<PAGE> 1
As Filed with the Securities and Exchange
Commission on October 30, 1997
1933 Act File No. 2-25984
1940 Act File No. 811-1467
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 60 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 39 [X]
(Check appropriate box or boxes.)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
----------------------------------------
(Exact Name of Registrant)
625 Fourth Avenue South, Minneapolis, Minnesota 55415
-----------------------------------------------------
(Address of Principal Executive Offices)
(612) 340-7215
------------------------------
(Registrant's Telephone Number)
Otis F. Hilbert, Secretary
The Lutheran Brotherhood Family of Funds
625 Fourth Avenue South
Minneapolis, Minnesota 55415
--------------------------------------------------
(Name and Address of Agent for Service of Process)
With a copy to:
Edward T. O'Dell, P.C.
Goodwin, Procter & Hoar LLP
Exchange Place, Boston, MA 02109
--------------------------------
Approximate date of proposed public offering:
It is proposed that this filing will become effective under Rule 485 (check
appropriate box):
[ ] Immediately upon filing pursuant to paragraph (b)
[X] On October 31, 1997, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (c)(1)
[ ] On [DATE] pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] On (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
Form N-1A Item No. Caption or Location
Part A in Prospectuses
- ------------------ -------------------
<S> <C>
1. Cover Page Same
2. Synopsis Summary of Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives and Policies; Investment
Limitations; Investment Risks; The Funds and Their
Shares
5. Management of the Fund Fund Management; Fund Administration
Management=s Discussion Not Applicable
of Fund Performance
6. Capital Stock and Other Securities Multiple Class System; Dividends and Capital Gains; Taxes;
The Funds and their Shares
7. Purchase of Securities Being Buying Shares of The Lutheran Brotherhood
Offered Family of Funds; Net Asset Value of Your Shares;
Multiple Class System; Receiving Your Order;
Certificates and Statements
8. Redemption or Repurchase Redeeming Shares
9. Legal Proceedings Not Applicable
</TABLE>
(ii)
<PAGE> 3
<TABLE>
<CAPTION>
Caption or Location
Form N-1A Item No. Statement of
Part B Additional Information
- ------------------ ----------------------
<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History General Information
13. Investment Objectives and Investment Policies and Restrictions;
Policies Additional Information Concerning Certain Investment
Techniques; Brokerage Transactions
14. Management of the Registrant Fund Management
15. Control Persons and Principal Fund Management
Holders of Securities
16. Investment Advisory and Other Investment Advisory Services
Services Administration Services; Distribution and
Shareholder Services
17. Brokerage Allocation and Other Brokerage Transactions
Practices
18. Capital Stock and Other General Information
Securities
19. Purchase, Redemption and Pricing Purchasing Shares; Sales Change;
of Securities Being Offered Net Asset Value; Redeeming Shares
20. Tax Status Tax Status
21. Underwriters Distribution and Shareholder Services
22. Calculations of Performance Data Calculation of Performance Data
23. Financial Statements Financial Statements
</TABLE>
(iii)
<PAGE> 4
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
LUTHERAN BROTHERHOOD FUND
LUTHERAN BROTHERHOOD HIGH YIELD FUND
LUTHERAN BROTHERHOOD INCOME FUND
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
LUTHERAN BROTHERHOOD MONEY MARKET FUND
CLASS A AND CLASS B SHARES
PROSPECTUS October 31, 1997
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND ("LB Opportunity Growth Fund")
seeks long term growth of capital by investing primarily in a professionally
managed diversified portfolio of smaller capitalization common stocks. See page
P-.
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND ("LB Mid Cap Growth Fund") seeks
to achieve long term growth of capital by investing primarily in a
professionally managed diversified portfolio of common stocks of companies with
medium market capitalizations. See page P-.
LUTHERAN BROTHERHOOD WORLD GROWTH FUND ("LB World Growth Fund") seeks high
total return from long-term growth of capital by investing primarily in a
professionally managed diversified portfolio of common stocks of established,
non-U.S. companies. See page P-.
LUTHERAN BROTHERHOOD FUND ("LB Fund") seeks growth of capital and income by
investing in a professionally managed diversified portfolio of common stocks and
other securities issued by leading companies. See page P-.
LUTHERAN BROTHERHOOD HIGH YIELD FUND ("LB High Yield Fund") seeks high
current income by investing primarily in a professionally managed diversified
portfolio of high yield, high risk securities. The Fund will also consider
growth of capital as a secondary investment objective. See page P-.
LUTHERAN BROTHERHOOD INCOME FUND ("LB Income Fund") seeks high current
income while preserving principal, with possible long term growth of capital, by
investing primarily in a professionally managed diversified portfolio of debt
securities and dividend paying common and preferred stocks. See page P-.
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND ("LB Municipal Bond Fund") seeks
to provide high current income exempt from federal income tax by investing
primarily in a professionally managed diversified portfolio of municipal bonds.
See page P-.
<PAGE> 5
LUTHERAN BROTHERHOOD MONEY MARKET FUND ("LB Money Market Fund") seeks to
provide current income consistent with stability of principal. See page P-.
Lutheran Brotherhood Research Corp. ("LB Research"), an indirect
wholly-owned subsidiary of Lutheran Brotherhood, serves as investment adviser
for the funds listed above (each, a "Fund"). Lutheran Brotherhood and LB
Research personnel have developed skills in the investment advisory business
over the past 26 years, and Lutheran Brotherhood personnel have extensive skill
in managing assets, with over $11.7 billion in assets under management as of
September 30, 1996, including $7.4 billion in mutual fund assets. Lutheran
Brotherhood Securities Corp. ("LB Securities") serves as distributor for The
Lutheran Brotherhood Family of Funds. LB Research currently engages Rowe
Price-Fleming International, Inc. ("Price-Fleming" or "Sub-advisor") as
investment sub-advisor for LB World Growth Fund.
Each Fund is a diversified series of The Lutheran Brotherhood Family of
Funds (the "Trust"), an open-end management investment company.
