UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8352
LKCM Funds
(Exact name of registrant as specified in charter)
c/o Luther King Capital Management
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
(Address of principal executive offices) (Zip code)
Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, NW
Washington, DC 20036
(Name and address of agent for service)
1-800-688-LKCM
Registrant's telephone number, including area code
Date of fiscal year end: December 31, 2003
Date of reporting period: December 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
- --------------------------------------------------------------------------------
LKCM
FUNDS
- --------------------------------------------------------------------------------
LKCM SMALL CAP EQUITY FUND
LKCM EQUITY FUND
LKCM BALANCED FUND
LKCM FIXED INCOME FUND
LKCM INTERNATIONAL FUND
Annual Report
December 31, 2003
DEAR FELLOW SHAREHOLDERS:
We are pleased to report the following performance information for the LKCM
Funds:
FIVE YEAR AVG.
ONE YEAR AVERAGE ANNUAL
TOTAL ANNUALIZED TOTAL
RETURN RETURN RETURN
INCEPTION NAV @ ENDED ENDED SINCE
FUNDS DATES 12/31/03 12/31/03* 12/31/03* INCEPT.*
- ----- ---------- -------- --------- --------- --------
LKCM Equity Fund -
Institutional Class 1/3/96 $12.24 23.38% 3.83% 8.87%
S&P 500 Index 28.68% (0.57)% 9.27%
LKCM Small Cap Equity Fund -
Institutional Class 7/14/94 $19.54 34.71% 10.70% 13.57%
Russell 2000 Index 47.25% 7.13% 10.55%
LKCM Small Cap Equity Fund -
Adviser Class 6/5/03 $19.51 N/A N/A 21.66%#
Russell 2000 Index N/A N/A 22.79%#
LKCM International Fund 12/30/97 $8.52 34.68% (0.27)% 1.39%
MSCI/EAFE Index** 39.17% 0.26% 3.35%
LKCM Balanced Fund 12/30/97 $11.29 16.59% 2.71% 4.33%
S&P 500 Index 28.68% (0.57)% 3.77%
Lehman Bond Index*** 4.31% 6.65% 6.97%
LKCM Fixed Income Fund 12/30/97 $10.52 3.25% 5.77% 6.02%
Lehman Bond Index*** 4.31% 6.65% 6.97%
*Past Performance does not guarantee future results. Performance data
quoted represents past performance and the investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Investment
performance reflects fee waivers in effect. In the absence of such waivers,
total return would be reduced.
**Morgan Stanley Capital International Europe, Australasia, Far East Index
***Lehman Brothers Intermediate Government/Credit Bond Index
#Cumulative return
Short term performance, in particular, is not a good indication of the
fund's future performance, and an investment should not be made based
solely on returns.
2003 came in like a "bear" and out as a "bull" with the market generating
its first positive returns since 1999! The year began with concerns over a
pending war with Iraq, weak stock markets and the continued unwinding of the
speculative bubble of the late 1990s. Although the economy was improving,
spending and investment decisions were being deferred by both consumers and
businesses due to the uncertainty of the upcoming conflict and fear of
additional terrorist attacks.
In retrospect, the war was very brief, although the "end game" continues to
be more deadly and expensive than originally expected. As the war came to a
close, the heightened uncertainty that gripped our Nation early in the year
began to dwindle.
This resulted in stronger individual and business confidence, higher
corporate profits and an economy that exceeded the expectations of most
forecasters and investors. The stock market began a strong advance in March,
which continued throughout the rest of the year. Predictably, the market was led
by smaller companies, unprofitable companies with low dollar price shares, and
the companies that suffered the most during the bear market. Interest rates and
inflation remained tame while the U.S. dollar continued to weaken. Productivity
of existing workers has
2
been very strong and businessmen continue to be cautious regarding expansion as
many industries have excess capacity. As this excess capacity is worked off,
labor markets will recover.
In 2004, we expect the economy to remain strong and for Gross Domestic
Product to exceed 4%. A typical business cycle looks to be in place. The
consumer will be favorably impacted by the next phase of the tax cut which, in
turn, will increase consumption and positively impact the economy, corporate
profits, and corporate cash flow. We believe the excess operating capacity that
has existed in many industries as a result of over-investing in the late 1990s
will diminish. Strong corporate profits and cash flow should result in increased
levels of capital spending, thus continuing the economic expansion into 2005.
While our economic outlook is positive, we do have several areas of concern
that will be monitored closely. These include significant terrorist attacks in
the U.S., which could disrupt consumer confidence and business activity, spikes
in the price of oil, which would act as a hidden tax increase, reacceleration of
inflation, changes in monetary policy, further unexpected devaluation of the
dollar, and significant moves to restrict global trade.
Despite volatility during the year, interest rates on U.S. Government bonds
ended the year close to where they began. The bond market took comfort from
continued strong productivity gains and excess manufacturing capacity (referred
to as the output gap), which kept downward pressure on prices. We expect both
short and long-term interest rates to rise in 2004. The Federal Reserve is
likely to raise short-term rates if the economy continues to improve as
expected. The impact of the trade and budget deficits, coupled with an expanding
economy and/or a weakening dollar, should put upward pressure on rates. In
summary, we believe bond maturities should be kept relatively short.
The stock market snapped back with authority in 2003. The leadership was
primarily concentrated in companies that had declined sharply in the bear market
and where there was a large short interest position. Shares of companies that
were losing money and did not pay dividends outperformed shares of companies
that were earning money and paid dividends. Low dollar priced stocks
outperformed higher dollar priced stocks. In short, investors, or as some would
say, speculators, bought the depressed part of the market as investors' desire
to assume risk or volatility returned after three years of market decline. This
type of leadership is not unusual during the first year following a bear market.
The large amount of liquidity that has been injected into the U.S. economy
via tax cuts, low interest rates, money supply growth, and U.S. Government
spending, has finally found its way to the stock market. We expect this
liquidity injection to continue well into 2004 and continue to be favorable for
share prices. The economic backdrop is positive. Corporate profits and corporate
cash flow generation are rising sharply and are expected to continue to rise
during 2004. The quality of reported earnings is better relative to the 1990s,
when aggressive or loose accounting practices were broadly used. It is difficult
to determine the extent to which the favorable environment has already been
priced into the market. Consequently, we believe investors should remain
cautious, guarded, and refrain from getting carried away with the current
enthusiasm exemplified by the sharp gains of the last nine months.
A rise in interest rates, which we think is likely in 2004, could work
against the stock market. Higher rates could make it difficult for
price-earnings multiples to expand. Without the
3
expansion of price-earnings multiples, the market will have to depend on rising
earnings to drive share prices. Operating earnings should expand at a rate
greater than 10% during 2004. Consequently, even if price-earnings multiples
stay the same, the stock market should have a nice gain during the current year.
Because the stock market is a leading economic indicator, earnings and interest
rate outlook for 2005 will be very important to stock prices during the second
half of the year.
It is interesting to note that during the 1980s and 1990s, falling interest
rates had a positive impact on stock prices as price-earnings multiples
expanded. In fact, falling interest rates were responsible for approximately 40%
of the stock market gain during that period. The remaining 60% was the result of
growing corporate profits. Because we believe interest rates will rise, we do
not anticipate any meaningful price-earnings multiple expansion in 2004.
We do believe that in 2004, companies that are earning money and that pay
dividends will perform better on a relative basis than they did in 2003.
Dividends are an important part of historical investment returns and we expect
dividends will be important in 2004. The current market dividend payout ratio is
approximately 35%, while the historical payout ratio is near 50%. Consequently,
we would not be surprised to see a large number of companies increase their
dividends during 2004. This development is likely to be reinforced by the
relatively low tax rate on dividends, which is currently as low as 15%.
Presidential election activities should not materially impact the market.
Historically, we have had good markets under both Democratic and Republican
presidents. However, the market is sensitive to tax policy, which we believe
will be a central theme both in the campaigns and in the market.
We are optimistic in our outlook for the stock market. This said, we would
not be surprised to see the market enter a period of consolidation after 2003's
healthy advance. Rising corporate profits should more than offset higher
interest rates and their expected dampening affect on price - earnings
multiples. Investors should be primarily focused on shares of competitively
advantaged companies that are prudently capitalized and can generate high levels
of profitability and returns.
The LKCM Equity Fund is managed to provide long-term capital appreciation
and is primarily invested in common stocks of mid to large sized companies. The
Fund focuses its investments in quality companies with above-average
profitability and reasonable valuations. During 2003, the Fund returned 23.38%
vs. the S&P 500's 28.68% return. As of December 31, 2003, the total net assets
in the portfolio were $33.7 million with 96.6% of the net assets invested in
common stocks and 3.4% in cash reserves, net of liabilities. 2003 was a record
performance year, as it was one of the highest annual returns since the
inception of the Fund in 1996. Our performance was impacted by our limited
exposure to the bigger winners, the lower quality and lower market cap
companies. In addition, our results were held back due to our positions in the
Consumer Staples and Energy Sectors. The Fund remains positioned with a broadly
diversified portfolio of quality companies.
The LKCM Small Cap Fund is managed to maximize capital appreciation through
investment primarily in the common stocks of smaller companies. The performance
of the Fund's Institutional Class during 2003 was 34.71% vs. the Russell 2000's
47.25% return. The Fund's strategy focuses on investing in shares of reasonably
valued niche companies with above average growth and return prospects. Stock
selection and a focus on valuation remain an
4
important component of our success. As of December 31, 2003, the total net
assets of the Fund were $270.5 million with 95.6% of the net assets invested in
common and preferred stocks and 4.4% in cash reserves, net of liabilities. 2003
was a record performance year, as it was the highest annual return since the
inception of the Fund in 1994. Despite the fact that 2003 was a record year for
absolute return, we did underperform the Russell 2000. The Index gained
significantly from the dramatic rebound in the weakest companies; unproven
businesses, unprofitable companies, and companies whose stock prices were
punished most dramatically during the prior three-year bear market (i.e. low
market caps and low stock prices). We invest in higher quality companies and,
therefore, did not participate to the same degree as the Index. We chose to stay
consistent with our investment strategy of focusing on competitively advantaged
companies with proven businesses models, as we believe these companies present
the best opportunities for outperformance in the future.
The LKCM Balanced Fund emphasizes current income and long-term capital
appreciation. In order to attain the desired reward/risk profile, the Fund
invests in a blend of common stocks, convertible securities, government and
corporate bonds and cash. We believe our diversified, total return approach
proved successful during 2003 as the Fund returned 16.59% vs. the 28.68% return
in the S&P 500 and the 4.31% return in the Lehman Intermediate Bond Index. As of
December 31, 2003, total net assets were $8.8 million and the asset mix
contained 69.6% common stocks, 3.7% convertible securities, 26.2% corporate
bonds, and 0.5% in cash reserves, net of liabilities. The equity sector of the
Fund contributed the majority of the Fund's returns for the year. Within the
equity sector, energy and telecommunication stocks appreciated only modestly
while investments in areas such as information technology and financial services
contributed significantly to the Fund's returns. We feel the "total return"
philosophy of controlling risk via a blend of asset classes remains an
attractive investment strategy for long-term investors.
The LKCM Fixed Income Fund's main objective is current income. The Fund's
strategy is to invest in a combination of non-callable bonds for their offensive
characteristics and callable bonds as defensive investments in order to create a
high quality, low volatility, short-to-intermediate maturity portfolio. Our
primary focus is to identify corporate bonds with strong credit profiles and
attractive yields. The Fund had an average effective maturity at year-end of
approximately four years and an average quality rating of single A. Relative to
the comparable benchmark, the Fund had a higher percentage of its assets
invested in corporate bonds and had a shorter average maturity. The Fund's
shorter maturity and higher credit quality focus detracted from performance
during 2003. A shorter maturity and higher quality focus should have the Fund
well positioned for an economic recovery and subsequent rise in interest rates.
For 2003, the Fund returned 3.25% vs. 4.31% for the Lehman Intermediate Bond
Index. As of December 31, 2003, total net assets were $68.4 million and the
asset mix was 84.1% in corporate bonds, 13.5% in U.S. Treasury Notes, and 2.4%
in cash and cash equivalents, net of liabilities.
The LKCM International Fund currently owns shares of the TT EAFE Fund and
comments from TT International Investment Management follow this letter.
At LKCM, our investment objective is to utilize our proprietary research
capabilities to achieve superior returns over the market cycle in accordance
with the specific objectives of each of the Funds. Our investment strategy is
focused on our fundamental research effort combined with adequate
diversification and a keen eye on valuation. As always, we focus on attractively
valued, competitively advantaged companies with business models supporting high
and/or rising
5
returns on invested capital, strong and growing cash flows and solid balance
sheets. This investment process is consistent in all of our Fund offerings and
should keep us well positioned for the future. We appreciate the opportunity to
exercise our investment talents on your behalf and the trust you have placed in
LKCM by your investment in these Funds.
/s/ Luther King
J. Luther King, Jr., CFA
February 2, 2004
Please refer to the Schedule of Investments found on pages 19-28 and 50-52 of
the report for more information on Fund holdings. Fund holdings and sector
allocations are subject to change and are not recommendations to buy or sell
securities.
Please refer to the following performance pages for fund-specific risks.
6
TT INTERNATIONAL INVESTMENT MANAGEMENT
The LKCM International Fund is managed in a style that seeks a total return in
excess of the total return of the Morgan Stanley Capital International Europe,
Australasia and Far East Index.
FIRST QUARTER 2003
LKCM INTERNATIONAL FUND: -7.64% MSCI EAFE: -8.13%
Markets - The build up to the war in Iraq dominated market sentiment and price
action. Uncertainty over the timing of the conflict together with solvency fears
in the insurance sector combined to send stock markets to new lows. They bounced
back strongly in March once it became clear that military action was imminent.
Portfolio - Having been relatively cautious in the latter part of last year, we
used market weakness in the pre-war period to increase the risk profile of the
European portfolio on the premise that a quick and decisive conflict would lead
to a sharp relief rally. We also increased our exposure to Japan in February
ahead of the financial year-end book closing when public funds are traditionally
used to prop up the market. However, we reduced Asia almost to nothing given the
deteriorating geopolitical situation in North Korea and the SARS outbreak that
threatened to have a material impact on regional growth rates.
Performance - The Fund ended marginally ahead of MSCI EAFE. Allocation to cash
was significantly positive given sharp market falls and this accounted for the
small positive relative return over the first quarter. European markets were
particularly badly affected by the uncertainty in the first quarter and were
responsible for most of the portfolio's fall. Europe also underperformed the
benchmark because of disappointing stock selection (mainly in Financials, Energy
and Materials). Japan and Asia suffered too, but relative to the broad index,
these markets performed well. Our underweight position (despite increasing Japan
over the first quarter) meant allocation returns in both regions were negative.
Our early positioning in more economically sensitive sectors hurt performance in
the first quarter's volatile markets but produced strong returns in the second
quarter as markets bounced back.
SECOND QUARTER 2003
LKCM INTERNATIONAL FUND: +20.61% MSCI EAFE: +19.57%
Markets - After the battering that equities endured in the first quarter, the
second quarter provided some welcome relief. Markets rebounded following a short
and decisive war in Iraq and continued to rally for much of the second quarter,
buoyed by better economic data and greater policy stimulus, before consolidating
at quarter-end. Bond market weakness in late June prompted fears that rising
yields would choke off the economic recovery and the sell-off spread to
equities.
Portfolio - Having raised the risk profile of the European portfolio in the
first quarter, we maintained a more aggressive stance for most of the second
quarter but started to reduce our weighting at quarter-end given that Europe had
enjoyed the best of the rally and there were, in our view, better opportunities
further east. We remained underweight Japan and Asia throughout the second
quarter but began to increase our exposure (at the expense of Europe) at the end
of
7
June. These markets tend to be highly cyclical and we believe will respond to
improving U.S./China growth and global reflation.
Performance - The Fund ended a very strong quarter up more than 20% and over 1%
ahead of MSCI EAFE. Having fallen furthest over the first quarter, markets in
Europe saw the sharpest rises in the second quarter and were responsible for
almost all the positive return. The portfolio's strong performance relative to
the index was also chiefly attributable to Europe - stock selection
(particularly in Financials) was the biggest positive factor. The Japanese
market recovered impressively after a shaky start and small positives in
allocation, stock selection and currency helped Japan produce a respectable
relative return. Despite a strong run in the latter part of the second quarter,
markets in Asia performed poorly in relative terms - our low weighting to the
region was a further positive factor.
THIRD QUARTER 2003
LKCM INTERNATIONAL FUND: +5.88% MSCI EAFE: +8.18%
Performance - Positive European returns were offset by Far East stock selection
and currencies. Portfolio strategy in allocation terms was broadly correct -
reducing Europe (worst relative performer) to underweight and building a
position in Emerging Markets (strong relative performers) produced positive
returns. Stock selection though, particularly Japan and Korea, was disappointing
and accounted for much of the third quarter's underperformance. Currencies were
also negative with a +/US$ hedge (now closed) costing ~0.5% in relative terms.
Markets - Markets edged higher following the second quarter's impressive gains
before consolidating in September. Stronger data and better-than-expected
company results underpinned equities during quiet summer trading until
deteriorating newsflow, currency jitters and oil price rises prompted a sharp
correction at quarter end. Strong data from the U.S. showed some signs of
slowing down in September but elsewhere news remained mixed:
o The dollar fell heavily (to US$1.17 vs. the Euro &(Y)111) following
the G7 (the world's seven wealthiest countries) summit
o Euroland Gross Domestic Product contracted in the second quarter but
forward-looking surveys started to bounce back
o Japanese industrial production fell though business sentiment
(Tankan-quarterly survey) rose strongly
Japan powered ahead in the third quarter driven by improving U.S. data and
further evidence of recovery in the domestic economy, Japan's stockmarket
recorded its largest one-day drop in 2 years following heavy overnight falls in
the U.S. and uncertainty over November's Diet elections. A sharp rebound at
month-end helped regain some of this lost ground.
