distributions on the securities
loaned and to any increase in market value; (5) the Fund may pay only reasonable
custodian fees in connection with the loan; and (6) the Board of Trustees must
be able to vote proxies on the securities loaned, either by terminating the loan
or by entering into an alternative arrangement with the borrower.
TRUSTEES AND OFFICERS OF THE LKCM FUNDS
Under the laws of the State of Delaware, the Board of Trustees of the
Trust has overall responsibility for management of the Funds. The officers of
the Trust conduct and supervise its daily business. The Trustees and officers of
the Trust, their ages, their business addresses and principal occupations during
the past five years are as follows:
--------------------------------------------------------------------------------
POSITION(S) HELD WITH PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE AGE TRUST DURING PAST 5 YEARS
--------------------------------------------------------------------------------
J. Luther King, Jr.* 58 Chairman of the Board President, Luther King
301 Commerce Street of Trustees, President Capital Management
Fort Worth, Texas 76102 and Chief Executive Corporation since 1979
DOB: 1940 Officer
--------------------------------------------------------------------------------
H. Kirk Downey 56 Trustee of the Trust Dean, M.J. Neeley
2900 Lubbock Street School of Business,
Fort Worth, Texas 76109 Texas Christian
DOB: 1942 University Business
School since 1987
--------------------------------------------------------------------------------
Earle A. Shields, Jr. 78 Trustee of the Trust Consultant; formerly
53 Westover Terrace Consultant for NASDAQ
Fort Worth, Texas 76107 Corp. and Vice
DOB: 1920 President, Merrill
Lynch & Co., Inc.
--------------------------------------------------------------------------------
Paul W. Greenwell 48 Vice President of the Vice President, Luther
301 Commerce Street Trust King Capital
Fort Worth, Texas 76102 Management since 1983
DOB: 1950
--------------------------------------------------------------------------------
Jacqui Brownfield 38 Vice President, Fund Administrator
301 Commerce Street Secretary and Treasurer and Operations
Fort Worth, Texas 76102 of the Trust Manager, Luther King
DOB: 1960 Capital Management
since 1987
--------------------------------------------------------------------------------
* Mr. King is an "interested person" of the Trust (as defined in the 1940
Act) because of his affiliation with the Adviser.
The table below sets forth the compensation paid by the Trust to each of
the Trustees of the Trust during the fiscal year ended December 31, 1999:
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<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated Annual from Trust and
Compensation As Part of Fund Benefits Upon Fund Complex
Name of Person From Trust Expenses Retirement Paid to Trustees
-------------- ---------------- -------------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
J. Luther King, Jr. $0 $0 $0 $0
H. Kirk Downey $12,000 $0 $0 $12,000
Earle A. Shields, Jr. $12,000 $0 $0 $12,000
</TABLE>
Trustees other than those who are officers or affiliated with the Adviser
will receive an annual fee of $8,000 plus a meeting fee of $1,000 for each
meeting attended and are reimbursed for expenses incurred in attending Board
meetings.
TRUSTEES AND OFFICERS OF THE MASTER TRUST
The Trustees and officers of the Master Trust and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. Asterisks indicate that those Trustees and
officers are "interested persons" (as defined in the 1940 Act) of the Master
Trust. Unless otherwise indicated below, the address of each Trustee and officer
is 5 Martin Lane, London, England EC4R ODP. The address of the Master Trust is
c/o Investors Bank & Trust Company, 200 Clarendon St., Boston, MA 02116.
TRUSTEES
Michael Bullock* Partner, Portfolio Management Country Selection,
TT International (since September 1999); Group
Managing Director and CIO, Morgan Grenfell Asset
Management (1990 to 1998); Trustee and Secretary,
TT International U.S.A. Feeder Trust. His date of
birth is November 1, 1951.
David J.S. Burnett* Managing Partner, TT International (since
September 1998); Managing Director, Warburg
Dillon Read (October 1979 to September 1998);
Trustee and President, TT International U.S.A.
Feeder Trust. His date of birth is February 6,
1958.
Alexander S. Partner and Financial Controller, TT
Carswell* International; Trustee and Treasurer, TT
International U.S.A. Feeder Trust. His date of
birth is February 16, 1950.
INDEPENDENT TRUSTEES TO BE ELECTED
OFFICERS
Michael Bullock Secretary - Partner, Portfolio Management Country
Selection, TT International (since September
1999); Group Managing Director and CIO, Morgan
Grenfell Asset Management (1990 to 1998); Trustee
and Secretary, TT International U.S.A. Feeder
Trust. His date of birth is November 1, 1951.
David J.S. Burnett President - Managing Partner, TT International
(since September 1998); Managing Director,
22
<PAGE>
Warburg Dillon Read (October 1979 to September
1998); Trustee and President, TT International
U.S.A. Feeder Trust. His date of birth is
February 6, 1958.
Alexander S. Treasurer - Partner and Financial Controller,
Carswell TT International; Trustee and Treasurer, TT
International U.S.A. Feeder Trust. His date of
birth is February 16, 1950.
The compensation expected to be paid to the Trustees for the fiscal year
ending December 31, 2000 is set forth below. The Trustees may hold various other
directorships unrelated to the Trust or Portfolio.
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation from
Aggregate Benefits Accrued Annual Benefits the Trust
Compensation As Part of Upon and
from the Trust Trust Expenses Retirement Fund Complex*
<S> <C> <C> <C> <C>
Michael Bullock, None None None None
Secretary and Trustee
David J.S. Burnett, None None None None
President and Trustee
Alexander S. Carswell, None None None None
Treasurer and Trustee
Independent Trustees to be $_____ None None $_____
listed
</TABLE>
* Each of the Trustees serves as a trustee of the Master Trust and of TT
International U.S.A. Feeder Trust, a registered investment company having one
series, TT EAFE Mutual Fund.