Each Fund offers three classes of shares: Class A shares, Class B shares
and Institutional Class shares. The shares offered by this Prospectus are the
Class A shares and Class B shares. Class B shares of the LB Money Market Fund
are offered solely in exchange for Class B shares of other Funds. The
Institutional Class shares are offered through a separate prospectus and are
offered to Lutheran institutions, Lutheran church organizations and to certain
other institutional investors as may be determined by the Trust from time to
time, subject in each case to a minimum investment of $100,000. As of
October 31, 1997, all of the then outstanding shares of each Fund were
redesignated as Class A shares and, immediately thereafter, shares held by
Lutheran institutions and church organizations with accounts of at least
$100,000 were automatically converted to Institutional Class shares. A copy of
the prospectus for the Institutional Class shares may be obtained by writing LB
Securities or by calling toll free (800) 328-4552.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Funds before investing. It should be retained for future
reference. A Statement of Additional Information about the Funds dated
October 31, 1997 has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference in this Prospectus. It is available, at
no charge, upon request by writing LB Securities or by calling toll free (800)
328-4552. The SEC maintains a web site (http://www.sec.gov) that contains the
Statement of Additional Information, material incorporated by reference herein
and other information regarding the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON
THE ACCURACY OR ADEQUACY OF
P-2
<PAGE> 6
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN LB MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED BY
THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
P-3
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of Fund Expenses....................................................P-6
Financial Highlights........................................................P-10
Investment Objectives and Policies..........................................P-19
Investment Limitations......................................................P-32
Investment Risks............................................................P-33
Buying Shares of The Lutheran Brotherhood Family of Funds...................P-37
Net Asset Value of Your Shares..............................................P-40
Multiple Class System.......................................................P-41
Distribution and Shareholder Servicing Plans................................P-44
Receiving Your Order........................................................P-45
Certificates and Statements.................................................P-45
Redeeming Shares............................................................P-45
Dividends and Capital Gains.................................................P-49
Taxes.......................................................................P-49
Optimum Account.............................................................P-51
IRAs and Other Tax-Deferred Plans...........................................P-52
Fund Performance............................................................P-52
The Funds and Their Shares..................................................P-53
Fund Management.............................................................P-54
Fund Administration.........................................................P-57
</TABLE>
P-4
<PAGE> 8
<TABLE>
<S> <C>
Description of Debt Ratings.................................................P-57
How to Invest...............................................................P-61
Addresses...................................................................P-61
</TABLE>
P-5
<PAGE> 9
SUMMARY OF FUND EXPENSES
LB OPPORTUNITY GROWTH FUND
LB MID CAP GROWTH FUND
LB WORLD GROWTH FUND
LB FUND
LB HIGH YIELD FUND
LB INCOME FUND
LB MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
LB MONEY MARKET FUND (3)
CLASS A SHARES CLASS B SHARES CLASS A SHARES CLASS B SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4%(1) None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge
(as a percentage of net asset value at time of
purchase or redemption, whichever is lower) None 5%(2) None None
Redemption Fees (as a percentage
of amount redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
1. Initial sales charges for the Class A shares vary from 0% to 4% of the public
offering price, depending upon the amount of your investment. For a complete
description of sales charges for the Class A shares, see "Multiple Class System
- - Class A Shares."
2. The maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase. The contingent deferred sales
charge declines thereafter and no contingent deferred sales charge is imposed
after the fifth year. For a complete description of contingent deferred sales
charges for the Class B shares, see "Multiple Class System - Class B shares".
3. Holders of Class A shares of the LB Money Market Fund may elect the OPTIMUM
ACCOUNT(R) package, which is subject to a one-time new account fee of $25 and a
monthly administrative fee of $5. Exchanges of Class A shares of the LB Money
Market Fund for shares of other Funds incur the normal initial sales charge for
those Funds' shares, unless the Class A shares of the LB Money Market Fund
shares were previously acquired through an exchange of shares from other Funds
for which a sales charge was previously paid.
ANNUAL FUND OPERATING EXPENSES
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (1) 0.44% 0.44%
12b-1 Fees (2) -- 0.75%
Other Expenses(3) 0.84% 0.84%
Total Fund Operating Expenses (after waiver)(1) 1.28% 2.03%
</TABLE>
- --------------------------------------------------------------------------------
P-6
<PAGE> 10
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of estimated average net assets)
Management Fees (after waiver)(4) 0.00% 0.00%
12b-1 Fees (2) -- 0.75%
Other Expenses (3)(4) 1.95% 1.95%
Total Fund Operating Expenses (after waiver)(4) 1.95% 2.70%
</TABLE>
- --------------------------------------------------------------------------------
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (5) 0.65% 0.65%
12b-1 Fees (2) -- 0.75%
Other Expenses(3) 1.30% 1.30%
Total Fund Operating Expenses (after waiver)(5) 1.95% 2.70%
</TABLE>
- --------------------------------------------------------------------------------
LUTHERAN BROTHERHOOD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (6) 0.39% 0.39%
12b-1 Fees(2) -- 0.75%
Other Expenses(3) 0.58% 0.58%
Total Fund Operating Expenses (after waiver) (6) 0.97% 1.72%
</TABLE>
- --------------------------------------------------------------------------------
LUTHERAN BROTHERHOOD HIGH YIELD FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (7) 0.39% 0.39%
12b-1 Fees (2) -- 0.75%
Other Expenses(3) 0.52% 0.52%
Total Fund Operating Expenses (after waiver) (7) 0.91% 1.66%
</TABLE>
- --------------------------------------------------------------------------------
LUTHERAN BROTHERHOOD INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (8) 0.34% 0.34%
12b-1 Fees (2) -- 0.75%
Other Expenses(3) 0.49% 0.49%
Total Fund Operating Expenses (after waiver) (8) 0.83% 1.58%
</TABLE>
- --------------------------------------------------------------------------------
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (9) 0.32% 0.32%
12b-1 Fees (2) -- 0.75%
Other Expenses(3) 0.42% 0.42%
Total Fund Operating Expenses (after waiver) (9) 0.74% 1.49%
</TABLE>
- --------------------------------------------------------------------------------
P-7
<PAGE> 11
LUTHERAN BROTHERHOOD MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees (after waiver) (10) 0.13% 0.13%
12b-1 Fees (2) -- --
Other Expenses 0.82% 0.82%
Total Fund Operating Expenses (after waiver) (10) 0.95% 0.95%
</TABLE>
- ---------------------
(1) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Opportunity Growth Fund. Without the
waiver, Management Fees and Total Operating Expenses would be 0.69% and
1.53% for the Class A shares and 0.69% and 2.28% for the Class B shares.
(2) The offering of Class A and Class B shares of the Funds commenced on
October 31, 1997. 12b-1 Fees and Shareholder Servicing Fees are based on
estimated fees. Because the 12b-1 Fee is an annual fee charged against
the assets of the Fund, long-term shareholders may indirectly pay more
than the economic equivalent of the maximum front end sale charge
permitted under applicable rules.
(3) Includes a .25% shareholder servicing fee for each of the Class A and
Class B shares.
(4) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Mid Cap Growth Fund. LB Research has
further undertaken, until October 31, 1998, and thereafter until further
notice to the LB Mid Cap Growth Fund, to waive its advisory fee and, if
necessary, to bear certain expenses associated with operating LB Mid Cap
Growth Fund in order to limit the Fund's total operating expenses for
the Class A shares and Class B shares to an annual rate of 1.95% and
2.70%, respectively of the average net assets of the relevant class.
Management Fees, Other Expenses and Total Fund Operating Expenses for LB
Mid Cap Growth Fund would be 0.70%, 2.79% and 3.49%, respectively, of
estimated average net assets of the Fund for the Class A shares and
0.70%, 2.79% and 4.24%, respectively, of estimated average net assets of
the Fund for the Class B shares without such waivers.
(5) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB World Growth Fund. LB Research has
further undertaken, until October 31, 1998 and thereafter until further
notice to LB World Growth Fund, to limit the Fund's total operating
expenses for the Class A shares and Class B shares to an annual rate of
1.95% and 2.70%, respectively, of the average net assets of the relevant
class by means of a voluntary waiver of its advisory fee. Management
Fees and Total Fund Operating Expenses for LB World Growth Fund would be
1.08% and 2.38%, respectively, of the average net assets of the Fund for
the Class A shares and 1.08% and 3.13%, respectively, of the average net
assets of the Fund for Class B shares without such waivers.
(6) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Fund. Without the waiver, Management Fees
and Total Operating Expenses would have been 0.64% and 1.22% for the
Class A shares and 0.64% and 1.97% for the Class B shares. See "Fund
Management".
(7) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB High Yield Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.64% and
1.16% for the Class A shares and 0.64% and 1.91% for the Class B shares.
See "Fund Management".
(8) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Income Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.59% and
1.08% for the Class A shares and 0.59% and 1.83% for the Class B shares.
See "Fund Management".
(9) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Municipal Bond Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.57% and
0.99% for the Class A shares and 0.57% and 1.74% for the Class B shares.
See "Fund Management".