8
FOURTH QUARTER 2003
LKCM INTERNATIONAL FUND: +14.19% MSCI EAFE: +17.11%
Performance - October saw strong absolute and relative returns driven by a high
beta European portfolio. Emerging Markets were also up. Allocation to Korea and
Taiwan added 0.3% and stock selection was positive. The rest of Asia, including
Japan, ended in-line with the benchmark. But stock selection, largely in Japan,
hurt the Fund's relative performance in November. However, Europe, where we were
relatively underweight, did well against the index. A new +/CA$ hedge (since
closed) cost a further 0.4% or so. December's disappointing relative return was
due to stock selection. European financials were the biggest losers. Japan and
Asia were flat while Emerging Markets were down relatively despite a positive
allocation return.
Markets - Markets bounced back on strong data and rising company earnings in
October. Signs that the U.S. labour market was finally picking up and a
generally strong third quarter reporting season lifted equities following
September's late sell-off. However, by November, strong data on the labour
market, consumer confidence and business sentiment all failed to lift equities,
which in Europe were held back by the strength of the Euro and the volume of new
paper coming into the market. The prospect of a trade war and existing fears
over the current account deficit sent the dollar to a new record low against the
Euro of US$1.20. Following a quiet start to the month, more positive data,
notably a very strong Philly Fed survey, and the eventual capture of Saddam
Hussein, provided the catalyst for a year-end rally which saw many markets close
at 52 week highs. The dollar, though, continued its slide on fears over the
widening of the U.S. current account deficit, closing vs. the Euro at U.S.$1.26
and (Y)107.
The Fund posted a net return of 34.68% vs. 39.17% for MSCI EAFE during 2003. At
December 31, 2003 the asset base of the Fund was U.S.$41.2m (U.S.$29.6m at June
30, 2003).
Past performance does not guarantee future results. Performance data quoted
represents past performance and the investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
9
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM Small
Cap Equity Fund compared to the Fund's representative market indices. The LKCM
Small Cap Equity Fund invests in smaller companies, which may involve additional
risks such as limited liquidity and greater volatility.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost. The graph and table do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. One can not invest in an unmanaged index.
AVERAGE ANNUAL TOTAL RETURN
- -----------------------------------------------------------
PAST PAST PAST SINCE
1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- -----------------------------------------------------------
LKCM SMALL
CAP EQUITY
FUND -
INSTITUTIONAL
CLASS 34.71% 8.50% 10.70% 13.57%
- -----------------------------------------------------------
Russell 2000
Index 47.25% 6.27% 7.13% 10.55%
- -----------------------------------------------------------
Lipper Small-Cap
Core Fund
Index 40.90% 6.83% 9.39% 12.14%
- -----------------------------------------------------------
(1) July 14, 1994
A Hypothetical $10,000 Investment in LKCM Small Cap Equity Fund -
Institutional Class
Line Chart:
LKCM Small Cap Russell 2000 Lipper Small Cap
Equity Fund - Institutional Total Return Core Fund
Class $33,351 Index $25,843 Index $29,619
7/94 10000 10000 10000
12/94 10500 10277 10343
6/95 12170 11642 11874
12/95 13839 13065 13522
6/96 16157 14437 15418
12/96 17392 15228 16051
6/97 19526 16777 17746
12/97 21404 18614 19620
6/98 22102 19595 20750
12/98 20064 18198 18908
6/99 22042 19880 19953
12/99 23440 22083 22723
6/00 24930 22757 24666
12/00 26105 21439 24298
6/01 27334 22898 25899
12/01 28064 21995 26029
6/02 29004 21036 24618
12/02 24758 17550 21021
6/03 27343 20686 24034
12/03 33351 25843 29619
10
The Russell 2000 Index is an unmanaged index consisting of the 2,000 smallest of
the 3,000 largest stocks. The average market capitalization was approximately
$445 million.
The Lipper Small-Cap Core Fund Index is an unmanaged index consisting of 30
small-cap core funds that, by portfolio practice, invest at least 75% of their
equity assets in companies with market capitalizations (on a three-year weighted
basis) of less than 250% of the dollar-weighted median market capitalization of
the smallest 500 of the middle 1,000 securities of the S&P SuperComposite 1500
Index. Small-Cap core funds have more latitude in the companies in which they
invest. These funds will normally have an average price-to-earnings ratio,
price-to-book ratio and three-year sales-per-share growth figure, compared to
the S&P Small Cap 600 Index.
11
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM Equity
Fund compared to the Fund's representative market indices.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost. The graph and table do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. One can not invest in an unmanaged index.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------
PAST PAST PAST SINCE
1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- -------------------------------------------------------------
LKCM EQUITY
FUND -
INSTITUTIONAL
CLASS 23.38% (1.99)% 3.83% 8.87%
- -------------------------------------------------------------
S&P 500 Index 28.68% (4.05)% (0.57)% 9.27%
- -------------------------------------------------------------
Lipper Large-Cap
Core Fund Index 24.80% (5.02)% (1.08)% 8.08%
- -------------------------------------------------------------
(1) January 3, 1996
A Hypothetical $10,000 Investment in LKCM Equity Fund - Institutional Class
Line Chart:
LKCM Equity S&P Lipper Large-Cap
Fund - Institutional Total Return Core Fund
Class $19,731 Index $20,309 Index $18,622
1/96 10000 10000 10000
10800 10924 10904
12/96 11700 12201 11988
13491 14715 13817
12/97 14457 16272 15137
16179 19154 17256
12/98 16352 20922 17965
18522 23513 19875
12/99 20124 25324 21695
20597 25217 22567
12/00 20957 23019 20972
19612 21477 19896
12/01 18731 20283 18714
17425 17594 16603
12/02 15992 15782 14921
17340 17640 16436
12/03 19731 20309 18622
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and
industry group representation. It is a market-value weighted index (stock price
times number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The "500" is one of the most widely used
benchmarks of U.S. equity performance.
12
The Lipper Large-Cap Core Fund Index is an unmanaged index consisting of 30
large-cap core funds that, by portfolio practice, invest at least 75% of their
equity assets in companies with market capitalizations (on a three-year weighted
basis) greater than 300% of the dollar-weighted median market capitalization of
the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core
funds have more latitude in the companies in which they invest. These funds
typically have an average price-to-earnings ratio, price-to-book ratio and
three-year sales-per-share growth value, compared to the S&P 500 Index.
13
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM
Balanced Fund compared to the Fund's representative market indices.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost. The graph and table do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. One can not invest in an unmanaged index.
AVERAGE ANNUAL TOTAL RETURN
- ------------------------------------------------------------
PAST PAST PAST SINCE
1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- ------------------------------------------------------------
LKCM
BALANCED
FUND 16.59% 1.03% 2.71% 4.33%
- ------------------------------------------------------------
Lehman
Bond Index(2) 4.31% 7.68% 6.65% 6.97%
- ------------------------------------------------------------
S&P 500 Index 28.68% (4.05)% (0.57)% 3.77%
- ------------------------------------------------------------
Lipper Balanced
Fund Index 19.94% 1.20% 2.95% 4.88%
- ------------------------------------------------------------
(1) December 30, 1997
(2) Lehman Brothers Intermediate Government/Credit Bond Index
A Hypothetical $10,000 Investment in LKCM Balanced Fund
Line Chart:
LKCM Balanced Lehman Bond Lipper Balanced S&P 500
Fund $12,900 Index $14,988 Fund $13,310 Index $12,491
1/98 10000 10000 10000 10000
6/98 10694 10417 10955 11771
12/98 11283 10947 11508 12858
6/99 12206 10698 12218 14450
12/99 12809 10712 12541 15564
6/00 12685 11159 12759 15498
12/00 12510 11981 12841 14147
6/01 12381 12401 12626 13199
12/01 12569 13000 12426 12465
6/02 11751 13519 11675 10825
12/02 11065 14369 11098 9706
6/03 11777 14980 12083 10843
12/03 12900 14988 13310 12491
The Lehman Brothers Intermediate Government/Credit 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;
14
remaining maturity of one to ten years; minimum outstanding par value of $150
million; rated investment grade or higher by Moody's Investors Service or
equivalent; must be dollar denominated and non-convertible; and must be publicly
issued.
The Lipper Balanced Fund Index is an unmanaged index consisting of 30 funds
that, by portfolio practice, conserve principal by maintaining at all times a
balanced portfolio of both stocks and bonds. Typically, the stock/bond ratio
ranges around 60%/40%.
The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and
industry group representation. It is a market-value weighted index (stock price
times number of shares outstanding), with each stock's weight in the Index
proportionate to its market value. The "500" is one of the most widely used
benchmarks of U.S. equity performance.
15
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM Fixed
Income Fund compared to the Fund's representative market indices.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost. The graph and table do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. One can not invest in an unmanaged index.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------
PAST PAST PAST SINCE
1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- -------------------------------------------------------------
LKCM
FIXED INCOME
FUND 3.25% 6.73% 5.77% 6.02%
- -------------------------------------------------------------
Lehman
Bond Index(2) 4.31% 7.68% 6.65% 6.97%
- -------------------------------------------------------------
Lipper Short
Intermediate
Investment-Grade
Debt Fund Index 3.85% 6.26% 5.72% 5.93%
- -------------------------------------------------------------
(1) December 30, 1997
(2) Lehman Brothers Intermediate Government/Credit Bond Index
A Hypothetical $10,000 Investment in LKCM Fixed Income Fund
Line Chart:
Lipper Short Intermediate
LKCM Fixed Lehman Bond Investment-Grade Debt
Income Fund $14,203 Index $14,988 Fund Index $14,137
1/98 10000 10000 10000
6/98 10308 10417 10377
12/98 10727 10947 10788
6/99 10606 10698 10635
12/99 10690 10712 10682
6/00 11016 11159 11034
12/00 11679 11981 11813
6/01 12251 12401 12237
12/01 12925 13000 12784
6/02 13213 13519 13104
12/02 13756 14369 13844
6/03 14153 14980 14108
12/03 14203 14988 14137
The Lehman Brothers Intermediate Government/Credit 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;
16
remaining maturity of one to ten years; minimum outstanding par value of $150
million; rated investment grade or higher by Moody's Investors Service or
equivalent; must be dollar denominated and non-convertible; and must be publicly
issued.
The Lipper Short Intermediate Investment-Grade Debt Fund Index is an unmanaged
index consisting of 30 funds that, by portfolio practice, invest at least 65% of
their assets in investment-grade debt issues (rated in the top four grades) with
dollar weighted average maturities of one to five years.
17
PERFORMANCE:
- --------------------------------------------------------------------------------
The following information illustrates the historical performance of LKCM
International Fund compared to the Fund's representative market index. The LKCM
International Fund invests in foreign securities which may involve greater
volatility and political, economic and currency risks and differences in
accounting methods.
Note: Past performance is not predictive of future performance. Your investment
return and principal value will fluctuate. When shares are redeemed, they may be
worth more or less than the original cost. The graph and table do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares.
An index is a fictitious unmanaged portfolio and does not trade or incur any
expenses. One can not invest in an unmanaged index.
AVERAGE ANNUAL TOTAL RETURN
- -------------------------------------------------------------
PAST PAST PAST SINCE
1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- -------------------------------------------------------------
LKCM
INTERNATIONAL
FUND 34.68% (8.18)% (0.27)% 1.39%
- -------------------------------------------------------------
EAFE Index(2) 39.17% (2.57)% 0.26% 3.35%
- -------------------------------------------------------------
Lipper International
Fund Index 36.00% (1.86)% 2.13% 3.81%
- -------------------------------------------------------------
(1) December 30, 1997
(2) Morgan Stanley Capital International Europe, Australasia, Far East Index
A Hypothetical $10,000 Investment in LKCM International Fund
Line Chart:
LKCM International EAFE Lipper International
Fund $10,864 Index $12,189 Fund Index $12,520
1/98 10000 10000 10000
6/98 10920 11608 11581
12/98 11010 12033 11266
6/99 11210 12527 12043
12/99 15712 15317 15527
6/00 15559 14712 14889
12/00 14035 13179 13243
6/01 11434 11281 11583
12/01 9942 10385 10683
6/02 9474 10241 10739
12/02 8067 8758 9206
6/03 8988 9620 10052
12/03 10864 12189 12520
The Morgan Stanley Capital International Europe Australasia, Far East Index
("MSCI/EAFE") is an unmanaged index composed of 21 European and Pacific Basin
countries. The MSCI/EAFE Index is the most recognized international index and is
weighted by market capitalization.
The Lipper International Fund Index is an unmanaged index consisting of 30 funds
that, by portfolio practice, invest their assets in securities whose primary
trading markets are outside of the United States.
18
LKCM SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
COMMON STOCKS - 95.60% SHARES VALUE
- ----------------------------------------------------------------------------------------
BANKS - 7.33%
City Bank 44,255 $ 1,438,287
Cullen/Frost Bankers, Inc. 100,000 4,057,000
Glacier Bancorp, Inc. 90,000 2,916,000
Hibernia Corporation - Class A 125,000 2,938,750
Southwest Bancorporation
of Texas, Inc. 85,000 3,302,250
Texas Regional Bancshares,
Inc. - Class A 140,000 5,180,000
-----------
19,832,287
-----------
BASIC MATERIALS - 6.99%
Anchor Glass Container
Corporation 128,000 2,048,000
Boise Cascade Corporation 100,000 3,286,000
Kronos Worldwide, Inc. # 25,000 555,000
Louisiana-Pacific
Corporation # 330,000 5,900,400
NL Industries, Inc. 50,000 585,000
Packaging Corp of America 145,000 3,169,700
Pope & Talbot, Inc. 190,000 3,345,900
-----------
18,890,000
-----------
CONSUMER DISCRETIONARY - 18.01%
Arctic Cat Inc. 100,000 2,470,000
Argosy Gaming Company # 85,000 2,209,150
Emmis Communications
Corporation - Class A # 150,000 4,057,500
Gray Television, Inc. 214,600 3,244,752
InterTAN, Inc. # 137,600 1,392,512
Iron Mountain, Inc. # 60,000 2,372,400
La Quinta Properties, Inc. -
Paired # (2) 430,000 2,756,300
Mobile Mini, Inc. # 210,000 4,141,200
Multimedia Games, Inc. # 55,000 2,260,500
Office Depot, Inc. # 125,000 2,088,750
Peet's Coffee & Tea Inc. # 160,000 2,785,600
Penn National Gaming, Inc. # 85,000 1,961,800
Sirius Satellite Radio Inc. # 775,000 2,449,000
Sylvan Learning Systems,
Inc. # 108,200 3,115,078
Tractor Supply Company # 160,000 6,222,400
Viad Corp 124,000 3,100,000
West Marine, Inc. # 75,200 2,091,312
-----------
48,718,254
-----------
CONSUMER STAPLES - 7.72%
Charming Shoppes, Inc. # 320,000 1,728,000
Columbia Sportswear
Company # 47,900 2,610,550
Cott Corporation # (1) 125,000 3,501,250
Foot Locker, Inc. 100,000 2,345,000
- ----------------------------------------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------
CONSUMER STAPLES - 7.72% (CONTINUED)
Hain Celestial Group, Inc. # 159,000 $ 3,690,390
Jos. A. Bank Clothiers, Inc. # 93,400 3,240,046
United Natural Foods, Inc. # 105,000 3,770,550
-----------
20,885,786
-----------
ENERGY - 8.18%
Cabot Oil & Gas Corporation -
Class A 105,000 3,081,750
Denbury Resources Inc. # 160,000 2,225,600
Encore Acquisition
Company # 100,000 2,465,000
Evergreen Resources, Inc. # 120,000 3,901,200
Hanover Compressor
Company # 370,000 4,125,500
St. Mary Land & Exploration
Company 80,000 2,280,000
Tom Brown, Inc. # 125,000 4,031,250
-----------
22,110,300
-----------
FINANCIAL SERVICES - 1.02%
Triad Guaranty Inc. # 55,000 2,769,250
-----------
HEALTH CARE - 8.61%
Apogent Technologies Inc. # 120,000 2,764,800
Bentley Pharmaceuticals, Inc. # 154,000 2,048,200
Cyberonics, Inc. # 80,000 2,560,800
Henry Schein, Inc. # 50,000 3,379,000
Hooper Holmes, Inc. 260,000 1,606,800
Sybron Dental Specialties,
Inc. # 150,000 4,215,000
Triad Hospitals, Inc. # 110,000 3,659,700
Wright Medical Group, Inc. # 100,000 3,044,000
-----------
23,278,300
-----------
INDUSTRIALS - 10.37%
Albany International Corp. -
Class A 105,000 3,559,500
Allied Waste Industries, Inc. # 299,272 4,153,895
Hughes Supply, Inc. 50,000 2,481,000
Hydril Company # 100,000 2,393,000
Lindsay Manufacturing
Company 225,000 5,681,250
Reliance Steel & Aluminum
Company 131,250 4,358,813
Waste Connections, Inc. # 85,000 3,210,450
Watts Water Technologies, Inc. -
Class A 100,000 2,220,000
-----------
28,057,908
-----------
See notes to the financial statements.