The Master Trust's Declaration of Trust provides that the Master Trust
will indemnify its Trustees and officers against liabilities and expenses
incurred in connection with litigation in which they may be involved because of
their offices with the Master Trust, unless it is finally adjudicated that they
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of the
Master Trust. In the case of settlement, such indemnification will not be
provided unless it has been determined by a court or other body approving the
settlement or other disposition, or by a reasonable determination, based upon a
review of readily available facts, by vote of a majority of disinterested
Trustees or in a written opinion of independent counsel, that such officers or
Trustees have not engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of their duties.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
The following person may be deemed to control the International Fund by virtue
of its ownership, of record or beneficially, of more than 25% of the outstanding
shares of the International Fund as of August 31, 2000:
Gannet 401K Savings Plan _____%
c/o Boston Safe Deposit & Trust
135 Santilli Highway
Everett, MA 02149
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<PAGE>
As of August 31, 2000, the following persons, in addition to those above,
owned of record or beneficially 5% or more of the shares of the funds as shown:
PRINCIPAL SHAREHOLDERS
SMALL CAP EQUITY FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
Sid Richard Foundation ________ _____%
c/o Texas Commerce Bank
P.O. Box 2558
Houston, TX 77252
PRINCIPAL SHAREHOLDERS
EQUITY FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
Luther King Capital Management _______ ______%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Muir & Company _______ _______%
c/o Frost National Bank
PO Box 2479
San Antonio, TX 78298
Luther King Capital Management ________ _______%
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
24
<PAGE>
PRINCIPAL SHAREHOLDERS
BALANCED FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
Firstar Bank, N.A. Custodian FBO __________ _____%
Ed D. Ligon Jr. IRA
25 Carmel Lane
Little Rock, AR 72212
Lau & Company __________ _______%
c/o Frost National Bank
PO Box 2950
San Antonio, TX 78299
Luther King Capital Management __________ _________%
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Summit Partners __________ _____%
301 Commerce Street Suite 1600
Fort Worth, TX 76102
Lura D. Deffebach _________ ______%
2444 Stonebridge Place
Fort Worth, TX 76110
Luther King Capital Management _________ _______%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
First Southwest Company FBO ________ _______%
Richard Loren Franklin
1700 Pacific Avenue, Suite 500
Dallas, TX 75201
25
<PAGE>
PRINCIPAL SHAREHOLDERS
FIXED INCOME FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
Luther King Capital Management ________ ______%
Profit Sharing Trust
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
Strafe & Company FBO _________ ______%
Lena Pope Home
1900 Polaris Parkway
Columbus, OH 43240
Strafe & Company FBO ________ ______%
Community Hospice
1900 Polaris Parkway
Columbus, OH 43240
PRINCIPAL SHAREHOLDERS
INTERNATIONAL FUND
NAME AND ADDRESS OF BENEFICIAL OWNER # OF SHARES % OF TOTAL FUND
----------- ---------------
Balsa & Company _________ _____%
c/o Chase Manhattan Bank
Grand Central Station
PO Box 1768
New York, NY 10163
Hamill & Company FBO __________ _____%
Sid Richardson Foundation
c/o Texas Commerce Bank
PO Box 2558
Houston, TX 77252
Northern Trust Trustee FBO _________ ______%
Gannett
PO Box 92956
Chicago, IL 60675
Northern Trust Company Custodian FBO __________ _____%
Dallas Symphony
PO Box 92956
Chicago, IL 60675
As of _________, 2000, all Trustees and officers as a group owned
beneficially (as the term is defined in Section 13(d) under the Securities and
Exchange Act of 1934) less than 1% of shares of each of the Funds.
26
<PAGE>
INVESTMENT ADVISER
The manager of the Funds is Luther King Capital Management Corporation
(the "Adviser"). The Adviser is controlled by J. Luther King, Jr. Mr. King is
the Chairman of the Board of Trustees, President, Chief Executive and Manager of
the Trust. Under an Investment Advisory Agreement (the "Agreement") with the
Funds, the Adviser manages the investment and reinvestment of the Funds' assets,
subject to the control and supervision of the Board of Trustees of the Trust.
The Adviser is responsible for making investment decisions for the Funds and for
placing the Funds' purchase and sale orders. In addition, subject to any
approvals required by the 1940 Act, the Adviser may delegate its duty to make
investment decisions and to place purchase and sale orders to one or more
investment subadvisers with respect to some or all of the International Fund's
assets. In the event of such a delegation, the Adviser is obligated to monitor
and review the activities of the subadviser. Under the Agreement, the Funds pay
the Adviser an advisory fee calculated by applying a quarterly rate, equal on an
annual basis to the following numbers shown as a percentage of average daily net
assets for the quarter. However, until further notice, the Adviser has
voluntarily agreed to waive its advisory fees and reimburse expenses to the
extent necessary to keep the total operating expenses of the Small Cap Equity,
Equity, Balanced and Fixed Income Funds from exceeding the respective caps also
shown as a percentage of average daily net assets for the quarter.
The advisory fees for the fiscal year ended December 31, 1999, were as
follows:
Adviser Fee Cap
----------- ---
Small Cap Equity Fund 0.75% 1.00%
Equity Fund 0.70% 0.80%
Balanced Fund 0.65% 0.80%
Fixed Income Fund 0.50% 0.65%
International Fund 1.00% 1.20%
To the extent that the International Fund invests all of its investable
assets in the Portfolio, the advisory fee paid to the Adviser is reduced from an
annual rate of 1.00% of the fund's average daily net assets to an annual rate of
0.50% of the fund's average daily net assets. The Adviser has agreed to continue
its voluntary expense limitation on the International Fund's total annual
operating expenses to ensure that the fund's expenses do not exceed 1.20%.
As compensation for the services rendered by the Adviser under the
Agreement, for the years ended December 31, 1997, 1998 and 1999, the Adviser
earned and waived and/or reimbursed the amounts listed below. During these
periods, the Adviser managed the assets of the International Fund.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Small Cap Equity Fund $1,813,278 $1,977,956 $1,644,113
(amount waived/reimbursed) $(0) $(0) $(0)
Equity Fund $274,166 $281,873 $282,731
(amount waived/reimbursed) $(143,411) $(86,983) $(52,465)
Balanced Fund N/A $12,623 $30,428
(amount waived/reimbursed) N/A $(73,294) $(53,613)
Fixed Income Fund N/A $52,488 $102,645
(amount waived/reimbursed) N/A $(65,831) $(49,500)
International Fund N/A $396,641 $586,147
(amount waived/reimbursed) N/A $(78,087) $(186,212)
</TABLE>
ADVISER TO PORTFOLIO
TT International Investment Management ("TT International"), the
adviser to the Portfolio, is a partnership controlled by Timothy A. Tacchi.
27
<PAGE>
Prior to the date of this Statement of Additional Information, TT
International served as the subadviser to the International Fund. In that
capacity, it managed the assets of the fund.
Pursuant to a Management Agreement ("Management Agreement") entered into
between the Master Trust, on behalf of the Portfolio, and TT International, TT
International manages the securities of the Portfolio and makes investment
decisions for the Portfolio subject to such policies as the Master Board of
Trustees may determine. By its terms, the Management Agreement continues in
effect for an initial two-year period and thereafter from year to year as long
as such continuance is specifically approved at least annually by the Master
Trust's Board of Trustees or by a vote of a majority of the outstanding voting
securities of the Portfolio, and, in either case, by a majority of the Trustees
of the Master Trust who are not parties to the Management Agreement or
interested persons of any such party, at a meeting called for the purpose of
voting on the Management Agreement. The Management Agreement can be terminated,
without penalty, on not more than 60 days' nor less than 30 days' written notice
by the Master Trust when authorized either by a vote of a majority of the
outstanding voting securities of the Portfolio or by a vote of a majority of the
Board of Trustees of the Master Trust, or by TT International on not more than
60 days' nor less than 30 days' written notice. The Management Agreement
automatically will terminate in the event of its assignment.