(10) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Money Market Fund. LB Research has
further undertaken, until October 31, 1998 and thereafter until further
notice to the Fund, to limit the LB Money Market Fund's total operating
expenses for the Class A shares and Class B shares to 0.95%, of the
average net assets of each class by means of a voluntary waiver of its
advisory fee. Management Fees and Total Fund Operating Expenses would be
.50% and 1.32%, of average net assets of each of the Class A shares and
Class B shares without such waivers.
P-8
<PAGE> 12
EXAMPLE:
YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT, INCLUDING, FOR THE
CLASS A SHARES, THE MAXIMUM APPLICABLE INITIAL SALES CHARGES AND ASSUMING (1) 5%
ANNUAL RETURN AND (2) REDEMPTION AT THE END OF EACH TIME PERIOD:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
LB Opportunity Growth Fund
Class A shares $53 $79 $107 $188
Class B shares(1) $71 $94 $119 $191
LB Mid Cap Growth Fund
Class A shares $59 $99
Class B shares $77 $114
LB World Growth Fund
Class A shares $59 $99 $141 $258
Class B shares(1) $77 $114 $153 $261
LB Fund
Class A shares $49 $70 $91 $154
Class B shares(1) $67 $84 $103 $156
LB High Yield Fund
Class A shares $49 $68 $88 $147
Class B shares(1) $67 $82 $100 $150
LB Income Fund
Class A shares $48 $65 $84 $138
Class B shares(1) $66 $80 $96 $141
LB Municipal Bond Fund
Class A shares $47 $63 $80 $128
Class B shares(1) $65 $77 $91 $130
LB Money Market Fund
Class A shares $10 $32 $56 $124
Class B shares(2) $60 $62 $66 $124
</TABLE>
YOU WOULD PAY THE FOLLOWING EXPENSES ON THE SAME INVESTMENT, ASSUMING NO
REDEMPTION:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
LB Opportunity Growth Fund
Class A shares $53 $79 $107 $188
Class B shares(1) $21 $64 $109 $191
LB Mid Cap Growth Fund
Class A shares $59 $99
Class B shares $27 $84
LB World Growth Fund
Class A shares $59 $99 $141 $258
Class B shares(1) $27 $84 $143 $261
LB Fund
Class A shares $49 $70 $91 $154
Class B shares(1) $17 $54 $93 $156
LB High Yield Fund
Class A shares $49 $68 $88 $147
Class B shares(1) $17 $52 $90 $150
LB Income Fund
Class A shares $48 $65 $84 $138
Class B shares(1) $16 $50 $86 $141
LB Municipal Bond Fund
Class A shares $47 $63 $80 $128
Class B shares(1) $15 $47 $81 $130
LB Money Market Fund
Class A shares $10 $32 $56 $124
Class B shares $10 $32 $56 $124
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of five years.
(2) Class B shares of the LB Money Market Fund are offered solely in exchange
for Class B shares of other Funds of The Lutheran Brotherhood Family of
Funds. The example set forth above assumes that no Class B shares of any
other Funds that are subject to a CDSC were previously held. See "Multiple
Class System - Class B Shares" for more information.
THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR FUTURE
RETURN OR EXPENSES. ACTUAL RETURN OR EXPENSES MAY BE GREATER OR LESS THAN SHOWN.
P-9
<PAGE> 13
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Actual expense levels for the current and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders. For more complete information and
descriptions of various costs and expenses, see "Multiple Class System" and
"Fund Administration".
FINANCIAL HIGHLIGHTS
The tables below for each of the Funds except LB Mid Cap Growth Fund, to
the extent and for the periods indicated in its report (except for the period
ended April 30, 1997), have been examined by Price Waterhouse LLP, independent
accountants, whose reports are included in the Annual Reports to Shareholders
for the fiscal year ended October 31, 1996. The tables should be read in
conjunction with the financial statements and notes thereto that appear in such
reports, which are incorporated by reference into the Statement of Additional
Information. The table below for LB Mid Cap Growth Fund is unaudited and should
be read in conjunction with the unaudited financial statements of such Fund and
notes thereto included in the Statement of Additional Information. Shares of the
Fund had no class designations until October 31, 1997, when designations were
assigned based on the sales charges, Rule 12b-1 fees and shareholder servicing
fees applicable to shares sold thereafter. The financial data below only covers
periods prior to the adoption of class designations and therefore do not reflect
the Rule 12b-1 fees of 0.75% per year applicable to the Class B shares and the
shareholder servicing fees of 0.25% per year applicable to the Class A and Class
B shares, which will adversely affect performance results for periods after
October 31, 1997.
P-10
<PAGE> 14
LB OPPORTUNITY GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
For the Period
Six Months Ended January 8, 1993
April 30, 1997 Year Ended Year Ended Year Ended (effective date) to
(For a share outstanding throughout (unaudited) 10/31/96 10/31/95 10/31/94 October 31, 1993
the period)(a) ---------------- ---------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..... $13.62 $13.83 $10.76 $10.66 $ 8.43
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income.................. (0.05) (0.11) (0.09) (0.06) (0.07)
Net Realized and Unrealized Gain
(Loss) on Investment................. (2.66) 2.63 3.16 0.16 2.30
------ ------ ------ ------ ------
Total from Investment Operations......... (2.71) 2.52 3.07 0.10 2.23
------ ------ ------ ------ ------
Less Distributions:
Distributions from Net Realized
Gain on Investments.................. (1.49) (2.73) -- -- --
------ ------ ------ ------ ------
Net Asset Value, End of Period........... $ 9.42 $13.62 $13.83 $10.76 $10.66
====== ====== ====== ====== ======
Total Investment Return at Net Asset
Value(%)(b) (21.91)% 21.27% 28.53% 0.94% 26.45%
Net Assets, End of Period (in millions).. $224.0 $265.8 $165.7 $99.6 $40.8
Ratio of Expenses to Average Net
Assets (%) 1.32%(c) 1.28% 1.43% 1.66% 2.33%(c)
Ratio of Net Investment Income to
Average Net Assets (%)................. (0.84%)(c) -0.92% -0.88% -0.83% -1.76%(c)
Portfolio Turnover (%)................... 43% 176% 213% 64% 97%
Average commission rate(d)............... $0.0487 $0.0488 N/A N/A N/A
</TABLE>
- ---------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated
as capital items that increase the cost basis of securities purchased,
or reduce the proceeds of securities sold.
P-11
<PAGE> 15
LB Mid Cap Growth Fund
CLASS A SHARES
<TABLE>
<CAPTION>
Four Months Ended
September 30, 1997
(unaudited)
------------------
<S> <C>
(For a share outstanding throughout the period) (a)
Net Asset Value, Beginning of Period ...................... $ 9.25
--------
Investment Operations:
Net Investment Loss ....................................... (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments ................................... 1.44
--------
Total from Investment Operations .......................... 1.43
--------
Net Asset Value, End of Period ............................ $ 10.68
========
Total Investment Return at
Net Asset Value (b) ...................................... 15.46%
Net Assets, End of Period ($ in millions) ................. $ 12.1
Ratio of Expenses to Average
Net Assets ............................................... 1.95%(c)
Ratio of Net Investment Loss to
Average Net Assets ....................................... 0.84%(c)
Portfolio Turnover Rate ................................... 54%
Average commission rate (d) ............................... $ 0.0582
</TABLE>
- ----------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of a sales charge.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred
in connection with execution of portfolio transactions during the
period, divided by the sum of all portfolio shares purchased and sold
during the period that were subject to a commission. Broker commissions
are treated as capital items that increase the cost basis of securities
purchased, or reduce the proceeds of securities sold.