19
LKCM SMALL CAP EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUST - 2.26%
American Financial Realty
Trust 170,000 $ 2,898,500
FelCor Lodging Trust Inc. 290,000 3,213,200
-----------
6,111,700
-----------
TECHNOLOGY - 14.20%
Activision, Inc. # 187,500 3,412,500
Arbitron Inc. # 55,000 2,294,600
Brooks Automation, Inc. # 125,000 3,021,250
Cognos, Inc. # (1) 50,000 1,531,000
Cymer, Inc. # 60,000 2,771,400
Harris Corporation 80,000 3,036,000
KEMET Corporation # 235,000 3,217,150
Kopin Corporation # 280,000 1,878,800
NETGEAR, Inc. # 175,000 2,798,250
Pegasus Solutions Inc. # 100,000 1,047,000
Perot Systems Corporation -
Class A # 150,000 2,022,000
The Reynolds and Reynolds
Company - Class A 110,000 3,195,500
SERENA Software, Inc. # 160,000 2,936,000
Tekelec # 190,000 2,954,500
Vishay Intertechnology, Inc. # 100,000 2,290,000
-----------
38,405,950
-----------
TELECOMMUNICATIONS - 1.82%
Advanced Fibre Communications,
Inc. # 100,000 2,015,000
Inet Technologies, Inc. # 140,000 1,680,000
KVH Industries, Inc. # 45,000 1,236,150
-----------
4,931,150
-----------
TRANSPORTATION - 9.09%
EGL, Inc. # 200,000 3,512,000
J.B. Hunt Transport
Services, Inc. # 106,000 2,863,060
Kirby Corporation # 280,000 9,766,400
Landstar System, Inc. # 98,000 3,727,920
RailAmerica, Inc. # 190,500 2,247,900
RailAmerica, Inc. # r
(Acquired 2/19/1999,
Cost $1,846,219) 209,500 2,472,100
-----------
24,589,380
-----------
TOTAL COMMON STOCKS
(cost $169,611,038) 258,580,265
-----------
- ----------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS - 4.57% SHARES VALUE
- ----------------------------------------------------------------------------------------
MONEY MARKET FUNDS - 4.57%
Federated Cash Trust Series II -
Treasury Cash Series II 6,172,334 $ 6,172,334
SEI Daily Income Trust
Government Fund -
Class B 6,172,334 6,172,334
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $12,344,668) 12,344,668
-----------
TOTAL INVESTMENTS - 100.17%
(cost $181,955,706) 270,924,933
-----------
Other Liabilities, less Assets - (0.17)% (446,890)
-----------
Total Net Assets - 100.00% $270,478,043
============
# - Non-income producing security.
(1) - Foreign security.
(2) - Security represents equal ownership of LaQuinta Properties, Inc. -
Class B and La Quinta Corp. common stock.
r - Restricted Security. Purchased shares in a private placement
transaction; resale to the public may require registration or may
extend only to qualified institutional buyers.
See notes to the financial statements.
20
LKCM EQUITY FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
COMMON STOCK - 96.61% SHARES VALUE
- ----------------------------------------------------------------------------------------
BANKS - 11.85%
Bank of America Corporation 10,000 $ 804,300
The Bank of New York
Company, Inc. 11,000 364,320
Bank One Corporation 6,500 296,335
Charter One Financial, Inc. 12,000 414,600
Cullen/Frost Bankers, Inc. 17,000 689,690
Hibernia Corporation - Class A 15,000 352,650
Mellon Financial Corporation 12,000 385,320
Northern Trust Corporation 6,000 278,520
Wells Fargo Company 7,000 412,230
-----------
3,997,965
-----------
BASIC MATERIALS - 3.96%
E.I. du Pont de Nemours
and Company 10,000 458,900
Temple-Inland Inc. 14,000 877,380
-----------
1,336,280
-----------
CONSUMER DISCRETIONARY - 12.53%
Clear Channel
Communications, Inc. 24,000 1,123,920
Gannett Company, Inc. 8,000 713,280
Home Depot, Inc. 20,000 709,800
Newell Rubbermaid Inc. 19,500 444,015
Tiffany & Co. 15,400 696,080
Time Warner Inc. # 30,000 539,700
-----------
4,226,795
-----------
CONSUMER STAPLES - 9.85%
CVS Corporation 8,000 288,960
Kimberly-Clark Corporation 11,500 679,535
Kohl's Corporation # 7,500 337,050
Kraft Foods Inc. - Class A 9,000 289,980
McCormick & Company,
Incorporated (2) 12,600 379,260
PepsiCo, Inc. 15,000 699,300
The Procter & Gamble Company 6,500 649,220
-----------
3,323,305
-----------
ENERGY - 8.73%
Anadarko Petroleum
Corporation 10,000 510,100
BJ Services Company # 6,300 226,170
Burlington Resources Inc. 6,500 359,970
EOG Resources, Inc. 9,000 415,530
Exxon Mobil Corporation 18,000 738,000
Halliburton Company 13,000 338,000
Noble Energy, Inc. 8,000 355,440
-----------
2,943,210
-----------
- ----------------------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES - 7.17%
American International
Group, Inc. 4,200 $ 278,376
Automatic Data Processing, Inc. 10,000 396,100
Citigroup, Inc. 6,000 291,240
First Data Corporation 9,000 369,810
Morgan Stanley 5,700 329,859
Prudential Financial, Inc. 18,000 751,860
-----------
2,417,245
-----------
HEALTH CARE - 7.15%
Abbott Laboratories 8,000 372,800
Merck & Company, Inc. 10,000 462,000
Pfizer Inc. 16,400 579,412
Schering-Plough Corporation 20,000 347,800
Teva Pharmaceutical
Industries Ltd. - ADR (1) 4,000 226,840
Wyeth 10,000 424,500
-----------
2,413,352
-----------
INDUSTRIALS - 13.22%
Allied Waste Industries, Inc. # 60,000 832,800
General Electric Company 20,000 619,600
Honeywell International Inc. 24,000 802,320
Masco Corporation 18,000 493,380
Raytheon Company - Class B 22,000 660,880
Tyco International Ltd.(1) 15,000 397,500
Waste Management, Inc. 22,000 651,200
-----------
4,457,680
-----------
TECHNOLOGY - 20.14%
BMC Software, Inc. # 25,000 466,250
Cisco Systems, Inc. # 35,000 850,150
Dell Inc. # 25,700 872,772
EMC Corporation # 30,000 387,600
Intel Corporation 27,000 869,400
International Business
Machines Corporation 5,000 463,400
Microsoft Corporation 20,000 550,800
Motorola, Inc. 34,000 478,380
Oracle Corporation # 45,000 594,000
Sun Microsystems, Inc. # 35,000 157,150
Texas Instruments Incorporated 30,000 881,400
VERITAS Software
Corporation # 6,000 222,960
-----------
6,794,262
-----------
See notes to the financial statements.
21
LKCM EQUITY FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
COMMON STOCK SHARES VALUE
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 2.01%
ALLTEL Corporation 7,000 $ 326,060
Verizon Communications Inc. 10,000 350,800
-----------
676,860
-----------
TOTAL COMMON STOCKS
(cost $26,726,582) 32,586,954
-----------
- ----------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS - 4.22% SHARES VALUE
- ----------------------------------------------------------------------------------------
MONEY MARKET FUNDS - 4.22%
Federated Cash Trust Series II -
Treasury Cash Series II 710,975 710,975
SEI Daily Income Trust
Government Fund - Class B 710,975 710,975
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,421,950) 1,421,950
-----------
TOTAL INVESTMENTS - 100.83%
(cost $28,148,532) 34,008,904
-----------
Liabilities, less Other Assets - (0.83)% (279,731)
-----------
Total Net Assets - 100.00% $33,729,173
===========
# - Non-income producing security.
(1) - Foreign security.
(2) - Non-voting shares.
ADR - American Depository Receipts.
See notes to the financial statements.
22
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
COMMON STOCKS - 69.58% SHARES VALUE
- ----------------------------------------------------------------------------------------
BANKS - 7.66%
The Bank of New York
Company, Inc. 4,000 $ 132,480
Charter One Financial, Inc. 4,000 138,200
Cullen/Frost Bankers, Inc. 3,500 141,995
Mellon Financial Corporation 3,440 110,458
Wells Fargo Company 2,500 147,225
-----------
670,358
-----------
BASIC MATERIALS - 4.04%
Boise Cascade Corporation 3,600 118,296
E.I. du Pont de Nemours
and Company 2,400 110,136
Temple-Inland Inc. 2,000 125,340
-----------
353,772
-----------
CONSUMER DISCRETIONARY - 7.03%
Clear Channel
Communications, Inc. 2,900 135,807
Harte-Hanks, Inc. 4,500 97,875
Home Depot, Inc. 3,400 120,666
Viacom, Inc. - Class B 2,887 128,125
Wal-Mart Stores, Inc. 2,500 132,625
-----------
615,098
-----------
CONSUMER STAPLES - 8.81%
Altria Group, Inc. 1,600 87,072
The Coca-Cola Company 2,300 116,725
Colgate-Palmolive Company 2,300 115,115
Kimberly-Clark Corporation 2,100 124,089
Kohl's Corporation # 2,300 103,362
Kraft Foods Inc. - Class A 3,500 112,770
PepsiCo, Inc. 2,400 111,888
-----------
771,021
-----------
ENERGY - 7.35%
Anadarko Petroleum Corporation 2,500 127,525
EOG Resources, Inc. 2,000 92,340
Exxon Mobil Corporation 4,000 164,000
Schlumberger Limited(1) 2,450 134,064
Unocal Corporation 3,400 125,222
-----------
643,151
-----------
FINANCIAL SERVICES - 4.73%
American International
Group, Inc. 1,852 122,751
Automatic Data Processing, Inc. 3,000 118,830
Citigroup, Inc. 2,066 100,284
H&R Block, Inc. 1,300 71,981
-----------
413,846
-----------
- ----------------------------------------------------------------------------------------
COMMON STOCKS SHARES VALUE
- ----------------------------------------------------------------------------------------
HEALTH CARE - 9.23%
Alcon, Inc. (1) 2,400 $ 145,296
Medtronic, Inc. 2,300 111,803
Pfizer Inc. 4,000 141,320
Schering-Plough Corporation 3,500 60,865
Teva Pharmaceutical
Industries Ltd. - ADR (1) 2,000 113,420
Triad Hospitals, Inc. # 3,500 116,445
Wyeth 2,800 118,860
-----------
808,009
-----------
INDUSTRIALS - 5.84%
Allied Waste Industries, Inc. # 10,000 138,800
General Dynamics Corporation 1,000 90,390
General Electric Company 4,800 148,704
Waste Management, Inc. 4,500 133,200
-----------
511,094
-----------
TECHNOLOGY - 12.48%
Cisco Systems, Inc. # 4,700 114,163
Dell Inc. # 2,900 98,484
First Data Corporation 2,600 106,834
Harris Corporation 2,800 106,260
International Business
Machines Corporation 1,000 92,680
Intel Corporation 2,900 93,380
Microsoft Corporation 4,800 132,192
Motorola, Inc. 4,500 63,315
Oracle Corporation # 6,640 87,648
SunGard Data Systems Inc. # 3,000 83,130
Texas Instruments Incorporated 3,900 114,582
-----------
1,092,668
-----------
TELECOMMUNICATIONS - 2.41%
ALLTEL Corporation 2,200 102,476
Verizon Communications Inc. 3,100 108,748
-----------
211,224
-----------
TOTAL COMMON STOCKS
(cost $5,614,121) 6,090,241
-----------
See notes to the financial statements.
23
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS - 26.17% PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
BANKS - 2.21%
Bancwest Corporation,
8.30%, 1/15/2011 $ 75,000 $ 90,413
The Bank of New York
Company, Inc.,
3.90%, 9/1/2007 100,000 102,808
-----------
193,221
-----------
BASIC MATERIALS - 1.23%
Weyerhaeuser Company,
5.95%, 11/1/2008 100,000 107,601
-----------
CONSUMER DISCRETIONARY - 4.09%
CBS Corporation,
7.15%, 5/20/2005 100,000 107,194
J.C. Penney Company, Inc.,
6.50%, 12/15/2007 60,000 63,975
Target Corporation,
7.50%, 2/15/2005 100,000 106,291
Wal-Mart Stores, Inc.,
5.45%, 8/1/2006 75,000 80,794
-----------
358,254
-----------
ENERGY - 3.68%
Anadarko Petroleum Corporation,
3.25%, 5/1/2008 100,000 98,295
Burlington Resources Finance
Company (1),
6.68%, 2/15/2011 100,000 112,550
EOG Resources, Inc.,
6.50%, 12/1/2007 100,000 110,793
-----------
321,638
-----------
FINANCIAL SERVICES - 9.09%
American General Corporation,
6.75%, 6/15/2005 100,000 107,217
Block Financial Corporation,
6.75%, 11/1/2004 152,000 158,371
Citicorp,
6.75%, 8/15/2005 100,000 107,911
Lehman Brothers
Holdings, Inc.,
8.25%, 6/15/2007 100,000 116,651
Morgan Stanley,
6.875%, 3/1/2007 100,000 112,608
Pitney Bowes Credit
Corporation,
5.75%, 8/15/2008 100,000 109,378
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
FINANCIAL SERVICES - 10.30% (CONTINUED)
Prudential Funding LLC r,
6.60%, 5/15/2008
(Acquired 8/7/2003,
Cost $83,023) $ 75,000 $ 83,569
-----------
795,705
-----------
TECHNOLOGY - 4.10%
First Data Corporation,
4.70%, 11/1/2006 100,000 105,514
Harris Corporation,
6.35%, 2/1/2028 110,000 117,579
Motorola, Inc.,
6.75%, 2/1/2006 100,000 107,791
Oracle Corporation,
6.91%, 2/15/2007 25,000 27,812
-----------
358,696
-----------
TELECOMMUNICATIONS - 0.61%
Chesapeake & Potomac
Telephone Company,
6.125%, 7/15/2005 50,000 53,287
-----------
UTILITY - 1.16%
FPL Group Capital Inc.,
3.25%, 4/11/2006 100,000 101,813
-----------
TOTAL CORPORATE BONDS
(cost $2,168,192) 2,290,215
-----------
- ----------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED
STOCKS - 3.72% SHARES VALUE
- ----------------------------------------------------------------------------------------
CONSUMER STAPLES - 0.77%
Tribune Company, Convertible,
2.00%, 5/15/2029 830 67,437
-----------
FINANCIAL SERVICES - 1.71%
Prudential Financial, Inc., 6.75% 2,300 150,075
-----------
INDUSTRIALS - 1.24%
Raytheon Co., 8.25% 2,000 108,560
-----------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $326,871) 326,072
-----------
See notes to the financial statements.
24
LKCM BALANCED FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS - 0.15% SHARES VALUE
- ----------------------------------------------------------------------------------------
MONEY MARKET FUNDS - 0.15%
Federated Cash Trust Series II -
Treasury Cash Series II 6,583 $ 6,583
SEI Daily Income Trust
Government Fund - Class B 6,583 6,583
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $13,166) 13,166
-----------
TOTAL INVESTMENTS - 99.62%
(cost $8,122,350) 8,719,694
Other Assets, less Liabilities - 0.38% 33,072
-----------
Total Net Assets - 100.00% $ 8,752,766
===========
# - Non-income producing security.
(1) - Foreign security.
ADR - American Depository Receipts.
r Restricted Security. Purchased shares in a private placement
transaction; resale to the public may require registration or may
extend only to qualified institutional buyers.
See notes to the financial statements.
25
LKCM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS - 82.47% PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
BANKS - 6.32%
Bancwest Corporation,
8.30%, 1/15/2011 $ 750,000 $ 904,127
The Bank of New York
Company, Inc.,
5.20%, 7/1/2007 1,000,000 1,072,154
Nationsbank Corporation:
6.875%, 2/15/2005 1,000,000 1,055,263
6.375%, 2/15/2008 350,000 388,140
SunTrust Banks, Inc.,
6.25%, 6/1/2008 811,000 900,761
-----------
4,320,445
-----------
BASIC MATERIALS - 5.90%
Alcoa Inc.:
5.875%, 6/1/2006 1,114,000 1,204,412
4.25%, 8/15/2007 750,000 780,482
Packaging Corp of America,
5.75%, 8/1/2013 1,000,000 1,012,050
Weyerhaeuser Company,
5.95%, 11/1/2008 965,000 1,038,353
-----------
4,035,297
-----------
CONSUMER DISCRETIONARY - 12.45%
CBS Corporation,
7.15%, 5/20/2005 1,045,000 1,120,174
Clear Channel
Communications, Inc.:
4.625%, 1/15/2008 725,000 748,626
4.25%, 5/15/2009 500,000 502,000
Dollar General Corporation,
Putable 6/15/2005,
8.625%, 6/15/2010 1,095,000 1,235,981
J.C. Penney Company, Inc.,
6.50%, 12/15/2007 650,000 693,063
Masco Corporation,
6.00%, 5/3/2004 1,200,000 1,216,702
Target Corporation,
7.50%, 2/15/2005 1,000,000 1,062,905
Viacom Inc.,
5.625%, 8/15/2012 800,000 852,728
Wal-Mart Stores, Inc.,
5.45%, 8/1/2006 1,000,000 1,077,250
-----------
8,509,429
-----------
CONSUMER STAPLES - 2.91%
Anheuser-Busch Companies, Inc.,
Callable 1/15/2006,
5.75%, 1/15/2011 588,000 621,802
Kimberly-Clark Corporation,
7.10%, 8/1/2007 500,000 571,091
PepsiCo, Inc.,
5.75%, 1/15/2008 730,000 794,161
-----------
1,987,054
-----------
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
ENERGY - 11.03%
Amerada Hess Corporation,
6.65%, 8/15/2011 $ 950,000 $ 1,031,107
Anadarko Petroleum
Corporation,
3.25%, 5/1/2008 1,150,000 1,130,393
Burlington Resources
Finance Company (1),
6.68%, 2/15/2011 1,070,000 1,204,287
EOG Resources, Inc.,
6.50%, 12/1/2007 1,000,000 1,107,930
Kerr-McGee Corporation,
6.875%, 9/15/2011 1,000,000 1,114,217
Transocean Inc. (1),
6.625%, 4/15/2011 800,000 894,293
XTO Energy, Inc.,
6.25%, 4/15/2013 1,000,000 1,057,500
-----------
7,539,727
-----------
FINANCIAL SERVICES - 14.89%
American General Finance
Corporation,
5.875%, 12/15/2005 200,000 214,120
Block Financial Corporation:
6.75%, 11/1/2004 1,155,000 1,203,408
8.50%, 4/15/2007 330,000 381,390
The Goldman Sachs Group, Inc.,
5.25%, 4/1/2013 1,000,000 1,014,710
Lehman Brothers Holdings, Inc.,
8.25%, 6/15/2007 1,000,000 1,166,511
Mellon Funding Corporation,
6.40%, 5/14/2011 1,292,000 1,451,376
Morgan Stanley,
6.875%, 3/1/2007 1,000,000 1,126,081
Pitney Bowes Credit
Corporation,
5.75%, 8/15/2008 1,000,000 1,093,784
Prudential Funding LLC r,
6.60%, 5/15/2008
(Acquired 8/7/2003,
Cost $1,189,997) 1,075,000 1,197,819
Wells Fargo Financial, Inc.,
6.125%, 2/15/2006 1,231,000 1,327,998
-----------
10,177,197
-----------
See notes to the financial statements.