The Portfolio is newly organized and has not paid management fees or
expenses as of the date of this Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE
THE ADVISER
The Agreement authorizes the Adviser to select the brokers or dealers that
will execute the purchases and sales of investment securities for the Funds and
directs the Adviser to use its best efforts to obtain the best execution with
respect to all transactions for the Funds. As permitted by Section 28(e) of the
Securities Exchange Act of 1934, as amended, the Adviser may cause the Funds to
pay higher commission rates than the lowest available when the Adviser believes
it is reasonable to do so in light of the value of the research services
provided by the broker effecting the transaction. These services, which in some
cases may also be purchased for cash, include such matters as general economic
and security market reviews, industry and company reviews, evaluations of
securities and recommendations as to the purchase and sale of securities. Some
of these services are of value to the Adviser in advising various clients,
including the Funds, although not all of these services are necessarily useful
and of value in managing the Funds.
It is not the Adviser's practice to allocate brokerage or principal
business on the basis of sales of shares that may be made through intermediary
brokers or 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. The aggregate amount of brokerage
commissions paid by each fund during the past three fiscal years is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Small Cap Equity Fund $290,682 $330,945 $314,131
Equity Fund 78,289 77,367 70,375
Balanced Fund 0 3,526 5,959
Fixed Income Fund 0 0 0
International Fund 0 578,845 614,948
</TABLE>
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Adviser. If purchases or sales of
securities consistent with the investment policies of the Funds and one or more
of these other clients serviced by the Adviser 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.
28
<PAGE>
TT INTERNATIONAL
Specific decisions to purchase or sell securities for the Portfolio are
made by portfolio managers who are partners or employees of TT International.
The portfolio managers of the Portfolio may serve other clients of TT
International in a similar capacity.
TT International determines which brokers or dealers are to be used for
brokerage transactions and negotiates and approves commission rates paid. In the
selection of brokers and dealers to execute security transactions for the
Portfolio, TT International will endeavor to ensure that the chosen brokers and
dealers have the ability to obtain best execution. TT International believes
that, particularly in countries with less developed securities markets, it is
important to deal with brokers and dealers that have experience and expertise in
the local markets. Other factors in the selection of brokers and dealers include
the reliability, integrity, financial condition and general execution and
operation capabilities of competitive brokers and dealers and research services
provided by them. Based on these factors, TT International may not always direct
trades to brokers or dealers that offer the lowest commission rates. On at least
an annual basis, TT International establishes for each region or country in
which it effects brokerage transactions, a schedule of commissions that will
apply generally to its transactions on behalf of its clients in that region or
country. As a result, TT International does not negotiate commission rates for
particular trades. TT International reviews these commission levels periodically
in light of prevailing market commission rates.
TT International receives a wide range of research from brokers and
dealers. Research received includes economic forecasts and interpretations,
information on industries, groups of securities, individual companies,
statistics, political developments, technical market action pricing and
appraisal services, performance analysis and provision of computerized quotation
and other equipment. These research services are a significant factor, among
others, in the selection of brokers and dealers. Research services may be
provided directly by brokers and dealers, or pursuant to "soft dollar"
arrangements whereby the broker or dealer pays for the services to be provided
by others.
To the extent that research services of value are provided by brokers and
dealers, TT International is relieved of expenses that it might otherwise bear
and the Portfolio may pay commissions higher than those obtainable from brokers
or dealers who do not provide such research services.
Research services furnished by brokers or dealers through which TT
International effects securities transactions may be used in servicing all
accounts which it manages. Conversely, research services received from brokers
or dealers which execute transactions for a particular account will not
necessarily be used by TT International specifically in connection with the
management of that account.
The Portfolio is newly organized and has not paid brokerage commissions as
of the date of this Statement of Additional Information.
In certain instances there may be securities which are suitable for the
Portfolio as well as for one or more of TT International's other clients.
Investment decisions for the Portfolio and for TT International's other clients
are made with a view to achieving their respective investment objectives. It may
develop that a particular security may be bought or sold for only one client
even thought it might be held by, or bought or sold for, other clients.
Likewise, a particular security may be bought for one or more clients when one
or more clients are selling that same security. Some simultaneous transactions
are inevitable when several clients receive investment advice from the same
investment manager, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as the Portfolio is
concerned. However, it is believed that the ability of the Portfolio to
participate in volume transactions will produce better executions for the
Portfolio.
It is TT International's policy to exclude institutional accounts, such as
the Portfolio's, from allocations of stock in initial public offerings or other
"hot issues," unless the market capitalization of the issuer exceeds a minimum
threshold determined by TT International from time to time and TT International
otherwise determines participation to be appropriate. This policy is based on TT
International's judgment that companies with smaller market capitalizations are
29
<PAGE>
not suitable for accounts such as those of the Portfolio and that even larger
initial public offerings may not be suitable for the Portfolio. TT International
may allocate these investments to other accounts managed by TT International,
which may include accounts in which TT International and its principals have
investment or carried interests. As a result the Portfolio may not participate
in short-term gains based upon post-issue appreciation in the value of "hot
issues" even in cases where these opportunities may result, at least in part,
from trading activity by the Portfolio. However, the Portfolio will also avoid
the risks associated with some initial public offerings and other "hot issues"
of smaller issuers.
CUSTODIAN
As custodian of the Funds' assets, Firstar Bank, N.A., 425 Walnut Street,
Cincinnati, OH 45202, has custody of all securities and cash of the Funds,
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by the officers of the Trust. Investors Bank & Trust
Company ("IBT"), 200 Clarendon Street, Boston, MA 02110, serves as the custodian
for the Portfolio.
ADMINISTRATOR
Pursuant to a Fund Administration Agreement and a Fund Accounting
Agreement, Firstar Mutual Fund Services, LLC ("Firstar"), 615 East Michigan
Street, Milwaukee, Wisconsin 53202, provides each Fund with administrative and
fund accounting and dividend services pursuant to a Fund Administration
Agreement and a Fund Accounting Service Agreement. The services under these
Agreements are subject to the supervision of the Board of Trustees of the Trust
and officers, and include day-to-day administration of matters necessary to the
Funds' operations, maintenance of their records, preparation of reports,
compliance testing of the Funds' activities, and preparation of periodic updates
of the registration statement under federal and state laws. For administration
services, Firstar receives from each Fund a fee, calculated daily and paid
monthly.
<TABLE>
<CAPTION>
Fee for first $200 million Next $500 million of Average daily net assets in
of average daily net assets average daily net assets excess of $700 million
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund 0.06% 0.05% 0.03%
Equity Fund 0.06% 0.05% 0.03%
Balanced Fund 0.06% 0.05% 0.03%
Fixed Income Fund 0.06% 0.05% 0.03%
</TABLE>
<TABLE>
<CAPTION>
Fee for Next $300 million of Next $500 million of Average daily net
first $200 average daily net average daily net assets in excess of
million of assets assets $1 billion
average
daily net
assets
------------- ----------------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
International Fund 0.07% 0.05% 0.04% 0.03%
</TABLE>
Administration fees incurred during the past 3 fiscal years follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund $350,914 $156,396 $130,065
Equity Fund 125,290 26,410 26,054
Balanced Fund N/A 17,929 9,458
Fixed Income Fund N/A 19,354 20,167
International Fund N/A 35,920 40,976
</TABLE>
30
<PAGE>
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar also acts as transfer agent and dividend-disbursing agent for the
Funds. IBT also provides transfer agency services and fund accounting services
for the Portfolio.