P-12
<PAGE> 16
LB WORLD GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
For the Period From
Six Months Ended September 5, 1995
April 30, 1997 Year Ended (effective date) to
(For a share outstanding throughout the period)(a) (unaudited) October 31, 1996 October 31, 1995
---------------- ---------------- -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $9.48 $8.44 $8.50
----- ----- -----
Income From Investment Operations:
Net Investment Income............................ -- 0.04 0.01
Net Realized and Unrealized Gain (Loss)
on Investments................................ 0.46 1.02 (0.07)
----- ----- -----
Total from Investment Operations...................... 0.46 1.06 (0.06)
----- ----- -----
Less Distributions from:
Net Investment Income............................ (0.04) (0.02) --
Net Realized Gains on Investments................ (0.04) -- --
----- ----- -----
Total Distributions................................... (0.08) (0.02) --
----- ----- -----
Net Asset Value, End of Period........................ $9.86 $9.48 $8.44
===== ===== =====
Total Investment Return at Net Asset Value(b)......... 4.94% 12.53% -0.71%
Net Assets, End of Period (in millions)............... $65.9 $52.9 $14.0
Ratio of Expenses to Average Net Assets............... 1.91%(c) 1.95%(d) 1.95%(c,d)
Ratio of Net Investment Income to Average Net Assets.. 0.09%(c) 0.67%(d) 1.60%(c,d)
Portfolio Turnover Rate............................... 9% 11% 0%
Average commission rate(e)............................ $0.0256 $0.0216 N/A
</TABLE>
- ------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Effective September 5, 1995, Lutheran Brotherhood Research Corp. (LBRC) has
voluntarily undertaken to limit the Fund's expense ratio at 1.95%. Had LBRC
not undertaken such action, the ratio of expenses to average net assets
would have been 2.13% and 2.89%, and the ratio of net investment income to
average net assets would have been 0.49% and 0.66%, respectively, for the
year ended October 31, 1996 and for the period from September 5, 1995 to
October 31, 1995.
(e) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated as
capital items that increase the cost basis of securities purchased, or
reduce the proceeds of securities sold.
P-13
<PAGE> 17
LB FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Six Months Months
(For a share outstanding Ended Year Year Year ended Years ended January 31,
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31 ----------------------------------------------
unaudited) 10/31/96 10/31/95 10/31/94 1993 1993 1992 1991 1990 1989 1988
-------------- -------- -------- -------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 23.07 $ 21.19 $17.67 $18.85 $18.53 $19.14 $17.10 $15.83 $15.97 $14.44 $18.38
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income...... 0.10 0.20 0.22 0.19 0.29 0.27 0.32 0.37 0.36 0.47 0.49
Net Realized and Unrealized
Gain Loss on Investments. 2.71 3.33 3.52 (0.20) 1.04 1.42 3.90 1.34 1.32 1.54 (2.19)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations 2.81 3.53 3.74 (0.01) 1.33 1.69 4.22 1.71 1.68 2.01 (1.70)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income... (0.10) (0.20) (0.22) (0.20) (0.28) (0.27) (0.31) (0.38) (0.32) (0.48) (0.48)
Net Realized Gain on
Investments............. (1.76) (1.45) -- (0.97) (0.73) (2.03) (1.87) (0.06) (1.50) -- (1.76)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions........ 1.86 (1.65) (0.22) (1.17) (1.01) (2.30) (2.18) (0.44) (1.82) (0.48) (2.24)
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value End of
Period.................. $24.02 $ 23.07 $21.19 $17.67 $18.85 $18.53 $19.14 $17.10 $15.83 $15.97 $14.44
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Investment Return a
Net Asset Value(%)(b)... 12.64% 17.61% 21.34% -0.11% 7.41% 9.47% 24.67% 10.92% 9.77% 14.26% -8.70%
Net Assets, End of Period
(in millions)........... $ 873.2 $ 768.8 $645.5 $548.6 $527.3 $460.9 $380.3 $303.4 $273.3 $275.9 $258.9
Ratio of Expenses to
Average Net Assets (%).. 0.91%(c,e) 0.97% 1.02% 1.04% 1.01%(c) 0.97% 1.00% 1.05% 1.04% 1.08% 1.07%
Ratio of Net Investment
Income to Average Net
Assets (%).............. 0.85%(c,e) 0.94% 1.15% 1.10% 2.15%(c) 1.44% 1.69% 2.21% 1.99% 3.24% 2.69%
Portfolio Turnover (%)..... 26% 91% 127% 234% 237% 249% 175% 148% 145% 89% 88%
Average commission rate(d). $0.0598 $0.0664 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
- ----------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated
as capital items that increase the cost basis of securities purchased,
or reduce the proceeds of securities sold.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Fund. Had
LB Research not undertaken such action, the ratio of expenses to average
net assets would have been 0.94% and the ratio of net investment income
to average net assets would have been 0.82%.
P-14
<PAGE> 18
LB HIGH YIELD FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Six Months Months
(For a share Ended Year Year Year ended Years ended January 31,
outstanding throughout April 30, 1997 Ended Ended Ended Oct. 31 -------------------------------------------------
the period)(a) (unaudited) 10/31/96 10/31/95 10/31/94 1993 1993 1992 1991 1990 1989 1988*
-------------- -------- -------- -------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period................ $ 9.21 $ 9.03 $ 8.86 $ 9.73 $ 9.12 $ 8.45 $ 6.72 $ 7.93 $ 9.72 $ 9.86 $10.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment
Income................ 0.42 0.84 0.83 0.83 0.61 0.88 0.93 0.92 1.12 1.14 0.87
Net Realized and
Unrealized Gain (Loss)
on Investments........ (0.30) 0.17 0.24 (0.86) 0.60 0.68 1.72 (1.21) (1.76) (0.17) (0.60)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations............ 0.12 1.01 1.07 (0.03) 1.21 1.56 2.65 (0.29) (0.64) 0.97 0.27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions
from:
Net Investment Income. (0.44) (0.83) (0.85) (0.82) (0.60) (0.89) (0.92) (0.92) (1.15) (1.11) (0.85)
Net Realized Gain
on Investments........ (0.03) -- (0.05) (0.02) -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (0.47) (0.83) (0.90) (0.84) (0.60) (0.89) (0.92) (0.92) (1.15) (1.11) (0.85)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value End
of Period............. $ 8.86 $ 9.21 $ 9.03 $ 8.86 $ 9.73 $ 9.12 $ 8.45 $ 6.72 $ 7.93 $ 9.72 $ 9.86
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Investment
Return at Net
Asset Value(%)(b)..... 1.31% 11.64% 12.93% -0.47% 13.72% 19.51% 41.59% -3.98% -7.52% 10.52% 3.54%
Net Assets, End of
Period (in millions).. $741.5 $703.1 $594.3 $499.6 $440.3 $330.2 $217.0 $137.0 $149.6 $126.5 $ 61.3
Ratio of Expenses to
Average Net
Assets (%)............ 0.86%(c,d) 0.91% 0.93% 0.95% 0.94%(c) 0.99% 1.16% 1.23% 1.19% 1.21% 1.50%(c)
Ratio of Net Investment
Income to Average
Net Assets (%)........ 9.32%(c,d) 9.23% 9.53% 8.92% 8.72%(c) 10.04% 11.95% 12.51% 12.23% 11.72% 10.95%(c)
Portfolio Turnover..... 59% 104% 71% 50% 66% 86% 145% 120% 86% 73% 67%
</TABLE>
- -------------------
* For the period April 3, 1987 (effective date) to January 31, 1988.