26
LKCM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
HEALTHCARE - 4.36%
Becton, Dickinson and Company,
Callable 1/15/2005,
8.70%, 1/15/2025 $1,030,000 $ 1,135,447
Cardinal Health, Inc.:
6.50%, 2/15/2004 504,000 506,784
6.75%, 2/15/2011 250,000 286,011
HCA Inc.,
6.91%, 6/15/2005 1,000,000 1,053,733
-----------
2,981,975
-----------
INDUSTRIALS - 4.77%
General Dynamics Corporation,
4.25%, 5/15/2013 1,000,000 958,510
General Electric Capital
Corporation,
6.80%, 11/1/2005 1,000,000 1,086,358
Waste Management, Inc.,
7.375%, 8/1/2010 1,049,000 1,213,759
-----------
3,258,627
-----------
REAL ESTATE INVESTMENT TRUSTS - 3.03%
Camden Property Trust,
7.00%, 11/15/2006 800,000 871,955
EOP Operating Limited
Partnership,
5.875%, 1/15/2013 1,150,000 1,202,644
-----------
2,074,599
-----------
TECHNOLOGY - 9.20%
Computer Associates
International, Inc.,
6.375%, 4/15/2005 1,000,000 1,045,752
Dell Inc.,
6.55%, 4/15/2008 1,000,000 1,118,164
Electronic Data Systems
Corporation,
6.85%, 10/15/2004 450,000 465,800
First Data Corporation:
4.70%, 11/1/2006 235,000 247,959
6.375%, 12/15/2007 400,000 443,316
Motorola, Inc.,
6.75%, 2/1/2006 1,100,000 1,185,704
Oracle Corporation,
6.91%, 2/15/2007 675,000 750,922
Texas Instruments, Inc.,
7.00%, 8/15/2004 1,000,000 1,034,629
-----------
6,292,246
-----------
- ----------------------------------------------------------------------------------------
CORPORATE
BONDS PRINCIPAL VALUE
- ----------------------------------------------------------------------------------------
TELECOMMUNICATIONS - 3.72%
ALLTEL Corporation,
6.75%, 9/15/2005 $1,000,000 $ 1,076,770
GTE Florida Inc.,
6.25%, 11/15/2005 330,000 354,771
Verizon New York, Inc. -
Series A,
6.875%, 4/1/2012 1,000,000 1,108,622
-----------
2,540,163
-----------
UTILITIES - 3.89%
Progress Energy, Inc.,
5.85%, 10/30/2008 1,000,000 1,073,688
Southern Company Capital
Funding, Inc.,
5.30%, 2/1/2007 1,000,000 1,079,634
TXU Corp.,
6.375%, 6/15/2006 475,000 504,688
-----------
2,658,010
-----------
TOTAL CORPORATE BONDS
(cost $54,734,256) 56,374,769
-----------
- ----------------------------------------------------------------------------------------
FIRST MORTGAGE BOND - 1.58%
- ----------------------------------------------------------------------------------------
UTILITY - 1.58%
PP&L Resources, Inc.,
6.55%, 3/1/2006 1,000,000 1,080,570
-----------
TOTAL FIRST MORTGAGE BOND
(cost $977,451) 1,080,570
-----------
- ----------------------------------------------------------------------------------------
U.S. GOVERNMENT &
AGENCY ISSUES - 13.54%
- ----------------------------------------------------------------------------------------
Fannie Mae,
3.34%, 2/6/2007 1,000,000 1,001,957
Federal Home Loan Bank,
Callable 3/26/2004,
3.35%, 12/26/2008 1,000,000 986,214
Freddie Mac,
5.125%, 10/15/2008 1,000,000 1,073,503
U.S. Treasury Notes:
7.25%, 8/15/2004 1,000,000 1,038,204
7.50%, 2/15/2005 1,000,000 1,069,336
6.50%, 5/15/2005 1,000,000 1,069,063
4.625%, 5/15/2006 1,000,000 1,060,157
5.50%, 5/15/2009 1,000,000 1,112,383
5.75%, 8/15/2010 750,000 841,172
-----------
TOTAL U.S. GOVERNMENT & AGENCY ISSUES
(cost $9,028,284) 9,251,989
-----------
See notes to the financial statements.
27
LKCM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
- ----------------------------------------------------------------------------------------
SHORT-TERM
INVESTMENTS - 1.04% SHARES VALUE
- ----------------------------------------------------------------------------------------
MONEY MARKET FUNDS - 1.04%
Federated Cash Trust Series II -
Treasury Cash Series II 356,565 $ 356,565
SEI Daily Income Trust
Government Fund -
Class B 356,565 356,565
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $713,130) 713,130
-----------
TOTAL INVESTMENTS - 98.63%
(cost $65,453,121) 67,420,458
-----------
Other Assets, less Liabilities - 1.37% 933,493
-----------
Total Net Assets - 100.00% $68,353,951
===========
(1) - Foreign security.
r - Restricted Security. Purchased shares in a private placement
transaction; resale to the public may require registration or may
extend only to qualified institutional buyers.
See notes to the financial statements.
28
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
LKCM LKCM LKCM LKCM
SMALL CAP LKCM BALANCED FIXED INCOME INTERNATIONAL
EQUITY FUND EQUITY FUND FUND FUND FUND
ASSETS:
Investments, at value * ................ $270,924,933 $ 34,008,904 $ 8,719,694 $ 67,420,458 $ 41,212,775**
Dividends and interest receivable ...... 138,731 36,193 41,235 1,020,425 --
Receivable from Adviser ................ -- -- 965 -- --
Receivable for fund shares sold ........ 173 -- -- -- --
Other assets ........................... 31,148 12,717 3,664 12,563 6,471
------------ ------------ ------------ ------------ ------------
Total assets ....................... 271,094,985 34,057,814 8,765,558 68,453,446 41,219,246
------------ ------------ ------------ ------------ ------------
LIABILITIES:
Payable for investments purchased ...... -- 276,694 -- -- --
Payable for investment advisory fees ... 493,468 23,959 -- 63,726 6,106
Distribution expense payable ........... 1,758 -- -- -- --
Accrued expenses and other liabilities . 121,716 27,988 12,792 35,769 23,675
------------ ------------ ------------ ------------ ------------
Total liabilities .................. 616,942 328,641 12,792 99,495 29,781
------------ ------------ ------------ ------------ ------------
NET ASSETS ............................. $270,478,043 $33,729,173 $8,752,766 $68,353,951 $41,189,465
============ ============ ============ ============ ============
NET ASSETS CONSIST OF:
Paid in capital ........................ $173,191,870 $ 28,588,116 $ 8,464,532 $ 66,622,605 $ 77,385,995
Undistributed net investment income .... -- 58,198 10,414 107,578 --
Accumulated net realized gain (loss)
on securities and foreign currency
transactions ......................... 8,316,946 (777,513) (319,524) (343,569) (40,747,238)
Net unrealized appreciation on:
Investments .......................... 88,969,227 5,860,372 597,344 1,967,337 4,536,856
Other assets and liabilities
denominated in foreign currency ...... -- -- -- -- 13,852
------------ ------------ ------------ ------------ ------------
Net assets ............................. $270,478,043 $ 33,729,173 $ 8,752,766 $ 68,353,951 $ 41,189,465
============ ============ ============ ============ ============
INSTITUTIONAL CLASS***
Net assets ............................. $266,841,834 $ 33,729,173 $ 8,752,766 $ 68,353,951 $ 41,189,465
Shares of beneficial interest
outstanding (unlimited shares of
no par value authorized) ............. 13,658,021 2,755,898 775,175 6,496,480 4,833,767
Net asset value per share (offering
and redemption price) ................ $ 19.54 $ 12.24 $ 11.29 $ 10.52 $ 8.52
============ ============ ============ ============ ============
ADVISER CLASS
Net assets.............................. $ 3,636,209
Shares of beneficial interest
outstanding (unlimited shares of
no par value authorized) ............. 186,374
Net asset value per share (offering
and redemption price)................. $ 19.51
============
* Cost of Investments................... $181,955,706 $ 28,148,532 $ 8,122,350 $ 65,453,121
============ ============ ============ ============
** Investments in the Master Portfolio.
***Currently, only the Small Cap Equity and Equity Funds offer a second class.
See notes to the financial statements.
29
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
LKCM LKCM LKCM LKCM
SMALL CAP LKCM BALANCED FIXED INCOME INTERNATIONAL
EQUITY FUND EQUITY FUND FUND FUND FUND
INVESTMENT INCOME:
Dividends * ............................... $ 1,070,054 $ 423,601 $ 102,289 $ -- $ 711,794
Interest .................................. 110,675 19,665 112,264 2,916,197 8,685
Expenses allocated from
Master Portfolio ........................ -- -- -- -- (348,666)
------------ ------------ ------------ ------------ ------------
Total income .......................... 1,180,729 443,266 214,553 2,916,197 371,813
------------ ------------ ------------ ------------ ------------
EXPENSES:
Investment advisory fees .................. 1,722,924 205,457 53,347 306,984 161,014
Distribution expense - Adviser Class ...... 3,003 -- -- -- --
Administrative fees ....................... 173,408 38,015 20,025 42,622 45,606
Accounting and transfer agent
fees and expenses ....................... 110,512 57,506 36,512 62,168 37,470
Professional fees ......................... 90,534 10,790 3,114 25,094 17,154
Custody fees and expenses ................. 27,039 3,894 3,770 6,748 723
Federal and state registration ............ 40,637 24,226 6,471 15,544 18,073
Reports to shareholders ................... 19,869 2,216 630 4,809 4,097
Trustees' fees ............................ 18,247 2,109 564 3,998 4,224
Other ..................................... 17,050 1,880 600 4,195 4,546
------------ ------------ ------------ ------------ ------------
Total expenses .......................... 2,223,223 346,093 125,033 472,162 292,907
Less, expense waiver and/or
reimbursement ......................... -- (111,285) (59,375) (73,083) (255,410)
------------ ------------ ------------ ------------ ------------
Net expenses ............................ 2,223,223 234,808 65,658 399,079 37,497
------------ ------------ ------------ ------------ ------------
NET INVESTMENT INCOME (LOSS) .............. (1,042,494) 208,458 148,895 2,517,118 334,316
------------ ------------ ------------ ------------ ------------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments ............................. 22,491,811 (42,675) (18,241) 165,162 2,195,856**
Foreign currency transactions ........... -- -- -- -- (36,074)**
------------ ------------ ------------ ------------ ------------
22,491,811 (42,675) (18,241) 165,162 2,159,782
------------ ------------ ------------ ------------ ------------
Net change in unrealized
appreciation/depreciation on:
Investments ............................. 49,805,401 6,269,445 1,176,883 (760,110) 7,368,188**
Foreign currency transactions ........... -- -- -- -- 108,588**
------------ ------------ ------------ ------------ ------------
49,805,401 6,269,445 1,176,883 (760,110) 7,476,776
------------ ------------ ------------ ------------ ------------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS ................... 72,297,212 6,226,770 1,158,642 (594,948) 9,636,558
------------ ------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............... $ 71,254,718 $ 6,435,228 $ 1,307,537 $ 1,922,170 $ 9,970,874
============ ============ ============ ============ ============
* Net of Foreign Taxes Withheld ........... $ -- $ 664 $ 551 $ -- $ 107,792
============ ============ ============ ============ ============
** Allocated from the Master Portfolio.
See notes to the financial statements.
30
STATEMENTS OF CHANGES IN NET ASSETS
LKCM
SMALL CAP EQUITY FUND LKCM EQUITY FUND
--------------------------------- ---------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
OPERATIONS:
Net investment income (loss) ....................... $ (1,042,494) $ (407,202) $ 208,458 $ 140,264
Net realized gain (loss) on investments ............ 22,491,811 (3,043,395) (42,675) (653,825)
Net change in unrealized
appreciation/depreciation
on investments ................................... 49,805,401 (23,836,344) 6,269,445 (3,684,486)
------------- ------------- ------------- -------------
Net increase (decrease) in net assets
resulting from operations .................... 71,254,718 (27,286,941) 6,435,228 (4,198,047)
------------- ------------- ------------- -------------
DIVIDENDS AND DISTRIBUTIONS
TO INSTITUTIONAL CLASS SHAREHOLDERS:
Net investment income .............................. -- (67,958) (204,369) (142,138)
Net realized gain on investments ................... (13,042,513) (93,234) -- --
------------- ------------- ------------- -------------
(13,042,513) (161,192) (204,369) (142,138)
------------- ------------- ------------- -------------
DISTRIBUTIONS TO ADVISER CLASS SHAREHOLDERS:
Net realized gain on investments ................... (177,235) -- -- --
------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (NOTE C) ................. 5,557,439 13,763,763 2,826,460 2,190,437
------------- ------------- ------------- -------------
Total increase (decrease) in net assets ........ 63,592,409 (13,684,370) 9,057,319 (2,149,748)
NET ASSETS:
Beginning of period ................................ 206,885,634 220,570,004 24,671,854 26,821,602
------------- ------------- ------------- -------------
End of period * .................................... $ 270,478,043 $ 206,885,634 $ 33,729,173 $ 24,671,854
============= ============= ============= =============
* Including undistributed net
investment income of: ............................ $ -- $ -- $ 58,198 $ 54,109
============= ============= ============= =============
See notes to the financial statements.
31
STATEMENTS OF CHANGES IN NET ASSETS
LKCM LKCM
BALANCED FUND FIXED INCOME FUND
--------------------------------- ---------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
2003 2002 2003 2002
------------- ------------- ------------- -------------
OPERATIONS:
Net investment income .............................. $ 148,895 $ 155,715 $ 2,517,118 $ 2,472,886
Net realized gain (loss) on investments ............ (18,241) (313,787) 165,162 (429,327)
Net change in unrealized
appreciation/depreciation
on investments ................................... 1,176,883 (754,716) (760,110) 1,050,064
------------ ------------ ------------ ------------
Net increase (decrease) in net assets
resulting from operations .................... 1,307,537 (912,788) 1,922,170 3,093,623
------------ ------------ ------------ ------------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS:
Net investment income .............................. (145,359) (146,346) (2,522,481) (2,423,086)
Net realized gain on investments ................... -- (3,713) -- --
------------ ------------ ------------ ------------
Total dividends and distributions ................ (145,359) (150,059) (2,522,481) (2,423,086)
------------ ------------ ------------ ------------
NET INCREASE IN NET ASSETS FROM
FROM FUND SHARE TRANSACTIONS (NOTE C) ............ 292,996 985,687 12,389,668 10,447,856
------------ ------------ ------------ ------------
Total increase (decrease) in net assets ............ 1,455,174 (77,160) 11,789,357 11,118,393
NET ASSETS:
Beginning of period ................................ 7,297,592 7,374,752 56,564,594 45,446,201
------------ ------------ ------------ ------------
End of period * .................................... $ 8,752,766 $ 7,297,592 $ 68,353,951 $ 56,564,594
============ ============ ============ ============
* Including undistributed net
investment income of: ............................ $ 10,414 $ 18,629 $ 107,578 $ 149,839
============ ============ ============ ============
See notes to the financial statements.
32
STATEMENTS OF CHANGES IN NET ASSETS
LKCM
INTERNATIONAL FUND
---------------------------------
Year Ended Year Ended
December 31, December 31,
2003 2002
------------ ------------
OPERATIONS:
Net investment income .................................................................... $ 334,316 $ 688,860
Net realized gain (loss) on investments, futures contracts and foreign
currency transactions .................................................................. 2,159,782 (8,890,738)
Net change in unrealized appreciation/depreciation ....................................... 7,476,776 (3,932,743)
------------ ------------
Net increase (decrease) in net assets resulting from operations ...................... 9,970,874 (12,134,621)
------------ ------------
DIVIDENDS TO SHAREHOLDERS:
Net investment income .................................................................... (536,161) (1,123,215)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS (NOTE C) .............. 213,109 (25,568,683)
------------ ------------
Total increase (decrease) in net assets .................................................. 9,647,822 (38,826,519)
NET ASSETS:
Beginning of period ...................................................................... 31,541,643 70,368,162
------------ ------------
End of period * .......................................................................... $ 41,189,465 $ 31,541,643
============ ============
* Including undistributed net investment income of: ...................................... $ -- $ 92,408
============ ============
See notes to the financial statements.