DISTRIBUTOR
Provident Distributors, Inc. (the "Distributor"), Four Falls Corporate
Center, 6th Floor, West Conshocken, Pennsylvania 19428-2961, a registered
broker-dealer and member of the National Association of Securities Dealers,
Inc., distributes the Funds' shares. Jacqui Brownfield, an employee of the
Adviser and an officer of the Trust, is a registered representative of the
Distributor. The Distributor uses its best efforts to distribute the Funds'
shares, which shares are offered for sale by the Funds continuously at net asset
value per share without the imposition of a sales charge.
DISTRIBUTION PLAN
As stated in the Prospectus, the Board of Trustees, including a majority
of the Trustees who were not interested persons of the Trust and who had no
direct or indirect financial interest in the operations of a distribution plan,
on behalf of the Funds, adopted a Distribution Plan, pursuant to Rule 12b-1
under the 1940 Act (the "Plan").
Pursuant to the Plan, the funds can pay up to an aggregate maximum of
0.75% per annum of each Fund's average daily net assets for actual expenses
incurred in the distribution and promotion of the shares of the Funds,
including, but not limited to, the printing of Prospectuses, Statements of
Additional Information, reports used for sales purposes, advertisements,
expenses of preparation and printing of sales literature, and other
distribution-related expenses.
Although approved, the Board of Trustees has not authorized implementation
of the plan. As a result, the Funds are neither accruing nor paying any Rule
12b-1 fees.
CODE OF ETHICS
The Trust, the Adviser and TT International have each adopted a written
Code of Ethics. These Codes of Ethics govern the personal securities
transactions of trustees, directors, officers and employees who may have access
to current trading information of the Funds. The Codes permit such persons to
invest in securities for their personal accounts, including securities that may
be purchased or held by the Funds. The Codes include reporting and other
obligations to monitor personal transactions and ensure that such transactions
are consistent with the best interest of the Funds.
PURCHASE AND PRICING OF SHARES
PURCHASE OF SHARES
PURCHASING SHARES WITH LIQUID SECURITIES. Certain clients of the Adviser
may, subject to the approval of the Trust, purchase shares of the Funds with
liquid securities that are eligible for purchase by a Fund (consistent with the
Fund's investment policies and restrictions) and that have a value that is
readily ascertainable (and not established only by evaluation procedures) as
evidenced by a listing on the American Stock Exchange, the New York Stock
Exchange or The Nasdaq Stock Market. These transactions will be effected only if
the Adviser intends to retain the security in the Funds as an investment. Assets
so purchased by the Funds will be valued in generally the same manner as they
would be valued for purposes of pricing a Fund's shares, if such assets were
included in the Fund's assets at the time of purchase.
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
31
<PAGE>
investors. 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 $25 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
that is lower than their purchase price.
To establish the Automatic Investment Program, an investor must complete
the appropriate sections of the Account Registration Form. Please call the Trust
at 800-688-LKCM if you have questions. An investor may cancel his or her
participation in this Program or change the amount of purchase at any time by
mailing written notification to: Firstar Mutual Fund Services, LLC, 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.
PRICING OF SHARES
Shares of the Funds are sold on a continual basis at the net asset value
per share next computed following acceptance of an order by a Fund. A Fund's net
asset value per share for the purpose of pricing purchase and redemption orders
is determined as of the close of normal trading (currently 4:00 p.m. Eastern
Time) on each day the New York Stock Exchange is open for trading. The NYSE is
closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Securities listed on a U.S. securities exchange or Nasdaq for which market
quotations are readily available are valued at the last quoted sale price on the
day the valuation is made. Price information on listed securities is taken from
the exchange where the security is primarily traded. Options, futures, unlisted
U.S. securities and listed U.S. securities not traded on the valuation date for
which market quotations are readily available are valued at the mean of the most
recent quoted bid and asked price. Securities listed on a foreign exchange for
which market quotations are readily available are valued at the latest quoted
sales price available before the time when assets are valued. Quotations of
foreign securities in foreign currency are converted to U.S. dollar equivalents
using net foreign exchange quotations received from independent dealers at the
time of valuation. Unlisted foreign securities are valued at fair value as
determined in accordance with policies established by the Board of Trustees.
Although the International Fund values its assets in U.S. dollars on a daily
basis, it does not intend to convert holdings of foreign currencies into U.S.
dollars on a daily basis.
Fixed-income securities (other than obligations having a maturity of 60
days or less) are normally valued on the basis of quotes obtained from pricing
services, which take into account appropriate factors such as institutional-
sized trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data.
Fixed-income securities purchased with remaining maturities of 60 days or less
are valued at amortized cost if it reflects fair value. In the event that
amortized cost does not reflect market, market prices as determined above will
be used. Other assets and securities for which no quotations are readily
available (including restricted securities) will be valued in good faith at fair
value using methods determined by the Board of Trustees of the Trust.
32
<PAGE>
REDEMPTIONS IN KIND
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 (i) $250,000 or (ii) 1% of the net assets of a Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the SEC. Redemptions in excess of the above limits may be paid in
whole or in part in investment securities or in cash, as the Trustees may deem
advisable; however, payment will be made wholly in cash unless the Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the applicable Fund. If
redemptions are paid in investment securities the redeeming shareholders might
incur brokerage expenses if they converted these securities to cash. Securities
used to make such "in-kind" redemptions will be readily marketable. The method
of valuing such securities will be the same as the method of valuing Fund
securities described under "Pricing of Shares," and such valuation will be made
as of the same time the redemption price is determined.
TAXATION
TAXATION OF THE FUNDS
Each Fund intends to continue to qualify annually for treatment as a
"regulated investment company" under Subchapter M of the Code ("RIC") and, if so
qualified, will not be liable for federal income tax to the extent earnings and
unrealized gains are distributed to its shareholders on a timely basis. If a
Fund fails to qualify for treatment as a RIC, it would be treated as a regular
corporation for federal income tax purposes. In that case, it would be subject
to federal income tax, and any distributions that it made to its shareholders
would be taxable as ordinary income (with no part treated as a capital gain
distribution) to the extent of its earnings and profits and would not be
deductible by it. This would increase the cost of investing in that Fund for
shareholders and would make it more economical for shareholders to invest
directly in securities held by that Fund instead of investing indirectly in
those securities through the Fund.
Each Fund will be subject to a nondeductible 4% excise tax ("Excise Tax")
to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net
income for the one-year ending on October 31 of that year, plus certain other
amounts.
Hedging strategies, such as entering into Forward Contracts and writing
(selling) and purchasing options and futures contracts, involve complex rules
that will determine for federal income tax purposes the amount, character, and
timing of recognition of the gains and losses a Fund realizes in connection
therewith. Gain from the disposition of foreign currencies (except certain gains
that may be excluded by future regulations), and gains from options, futures and
Forward Contracts derived by a Fund with respect to its business of investing in
securities or foreign currencies, will be treated as qualifying income under the
income requirement to qualify as a RIC.