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB High Yield
Fund. Had LB Research not undertaken such action, the ratio of expenses
to average net assets would have been 0.89% and the ratio of net
investment income to average net assets would have been 9.29%.
P-15
<PAGE> 19
LB INCOME FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Six Months Months
(For a share outstanding Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
-------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............ $ 8.50 $ 8.72 $ 8.01 $ 9.43 $ 9.10
------ ------ ------ ------ --------
Investment Operations:
Net Investment Income........... 0.27 0.57 0.59 0.58 0.47
Net Realized and
Unrealized Gain (Loss)
on Investments................. (0.17) (0.19) 0.69 (1.19) 0.33
------ ------ ------ ------ --------
Total from Investment
Operations..................... 0.10 0.38 1.28 (0.61) 0.80
------ ------ ------ ------ --------
Less Distributions from:
Net Investment Income.......... (0.28) (0.60) (0.57) (0.56) (0.47)
Net Realized Gain on
Investments.................... -- -- -- (0.25) --
------ ------ ----- ------ --------
Total Distributions............. (0.28) (0.60) (0.57) (0.81) (0.47)
------ ------ ------ ------ --------
Net Asset Value End of
Period......................... $ 8.32 $ 8.50 $ 8.72 $ 8.01 $ 9.43
====== ====== ====== ====== ========
Total Investment Return
at Net Asset
Value(%)(b).................... 1.20% 4.56% 16.53% -6.81% 8.97%
Net Assets, End of
Period (in millions)........... $793.0 $871.0 $942.1 $907.2 $1,042.2
Ratio of Expenses to
Average Net Assets (%)......... 0.81%(c,e) 0.83% 0.83% 0.82% 0.80%(c,d)
Ratio of Net Investment
Income to Average
Net Assets (%)................. 6.50%(c,e) 6.61% 7.01% 6.77% 6.87%(c,d)
Portfolio Turnover (%).......... 53% 142% 131% 155% 84%
</TABLE>
<TABLE>
<CAPTION>
(For a share outstanding Years ended January 31,
throughout the period)(a) ---------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period............ $ 8.79 $ 8.35 $ 8.47 $ 8.52 $ 8.62 $ 9.07
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income........... 0.66 0.72 0.78 0.82 0.80 0.80
Net Realized and
Unrealized Gain (Loss)
on Investments................. 0.31 0.44 (0.11) (0.06) (0.10) (0.44)
------ ------ ------ ------ ------ ------
Total from Investment
Operations..................... 0.97 1.16 0.67 0.76 0.70 0.36
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income.......... (0.66) (0.72) (0.79) (0.81) (0.80) (0.81)
Net Realized Gain on
Investments.................... -- -- -- -- -- --
------ ------ ------ ----- ------ ------
Total Distributions............. (0.66) (0.72) (0.79) (0.81) (0.80) (0.81)
------ ------ ------ ------ ------ ------
Net Asset Value End of
Period......................... $ 9.10 $ 8.79 $ 8.35 $ 8.47 $ 8.52 $ 8.62
====== ====== ====== ====== ====== ======
Total Investment Return
at Net Asset
Value(%)(b).................... 11.50% 14.48% 8.39% 9.18% 8.69% 4.53%
Net Assets, End of
Period (in millions)........... $944.6 $819.5 $736.5 $719.8 $725.5 $711.8
Ratio of Expenses to
Average Net Assets (%)......... 0.90% 0.97% 1.02% 1.02% 1.03% 1.03%
Ratio of Net Investment
Income to Average
Net Assets (%)................. 7.40% 8.38% 9.35% 9.53% 9.52% 9.47%
Portfolio Turnover (%).......... 104% 117% 118% 113% 68% 48%
</TABLE>
- ------------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Computed on an annualized basis.
(d) During the nine month period ended October 31, 1993, Lutheran Brotherhood
Research Corp. (LBRC) undertook a voluntary reduction of the Fund's
investment advisory fee equal to 0.10% of average daily net assets. Had
LBRC not undertaken such action, the ratio of expenses to average net
assets would have been 0.90% and the ratio of net investment income to
average net assets would have been 6.77%.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Income Fund.
Had LB Research not undertaken such action, the ratio of expenses to
average net assets would have been 0.84% and the ratio of net investment
income to average net assets would have been 6.47%.
P-16
<PAGE> 20
LB MUNICIPAL BOND FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(UNAUDITED) 10/31/96 10/31/95 10/31/94 1993
---------------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........... $ 8.60 $ 8.58 $ 7.88 $ 9.00 $ 8.52
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income............ 0.22 0.44 0.45 0.46 0.37
Net Realized and Unrealized Gain
(Loss) on Investments......... (0.07) 0.01 0.70 (0.96) 0.51
------ ------ ------ ------ ------
Total from Investment Operations. 0.15 0.45 1.15 0.50 0.88
------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income......... (0.23) (0.43) (0.45) (0.46) (0.37)
Net Realized Gain on
Investments................. -- -- -- (0.16) (0.03)
------ ------ ------ ------ ------
Total Distributions.............. (0.23) (0.43) (0.45) (0.62) (0.40)
------ ------ ------ ------ ------
Net Asset Value End of Period.... $ 8.52 $ 8.60 $ 8.58 $ 7.88 $ 9.00
====== ===== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b)......... 1.71% 5.33% 14.97% -5.93% 10.73%
Net Assets, End of
Period (in millions).......... $586.7 $609.5 $628.7 $595.2 $629.7
Ratio of Expenses to Average
Net Assets (%)................ 0.71%(c,e) 0.74% 0.74% 0.75% 0.74%(c,d)
Ratio of Net Investment Income
to Average Net Assets (%)..... 5.20%(c,e) 5.14% 5.43% 5.44% 5.69%(c,d)
Portfolio Turnover (%)........... 8% 33% 36% 38% 46%
</TABLE>
<TABLE>
<CAPTION>
(For a share outstanding
throughout the period)(a) YEARS ENDED JANUARY 31,
------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........... $ 8.45 $ 8.32 $ 8.15 $ 8.18 $ 8.09 $ 8.45
------ ----- ----- ----- ----- ------
Investment Operations:
Net Investment Income............ 0.53 0.56 0.58 0.58 0.60 0.59
Net Realized and Unrealized Gain
(Loss) on Investments......... 0.28 0.29 0.16 (0.02) 0.07 (0.37)
------ ----- ----- ----- ----- ------
Total from Investment Operations. 0.81 0.85 0.74 0.56 0.67 0.22
------ ----- ----- ----- ----- ------
Less Distributions from:
Net Investment Income......... (0.52) (0.56) (0.57) (0.59) (0.58) (0.58)
Net Realized Gain on
Investments................. (0.22) (0.16) -- -- -- --
------ ----- ----- ----- ----- ------
Total Distributions.............. (0.74) (0.72) (0.57) (0.59) (0.58) (0.58)
------ ----- ----- ----- ----- ------
Net Asset Value End of Period.... $ 8.52 $ 8.45 $ 8.32 $ 8.15 $ 8.18 $ 8.09
====== ===== ===== ===== ===== ======
Total Investment Return at
Net Asset Value(%)(b)......... 9.96% 10.64% 9.54% 7.02% 8.70% 2.95%
Net Assets, End of
Period (in millions).......... $532.6 $448.4 $382.5 $348.2 $306.5 $283.6
Ratio of Expenses to Average
Net Assets (%)................ 0.80% 0.83% 0.86% 0.86% 0.92% 0.91%
Ratio of Net Investment Income
to Average Net Assets (%)..... 6.22% 6.65% 7.06% 7.04% 7.37% 7.39%
Portfolio Turnover (%)........... 77% 78% 68% 60% 70% 61%
</TABLE>
- ------------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of sales charges.