33
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM SMALL CAP EQUITY FUND
Adviser Institutional
Class* Class*
June 5, 2003 Year Year Year Year Year
through Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31, December 31,
2003 2003 2002 2001 2000 1999
------- -------- -------- -------- -------- --------
NET ASSET VALUE-- BEGINNING OF PERIOD ...... $ 16.85 $ 15.24 $ 17.29 $ 17.00 $ 18.08 $ 15.72
------- -------- -------- -------- -------- --------
Net investment income (loss)................ (0.08)(1) (0.08)(1) (0.03)(2) 0.08 0.05 0.03
Net realized and unrealized gain (loss)
on investments........................... 3.74 5.38 (2.01) 1.20 2.02 2.61
------- -------- -------- -------- -------- --------
Total from investment operations ....... 3.66 5.30 (2.04) 1.28 2.07 2.64
------- -------- -------- -------- -------- --------
Dividends from net investment income -- -- (0.00)(3) (0.07) (0.05) (0.03)
Distributions from net realized gains ...... (1.00) (1.00) (0.01) (0.92) (3.10) (0.25)
------- -------- -------- -------- -------- --------
Total dividends and distributions ...... (1.00) (1.00) (0.01) (0.99) (3.15) (0.28)
------- -------- -------- -------- -------- --------
NET ASSET VALUE-- END OF PERIOD............. $ 19.51 $ 19.54 $ 15.24 $ 17.29 $ 17.00 $ 18.08
======= ======== ======== ======== ======== ========
TOTAL RETURN ............................... 21.66%(4) 34.71% (11.79)% 7.50% 11.37% 16.83%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) ...... $ 3,636 $266,842 $206,886 $220,570 $211,001 $230,164
Ratio of expenses to average net assets .... 1.21%(5) 0.97% 0.94% 0.92% 0.93% 0.90%
Ratio of net investment income (loss)
to average net assets .................... (0.69)%(5) (0.45)% (0.19)% 0.46% 0.32% 0.16%
Portfolio turnover rate(6).................. 43% 43% 52% 62% 79% 48%
* On May 1, 2003 the Adviser Class Shares were effective and the initial
class of shares were named Institutional Shares. Commencement of sales of
the Adviser Class occurred on June 5, 2003.
(1) Net investment loss per share represents net investment loss divided by the
average shares outstanding throughout the period.
(2) Net investment loss per share is calculated using the ending balance of
undistributed net investment loss prior to considerations of adjustments
for permanent book and tax differences.
(3) Less than $(0.005).
(4) Not Annualized.
(5) Annualized.
(6) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements.
34
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM EQUITY FUND
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE-- BEGINNING OF PERIOD................... $ 9.98 $ 11.76 $ 13.25 $ 14.91 $ 14.39
-------- -------- -------- -------- --------
Net investment income .................................. 0.07 0.06 0.08 0.40 0.10(1)
Net realized and unrealized gain (loss)
on investments ....................................... 2.26 (1.78) (1.49) 0.24 2.97
-------- -------- -------- -------- --------
Total from investment operations..................... 2.33 (1.72) (1.41) 0.64 3.07
-------- -------- -------- -------- --------
Dividends from net investment income.................... (0.07) (0.06) (0.06) (0.40) (0.15)
Distributions from net realized gains................... -- -- (0.02) (1.90) (2.40)
-------- -------- -------- -------- --------
Total dividends and distributions.................... (0.07) (0.06) (0.08) (2.30) (2.55)
-------- -------- -------- -------- --------
NET ASSET VALUE-- END OF PERIOD......................... $ 12.24 $ 9.98 $ 11.76 $ 13.25 $ 14.91
======== ======== ======== ======== ========
TOTAL RETURN............................................ 23.38% (14.64)% (10.61)% 4.14% 23.07%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands)................... $ 33,729 $ 24,672 $ 26,822 $ 24,800 $ 27,492
Ratio of expenses to average net assets:
Before expense waiver and/or reimbursement ........... 1.18% 1.05% 1.05% 1.06% 0.93%
After expense waiver and/or reimbursement............. 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of net investment income to average net assets:
Before expense waiver and/or reimbursement ........... 0.33% 0.29% 0.53% 2.33% 0.56%
After expense waiver and/or reimbursement ............ 0.71% 0.54% 0.78% 2.59% 0.69%
Portfolio turnover rate................................. 14% 44% 35% 57% 59%
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
See notes to the financial statements.
35
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM BALANCED FUND
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE-- BEGINNING OF PERIOD.................. $ 9.86 $ 11.44 $ 11.77 $ 12.30 $ 11.05
-------- -------- -------- -------- --------
Net investment income.................................. 0.19 0.23 0.30 0.26 0.22
Net realized and unrealized gain (loss)
on investments...................................... 1.42 (1.59) (0.26) (0.55) 1.26
-------- -------- -------- -------- --------
Total from investment operations.................... 1.61 (1.36) 0.04 (0.29) 1.48
-------- -------- -------- -------- --------
Dividends from net investment income................... (0.18) (0.21) (0.32) (0.22) (0.22)
Distributions from net realized gains.................. -- (0.01) (0.05) (0.02) (0.01)
-------- -------- -------- -------- --------
Total dividends and distributions................... (0.18) (0.22) (0.37) (0.24) (0.23)
-------- -------- -------- -------- --------
NET ASSET VALUE-- END OF PERIOD........................ $ 11.29 $ 9.86 $ 11.44 $ 11.77 $ 12.30
======== ======== ======== ======== ========
TOTAL RETURN........................................... 16.59% (11.97)% 0.47% (2.34)% 13.53%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands).................. $ 8,753 $ 7,298 $ 7,375 $ 7,767 $ 6,851
Ratio of expenses to average net assets:
Before expense reimbursement......................... 1.52% 1.66% 1.58% 1.72% 1.95%
After expense reimbursement.......................... 0.80% 0.80% 0.80% 0.80% 0.80%
Ratio of net investment income to average net assets:
Before expense waiver and/or reimbursement .......... 1.09% 1.31% 1.83% 1.24% 0.81%
After expense waiver and/or reimbursement............ 1.81% 2.17% 2.61% 2.16% 1.96%
Portfolio turnover rate................................ 24% 17% 37% 48% 47%
See notes to the financial statements.
36
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM FIXED INCOME FUND
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE-- BEGINNING OF PERIOD.................. $ 10.61 $ 10.48 $ 10.01 $ 9.69 $ 10.25
-------- -------- -------- -------- --------
Net investment income.................................. 0.42 0.51 0.60 0.56 0.52
Net realized and unrealized gain (loss)
on investments...................................... (0.08) 0.13 0.45 0.31 (0.55)
-------- -------- -------- -------- --------
Total from investment operations.................... 0.34 0.64 1.05 0.87 (0.03)
-------- -------- -------- -------- --------
Dividends from net investment income................... (0.43) (0.51) (0.58) (0.55) (0.52)
Distributions from net realized gains.................. -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total dividends and distributions................... (0.43) (0.51) (0.58) (0.55) (0.53)
-------- -------- -------- -------- --------
NET ASSET VALUE-- END OF PERIOD........................ $ 10.52 $ 10.61 $ 10.48 $ 10.01 $ 9.69
======== ======== ======== ======== ========
TOTAL RETURN........................................... 3.25% 6.32% 10.76% 9.26% (0.34)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands).................. $ 68,354 $ 56,565 $ 45,446 $ 33,560 $ 26,016
Ratio of expenses to average net assets:
Before expense reimbursement......................... 0.77% 0.75% 0.77% 0.84% 0.89%
After expense reimbursement.......................... 0.65% 0.65% 0.65% 0.65% 0.65%
Ratio of net investment income to average net assets:
Before expense waiver and/or reimbursement........... 3.98% 4.96% 5.81% 5.63% 5.34%
After expense waiver and/or reimbursement............ 4.10% 5.06% 5.93% 5.82% 5.58%
Portfolio turnover rate................................ 58% 40% 36% 28% 68%
See notes to the financial statements.
37
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
LKCM INTERNATIONAL FUND
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE-- BEGINNING OF PERIOD.................. $ 6.41 $ 8.07 $ 11.44 $ 15.44 $ 11.01
-------- -------- -------- -------- --------
Net investment income.................................. 0.07(2) 0.08(1) 0.01(1) 0.06(1) 0.00
Net realized and unrealized gain (loss)
on investments....................................... 2.13 (1.60) (3.35) (1.74) 4.70
-------- -------- -------- -------- --------
Total from investment operations.................... 2.20 (1.52) (3.34) (1.68) 4.70
-------- -------- -------- -------- --------
Redemption fees........................................ 0.02 -- -- -- --
-------- -------- -------- -------- --------
Dividends from net investment income................... (0.11) (0.14) -- (0.01) --
Distributions from net realized gains.................. -- -- (0.03) (2.31) (0.27)
-------- -------- -------- -------- --------
Total dividends and distributions................... (0.11) (0.14) (0.03) (2.32) (0.27)
-------- -------- -------- -------- --------
NET ASSET VALUE-- END OF PERIOD........................ $ 8.52 $ 6.41 $ 8.07 $ 11.44 $ 15.44
======== ======== ======== ======== ========
TOTAL RETURN........................................... 34.68% (18.86)% (29.16)% (10.68)% 42.71%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands).................. $ 41,189 $ 31,542 $ 70,368 $ 99,526 $ 83,892
Ratio of expenses to average net assets:
Before expense reimbursement......................... 1.99% 1.55% 1.56% 1.51% 1.52%
After expense reimbursement.......................... 1.20% 1.20% 1.20% 1.20% 1.20%
Ratio of net investment income (loss)
to average net assets:
Before expense waiver and/or reimbursement .......... 0.25% 0.68% (0.21)% 0.08% (0.28)%
After expense waiver and/ or reimbursement .......... 1.04% 1.03% 0.15% 0.39% 0.04%
Portfolio turnover rate................................ N/A N/A N/A 186%(3) 205%
(1) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(2) Net investment income per share is calculated using the ending balance of
undistributed net investment income prior to considerations of adjustments
for permanent book and tax differences.
(3) On October 2, 2000, the Fund invested all of its investable assets into the
TT EAFE Portfolio, which has an identical investment objective as the Fund.
Portfolio turnover rate is provided for the period January 1, 2000 through
September 30, 2000.
See notes to the financial statements.
38
LKCM FUNDS
NOTES TO THE FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: LKCM Funds (the "Trust") is
registered under the Investment Company Act of 1940 ("1940 Act") as an open-end,
management investment company. The Trust was organized as a Delaware business
trust on February 10, 1994 and consists of five diversified series of shares
comprising the LKCM Small Cap Equity Fund, LKCM Equity Fund, LKCM Balanced Fund,
LKCM Fixed Income Fund and LKCM International Fund (collectively, the "Funds"),
the assets of which are invested in separate, independently managed portfolios.
Investment operations of the Funds began on July 14, 1994 (LKCM Small Cap Equity
Fund), January 3, 1996 (LKCM Equity Fund), and December 30, 1997 (LKCM Balanced
Fund, LKCM Fixed Income Fund and LKCM International Fund). The Small Cap Equity
Fund and the Equity Fund issued a second class of shares, Adviser Class Shares,
and renamed the initial class as Institutional Class Shares on May 1, 2003. The
Small Cap Equity Adviser Class Shares were initially sold on June 5, 2003 and
are subject to expenses pursuant to the Rule 12b-1 plan described in Note C. The
LKCM Small Cap Equity Fund seeks to maximize capital appreciation by investing
primarily in equity securities of small companies (those with market values less
than $2.0 billion) which the Adviser believes are likely to have above-average
growth in revenue and/or earnings and potential for above-average capital
appreciation. The LKCM Equity Fund seeks to maximize long-term capital
appreciation 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 the shareholders' equity and
under-leveraged balance sheets, and potential for above-average capital
appreciation. The LKCM Balanced Fund seeks to provide investors with current
income and capital appreciation by investing primarily in a diversified
portfolio of equity and debt securities of companies with established operating
histories and strong fundamental characteristics. The LKCM Fixed Income Fund
seeks to provide investors with current income by investing primarily in a
diversified portfolio of investment grade, short intermediate-term debt
securities issued by corporations, the U.S. Government, agencies or
instrumentalities of the U.S. Government and cash equivalent securities. The
LKCM International Fund seeks to provide investors with a total return in excess
of the Morgan Stanley Capital International EAFE Index.
The LKCM International Fund currently intends to attempt to achieve its goal by
operating under a master-feeder structure. This means that the LKCM
International Fund currently intends to seek its investment objective by
investing all of its investable assets in the TT EAFE Portfolio ("Portfolio" or
"Master Portfolio"), a series of the TT International U.S.A. Master Trust, which
has an identical investment objective as the LKCM International Fund and is
managed by TT International Investment Management ("TT International"). On
October 2, 2000, the International Fund invested all of its investable assets
into the Portfolio. At December 31, 2003, the LKCM International Fund has a
49.9% ownership interest in the Portfolio, which is recorded at value. The
Portfolio's financial statements are included within this annual report and
should be read in conjunction with the financial statements of the LKCM
International Fund. The LKCM International Fund records its daily pro-rata share
of the Portfolio's income, expenses, and realized and unrealized gains and
losses. In addition, the LKCM International Fund accrues its own expenses daily
as incurred. Accounting policies of the Portfolio, including valuation of
investments, are more fully described in the Portfolio's financial statements.
39
The following is a summary of significant accounting policies followed by the
Funds in preparation of the financial statements.
1. SECURITY VALUATION: Securities listed on a U.S. securities exchange for
which market quotations are readily available are valued at the last quoted
sale price on the day the valuation is made. Nasdaq National Market
securities are valued at the Nasdaq Official Closing Price ("NOCP"). Price
information on listed securities is taken from the exchange where the
security is primarily traded. Unlisted U.S. securities and listed U.S.
securities not traded on the valuation date for which market quotations are
readily available are valued at the mean of the most recent quoted bid and
asked price. Securities listed on a foreign exchange for which market
quotations are readily available are valued at the last quoted sales price
available before the time when assets are valued. Debt securities (other
than obligations having a maturity of 60 days or less) are normally valued
on the basis of quotes obtained from pricing services. Debt securities
purchased with remaining maturities of 60 days or less are valued at
amortized cost which reflects fair value. Other assets and securities for
which no quotations are readily available (including restricted securities)
are valued in good faith at fair value using methods determined by the Board
of Trustees.
2. FEDERAL INCOME TAXES: It is each Fund's policy to meet the requirements
of the Internal Revenue Code applicable to regulated investment companies
and each Fund intends to distribute substantially all of its investment
company net taxable income and net capital gains to shareholders. Therefore,
no federal income tax provision is recorded.
3. DISTRIBUTIONS TO SHAREHOLDERS: The LKCM Small Cap Equity, LKCM Equity and
LKCM International Funds generally intend to pay dividends and net capital
gain distributions, if any, at least on an annual basis. The LKCM Balanced
and LKCM Fixed Income Funds generally intend to pay dividends on a quarterly
basis and net capital gain distributions, if any, at least on an annual
basis.
4. FOREIGN SECURITIES: Investing in securities of foreign companies and
foreign governments involves special risks and considerations not typically
associated with investing in U.S. companies and securities of the U.S.
government. These risks include revaluation of currencies and future
adverse political and economic developments. Moreover, securities of many
foreign companies and foreign governments and their markets may be less
liquid and their prices more volatile than those of securities of
comparable U.S. companies and securities of the U.S. government.
5. FOREIGN CURRENCY TRANSLATIONS: The books and records of the Funds are
maintained in U.S. dollars. Foreign currency transactions are translated
into U.S. dollars on the following basis: (i) market value of investment
securities, assets and liabilities at the daily rates of exchange, and (ii)
purchases and sales of investment securities, dividend and interest income
and certain expenses at the rates of exchange prevailing on the respective
dates of such transactions. For financial reporting purposes, the Funds do
not isolate changes in the exchange rate of investment securities from the
fluctuations arising from changes in the market prices of securities.
However, for federal income tax purposes the Funds do isolate and treat as
ordinary income the effect of changes in foreign exchange rates on currency,
currency contracts and payables and receivables arising from trade date and
settlement date differences.
40
6. EXPENSE ALLOCATION: Expenses incurred by the Funds are allocated among
the Funds based upon (i) relative average net assets, (ii) a specific
identification basis as incurred, or (iii) evenly among the Funds, depending
on the nature of the expense. Expenses that are directly attributable to a
class of shares, such as Rule 12b-1 distribution fees, are charged to that
class. For multi-class Funds, income, unrealized and realized gains/losses
are generally allocated between the Fund's classes in proportion to their
respective net assets.
7. USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
8. OTHER: Security and shareholder transactions are recorded on the trade
date. Realized gains and losses on sales of investments are calculated on
the identified cost basis. Dividend income and dividends and distributions
to shareholders are recorded on the ex-dividend date. Interest income is
recognized on the accrual basis. All discounts and premiums are amortized on
the effective interest method for tax and financial reporting purposes.
Generally accepted accounting principles require that certain components of
net assets be adjusted to reflect permanent differences between financial
and tax reporting. These reclassifications have no effect on net assets or
net asset values per share.