Certain futures, foreign currency contracts, and listed nonequity options
(such as those on a securities index) in which all Funds but the Equity Fund may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts a Fund holds at the end of its taxable year generally
must be "market-to-market" (that is, treated as having been sold at that time
for their fair market value) for federal income tax purposes, with the result
that unrealized gains or losses will be treated as though they were realized.
Sixty percent of any net gain or loss recognized on these deemed sales, and 60%
of any net realized gain or loss from any actual sales of section 1256
contracts, will be treated as long-term capital gain or loss, and the balance
will be treated as short-term capital gain or loss. Section 1256 contracts also
may be market-to-market for purpose of the Excise Tax. These rules may operate
to increase the amount that a Fund must distribute to satisfy the distribution
requirement applicable to RICs (I.E., with respect to the portion treated as
short-term capital gain), which will be taxable to its shareholders as ordinary
income, and to increase the net capital gain (I.E., the excess of net long-term
capital gain over net short-term capital loss) a Fund recognizes , without in
either case increasing the cash available to the Fund. A Fund may elect to
exclude certain transactions from the operation of section 1256, although doing
so may have the effect of increasing the relative proportion of net short-term
capital gain (taxable as ordinary income) and/or increasing the amount of
33
<PAGE>
dividends that must be distributed to meet that distribution requirement and
avoid imposition of the Excise Tax.
If a Fund has an "appreciated financial position" - generally, an interest
(including an interest through an option, futures or Forward Contract, or short
sale) with respect to any stock, debt instrument (other than "straight debt"),
or partnership interest the fair market value of which exceeds its adjusted
basis - and enters into a "constructive sale" of the position, the Fund will be
treated as having made an actual sale thereof, with the result that it will
recognize gain at that time. A constructive sale generally consists of a short
sale, an offsetting notional principal contract, or a futures or Forward
Contract entered into by a Fund or a related person with respect to the same or
substantially underlying property. In addition, if the appreciated financial
position is itself a short sale or such a contract, acquisition of the
underlying property or substantially identical property will be deemed a
constructive sale. The foregoing will not apply, however, to any transaction by
a Fund during any taxable year that would otherwise be treated as a constructive
sale if the transaction is closed within 30 days after the end of that year and
the Fund holds the appreciated financial position unhedged for 60 days after
that closing (I.E., at no time during that 60-day period is the Fund's risk of
loss regarding that position reduced by reason of certain specified transactions
with respect to substantially identical or related property, such as having an
option to sell, being contractually obligated to sell, making a short sale, or
granting an option to buy substantially identical stock or securities).
The Balanced and Fixed Income Funds may acquire zero coupon or other
securities issued with original issue discount ("OID"). As a holder of those
securities, a Fund must include in its gross income the OID that accrues on them
during the taxable year, even if it receives no corresponding payment on them
during the year. Because each Fund annually must distribute substantially all of
its investment company taxable income, including any OID, to satisfy the
distribution requirement applicable to RICs and avoid imposition of the Excise
Tax, it may be required in a particular year to distribute as a dividend an
amount that is greater than the total amount of cash it actually receives. Those
distributions will be made from a Fund's cash assets or from the proceeds of
sales of its portfolio securities, if necessary. A fund may realize capital
gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
INVESTMENTS IN FOREIGN SECURITIES. Dividends and interest received by a
Fund, and gains realized thereby, may be subject to income, withholding, or
other taxes imposed by foreign countries and U.S. possessions ("foreign taxes")
that would reduce the yield and/or total return on its securities. Tax
conventions between certain countries and the United States may reduce or
eliminate foreign taxes, however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign investors.
If more than 50% of the value of the International Fund's total assets
(including its proportionate share of the Portfolio's total assets) at the close
of any taxable year consists of securities of foreign corporations, it will be
eligible to, and may, file an election with the IRS that will enable its
shareholders, in effect, to receive the benefit of the foreign tax credit with
respect to any foreign taxes it paid (including its proportionate share of any
foreign taxes paid by the Portfolio ("Fund's Foreign Taxes")). Pursuant to any
such election, the International Fund would treat those taxes as dividends paid
to its shareholders and each shareholder would be required to:
(1) include in gross income, and treat as paid by the shareholder, the
shareholder's proportionate share of those taxes,
(2) treat the shareholder's share of those taxes and of any dividend
paid by the fund that represents income from foreign or U.S.
possessions as the shareholder's own income from those sources, and
(3) either deduct the taxes deemed paid by the shareholder in computing
the shareholder's taxable income or, alternatively, use the
foregoing information in calculating the foreign tax credit against
the shareholder's federal income tax.
The International Fund will report to its shareholders shortly after each
taxable year their respective shares of its income from sources within foreign
countries and U.S. possessions (including its proportionate share of the
Portfolio's income from these sources) and the Fund's Foreign Taxes if it makes
this election. Individuals who have no more than $300 ($600 for married persons
34
<PAGE>
filing jointly) of creditable foreign taxes included on Form 1099 and have no
foreign source non-passive income will be able to claim a foreign tax credit
without having to file the detailed Form 1116 that otherwise is required.
The Funds may invest in the stock of "passive foreign investment
companies" ("PFICs"). A PFIC is any foreign corporation (with certain
exceptions) that, in general, meets either of the following tests:
(1) at least 75% of its gross income is passive or
(2) an average of at least 50% of its assets produce, or are held for
the production of, passive income.
Under certain circumstances, a Fund will be subject to federal income tax on a
portion of any "excess distribution" received on the stock of a PFIC or of any
gain on disposition of the stock (collectively "PFIC income"), plus interest
thereon, even if the Fund distributes the PFIC income as a taxable dividend to
its shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to it to
the extent it distributes that income to its shareholders.
If a Fund invests in a PFIC and elects to treat the PFIC as a "qualified
electing fund" ("QEF"), then in lieu of the foregoing tax and interest
obligation, the Fund would be required to include in income each year its PRO
RATA share of the QEF's annual ordinary earnings and net capital gain -- which
the Fund probably would have to distribute to its shareholders -- even if the
QEF did not distribute those earnings and gain to the Fund. In most instances it
will be very difficult, if not impossible, to make this election because of
certain requirements thereof.
Each Fund (other than the International Fund) or the Portfolio may elect
to "mark to market" its stock in any PFIC. "Marking-to-market," in this context,
means including in ordinary income each taxable year the excess, if any, of the
fair market value of the stock over a Fund's adjusted basis therein as of the
end of that year. Pursuant to the election, a Fund (other than the International
Fund) or the Portfolio also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included in income by the Fund
for prior taxable years under the election (and under regulations proposed in
1992 that provided a similar election with respect to the stock of certain
PFICs). A Fund's adjusted basis in each PFIC's stock subject to the election
would be adjusted to reflect the amounts of income included and deductions taken
thereunder.