(c) Computed on an annualized basis.
(d) During the nine month period ended October 31, 1993, Lutheran
Brotherhood Research Corp. (LBRC) undertook a voluntary reduction of the
Fund's investment advisory fee equal to 0.05% of average daily net
assets. Had LBRC not undertaken such action, the ratio of expenses to
average net assets would have been 0.79% and the ratio of net investment
income to average net assets would have been 5.64%.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Municipal
Bond Fund. Had LB Research not undertaken such action, the ratio of
expenses to average net assets would have been 0.74% and the ratio of
net investment income to average net assets would have been 5.17%.
P-17
<PAGE> 21
LB MONEY MARKET FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset Value,
Beginning of Period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income............ 0.02 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income............ (0.02) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value (%)(b)............ 2.28% 4.63% 4.95% 2.89% 1.63%
Net Assets, End of
Period (in millions).......... $439.3 $417.6 $341.1 $276.9 $275.1
Ratio of Expenses to Average
Net Assets (%)................ 0.95%(c,d) 1.01%(d) 1.10%(d) 1.10%(d) 1.10%(c,d)
Ratio of Net Investment Income
to Average Net Assets (%)..... 4.55%(c,d) 4.53%(d) 4.85%(d) 2.85%(d) 2.16%(c,d)
</TABLE>
<TABLE>
<CAPTION>
(For a share outstanding
throughout the period)(a) Years ended January 31,
------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income............ 0.03 0.05 0.07 0.08 0.07 0.06
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income............ (0.03) (0.05) (0.07) (0.08) (0.07) (0.06)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value (%)(b)............ 2.77% 5.10% 7.40% 8.44% 7.01% 5.98%
Net Assets, End of
Period (in millions).......... $317.0 $412.3 $473.4 $423.5 $309.3 $263.6
Ratio of Expenses to Average
Net Assets (%)................ 1.10%(d) 1.08% 1.07% 1.09% 1.07% 1.07%
Ratio of Net Investment Income
to Average Net Assets (%)..... 2.76%(d) 5.01% 7.16% 8.10% 6.83% 5.80%
</TABLE>
- ----------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total return is based on the change in net asset value during the period
and assumes reinvestment of all distributions.
(c) Computed on an annualized basis.
(d) Effective February 1, 1992 through March 31, 1996, Lutheran Brotherhood
Research Corp. (LBRC) had voluntarily undertaken to limit the Fund's
expense ratio to 1.10% of annual average daily net assets. Effective
April 1, 1996, LBRC voluntarily lowered the expense limit prospectively
to 0.95% of average daily net assets. Had LBRC not undertaken such
action to limit expenses, the ratio of expenses to average net assets
would have been 1.05%, 1.07%, 1.18%, 1.36%, 1.44% and 1.23% and the
ratio of net investment income to average net assets would have been
4.45%, 4.47%, 4.77%, 2.59%, 1.82% and 2.63%, respectively, for the six
months ended April 30, 1997, the years ended October 31, 1996 1995 and
1994, the nine month period ended October 31, 1993 and the year ended
January 31, 1993.
P-18
<PAGE> 22
INVESTMENT OBJECTIVES AND POLICIES
Each of the Funds in The Lutheran Brotherhood Family of Funds has a
separate investment objective and investment policies for the pursuit of that
objective. The investment objective of each Fund is fundamental and may not be
changed without the approval of shareholders of that Fund. Except as otherwise
indicated in this Prospectus, the investment policies of each Fund may be
changed from time to time by the Board of Trustees of the Trust. There is no
assurance that any of the Funds will achieve its investment objective, but it
will strive to do so by following the policies set forth below.
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
The investment objective of the LB Opportunity Growth Fund is to achieve
long term growth of capital.
The Fund will pursue its objective by seeking realized and unrealized
capital gains through the active management of a portfolio consisting primarily
of common stocks. Such active management may involve a high level of portfolio
turnover. The Fund will invest primarily in common stocks of domestic and
foreign companies that in the opinion of LB Research have a potential for above
average sales and earnings growth that is expected to lead to capital
appreciation. The Fund's investment adviser believes that over a long period of
time, smaller companies that have a competitive advantage will be able to grow
faster than larger companies, leading to a higher rate of growth in capital. For
a description of the risks associated with investments in such companies, see
"Investment Risks--LB Opportunity Growth Fund Investment Risks".
The Fund may also invest in bonds and preferred stocks, convertible bonds,
convertible preferred stocks, warrants, American Depository Receipts (ADR's) and
other debt or equity securities. In addition, the Fund may invest in U.S.
Government securities or cash. The Fund will not use any minimum level of credit
quality. At no time will the Fund invest more than 5% of its net assets in debt
obligations. Debt obligations may be rated less than investment grade, which is
defined as having a quality rating below "Baa", as rated by Moody's Investors
Service, Inc. ("Moody's), or below "BBB", as rated by Standard & Poor's
Corporation ("S&P"). For a description of Moody's and S&P's ratings, see
"Description of Debt Ratings". Securities rated below investment grade are
considered to be speculative and involve certain risks, including a higher risk
of default and greater sensitivity to interest rate and economic changes.
LB Research will use fundamental investment research techniques to seek
out those companies that have a competitively superior product or service in an
unsaturated market with large potential for growth. These will often be
companies with shorter histories and less seasoned operations. Many of such
companies will have market capitalizations that are less than $1 billion, with
lower daily trading volume in their stocks and less overall liquidity than
larger, more well established companies. LB Research anticipates that the common
stocks of such companies may increase in market value more rapidly than the
stocks of other companies.
The Fund will focus primarily on companies that possess superior earnings
prospects over a three to five year time horizon. The stocks that the Fund
invests in may be traded on national exchanges or in the over-the-counter market
("OTC"). There will be no limit on the proportion of the Fund's investment
portfolio that may consist of OTC stocks.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. While LB Research
does not intend to select portfolio securities for the specific purpose of
trading them within a short period of time, LB Research does intend to use an
active method of management which will result in the sale of some securities
after a relatively brief holding period. This method of management necessarily
results in higher cost to the Fund due to the fees associated with portfolio
securities transactions. A higher portfolio turnover rate may also result in
taxes on realized capital gains to be borne by shareholders. However, it is LB
Research's belief that this method of management can produce added value to the
Fund and its
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<PAGE> 23
shareholders that exceeds the additional costs of such transactions. The annual
portfolio turnover rates of the Fund for the fiscal years ended October 31, 1996
and October 31, 1995 were 176% and 213%, respectively.
For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
The investment objective of the LB Mid Cap Growth Fund is to achieve long
term growth of capital. The Fund will pursue its objective by investing
primarily in a professionally managed diversified portfolio of common stocks of
companies with medium market capitalizations. LB Research defines companies with
medium market capitalizations ("mid cap companies") as companies with
capitalizations ranging from $1 billion to $5 billion at the time of the Fund's
investment. The Fund will seek to invest in companies that have a track record
of earnings growth or the potential for continued above average growth. The Fund
will normally invest at least 65% of its total assets in common stocks of mid
cap companies. LB Research will use both fundamental and technical investment
research techniques to seek out these companies.
The stocks that the Fund invests in may be traded on national exchanges or
in the over-the-counter market ("OTC"). There will be no limit on the proportion
of the Fund's investment portfolio that may consist of OTC stocks.