B. INVESTMENT ADVISORY AND OTHER AGREEMENTS: Luther King Capital Management
Corporation (the "Adviser"), serves as the investment adviser to the Funds under
an Investment Advisory Agreement (the "Agreement"). The Adviser receives a fee,
computed daily and payable quarterly, at the annual rates presented below as
applied to each Fund's daily net assets. The Adviser has voluntarily agreed to
pay operating expenses in excess of the annual rates presented below as applied
to each Fund's daily net assets. For the year ended December 31, 2003, the
Adviser waived and/or reimbursed the following expenses:
LKCM LKCM LKCM LKCM LKCM
SMALL CAP EQUITY BALANCED FIXED INTERNATIONAL
EQUITY FUND FUND FUND INCOME FUND FUND
------------ ------ -------- ----------- ------------
Annual Advisory Rate 0.75% 0.70% 0.65% 0.50% (1)(2)
Annual Cap on Expenses 1.00% 0.80% 0.80% 0.65% 1.20%
Expenses Waived and/or
Reimbursed -- $111,285 $59,375 $73,083 $255,410
(1) To the extent that the 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.
(2) TT International is entitled to receive a fee from the Portfolio, calculated
daily and payable monthly, at the annual rate of 0.50%.
U.S. Bancorp Fund Services, LLC serves as transfer agent and administrator for
the Trust and serves as accounting services agent for all LKCM Funds except LKCM
International Fund. U.S. Bank, N.A. serves as custodian for all LKCM Funds
except LKCM International Fund. The Northern Trust Company serves as custodian
for the LKCMInternational Fund. SEI
41
Investments Company serves as accounting services agent and sub-administrator of
the LKCM International Fund.
Distribution services are performed pursuant to a distribution contract with
Quasar Distributors, LLC, the Trust's principal underwriter.
The Small Cap Equity Fund and the Equity Fund have adopted a Rule 12b-1 plan
under which the Adviser Class of each Fund may pay up to 1.00% of its average
daily net assets for distribution and other services. However, the Board of
Trustees has currently only authorized a fee of 0.25% of the Fund's average
daily net assets. For the period June 5, 2003 through December 31, 2003, fees
accrued by the Small Cap Equity Fund pursuant to the 12b-1 Plan were $3,003.
C. FUND SHARES: At December 31, 2003, there was an unlimited number of shares of
beneficial interest, no par value, authorized. The following table summarizes
the activity in shares of each Fund:
SMALL CAP EQUITY FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------------- -----------------------
INSTITUTIONAL CLASS INSTITUTIONAL CLASS
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -----------
Shares sold 888,911 $ 15,343,228 4,240,612 $ 69,712,550
Shares issued to
shareholders in
reinvestment of
distributions 610,521 12,045,571 9,705 147,221
Shares redeemed (1,414,800) (25,211,565) (3,437,426) (56,096,008)
Redemption fee -- 129 -- --
---------- ------------ ---------- ------------
Net increase 84,632 $ 2,177,363 812,891 $ 13,763,763
============ ============
SHARES OUTSTANDING:
Beginning of period 13,573,389 12,760,498
---------- ----------
End of period 13,658,021 13,573,389
========== ==========
JUNE 5, 2003*
THROUGH
DECEMBER 31, 2003
-----------------------
ADVISER CLASS
SHARES AMOUNT
---------- -----------
Shares sold 177,377 $3,202,841
Shares issued to
shareholders in
reinvestment of
distributions 8,997 177,235
---------- ----------
Net increase 186,374 $3,380,076
==========
SHARES OUTSTANDING:
Beginning of period --
----------
End of period 186,374
==========
Total Net Increase $5,557,439
==========
* Commencement of sales.
42
EQUITY FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -----------
Shares sold 670,954 $ 7,074,203 553,758 $ 5,985,628
Shares issued to
shareholders in
reinvestment of
distributions 15,076 184,230 13,437 133,296
Shares redeemed (403,376) (4,432,020) (374,987) (3,928,487)
Redemption fee -- 47 -- --
---------- ----------- ---------- -----------
Net increase 282,654 $ 2,826,460 192,208 $ 2,190,437
=========== ===========
SHARES OUTSTANDING:
Beginning of period 2,473,244 2,281,036
---------- ----------
End of period 2,755,898 2,473,244
========== ==========
BALANCED FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -----------
Shares sold 139,988 $ 1,401,222 137,766 $1,432,240
Shares issued to
shareholders in
reinvestment
of distributions 14,052 143,493 14,196 146,929
Shares redeemed (118,728) (1,251,719) (56,684) (593,482)
---------- ---------- ---------- ----------
Net increase 35,312 $ 292,996 95,278 $ 985,687
========== ==========
SHARES OUTSTANDING:
Beginning of period 739,863 644,585
---------- ----------
End of period 775,175 739,863
========== ==========
FIXED INCOME FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------- ---------- -----------
Shares sold 1,508,017 $16,015,902 1,996,263 $ 20,963,357
Shares issued to
shareholders in
reinvestment of
distributions 199,316 2,105,232 185,727 1,934,879
Shares redeemed (540,941) (5,731,565) (1,186,475) (12,450,380)
Redemption fee -- 99 -- --
---------- ----------- ---------- ------------
Net increase 1,166,392 $12,389,668 995,515 $ 10,447,856
=========== ============
SHARES OUTSTANDING:
Beginning of period 5,330,088 4,334,573
---------- ----------
End of period 6,496,480 5,330,088
========== ==========
43
INTERNATIONAL FUND
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ----------- ------------
Shares sold 2,859,335 $19,538,465 23,090,610 $163,700,336
Shares issued to
shareholders in
reinvestment of
distributions 62,431 528,796 173,345 1,092,076
Shares redeemed (3,006,962) (19,966,021) (27,065,717) (190,361,095)
Redemption fee -- 111,869 -- --
------------ ----------- ----------- ------------
Net increase (decrease) (85,196) $ 213,109 (3,801,762) $(25,568,683)
=========== ============
SHARES OUTSTANDING:
Beginning of period 4,918,963 8,720,725
---------- -----------
End of period 4,833,767 4,918,963
========== ===========
D. SECURITY TRANSACTIONS: Purchases and sales of investment securities, other
than short-term investments, for the year ended December 31, 2003 were as
follows
PURCHASES SALES
U.S. U.S.
GOVERNMENT OTHER GOVERNMENT OTHER
----------- ----------- ----------- -----------
LKCM Small Cap Equity Fund $ ____ $96,186,467 $ ____ $91,345,333
LKCM Equity Fund ____ 8,921,014 ____ 3,747,830
LKCM Balanced Fund ____ 2,568,381 205,355 1,705,540
LKCM Fixed Income Fund 13,502,259 36,741,169 13,154,869 20,912,088
E. TAX INFORMATION: At December 31, 2003, the components of accumulated earnings
(losses) on a tax basis were as follows:
LKCM LKCM LKCM LKCM
SMALL CAP EQUITY BALANCED FIXED
EQUITY FUND FUND FUND INCOME FUND
------------ ----------- ---------- -----------
Cost of investments $181,955,706 $28,149,190 $8,156,340 $65,388,657
============ =========== ========== ===========
Gross unrealized appreciation $ 90,238,406 $ 6,903,882 $1,153,426 $ 2,261,610
Gross unrealized depreciation (1,269,179) (1,044,168) (590,072) (229,809)
------------ ----------- ---------- -----------
Net unrealized appreciation
(depreciation) $ 88,969,227 $ 5,859,714 $ 563,354 $ 2,031,801
============ =========== ========== ===========
Undistributed ordinary income $ -- $ 58,198 $ 44,404 $ 32,423
Undistributed long-term
capital gain 8,316,946 -- -- --
------------ ----------- ---------- -----------
Total distributable earnings $ 8,316,946 $ 58,198 $ 44,404 $ 32,423
------------ ----------- ---------- -----------
Other accumulated losses $ -- $ (776,855) $ (319,524) $ (332,878)
------------ ----------- ---------- -----------
Total accumulated earnings $ 97,286,173 $ 5,141,057 $ 288,234 $ 1,731,346
============ =========== ========== ===========
44
At December 31, 2003 the accumulated capital loss carryforwards were as follows:
LKCM LKCM LKCM LKCM LKCM
SMALL CAP EQUITY BALANCED FIXED INTERNATIONAL
EQUITY FUND FUND FUND INCOME FUND FUND
---------- -------- -------- -------- -----------
Expiring in 2009 $ -- $ 64,154 $ -- $ -- $28,907,739
Expiring in 2010 -- 489,676 309,137 332,878 11,720,144
Expiring in 2011 -- 143,387 10,387 -- --
---------- -------- -------- -------- -----------
Total capital loss
carryforwards $ -- $697,217 $319,524 $332,878 $40,627,883
========== ======== ======== ======== ===========
To the extent the Funds realize future net capital gains, those gains will be
offset by an unused capital loss carryforwards. For the year ended December 31,
2003, capital loss carryforwards of $1,968,360, $202,060, and $49,168 were
utilized by the LKCM Small Cap Equity Fund, LKCM Fixed Income Fund, and the LKCM
International Fund, respectively. At December 31, 2003, the LKCM Equity Fund and
the LKCM International Fund had net realized losses from transitions between
November 1, 2003 and December 31, 2003 of $79,638 and $121,943, respectively,
which are deferred for tax purposes and will be recognized in 2004.
The tax components of dividends paid during the year ended December 31, 2003
were as follows:
ORDINARY LONG-TERM
INCOME CAPITAL GAINS
---------- -------------
LKCM Small Cap Equity Fund $ -- $13,219,748
LKCM Equity Fund 204,369 --
LKCM Balanced Fund 145,359 --
LKCM Fixed Income Fund 2,522,481 --
LKCM International Fund 536,161 --
The tax components of dividends paid during the year ended December 31, 2002
were as follows:
ORDINARY LONG-TERM
INCOME CAPITAL GAINS
---------- -------------
LKCM Small Cap Equity Fund $ 67,958 $93,234
LKCM Equity Fund 142,138 --
LKCM Balanced Fund 146,353 3,706
LKCM Fixed Income Fund 2,423,086 --
LKCM International Fund 1,123,215 --
45
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders
of LKCM Funds
In our opinion, the accompanying statements of assets and liabilities, including
the schedules of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of LKCM Small Cap Equity Fund, LKCM
Equity Fund, LKCM Balanced Fund, LKCM Fixed Income Fund and LKCM International
Fund (constituting the LKCM Funds, hereafter referred to as the "Funds") at
December 31, 2003, and the results of each of their operations, the changes in
each of their net assets and each of their financial highlights for the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 23, 2004
46
ADDITIONAL TAX INFORMATION: The LKCM Equity, Balanced and International Funds
designate 73.52%, 56.91% and 77.65%, respectively, of dividends declared after
December 31, 2002 from net investment income as qualified dividend income under
the Jobs & Growth Tax Reconciliation Act of 2003.
47
ADDITIONAL INFORMATION
INFORMATION ABOUT THE FUNDS' TRUSTEES
- -------------------------------------
The business and affairs of the Funds are managed under the direction of the
Funds' Board of Trustees. Information pertaining to the Trustees of the Funds is
set forth below. The Statement of Additional Information includes additional
information about the Funds' Trustees and officers and is available, without
charge, upon request by calling 1-800-688-LKCM.
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF
TERM OF PORTFOLIOS
OFFICE & PRINCIPAL IN FUND
POSITION(S) LENGTH OCCUPATION COMPLEX OTHER
NAME, ADDRESS HELD WITH OF TIME DURING PAST OVERSEEN DIRECTORSHIPS
AND AGE THE FUND SERVED1 FIVE YEARS BY TRUSTEE HELD BY TRUSTEE
- ---------------------------------------------------------------------------------------------------------------------------------
DISINTERESTED TRUSTEES:
- ---------------------------------------------------------------------------------------------------------------------------------
H. Kirk Downey Trustee Since 1994 CEO, Texassystems, 5 Non-executive
301 Commerce Street LLC and CEO, chairman of the
Suite 1600 Texaslearningsystems board of AZZ
Fort Worth, Texas 76102 LLC since 1999; Incorporated, a
Age: 61 Dean, M.J. Neeley manufacturing
School of Business, company
Texas Christian
University Business
School from 1987 to
2001
- ---------------------------------------------------------------------------------------------------------------------------------
Earle A. Shields, Jr. Trustee Since 1994 Consultant; formerly 5 Priests Pension Fund
301 Commerce Street Consultant for of the Catholic
Suite 1600 NASDAQ Corp. and Diocese of Fort
Fort Worth, TX 76102 Vice President, Worth, Lay Workers
Age: 83 Merrill Lynch & Co., Pension Fund of the
Inc. Catholic Diocese of
Fort Worth, St.
Joseph Health Care
Trust, Catholic
Schools Trust and
Catholic Foundation
of North Texas
INTERESTED TRUSTEE:
- ---------------------------------------------------------------------------------------------------------------------------------
J. Luther King, Jr.2 Chairman of Since 1994 Chairman, President, 5 DK Leasing Corp
301 Commerce Street the Board of and Director, Luther (private plane),
Fort Worth, TX 76102 Trustees, King Capital Employee Retirement
Age: 63 President and Management Systems of Texas, 4K
Chief Executive Corporation since Land & Cattle
Officer 1979 Company, Hunt Forest
Products (lumber),
Ruston Industrial
Corp. (forest
products),
Investment Company
Association of
America (trade
organization), JLK
Venture Corp
(private equity),
Southwestern
Exposition &
Livestock, Southwest
JLK, Texas Christian
University, Texas
Southwestern
Cattleraisers
Foundation,
University of Texas
Investment
Management
- --------------------------------------------------------------------------------
1 Each Trustee holds office during the lifetime of the Trust until that
individual resigns, retires or is otherwise removed or replaced.
2 Mr. King is an "interested person" of the Trust (as defined in the 1940
Act) because he controls the Adviser.
See TT EAFE Portfolio Financial Statements for trustees and officers of the TT
International U.S.A. Master Trust.
48
TERM OF
OFFICE & PRINCIPAL
POSITION(S) LENGTH OCCUPATION
NAME, ADDRESS HELD WITH OF TIME DURING PAST
AND AGE THE FUND SERVED FIVE YEARS
- -----------------------------------------------------------------------------------------------
OFFICERS:
- -----------------------------------------------------------------------------------------------
J. Luther King, Jr. President and Since Chairman, President and Director,
301 Commerce Street Chief Executive 1994 Luther King Capital Management
Fort Worth, Texas 76102 Officer Corporation since 1979.
Age: 63
- -----------------------------------------------------------------------------------------------
Paul W. Greenwell Vice President Since Vice President, Luther King Capital
301 Commerce Street 1996 Management since 1983.
Fort Worth, Texas 76102
Age: 53
- -----------------------------------------------------------------------------------------------
Jacqui Brownfield Vice President, Since Fund Administrator and Operations
301 Commerce Street Secretary and 1994 Manager, Luther King Capital
Fort Worth, Texas 76102 Treasurer Mangagement since 1987.
Age: 42
- -----------------------------------------------------------------------------------------------
Steven R. Purvis Vice President Since Director of Research, Luther King
301 Commerce Street of the Trust 2000 Capital Management since 1996.
Fort Worth, Texas 76102
Age: 38
- -----------------------------------------------------------------------------------------------
49
TT EAFE PORTFOLIO
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2003
VALUE (NOTE 1)
COMMON STOCKS - 90.15% SHARES US$
- ----------------------------------------------------------------------------------------
AUSTRALIA - 1.50%
- ----------------------------------------------------------------------------------------
METALS & MINING - 1.50%
BHP Billiton Ltd. 87,153 $ 800,462
Rio Tinto Ltd. 15,664 439,036
-----------
TOTAL AUSTRALIA 1,239,498
-----------
- ----------------------------------------------------------------------------------------
FRANCE - 9.18%
- ----------------------------------------------------------------------------------------
AUTOMOTIVE - 1.31%
Peugeot SA 21,183 1,079,455
-----------
BANKS - 2.97%
Credit Agricole SA 102,664 2,451,346
-----------
DIVERSIFIED OPERATIONS - 1.02%
Moet Hennessy Louis
Vuitton SA 11,516 838,134
-----------
MEDIA - 1.75%
Vivendi Universal SA* 59,512 1,446,512
-----------
PHARMACEUTICALS - 1.57%
Sanofi-Synthelabo SA 17,265 1,300,100
-----------
RETAILERS - 0.56%
Casino Guichard
Perrachon SA 4,743 461,257
-----------
TOTAL FRANCE 7,576,804
-----------
- ----------------------------------------------------------------------------------------
GERMANY - 13.83%
- ----------------------------------------------------------------------------------------
AIRLINES - 1.60%
Deutsche Lufthansa AG 78,800 1,316,976
-----------
AUTOMOTIVE - 1.78%
Bayerische Motoren
Werke AG 31,784 1,473,336
-----------
CHEMICALS - 1.75%
BASF AG 25,676 1,443,787
-----------
DIVERSIFIED OPERATIONS - 1.90%
Siemens AG 19,574 1,567,795
-----------
DIVERSIFIED TELECOMMUNICATIONS - 1.83%
Deutsche Telekom AG* 82,376 1,507,662
-----------
- ----------------------------------------------------------------------------------------
VALUE (NOTE 1)
COMMON STOCKS SHARES US$
- ----------------------------------------------------------------------------------------
INSURANCE - 3.47%
Muenchener
Rueckversicherungs AG 23,649 $ 2,867,229
-----------
METALS - 1.01%
ThyssenKrupp AG 42,385 837,755
-----------
TRANSPORTATION SERVICES - 0.49%
Deutsche Post AG 19,595 404,109
-----------
TOTAL GERMANY 11,418,649
-----------
- ----------------------------------------------------------------------------------------
HONG KONG - 1.99%
- ----------------------------------------------------------------------------------------
BANKS - 0.47%
Hang Seng Bank Ltd. 29,700 390,206
-----------
DIVERSIFIED OPERATIONS - 0.44%
Swire Pacific Ltd. 58,500 360,934
-----------
DIVERSIFIED TELECOMMUNICATIONS - 0.48%
China Mobile Hong Kong
Ltd. 129,000 396,292
-----------
REAL ESTATE - 0.60%
Cheung Kong Holdings
Ltd. 46,000 365,874
Henderson Land Development
Company Ltd. 29,000 128,123
-----------
493,997
-----------
TOTAL HONG KONG 1,641,429
-----------
- ----------------------------------------------------------------------------------------
ITALY - 1.02%
- ----------------------------------------------------------------------------------------
BANKS - 1.02%
Capitalia Spa* 288,276 843,592
-----------
TOTAL ITALY 843,592
-----------
- ----------------------------------------------------------------------------------------
JAPAN - 17.70%
- ----------------------------------------------------------------------------------------
AUTOMOTIVE - 0.46%
Bridgestone Corp. 28,000 376,486
-----------
BANKS - 5.38%
Daiwa Securities
Group Inc. 97,000 659,821
Mitsubishi Tokyo
Financial Group Inc. 87 678,660
Nikko Cordial Corp. 142,000 791,023
Nomura Holdings Inc. 84,000 1,430,438
Softbank Corp. 15,300 468,265
See notes to the financial statements.