Gains or losses (1) from the disposition of foreign currencies including
Forward Contracts,, (2) on the disposition of a debt security denominated in a
foreign currency that are attributable to fluctuations in the value of the
foreign currency between the dates of acquisition and disposition of the
security, and (3) that are attributable to exchange rate fluctuations between
the time a Fund accrues interest, dividends, or other receivables or expenses or
other liabilities denominated in a foreign currency and the time it actually
collects the receivables or pays the liabilities, generally are treated as
ordinary income or loss. These gains or losses will increase or decrease the
amount of investment company taxable income available to a Fund for distribution
to its shareholders as ordinary income, rather than increasing or decreasing the
amount of its net capital gain.
TAXATION OF THE PORTFOLIO
The Portfolio will be classified for federal tax purposes as a partnership
that is not a "publicly traded partnership." As a result, the Portfolio is not
subject to federal income tax; instead, each investor in the Portfolio, such as
the International Fund, is required to take into account in determining its
federal income tax liability its share of the Portfolio's income, gains, losses
and deductions, without regard to whether it has received any cash distributions
from the Portfolio.
The International Fund is deemed to own a proportionate share of the
Portfolio's assets and to earn a proportionate share of the Portfolio's income
for purposes of determining whether the fund satisfies the requirements to
qualify as a RIC. Accordingly, the Portfolio intends to conduct its operations
so that the fund will be able to satisfy all those requirements.
35
<PAGE>
Distributions to the International Fund from the Portfolio (whether
pursuant to a partial or complete withdrawal or otherwise) will not result in
the fund's recognition of any gain or loss for federal income tax purposes,
except that (1) gain will be recognized to the extent any cash that is
distributed exceeds the fund's basis for its interest in the Portfolio before
the distribution, (2) income or gain will be recognized if the distribution is
in liquidation of the fund's entire interest in the Portfolio and includes a
disproportionate share of any unrealized receivables held by the Portfolio, and
(3) loss will be recognized if a liquidation distribution consists solely of
cash and/or unrealized receivables. The International Fund's basis for its
interest in the Portfolio generally will equal the amount of cash and the basis
of any property the Fund invests in the Portfolio, increased by the Fund's share
of the Portfolio's net income and gains and decreased by (a) the amount of cash
and the basis of any property the Portfolio distributes to the Fund and (b) the
Fund's share of the Portfolio's losses.
See "Taxation of the Funds" for a discussion of the tax consequences to
the Portfolio (and, indirectly, the International Fund) from hedging strategies,
section 1256 contracts, constructive sales, and investments in foreign
securities.
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Funds' advertising and
promotional materials are calculated according to the following formula:
n
P(1+T) = ERV
where P equals a hypothetical initial payment of $1,000; T equals average annual
total return; n equals the number of years; and ERV equals the ending redeemable
value at the end of the period of a hypothetical $1,000 payment made at the
beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1999
Since Inception
1 Year 5 Years (Inception Date)
------------------------------ ------------ ------------ ----------------------------
<S> <C> <C> <C>
Small Cap Equity Fund 16.83% 17.43% 16.85%
(July 14, 1994)
Equity Fund 23.07% N/A 19.11%
(January 3, 1996)
Balanced Fund 13.53% N/A 13.18%
(December 30, 1997)
Fixed Income Fund -0.34% N/A 3.40%
(December 30, 1997)
International Fund 42.71% N/A 25.35%
(December 30, 1997)
</TABLE>
36
<PAGE>
CUMULATIVE TOTAL RETURN. Cumulative total return represents the simple
change in value of an investment over a stated period and may be quoted as a
percentage or as a dollar amount. Total returns may be broken down into their
components of income and capital (including capital gains and changes in share
price) in order to illustrate the relationship between these factors and their
contributions to total return.
YIELD
Annualized yield quotations used in a Fund's advertising and promotional
materials are calculated by dividing the Fund's interest income for a specified
thirty-day period, net of expenses, by the average number of shares outstanding
during the period, and expressing the result as an annualized percentage
(assuming semi-annual compounding) of the net asset value per share at the end
of the period. Yield quotations are calculated according to the following
formula:
YIELD = 2[(a-b + 1) to the power of 6 - 1]
----
c-d
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends; and "d" equals the maximum offering price per share on the
last day of the period.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date. The
Fixed Income Fund's 30-day yield was 6.87% at December 31, 1999.
OTHER INFORMATION
Each Fund's performance data quoted in advertising and other promotional
materials represents past performance and is not intended to predict or indicate
future results. The return and principal value of an investment in a Fund will
fluctuate, and an investor's redemption proceeds may be more or less than the
original investment amount.
From time to time, in advertisements and sales materials, each Fund may
include a list of it top ten holdings. If permitted by applicable law, the Funds
may advertise the performance of registered investment companies or private
accounts that have investment objectives, policies and strategies substantially
similar to those of the Funds.
COMPARISON OF FUND PERFORMANCE
The performance of a Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar,
Inc., the Donoghue Organization, Inc. or other independent services which
monitor the performance of investment companies, and may be quoted in
advertising in terms of its ranking in each applicable universe. In
addition, the Funds may use performance data reported in financial and
industry publications, including Barron's, Business Week, Forbes, Fortune,
Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall
Street Journal and USA Today.
The Funds may from time to time use the following unmanaged indices for
performance comparison purposes:
S&P 500 Index - The S&P 500 Index is an unmanaged index composed of 500
stocks designed to mimic the overall equity market's industry weightings.
Most, but not all, large capitalization stocks are in the index. There are
also some small capitalization names in the index. The list is maintained
by Standard & Poor's Corporation. It is market capitalization weighted.
37
<PAGE>
There are always 500 issuers in the S&P 500. Changes are made by Standard
& Poor's as needed.
Lehman Brothers Government/Corporate Index ("LB Govt/Corp") - The LB
Govt/Corp is a weighted index comprised of publicly-traded intermediate
and long-term government and corporate debt with an average maturity of 11
years.
Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks
in the Russell 3000, a market value weighted index of the 3,000 largest
U.S. publicly-traded companies.
EAFE Index - The EAFE Index is an unmanaged index representing the market
value weighted price of stocks of approximately 1100 companies screened
for liquidity, cross-ownership and industry representation and listed on
major stock exchanges in Europe, Australasia and the Far East. The Index
is compiled by Morgan Stanley Capital International.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202, serves as the Funds' independent accountants, whose services
include examination of the Funds' financial statements and the performance of
other related audit and tax services. PricewaterhouseCoopers LLP, 150 Federal
Street, Boston, MA 02110, serves as the independent accountants to the Master
Trust.
FINANCIAL STATEMENTS
The audited financial statements for the Funds are incorporated by
reference to the Funds' Annual Report, for the year ended 1999, as filed with
the Securities and Exchange Commission on February 29, 2000.
38
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. Corporate Bond Ratings:
AAA: judged to be the best quality; carry the smallest degree of
investment risk; AA: judged to be of high quality by all standards; A:
possess many favorable investment attributes and are to be considered as
higher medium grade obligations; BAA: considered as lower medium grade
obligations, i.e., they are neither highly protected nor poorly secured; BA,
B: protection of interest and principal payments is questionable.