Many mid cap companies have lower daily trading volume in their stocks and
less overall liquidity than larger, more well established companies. The common
stocks of such companies may have greater price volatility than the stocks of
other larger companies. For a description of these and other risks associated
with investments in such companies, see "Investment Risks -- LB Mid Cap Growth
Fund Investment Risks".
The Fund may also invest in other types of securities, including bonds,
preferred stocks, convertible bonds, convertible preferred stocks, warrants,
American Depository Receipts (ADR's), common stocks of companies falling outside
the medium market capitalization range, and other debt or equity securities. In
addition, the Fund may invest in U.S. Government securities or cash. The Fund
will not use any minimum level of credit quality. At no time will the Fund
invest more than 5% of its net assets in debt obligations. Debt obligations may
be rated less than investment grade, which is defined as having a quality rating
below "Baa", as rated by Moody's Investors Service, Inc. ("Moody's), or below
"BBB", as rated by Standard & Poor's Corporation ("S&P"). For a description of
Moody's and S&P's ratings, see "Description of Debt Ratings". Securities rated
below investment grade (sometimes referred to as "high yield" or "junk bonds")
are considered to be speculative and involve certain risks, including a higher
risk of default and greater sensitivity to interest rate and economic changes.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. While LB Research
does not intend to select portfolio securities for the specific purpose of
trading them within a short period of time, LB Research does intend to use an
active method of management which will result in the sale of some securities
after a relatively brief holding period. This method of management necessarily
results in higher cost to the Fund due to the fees associated with portfolio
securities transactions. A higher portfolio turnover rate may also result in
taxes on realized capital gains to be borne by shareholders. However, it is LB
Research's belief that this method of management can produce added value to the
Fund and its shareholders that exceeds the additional costs of such
transactions. The annual portfolio turnover rate of the Fund is generally
expected not to exceed 100%. See "Taxes".
For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
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<PAGE> 24
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
The investment objective of the LB World Growth Fund is to seek total
return from long-term growth of capital. The Fund will pursue its objective
principally through investments in common stocks of established, non- U.S.
companies. Total return consists of capital appreciation or depreciation,
dividend income, and currency gains or losses.
The Fund intends to diversify investments broadly among countries and to
normally have at least three different countries represented in the Fund. The
Fund may invest in countries of the Far East and Western Europe as well as South
Africa, Australia, Canada and other areas (including developing countries). As a
temporary defensive measure, the Fund may invest substantially all of its assets
in one or two countries.
In seeking its objective, the Fund will invest primarily in common stocks
of established foreign companies which have the potential for growth of capital.
In order to increase total return, the Fund may also invest in bonds and
preferred stocks, convertible bonds, convertible preferred stocks, warrants,
American Depository Receipts (ADR's) and other debt or equity securities. In
addition, the Fund may invest in U.S. Government securities or cash. The Fund
will not use any minimum level of credit quality. At no time will the Fund
invest more than 5% of its net assets in debt obligations or other securities
that may be converted to debt obligations. Debt obligations may be rated less
than investment grade, which is defined as having a quality rating below "Baa",
as rated by Moody's Investors Service, Inc. ("Moody's"), or below "BBB", as
rated by Standard & Poor's Corporation ("S&P"). Debt obligations rated "Baa" or
"BBB" are considered to have speculative characteristics. For a description of
Moody's and S&P's ratings, see "Description of Debt Ratings". Securities rated
below investment grade are considered to be speculative and involve certain
risks, including a higher risk of default and greater sensitivity to interest
rate and economic changes.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Sub-advisor considers the following
factors: prospects for relative economic growth between foreign countries;
expected levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range of individual
investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor looks for one or
more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in their
market place. While current dividend income is not a prerequisite in the
selection of portfolio companies, the companies in which the Fund invests
normally will have a record of paying dividends, and will generally be expected
to increase the amounts of such dividends in future years as earnings increase.
The Fund's investments also may include, but are not limited to, European
Depository Receipts ("EDRs"), other debt and equity securities of foreign
issuers, and the securities of foreign investment funds or trusts (including
passive foreign investment companies). For a discussion of the risks involved in
foreign investing see the section of this Prospectus entitled "Foreign Issuers".
The Fund may engage in certain forms of options and futures transactions
that are commonly known as derivative securities transactions. These derivative
securities transactions are identified and described in the sections of this
Prospectus entitled "Put and Call Options" and "Financial Futures and Options on
Futures."
The Fund may use foreign currency exchange-related securities including
foreign currency warrants, principal exchange rate linked securities, and
performance indexed paper. The Fund does not expect to hold more than 5% of its
total assets in foreign currency exchange-related securities.
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<PAGE> 25
The Fund will normally conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through entering into forward contracts to purchase
or sell foreign currencies. The Fund will generally not enter into a forward
contract with a term of greater than one year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when Sub-advisor believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency, it
may enter into a forward contract to sell or buy the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Under certain circumstances, the Fund may commit a substantial portion
of the entire value of its portfolio to the consummation of these contracts.
Sub-advisor will consider the effect such a commitment of its portfolio to
forward contracts would have on the investment program of the Fund and the
flexibility of the Fund to purchase additional securities. Although forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be accurately predicted and the Fund's total return could be adversely
affected as a result.
For a discussion of foreign currency contracts and the risks involved
therein, see the section of this Prospectus entitled, "Investment Risks."
The Fund will not generally trade in securities for short-term profits,
but, when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. The annual portfolio turnover rate of the
Fund for the fiscal year ended October 31, 1996 and for the period ended
October 31, 1995 were 11% and 5%, respectively.
For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD FUND
The investment objective of the LB Fund is to seek growth of capital and
income.
The Fund seeks to achieve its objective by investing in securities issued
by leading companies. The Fund may invest in the common stocks and other
securities of leading companies, including corporate bonds, notes, preferred
stock, and warrants. The Fund may also invest in U.S. Government securities and
cash. For purposes of the Fund's investment objective, companies are deemed
"leading" in terms of market share, asset size, cash flow and other fundamental
factors.
LB Research will use fundamental investment research techniques to seek
out those companies that have a leading position within their industry or within
the capital markets generally. LB Research will focus upon market shares, growth
in sales and earnings, market capitalization and asset size and competitive
dominance. These will often be mature companies with a lengthy history and
seasoned operations. Many of them will have market capitalizations in excess of
$1 billion.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. LB Research
intends to use an active method of management and may select portfolio
securities for the specific purpose of trading them within a short period of
time, which will result in the sale of some securities after a relatively brief
holding period. This method of management necessarily results in higher cost to
the Fund due to the fees associated with portfolio securities transactions.
However, it is LB Research's belief that this method of management can produce
added value to the Fund and its shareholders that exceeds the additional
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<PAGE> 26
costs of such transactions. The annual portfolio turnover rates of the Fund for
the fiscal years ended October 31, 1996 and October 31, 1995 were 91% and 127%,
respectively.
For information on other investment policies of the Fund, see "Additional
Investment Practices" below.
LUTHERAN BROTHERHOOD HIGH YIELD FUND
The investment objective of the LB High Yield Fund is to obtain high
current income and, secondarily, growth of capital.
The Fund seeks to achieve its investment objectives by investing primarily
in a diversified portfolio of professionally managed high yield, high risk
securities, many of which involve greater risks than higher quality investments.
The Fund may invest in high yield, high risk bonds, notes, debentures and other
income producing debt obligations and dividend paying preferred stocks. These
securities are commonly known as "junk bonds". High yield, high risk securities
will ordinarily carry a quality rating "Ba" or lower by Moody's, "BB" or lower
by S&P, or, if not rated, such securities will be of comparable quality as
determined by the Fund's investment adviser. The Fund will use no minimum level
of quality rating and may purchase and hold securities in default. Securities
having a quality rating of Ba or BB and lower are considered to be speculative.