50
TT EAFE PORTFOLIO
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
VALUE (NOTE 1)
COMMON STOCKS SHARES US$
- ----------------------------------------------------------------------------------------
BANKS - 5.38% (CONTINUED)
Sumitomo Mitsui
Financial Group Inc. 77 $ 410,255
-----------
4,438,462
-----------
BEVERAGES, FOOD & TOBACCO - 0.51%
Japan Tobacco Inc. 58 424,839
-----------
CHEMICALS - 0.92%
Nitto Denko Corp. 14,300 760,567
-----------
COMMERCIAL SERVICES & SUPPLIES - 0.51%
Dentsu Inc. 83 418,214
-----------
COMPUTERS - 0.42%
NET One Systems Co. Ltd. 45 346,412
-----------
DIVERSIFIED OPERATIONS - 0.69%
Mitsubishi Heavy
Industries Ltd. 205,000 570,029
-----------
ELECTRONIC EQUIPMENT &
INSTRUMENTS - 2.78%
Keyence Corp. 1,700 358,337
Matsushita Electric
Industrial Co. Ltd. 12,000 165,942
Mitsubishi Electric Corp. 77,000 319,726
Sanyo Electric Co. Ltd. 146,000 762,900
Secom Co. Ltd. 18,500 690,492
-----------
2,297,397
-----------
INSURANCE - 0.98%
Millea Holdings Inc. 62 809,928
-----------
MACHINERY - 0.63%
SMC Corp. 4,200 522,795
-----------
MEDIA - 0.34%
Tokyo Broadcasting
System Inc. 17,400 277,147
-----------
REAL ESTATE - 0.49%
Mitsui Fudosan Co. Ltd. 45,000 406,457
-----------
- ----------------------------------------------------------------------------------------
VALUE (NOTE 1)
COMMON STOCKS SHARES US$
- ----------------------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT &
PRODUCTS - 1.01%
Omron Corp. 15,000 $ 304,423
Rohm Co. Ltd. 1,500 175,796
Tokyo Electron Ltd. 4,700 356,984
-----------
837,203
-----------
TELEVISION - 0.61%
Fuji Television Network Inc. 56 303,070
Nippon Television
Network Corp. 1,360 202,153
-----------
505,223
-----------
TRADING COMPANIES &
DISTRIBUTORS - 1.31%
Mitsubishi Corp. 44,000 466,399
Mitsui & Co. Ltd. 76,000 612,000
-----------
1,078,399
-----------
WIRELESS TELECOMMUNICATIONS
SERVICES - 0.66%
NTT DoCoMo Inc. 239 541,915
-----------
TOTAL JAPAN 14,611,473
-----------
- ----------------------------------------------------------------------------------------
NETHERLANDS - 3.09%
- ----------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT &
INSTRUMENTS - 3.09%
Koninklijke Philips
Electronics NV 87,410 2,552,395
-----------
TOTAL NETHERLANDS 2,552,395
-----------
- ----------------------------------------------------------------------------------------
SINGAPORE - 0.32%
- ----------------------------------------------------------------------------------------
TRANSPORTATION SERVICES - 0.32%
Neptune Orient
Lines Ltd.* 205,000 260,731
-----------
TOTAL SINGAPORE 260,731
-----------
- ----------------------------------------------------------------------------------------
SOUTH KOREA - 3.51%
- ----------------------------------------------------------------------------------------
AUTOMOTIVE - 0.80%
Hyundai Motor Co. 15,700 665,422
-----------
BANKS - 0.35%
Hana Bank* 15,530 286,748
-----------
See notes to the financial statements.
51
TT EAFE PORTFOLIO
SCHEDULE OF INVESTMENTS, CONTINUED
DECEMBER 31, 2003
VALUE (NOTE 1)
COMMON STOCKS SHARES US$
- ----------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT &
INSTRUMENTS - 2.36%
Samsung Electronics
Co. Ltd. 5,150 $ 1,949,349
-----------
TOTAL SOUTH KOREA 2,901,519
-----------
- ----------------------------------------------------------------------------------------
SWITZERLAND - 9.63%
- ----------------------------------------------------------------------------------------
BANKS - 7.28%
Credit Suisse Group 107,005 3,915,081
UBS AG 30,620 2,097,040
-----------
6,012,121
-----------
INSURANCE - 2.35%
Swiss Reinsurance 12,437 839,692
Zurich Financial
Services AG* 7,650 1,101,031
-----------
1,940,723
-----------
TOTAL SWITZERLAND 7,952,844
-----------
- ----------------------------------------------------------------------------------------
TAIWAN - 1.43%
- ----------------------------------------------------------------------------------------
INSURANCE - 0.65%
Cathay Financial
Holding Co. Ltd. 356,000 534,787
-----------
CHEMICALS - 0.33%
Nan Ya Plastics Corp. 186,000 268,454
-----------
SEMICONDUCTOR EQUIPMENT &
PRODUCTS - 0.45%
United Microelectronics
Corp.* 437,000 374,571
-----------
TOTAL TAIWAN 1,177,812
-----------
- ----------------------------------------------------------------------------------------
UNITED KINGDOM - 26.95%
- ----------------------------------------------------------------------------------------
BANKS - 10.74%
Abbey National PLC 190,129 1,807,310
HBOS PLC 301,459 3,904,420
HSBC Holdings PLC 100,810 1,584,484
Standard Chartered PLC 95,138 1,571,123
-----------
8,867,337
-----------
BEVERAGES, FOOD & TOBACCO - 0.96%
Imperial Tobacco
Group PLC 40,493 797,375
-----------
- ----------------------------------------------------------------------------------------
VALUE (NOTE 1)
COMMON STOCKS SHARES US$
- ----------------------------------------------------------------------------------------
CHEMICALS - 1.87%
BOC Group PLC 101,107 $ 1,544,808
-----------
ENTERTAINMENT - 1.12%
Carnival PLC 22,865 921,375
-----------
MINERALS - 1.80%
Xstrata PLC 131,822 1,486,682
-----------
PHARMACEUTICALS - 1.46%
GlaxoSmithKline PLC 52,469 1,202,271
-----------
TELEVISION - 1.47%
Granada PLC 556,336 1,215,029
-----------
WIRELESS TELECOMMUNICATIONS
SERVICES - 7.53%
mmO2 PLC* 1,405,643 1,937,561
Vodafone Group PLC 1,726,970 4,281,780
-----------
6,219,341
-----------
TOTAL UNITED KINGDOM 22,254,218
-----------
TOTAL COMMON STOCK
(cost $61,759,653) 74,430,964
-----------
- ----------------------------------------------------------------------------------------
EQUITY PERFORMANCE
LINKED NOTE - 1.46%
- ----------------------------------------------------------------------------------------
UBS Japan Mid-Cap
Index*
0.00%, 03/08/06 JPY 95,300,000 1,202,893
-----------
TOTAL EQUITY PERFORMANCE LINKED NOTE
(cost $933,525) 1,202,893
-----------
TOTAL INVESTMENTS - 91.61%
(cost $62,693,178) 75,633,857
-----------
Other Assets in excess
of Liabilities - 8.39% 6,929,419
-----------
Total Net Assets 100.00% $82,563,276
===========
* Non-income producing security.
JPY - Japanese Yen
See notes to the financial statements.
52
TT EAFE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
US$
-----------
ASSETS:
Investments, at value* ........................................... $75,633,857
Foreign currency** ............................................... 2,371,182
Receivable for investments sold .................................. 4,728,106
Dividends and interest receivable ................................ 152,387
Recoverable foreign taxes ........................................ 178,688
Other assets ..................................................... 14,490
-----------
Total assets ................................................... 83,078,710
===========
LIABILITIES:
Payable for investments purchased ................................ 279,105
Payable for open forward foreign currency exchange contracts ..... 56,679
Payable for investment advisory fees ............................. 33,961
Payable for administration fees .................................. 8,529
Payable to bank .................................................. 871
Accrued expenses and other liabilities ........................... 136,289
-----------
Total liabilities .............................................. 515,434
-----------
NET ASSETS........................................................ $82,563,276
===========
* Cost of Investments............................................. $62,693,178
===========
** Cost of Foreign Currency....................................... $ 2,336,850
===========
See notes to the financial statements.
53
TT EAFE PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
US$
-----------
INVESTMENT INCOME:
Dividend income*.................................................. $ 1,719,351
Interest income .................................................. 20,045
-----------
Total income ................................................... 1,739,396
-----------
EXPENSES:
Investment advisory fee .......................................... 365,073
Custody fees ..................................................... 197,412
Audit fees ....................................................... 90,265
Administration fees .............................................. 64,496
Legal services ................................................... 24,099
Trustees' fees and expenses ...................................... 23,587
Other fees ....................................................... 24,888
-----------
Total expenses ................................................. 789,820
-----------
NET INVESTMENT INCOME ............................................ 949,576
-----------
REALIZED/UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on:
Investment security transactions ............................... 4,033,324
Foreign currency transactions and forward foreign currency
exchange contracts .......................................... 7,931
-----------
Net change in unrealized appreciation/(depreciation) on:
Investment securities .......................................... 17,436,816
Foreign currency transactions and forward foreign currency
exchange contracts .......................................... (90,247)
-----------
NET GAIN ON INVESTMENTS .......................................... 21,387,824
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $22,337,400
===========
* Net of foreign taxes withheld................................... $ 232,519
===========
See notes to the financial statements.
54
TT EAFE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
TT EAFE
PORTFOLIO
-----------------------------
Year Year
Ended Ended
December 31, December 31,
2003 2002
US$ US$
------------- -------------
OPERATIONS:
Net investment income .................................................... $ 949,576 $ 1,617,014
Net realized gain (loss) ................................................. 4,041,255 (16,193,659)
Net change in unrealized appreciation/depreciation ....................... 17,346,569 (6,658,951)
------------- -------------
Net increase (decrease) in net assets resulting from operations ........ 22,337,400 (21,235,596)
------------- -------------
CAPITAL TRANSACTIONS
Contributions .......................................................... 5,813,185 168,468,799
Withdrawals ............................................................ (44,341,929) (172,438,004)
------------- -------------
Net decrease in net assets from capital transactions ................... (38,528,744) (3,969,205)
------------- -------------
Total decrease in net assets ............................................. (16,191,344) (25,204,801)
------------- -------------
NET ASSETS:
Beginning of period ...................................................... 98,754,620 123,959,421
------------- -------------
End of period ............................................................ $ 82,563,276 $ 98,754,620
============= =============
See notes to the financial statements.
55
TT EAFE PORTFOLIO
NOTES TO THE FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
TT EAFE Portfolio (the "Portfolio") is a series of TT International U.S.A.
Master Trust (the "Portfolio Trust"). The Portfolio Trust is registered under
the Investment Company Act of 1940, as an open-end management investment
company. The Portfolio Trust was organized as a business trust under the laws of
the Commonwealth of Massachusetts, pursuant to a Declaration of Trust dated as
of May 26, 2000. TT Active International Mutual Fund held 50.1% and the LKCM
International Fund held 49.9% of the Portfolio, respectively, as of December 31,
2003.
The following is a summary of significant accounting policies followed by the
Portfolio in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
1. SECURITY VALUATION
The equity securities of the Portfolio are valued at the last reported sales
price on the primary securities exchange or national securities market on
which such securities are traded. Securities not listed on an exchange or
national securities market, or securities in which there was no last
reported sales price, are valued at the most recent bid prices. Debt
securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in those securities or by an independent pricing source. U.S.
Government obligations are valued at the last reported bid price. Debt
securities maturing in 60 days or less are valued at amortized cost, which
approximates market value. Any securities, restricted securities or other
assets for which market quotations are not readily available are valued at
fair value as determined in good faith in accordance with policies approved
by the Portfolio's Board of Trustees. The Portfolio employs a valuation
policy that monitors for significant events in foreign markets using various
benchmarks and techniques in order to apply fair valuation procedures
approved by the Board of Trustees.
2. SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on the trade date. Dividend income
is recognized on the ex-dividend date, and interest income is recognized on
an accrual basis. Realized gains or losses are reported on the basis of
identified cost of securities delivered. Premium and discount on securities
purchased are amortized as a component of interest income using a constant
yield to maturity method.
3. EXPENSES
Expenses that are directly related to the Portfolio are charged to the
Portfolio. Other operating expenses of the Trust are prorated to the
Portfolio on the basis of relative daily net assets.
56
4. FEDERAL INCOME TAXES
The Portfolio intends to qualify as a partnership for U.S. Federal income
tax purposes. The Portfolio therefore believes that it will not be subject
to any U.S. Federal income tax on its income and net realized capital gains
(if any). However, each investor in the Portfolio will be subject to U.S.
Federal income taxation on its allocable share of the Portfolio's income and
capital gains for the purposes of determining its Federal income tax
liability. The determination of such share will be made in accordance with
the applicable sections of the U.S. Internal Revenue Code of 1986 (the
"Code").
It is intended that the Portfolio's assets, income and allocations will be
managed in such a way that a regulated investment company investing in the
Portfolio will be able to satisfy the requirements of Subchapter M of the
Code, assuming that the investment company invested all of its assets in the
corresponding Portfolio.
5. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and securities of the U.S. government. These
risks include devaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices
more volatile than those of securities of comparable U.S. companies and
securities of the U.S. government.
Since foreign securities often trade in currencies other than U.S. dollars,
changes in currency exchange rates will affect the Portfolio's net assets,
the value of dividends and interest earned, and gains and losses realized on
the sale of securities. An increase in the U.S. dollar exchange rate
relative to these other currencies will adversely affect the value of the
Portfolio. In addition, some foreign currency values may be volatile and
there is the possibility of government controls on currency exchanges or
government intervention in currency markets. Controls or intervention could
limit or prevent the Portfolio from realizing value in U.S. dollars from its
investment in foreign securities.
6. FOREIGN CURRENCY TRANSLATION
For financial reporting purposes, the Portfolio does not isolate changes in
the exchange rate of investment securities from the fluctuations arising
from changes in the market prices of securities. However, for financial
reporting and federal income tax purposes the Portfolio does isolate and
treat as ordinary income the effect of changes in foreign exchange rates on
currency, currency contracts and payables and receivables arising from trade
date and settlement date differences.
7. FORWARD FOREIGN CURRENCY CONTRACTS
The Portfolio may enter into forward foreign currency contracts as hedges
against either specific transactions, fund positions, or anticipated fund
positions. All commitments are "marked-to-market" daily at the applicable
foreign exchange rate and, any resulting unrealized gains or losses are
recorded. The Portfolio realizes gains and losses at the time forward
contracts are extinguished. Unrealized gains or losses on outstanding
positions in forward foreign currency contracts held at the close of the
year are recognized as ordinary income or loss for Federal income tax
purposes.
57
At December 31, 2003, the Portfolio had the following open forward foreign
currency outstanding:
SETTLEMENT DELIVER/ RECEIVE/ NET UNREALIZED
DATE UNITS OF CURRENCY IN EXCHANGE FOR DEPRECIATION
- -----------------------------------------------------------------------------------
01/09/04 Swiss Franc 3,782,520 Australian Dollar 3,990,000 $(56,679)
---------
8. FUTURES CONTRACTS
The Portfolio may purchase long futures contracts to gain exposure to market
changes, as this may be more efficient or cost effective than actually
buying the securities. A futures contract is an agreement between two
parties to buy and sell a security at a set price on a future date and is
exchange traded. Upon entering into a futures contract, the Portfolio is
required to pledge to the broker an amount of cash, U.S. Government
securities or other high-quality debt securities equal to the minimum
"initial margin" requirements of the exchange. Pursuant to the contract, the
Portfolio agrees to receive from or pay to the broker an amount of cash
equal to the daily fluctuation in the value of the contract. Such receipts
or payments are known as "variation margin" and are recorded by the
Portfolio as unrealized gains or losses. When the contract is closed, the
Portfolio records a gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed. Pursuant to regulations and/or published positions of the Securities
and Exchange Commission, the Portfolio is required to segregate cash or
liquid securities in connection with all futures transactions in an amount
generally equal to the entire futures contract amount. Risks of entering
into futures contracts include the possibility that there may be an illiquid
market and that a change in the value of the contracts may not correlate
with changes in the value of the underlying securities.
As of and for the year ended December 31, 2003, there were no open long
futures contracts outstanding.
9. OPTIONS CONTRACTS
A purchased option contract gives the buyer the right, but not the
obligation, to buy (call) or sell (put) an underlying item at a fixed
exercise price during a specified period. These contracts are generally
used by the Portfolio to provide the return of an index without purchasing
all of the securities underlying the index or as a substitute for
purchasing or selling specific securities.