CAA: Bonds that are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest. CA: Bonds that are rated Ca represent obligations
that are speculative in a high degree. Such issues are often in default or
have other marked shortcomings. C: Bonds which are rated C are the lowest
rated class of bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
Note: Moody's may apply numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Excerpts from Standard & Poor's Corporation Corporate Bond Ratings:
AAA: highest grade obligations; possess the ultimate degree of protection
as to principal and interest; AA: also qualify as high grade obligations, and in
the majority of instances differs from AAA issues only in small degree; A:
regarded as upper medium grade; have considerable investment strength but are
not entirely free from adverse effects of changes in economic and trade
conditions. Interest and principal are regarded as safe; BBB: regarded as
borderline between definitely sound obligations and those where the speculative
element begins to predominate; this group is the lowest which qualifies for
commercial bank investments.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. CI: The rating CI is reserved for income bonds on which no interest
is being paid. D: Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus(+) or Minus(-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Excerpts from Fitch IBCA, Duff & Phelps Corporate Bond Ratings:
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short term debt of these issuers is generally rated "-,+".
39
<PAGE>
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the basis
of their ultimate recovery value in liquidation or reorganization of the
obligor. "DDD" represents the highest potential for recovery on the these bonds,
and "D" represents the lowest potential for recovery.
PLUS (+) MINUS(-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "DDD", "DD", or "D" categories.
40
<PAGE>
LKCM FUNDS
PART C. OTHER INFORMATION
Item 23. EXHIBITS
--------
(a) Agreement and Declaration of Trust (1)
(a.1) Amendment Number 1 to Declaration of Trust - to be
filed
(b) By-Laws (1)
(b.1) Amendment Number 1 to By-laws - to be filed
(c) Not applicable
(d.1) Investment Advisory Agreement dated June 21, 1994 (1)
(d.2) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the Small Cap Equity Fund dated June
21, 1994 (1)
(d.3) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Equity Fund dated December
5, 1995 (1)
(d.4) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Balanced Fund dated December
30, 1997 (2)
(d.5) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Fixed Income Fund dated
December 30, 1997 (2)
(d.6) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
for the LKCM International Fund dated December 30,
1997 (2)
(d.7) Amended Fee Schedule to the Investment Advisory
Agreement Between LKCM Funds and Luther King Capital
Management for the LKCM International Fund - to be
filed
(e.1) Distribution Agreement between LKCM Funds and
Provident Distributors, Inc. dated November 4, 1999
(3)
(e.2) Consulting Agreement between Luther King Capital
Management Corporation and First Data Distributors,
Inc. dated December 1, 1999 (3)
(f) None
C-1
<PAGE>
(g.1) Custodian Servicing Agreement between LKCM Funds and
Firstar Bank, N.A. dated July 10, 1997 (1)
(g.2) Fee Schedule to the Custodian Servicing Agreement
with respect to the LKCM Balanced Fund and LKCM Fixed
Income Fund dated December 30, 1997 (2)
(g.3) Global Custody Agreement between The Chase Manhattan
Bank, Firstar Bank, N.A. and LKCM Fund on behalf of
its LKCM International Fund dated December 31, 1997
(2)
(h.1) Fund Administration Servicing Agreement between LKCM
Funds and Firstar Mutual Fund Services, LLC dated
July 10, 1997 (1)
(h.2) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM Balanced Fund and
LKCM Fixed Income Fund dated December 30, 1997 (2)
(h.3) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM International Fund
dated December 30, 1997 (2)
(h.4) Fund Accounting Servicing Agreement between LKCM
Funds and Firstar Mutual Fund Services, LLC dated
July 10, 1997 (1)
(h.5) Fee Schedule to the Fund Accounting Servicing
Agreement with respect to the LKCM Balanced Fund,
LKCM Fixed Income Fund and LKCM International Fund
dated December 30, 1997 (2)
(h.6) Transfer Agent Servicing Agreement between LKCM Funds
and Firstar Mutual Fund Services dated July 10, 1997
(1)
(h.7) Fee Schedule to the Transfer Agent Servicing
Agreement with respect to the LKCM Balanced Fund,
LKCM Fixed Income Fund and LKCM International Fund
dated December 30, 1997 (2)
(h.8) Form of Master-Feeder Participation Agreement - to be
filed
(i) Opinion of Kirkpatrick & Lockhart, LLP - to be filed
(j.1) Consent of PricewaterhouseCoopers LLP (3)
(j.2) Consent of Deloitte & Touche LLP (3)
(j.3) Re-issuance of opinion by Deloitte & Touche LLP (3)
(k) None
(l) Purchase Agreement dated June 6, 1994 (1)
(m) LKCM Fund Distribution Plan (1)
(n) None
C-2
<PAGE>
(o) Reserved
(p.1) Code of Ethics of LKCM Funds (3)
(p.2) Code of Ethics of Luther King Capital Management
Corporation (3)
(p.3) Code of Ethics of TT International Investment
Management (3)
----------------------------------
(1) Incorporated by reference from Post Effective
Amendment No. 6 to the Registration Statement of the
Trust, SEC File No. 33-75116, previously by EDGAR on
October 14, 1997.
(2) Incorporated by reference from Post Effective
Amendment No. 8 to the Registration Statement of the
Trust, SEC File No. 33-75116, filed previously by
EDGAR on February 27, 1998.
(3) Incorporated by reference from Post-Effective
Amendment No. 11 to the Registration Statement of the
Trust, SEC File No. 33-75116, filed previously via
EDGAR on April 28, 2000.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------
Registrant is not controlled by or under common control with any
person.
Item 25. INDEMNIFICATION
---------------
Reference is made to Article VI of the Registrant's Declaration of
Trust, incorporated by reference as Exhibit 1 hereto. Registrant hereby also
makes the undertaking consistent with Rule 484 under the Securities Act of 1933,
as amended.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provision, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISERS
-----------------------------------------------------
Besides serving as investment advisers to private accounts,
neither the Adviser nor the Subadviser is currently and has not during the past
two years engaged in any other business, profession, vocation, or employment of
C-3
<PAGE>
a substantial nature. Information regarding the business, vocation, or
employment of a substantial nature of the Adviser and Subadviser's directors and
officers is incorporated by reference from the information contained under
"Trustees and Officers" in Part B of this Registration Statement.
Item 27. PRINCIPAL UNDERWRITERS
----------------------
(a) Provident Distributors, Inc. is the general distributor of the
Registrant's shares.
(b) The principal business address of Provident Distributors, Inc.