Purchases of put and call options are recorded as investments, the values of
which are marked-to-market daily. When a purchased option expires, the
Portfolio will realize a loss equal to the premium paid. When the Portfolio
enters into a closing sale transaction, the Portfolio will realize a gain or
loss depending on whether the sales proceeds from the closing sale
transaction are greater or less than the cost of the option. When the
Portfolio exercises a put option, it will realize a gain or loss from the
sale of the underlying security and the proceeds from such sale will be
decreased by the premium originally paid. When the Portfolio exercises a
call option, the cost of the security which the Portfolio purchases upon
exercise will be increased by the premium originally paid.
58
The premium received for a written option is recorded as a liability. The
liability is marked-to-market daily based on the option's quoted market
price. When an option expires or the Portfolio enters into a closing
purchase transaction, the Portfolio realizes a gain (or loss if the cost of
the closing purchase transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the
underlying security and the liability related to such option is eliminated.
When a written call option is exercised, the Portfolio realizes a gain or
loss from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. If a written put
option is exercised, the amount of the premium originally received will
reduce the cost of the underlying security purchased.
The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Portfolio may
forego the opportunity for profit if the market value of the underlying
security increases and the option is exercised. The risk in writing a put
option is that the Portfolio may incur a loss if the market price of the
underlying security decreases and the option is exercised. In addition, the
Portfolio could be exposed to risks if the counterparties to the
transactions are unable to meet the terms of the contracts.
As of December 31, 2003, and for the year ending December 31, 2003, there
were no open options contracts outstanding.
10. EQUITY-LINKED NOTES
The Portfolio has invested in equity-linked notes, under which the payment
of principal at maturity is indexed to the market values of a specified
basket of equity securities. The notes are obligations of, and purchased
from, a dealer who has agreed to make a secondary market in them at a price
based on the daily closing values of the specified basket. In addition to
the market risk of the underlying holding, the Portfolio bears additional
counterparty risk to the issuing dealer. Under the terms of the notes, the
Portfolio's maximum loss is limited to its initial investment.
B. INVESTMENT ADVISORY AGREEMENT
Pursuant to a Management Agreement with the Portfolio Trust, TT International
Investment Management ("TTI") provides investment guidance and policy direction
in connection with the management of the Portfolio's assets. For its services
under the Management Agreement with respect to the Portfolio, TTI is entitled to
receive fees, which are computed daily and paid monthly, at an annual rate equal
to 0.50% of the Portfolio's average net assets.
C. SECURITY TRANSACTIONS
Purchases and sales of investments for the Portfolio, exclusive of short-term
securities, for the year ended December 31, 2003, were as follows:
COST OF PURCHASES PROCEEDS FROM SALES
US$ US$
- --------------------------------------------------------------------------------
128,600,386 163,613,419
59
At December 31, 2003, the Portfolio's aggregate unrealized appreciation and
depreciation on Investments based on cost for U.S. Federal income tax purposes
were as follows:
UNREALIZED UNREALIZED NET UNREALIZED
TAX COST APPRECIATION DEPRECIATION APPRECIATION
US$ US$ US$ US$
- --------------------------------------------------------------------------------
62,783,078 13,237,080 (386,301) 12,850,779
D. FINANCIAL HIGHLIGHTS
The ratios of expenses and net investment income to average net assets and
portfolio turnover rates (excluding short-term securities) for the Portfolio are
as follows:
FOR THE
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2001 2000*
- ---------------------------------------------------------------------------------------
Ratio of expenses 1.08% 0.85% 0.85% 0.92%+
Ratio of net investment income 1.30% 1.38% 0.51% 0.39%+
Portfolio Turnover 184% 231% 255% 37%
Total Return 34.79% (18.51)% (28.80)% (4.54)%^
* For the period October 2, 2000 (commencement of operations) through
December 31, 2000.
+ Annualized.
^ Not Annualized.
60
REPORT OF INDEPENDENT AUDITORS
To the Board of Trustees of TT International U.S.A. Master Trust
and the Shareholders of TT EAFE Portfolio:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of TT EAFE Portfolio (one of the
portfolios constituting TT International U.S.A. Master Trust, hereafter referred
to as the "Fund") at December 31, 2003, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
indicated, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2004
61
MANAGEMENT OF THE FUND AND THE PORTFOLIO (UNAUDITED)
- ----------------------------------------------------
The following chart lists Trustees and Officers as of February 13, 2004.
The management and affairs of the Fund are supervised by the Trustees of the
Feeder Trust under the laws of the Commonwealth of Massachusetts. The management
and affairs of the Portfolio are supervised by the Trustees of the Portfolio
Trust under the laws of the Commonwealth of Massachusetts.
The Trustees and officers of the Feeder Trust and the Portfolio Trust, their
ages, their principal occupations during the past five years (their titles may
have varied during that period) and other directorships they hold, and the
number of investment companies managed by TT International that they oversee are
set forth below. Unless otherwise indicated below, the address of each Trustee
and officer is One Freedom Valley Drive, Oaks, PA 19456. Each Trustee and
officer holds office for the lifetime of the Trusts unless that individual
resigns, retires or is otherwise removed or replaced. The Trust's Statement of
Additional Information ("SAI") includes additional information about the
Trustees and Officers. The SAI may be obtained without charge by calling
1-888-465-5722.
TRUSTEES OF THE FEEDER TRUST AND THE PORTFOLIO TRUST
- -------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES1
NUMBER OF
TERM OF PORTFOLIOS
OFFICE AND IN FUND PRINCIPAL OCCUPATION(S)
POSITION(S) LENGTH COMPLEX DURING PAST 5 YEARS;
NAME HELD WITH OF TIME OVERSEEN OTHER DIRECTORSHIPS
& AGE THE TRUSTS SERVED BY TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
John A. Benning Trustee of Since TT International Retired (since
Age: 69 the Feeder August 2000 U.S.A. Master December 1999);
Trust and & Feeder Senior Vice
the Portfolio Trusts: President and
Trust 4 Portfolios General Counsel and
Secretary, Liberty
Financial Companies,
Inc. (financial
services)
(1985-1999).
Trustee, Liberty
All-Star Equity Fund
(one mutual fund)
and Director,
Liberty All-Star
Growth Fund, Inc.
(one mutual fund)
(since October
2002); General
Partner, Mad River
Green Partners (real
estate) (since
1972).
- -------------------------------------------------------------------------------------------------------------------
Peter O. Brown Trustee of Since TT International Counsel, Harter,
Age: 63 the Feeder August 2000 U.S.A. Master Secrest & Emery LLP
Trust and & Feeder (law firm) since
the Portfolio Trusts: 2001); Partner,
Trust 4 Portfolios Harter, Secrest &
Emery LLP (from
1998-2000).
Trustee, CGM Trust
(three mutual funds)
and CGM Capital
Development Fund
(one mutual fund)
(since June 1993).
- -------------------------------------------------------------------------------------------------------------------
1 Non-Interested Trustees are those Trustees who are not "interested persons"
of the Feeder Trust or the Portfolio Trust as defined in the 1940 Act.
62
MANAGEMENT OF THE FUND AND THE PORTFOLIO (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------
TRUSTEES OF THE FEEDER TRUST AND THE PORTFOLIO TRUST
- -------------------------------------------------------------------------------------------------------------------
NON-INTERESTED TRUSTEES1 (CONTINUED)
NUMBER OF
TERM OF PORTFOLIOS
OFFICE AND IN FUND PRINCIPAL OCCUPATION(S)
POSITION(S) LENGTH COMPLEX DURING PAST 5 YEARS;
NAME HELD WITH OF TIME OVERSEEN OTHER DIRECTORSHIPS
& AGE THE TRUSTS SERVED BY TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
Robert W. Uek Trustee of Since TT International Self-Employed
Age: 62 the Feeder August 2000 U.S.A. Master Consultant (since
Trust and & Feeder 1999); Partner,
the Portfolio Trusts: PricewaterhouseCoopers
Trust 4 Portfolios LLP (accounting
firm) (1998 to June
1999). Trustee,
Hillview Investment
Trust II (three
mutual funds) (since
September 2000).
- -------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEES2
NUMBER OF
TERM OF PORTFOLIOS
OFFICE AND IN FUND PRINCIPAL OCCUPATION(S)
POSITION(S) LENGTH COMPLEX DURING PAST 5 YEARS;
NAME HELD WITH OF TIME OVERSEEN OTHER DIRECTORSHIPS
& AGE THE TRUSTS SERVED BY TRUSTEE HELD BY TRUSTEE
- -------------------------------------------------------------------------------------------------------------------
Jacqui Brownfield3 Trustee of Since TT International Vice President and
Age: 43 the Portfolio June 2003 U.S.A. Master Operations Manager,
Trust Trusts: Luther King Capital
2 Portfolios Managment (since
1987).
- -------------------------------------------------------------------------------------------------------------------
2 Interested Trustees are those Trustees who are "interested persons" of the
Feeder Trust or the Portfolio Trust as defined in the 1940 Act.
3 Ms. Brownfield is deemed to be an interested Trustee of the Portfolio Trust
because of her (i) affiliation with LKCM International Fund, the investment
company, which invests all of its investable assets in a series of the
Portfolio Trust and (ii) Luther King Capital Management, the investment
adviser to the LKCM International Fund.
63
MANAGEMENT OF THE FUND AND THE PORTFOLIO (UNAUDITED) (CONTINUED)
- ----------------------------------------------------------------
OFFICERS OF THE FEEDER TRUST AND THE PORTFOLIO TRUST
- -------------------------------------------------------------------------------------------------------------------
TERM OF
OFFICE AND
POSITION(S) LENGTH PRINCIPAL OCCUPATION(S)
NAME HELD WITH OF TIME DURING PAST 5 YEARS;
& AGE THE TRUSTS SERVED OTHER DIRECTORSHIPS HELD BY TRUSTEE
- ------------------------------------------------------------------------------------------------------------
David J.S. Burnett President Since Managing Partner, TT International
Age: 46 August 2000 (since September 1998); Director,
Brunswick UBS Warburg Ltd. (investment
banking) (May 1998 to August 1998);
Director, Dalgland Nominees (PM) Ltd.
(nominee company) (November 1995 to
August 1998); Chairman, Fenway Services
Limited (securities trader) (November
1997 to August 1998); Director, Warburg
Dillon Read Securities (South Africa)
(stock broker) (October 1995 to August
1998). Director, TJA Inc. (investment
company) (since November 2002);
Chairman, TT International Bermuda Ltd.
(since November 2001); Director, TT
International Funds PLC (investment
management) (since August 2001);
Director, TT International Advisors Inc.
(investment marketing) (since March
2001); Director, TT Europe Alpha Fund
Ltd. (investment management) (since July
2000); Director, TT Europe Beta Fund
Ltd. (investment management) (since June
2000); Director, TT Crosby Limited
(investment holding company) (since
January 1999).
- ------------------------------------------------------------------------------------------------------------
S. Austin Allison Secretary Since Partner, Head of Compliance & Legal, TT
Age: 56 August 2000 International (since January 2001); Head
of Compliance and Legal, TT
International (June 2000 to December
2000); Director, TT Investment Advisors
Inc. (since March 2001); Director, TT
International Funds PLC (since August
2001); Director, TT International
(Bermuda) Limited (since November 2001);
Director, TJA Inc. (investment company)
(since November 2002); Director, Legal &
Compliance, Westdeutsche Landesbank
Group (banking, financial services)
(January 1997 to June 2000).
- ------------------------------------------------------------------------------------------------------------
Graham Barr Treasurer Since Financial Controller, TT International
Age: 38 August 2000 (since June 1998); Company Secretary, TT
Crosby Ltd. (investment holding company)
(from November 1999 to November 2002);
Head of Investment Accounting, AIB
Govett Asset Management (fund
management) (August 1993 to June 1998).
- ------------------------------------------------------------------------------------------------------------
John C. Munch Assistant Since Assistant Secretary of SEI Investments
Age: 32 Secretary 2003 Global Funds Services and Vice President
and Secretary of SEI Investments
Distribution Co. since November 2001.
Associate at Howard Rice Nemovroski
Canady Falk & Rabkin (law firm)
(1998-2001). Associate at Seward &
Kissel (law firm) (1996-1998).
- ------------------------------------------------------------------------------------------------------------
Lee T. Wilcox Assistant Since Director of Fund Accounting, SEI
Age: 41 Treasurer 2003 Investments Global Funds Services (2002-
present). Senior Operations Manager of
Deutsche Bank Global Fund Services (2000
- 2002). PricewaterhouseCoopers LLP
(1995 - 2000).
64
This page intentionally left blank.
65
This page intentionally left blank.
66
This page intentionally left blank.
67
LKCM FUNDS
P.O. BOX 701
MILWAUKEE, WI 53201-0701
- --------------------------------------------------------------------------------
OFFICERS AND TRUSTEES
J. Luther King, Jr., CFA Jacqui Brownfield
Chairman of the Board, Vice President,
President Secretary & Treasurer
Paul W. Greenwell Joseph C. Neuberger
Vice President Assistant Treasurer
Steven R. Purvis, CFA Jeffrey T. Rauman
Vice President Assistant Secretary
H. Kirk Downey James Tiegs
Trustee Assistant Secretary
Earle A. Shields, Jr.
Trustee
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Luther King Capital Management Corporation
301 Commerce Street, Suite 1600
Fort Worth, TX 76102
- --------------------------------------------------------------------------------
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND
PAYING AGENT & SHAREHOLDER SERVICING AGENT
U.S. Bancorp Fund Services, LLC
P.O. Box 701
Milwaukee, WI 53201-0701
- --------------------------------------------------------------------------------
CUSTODIAN FOR ALL FUNDS EXCEPT LKCM INTERNATIONAL FUND
U.S. Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
- --------------------------------------------------------------------------------
CUSTODIAN FOR LKCM INTERNATIONAL FUND
The Northern Trust Company
50 South LaSalle Street
Chicago, IL 60675
- --------------------------------------------------------------------------------
FUND ACCOUNTANT & SUB-ADMINISTRATOR FOR LKCM INTERNATIONAL FUND
SEI Investments Company
1 Freedom Valley Drive
Oaks, PA 19456
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, WI 53202
- --------------------------------------------------------------------------------
DISTRIBUTOR
Quasar Distributors, LLC
615 E. Michigan Street
Milwaukee, WI 53202
- --------------------------------------------------------------------------------
This report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus.
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the covered period. The
registrant has not granted any waivers from any provisions of the code of ethics
during the covered period.
A copy of the registrant's Code of Ethics is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees has determined that it does not have an audit
committee financial expert serving on its audit committee. However, the board
believes that the members of the audit committee have sufficient experience and
expertise to carry out their duties and responsibilities, and to assess the
issues which can be reasonably expected to be raised by the registrant's
financial statements.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The registrant has engaged its principal accountant to perform audit services,
audit-related services, tax services and other services during the past two
fiscal years. "Audit services" refer to performing an audit of the registrant's
annual financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or engagements
for those fiscal years. "Audit-related services" refer to the assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit. "Tax services" refer to professional services rendered
by the principal accountant for tax compliance, tax advice, and tax planning.
The following table details the aggregate fees billed for each of the last two
fiscal years for audit fees, audit-related fees, tax fees and other fees by the
principal accountant.
- ----------------------------- ----------------------- ----------------------- -----------------------
FYE 12/31/2003 FYE 12/31/2002 # of Hours spent in
FYE 2003
- ----------------------------- ----------------------- ----------------------- -----------------------
Audit Fees $66,000 $57,000 N/A
Audit-Related Fees $0 $0 N/A
Tax Fees $17,000 $17,000 N/A
All Other Fees $0 $0 N/A
- ----------------------------- ----------------------- ----------------------- -----------------------
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services of
the registrant, including services provided to any entity affiliated with the
registrant. All of the principal accountant's hours spent on auditing the
registrant's financial statements were attributed to work performed by full-time
permanent employees of the principal accountant.
The following table indicates the non-audit fees billed by the registrant's
accountant for services to the registrant and to the registrant's investment
adviser (and any other controlling entity, etc.--not sub-adviser) for the last
two years. The audit committee of the board of trustees has considered whether
the provision of non-audit services that were rendered to the registrant's
investment adviser is compatible with maintaining the principal accountant's
independence and has concluded that the provision of such non-audit services by
the accountant has not compromised the accountant's independence.
- ------------------------------------------- ------------------------ -----------------------
Non-Audit Related Fees FYE 12/31/2003 FYE 12/31/2002
- ------------------------------------------- ------------------------ -----------------------
Registrant $0 $0
Registrant's Investment Adviser $73,000 $75,000
- ------------------------------------------- ------------------------ -----------------------
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES.
Not applicable to open-end investment companies.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Applicable for periods ending after January 1, 2004.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have concluded that the Registrant's disclosure controls
and procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940 (the "Act")) are effective as of a date within 90 days of the
filing date of the report that includes the disclosure required by is
paragraph, based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the Act.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the Registrant's last fiscal half-year that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 11. EXHIBITS.
(a)(1) Any code of ethics or amendment thereto. Filed herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. Filed herewith.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) LKCM Funds
By (Signature and Title) /s/ J. Luther King, Jr. , President
--------------------------------------------
J. Luther King, Jr., President
Date March 5, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ J. Luther King, Jr., President
------------------------------------
J. Luther King, Jr., President
Date March 5, 2004
---------------------------------------------------------
By (Signature and Title)* /s/ Jacqui Brownfield, Treasurer
-----------------------------------
Jacqui Brownfield, Treasurer
Date March 5, 2004
----------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.