("Provident"), the Registrant's principal underwriter, is Four Falls Corporate
Center, 6th Floor, West Conshocken, Pennsylvania 19428-2961. The following
information relates to each director and officer of Provident. The address of
each director and officer is the same as Provident's address above.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------- ---------------------------------------
POSITIONS AND OFFICES
NAME POSITIONS AND OFFICES WITH UNDERWRITER WITH REGISTRANT
---- -------------------------------------- ---------------
---------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C>
Philip H. Rinnander President & Treasurer None
---------------------------------------------------------------------------------- ---------------------------------------
Jane Haegele Sole Director, Secretary None
---------------------------------------------------------------------------------- ---------------------------------------
Jason A. Greim Vice President None
---------------------------------------------------------------------------------- ---------------------------------------
Barbara A. Rice Vice President None
---------------------------------------------------------------------------------- ---------------------------------------
Jennifer K. Rinnander Vice President None
---------------------------------------------------------------------------------- ---------------------------------------
Lisa M. Buono Vice President & Compliance Officer None
---------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
(c) Not applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The books, accounts and other documents required by Section 31(a)
under the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder will be maintained at the offices of:
Luther King Capital Management Corporation, 301 Commerce Street,
Suite 1600, Fort Worth, Texas 76102 (records relating to its function as
investment advisor)
Firstar Mutual Fund Services, LLC, 615 East Michigan Street,
Milwaukee, Wisconsin 53202 (records relating to its function as administrator,
transfer agent and dividend disbursing agent)
Firstar Bank, N.A., 615 East Michigan Street, Milwaukee, Wisconsin
53202 (records relating to its function as custodian)
TT International Investment Management, Martin House, 5 Martin
Lane, London EC4R ODP (records relating to its function as sub-adviser of the
International Fund)
C-4
<PAGE>
The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New
York 11245 (records relating to its function as sub-custodian)
Item 29. MANAGEMENT SERVICES
-------------------
All management-related services contracts entered into by
Registrant are discussed in Parts A and B of this Registration Statement.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A
as it relates to the LKCM Funds to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fort Worth and State of Texas on the
21st day of July , 2000.
By: J. Luther King, Jr.*
--------------------------------------------
J. Luther King, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 12 to the Registration Statement of the Registrant
as it relates to the LKCM Funds has been signed below by the following persons
in the capacities and on the date(s) indicated.
Name Title Date
---- ----- ----
J. Luther King, Jr. * Trustee, President and July 21, 2000
--------------------- Chief Executive Officer
J. Luther King, Jr.
H. Kirk Downey * Trustee July 21, 2000
----------------
H. Kirk Downey
Earle A. Shields, Jr. * Trustee July 21, 2000
-----------------------
Earle A. Shields, Jr.
Jacqui Brownfield* Vice President, Treasurer July 21, 2000
------------------ and Secretary
Jacqui Brownfield
/s/ Joseph C. Neuberger
-------------------------------------
*By Joseph C. Neuberger,
Attorney-in-fact
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, TT International
U.S.A. Master Trust has duly caused this Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A for the LKCM Funds as it relates to TT
International U.S.A. Master Trust to be signed on its behalf by the undersigned,
thereunto duly authorized, in London, England on July 21, 2000.
TT INTERNATIONAL U.S.A. MASTER TRUST
By: /s/ David J.S. Burnett
-------------------------------
David J.S. Burnett
President
Attest:
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Post-Effective Amendment No. 12 to the Registration Statement for
the LKCM Funds as it relates to the TT International U.S.A. Master Trust has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ David J.S. Burnett President and July 21, 2000
--------------------------------- Trustee
David J.S. Burnett
/s/ Alexander S. Carswell Treasurer July 21, 2000
---------------------------------
Alexander S. Carswell
/s/ Michael Bullock Secretary and July 21, 2000
--------------------------------- Trustee
Michael Bullock
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
(a) Agreement and Declaration of Trust (1)
(a.1) Amendment Number 1 to Declaration of Trust - to be
filed
(b) By-Laws (1)
(b.1) Amendment Number 1 to By-laws - to be filed
(c) Not applicable
(d.1) Investment Advisory Agreement dated June 21, 1994 (1)
(d.2) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the Small Cap Equity Fund dated June
21, 1994 (1)
(d.3) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Equity Fund dated December 5,
1995 (1)
(d.4) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Balanced Fund dated December
30, 1997 (2)
(d.5) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
Corporation for the LKCM Fixed Income Fund dated
December 30, 1997 (2)
(d.6) Fee Schedule to the Investment Advisory Agreement
Between LKCM Funds and Luther King Capital Management
for the LKCM International Fund dated December 30, 1997
(2)
(d.7) Amended Fee Schedule to the Investment Advisory
Agreement Between LKCM Funds and Luther King Capital
Management for the LKCM International Fund - to be
filed
(e.1) Distribution Agreement between LKCM Funds and Provident
Distributors, Inc. dated November 4, 1999 (3)
(e.2) Consulting Agreement between Luther King Capital
Management Corporation and First Data Distributors,
Inc. dated December 1, 1999 (3)
(f) None
(g.1) Custodian Servicing Agreement between LKCM Funds and
Firstar Bank, N.A. dated July 10, 1997 (1)
<PAGE>
(g.2) Fee Schedule to the Custodian Servicing Agreement with
respect to the LKCM Balanced Fund and LKCM Fixed Income
Fund dated December 30, 1997 (2)
(g.3) Global Custody Agreement between The Chase Manhattan
Bank, Firstar Bank, N.A. and LKCM Fund on behalf of its
LKCM International Fund dated December 31, 1997 (2)
(h.1) Fund Administration Servicing Agreement between LKCM
Funds and Firstar Mutual Fund Services, LLC dated July
10, 1997 (1)
(h.2) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM Balanced Fund and
LKCM Fixed Income Fund dated December 30, 1997 (2)
(h.3) Fee Schedule to the Fund Administration Servicing
Agreement with respect to the LKCM International Fund
dated December 30, 1997 (2)
(h.4) Fund Accounting Servicing Agreement between LKCM Funds
and Firstar Mutual Fund Services, LLC dated July 10,
1997 (1)
(h.5) Fee Schedule to the Fund Accounting Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (2)
(h.6) Transfer Agent Servicing Agreement between LKCM Funds
and Firstar Mutual Fund Services dated July 10, 1997
(1)
(h.7) Fee Schedule to the Transfer Agent Servicing Agreement
with respect to the LKCM Balanced Fund, LKCM Fixed
Income Fund and LKCM International Fund dated December
30, 1997 (2)
(h.8) Form of Master-Feeder Participation Agreement - to be
filed
(i) Opinion of Kirkpatrick & Lockhart, LLP - to be filed
(j.1) Consent of PricewaterhouseCoopers LLP (3)
(j.2) Consent of Deloitte & Touche LLP (3)
(j.3) Re-issuance of opinion by Deloitte & Touche LLP (3)
(k) None
(l) Purchase Agreement dated June 6, 1994 (1)
(m) LKCM Fund Distribution Plan (1)
(n) None
(o) Reserved
(p.1) Code of Ethics of LKCM Funds (3)
<PAGE>
(p.2) Code of Ethics of Luther King Capital Management
Corporation (3)
(p.3) Code of Ethics of TT International Investment
Management (3)
--------------------------------
(1) Incorporated by reference from Post Effective Amendment
No. 6 to the Registration Statement of the Trust, SEC
File No. 33-75116, previously by EDGAR on October 14,
1997.
(2) Incorporated by reference from Post Effective Amendment
No. 8 to the Registration Statement of the Trust, SEC
File No. 33-75116, filed previously by EDGAR on
February 27, 1998.
(3) Incorporated by reference from Post-Effective Amendment
No. 11 to the Registration Statement of the Trust, SEC
File No. 33-75116, filed previously via EDGAR on April
28, 2000.