See "Investment Risks - LB High Yield Fund Investment Risks". For a description
of Moody's and S&P's ratings, see "Description of Debt Ratings".
The Fund may also invest in common stocks, warrants to purchase stocks,
bonds or preferred stock convertible into common stock, and other equity
securities. Investments in such securities will be made in pursuit of the income
and capital growth objectives of the Fund, but at no time will the Fund invest
more than 20% of its total assets in equity securities.
As a nonfundamental policy, during normal market conditions the Fund will
maintain at least 65% of its total assets, taken at market value, in lower rated
securities. The Fund may invest, without limit, in short-term money market
instruments when, in the opinion of LB Research, short-term investments provide
a better opportunity for achieving the Fund's objectives than do longer term
investments. When making short-term investments for such purpose, the Fund will
not be limited to a minimum quality level and may use unrated instruments.
The Fund does not intend to engage in short-term trading but may dispose
of securities held for a short time if LB Research believes such disposition to
be advisable. The annual portfolio turnover rates of the Fund for the fiscal
years ended October 31, 1996 and October 31, 1995 were 104% and 71%,
respectively.
For information on other investment policies of the Fund, see "Additional
Investment Practices" below.
LUTHERAN BROTHERHOOD INCOME FUND
The investment objective of the LB Income Fund is to seek high current
income while preserving principal. The Fund's secondary investment objective is
to obtain long-term growth of capital in order to maintain investors' purchasing
power.
The Fund seeks to achieve its investment objectives by investing primarily
in debt securities such as bonds, notes, debentures, mortgage-backed securities,
other income producing debt obligations, and preferred stocks rated "Baa" or
higher by Moody's or "BBB" or higher by S&P. If not rated, such securities will
be of comparable quality in the opinion of LB Research. Securities rated BBB or
Baa, although considered to be investment grade or higher, have speculative
characteristics. If a portfolio security's quality rating drops below investment
grade after the Fund has acquired the security, the Fund may continue to hold
the security in its portfolio. A description of the ratings that are given to
debt securities
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<PAGE> 27
by Moody's and S&P and the standards applied by them in assigning these ratings
may be found at end of this Prospectus.
The Fund may from time to time invest in debt securities that are not
rated as investment grade. For a description of the risks of investing in such
securities, see the section of this Prospectus entitled "Investment Risks of
High Yield Securities". The Fund may also invest in common stock and bonds and
preferred stock that are convertible into common stock. No more than 10% of the
Fund's total assets will be invested in common stock and no more than 25% of the
value of the total assets will be invested in all securities described in this
paragraph.
Debt securities may bear fixed or variable rates of interest. They may
involve equity features such as conversion or exchange rights, warrants for the
acquisition of common stock of the same or a different issuer, participation
based on revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
The Fund may engage in short-term trading and dispose of securities held
for a short time if LB Research believes such disposition to be advisable. This
method of management necessarily results in higher cost to the Fund due to the
fees associated with portfolio securities transactions. However, it is LB
Research's belief that this method of management can produce added value to the
Fund and its shareholders that exceeds the additional costs of such
transactions. The annual portfolio turnover rates of the Fund for the fiscal
years ended October 31, 1996 and October 31, 1995 were 142% and 131%,
respectively.
For information on other investment policies of the Fund, see "Additional
Investment Practices" below.
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
The investment objective of the LB Municipal Bond Fund is to provide its
shareholders with a high level of current income which is exempt from federal
income tax.
The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of municipal bonds. Municipal bonds are debt obligations
issued by or on behalf of states (including the District of Columbia),
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest from which is exempt
from federal income tax. At least 80% of the Fund's total assets will be
invested in municipal bonds unless LB Research determines that market conditions
call for a temporary defensive posture.
The Fund does not generally intend to purchase securities if, as a result
of such purchase, more than 25% of the value of its total assets would be
invested in the securities of governmental subdivisions located in any one
state, territory or possession of the United States. The Fund may invest more
than 25% of the value of its total assets in industrial development bonds. As to
industrial development bonds, the Fund may invest up to 25% of its total assets
in securities issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds or
electric power project revenue bonds, or in industrial development revenue bonds
which are based, directly or indirectly, on the credit of private entities in
any one industry. This may make the Fund more susceptible to economic, political
or regulatory occurrences affecting a particular industry or sector and increase
the potential for fluctuation of net asset value.
Municipal Bonds: Municipal bonds are generally issued to finance public
works, such as bridges and highways, housing, mass transportation projects,
schools and hospitals. Municipal bonds are also issued to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions and facilities. The two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge and ability to raise taxes to repay the
principal and interest. Revenue bonds are repayable only from the income earned
from the facility financed by the bond or other
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<PAGE> 28
specific source of revenue. For example, income earned by a housing development
can be used to repay the bonds that raised the funds for its construction.
Industrial Development Bonds: Industrial development bonds are considered
municipal bonds if the interest paid on them is exempt from federal income tax.
Industrial development bonds which qualify as municipal bonds are almost always
revenue bonds. They are issued by or on behalf of public authorities to raise
money for privately-operated housing facilities, sports facilities, convention
or trade show centers, airports, mass transit, port facilities, parking areas,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage disposal.
Municipal Bonds Suitable for Investment: The Fund generally restricts its
investments to municipal bonds rated Aaa, Aa, A or Baa by Moody's, or AAA, AA, A
or BBB by S&P. Municipal bonds in the lowest rated category have speculative
characteristics. The Fund also may invest in municipal bonds (but not industrial
development bonds) that are not rated by Moody's or S&P but, in the opinion of
LB Research, would qualify for Standard & Poor's BBB or Moody's Baa rating.
Subsequent to its purchase by the Fund, an issue of municipal bonds may cease to
be rated or its rating may be reduced below the minimums required for purchase
by the Fund. Neither event requires the elimination of such obligation from the
Fund's portfolio, but LB Research will consider such an event in its
determination of whether the Fund should continue to hold such obligation in its
portfolio.
The annual portfolio turnover rates of the Fund for the fiscal years ended
October 31, 1996 and October 31, 1995 were 33% and 36%, respectively.
For information on other investment policies of the Fund, see "Additional
Investment Practices" below.
LUTHERAN BROTHERHOOD MONEY MARKET FUND
The LB Money Market Fund's investment objective is current income
consistent with stability of principal.
The Fund pursues this investment objective by investing in a portfolio of
money market instruments that mature in 397 days or less in order to obtain
current income and maintain a stable principal. The dollar-weighted average
maturity of money market instruments held by the LB Money Market Fund will be 90
days or less. The policy of the Fund is generally to hold instruments until
maturity. However, the Fund may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations.
Permissible LB Money Market Fund investments include, but are not limited
to: U.S. Treasury bills and all other marketable obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
instruments of domestic and foreign banks and savings and loans; prime
commercial paper; variable amount demand master notes; repurchase agreements;
instruments secured by the obligations described above and asset-backed
securities.
The Fund will not purchase a security (other than U.S. Government
obligations) unless the security (i) is rated by at least two nationally
recognized statistical rating organizations (NRSROs) with the highest rating
assigned to short-term debt securities (or, if rated by only one NRSRO by that
NRSRO, or if not rated, is determined to be of comparable quality), or (ii) is
rated by at least two such NRSROs within the two highest ratings assigned to
short-term debt securities (or, if rated by only one NRSRO by that NRSRO, or if
not rated, is determined to be of comparable quality) and not more than 5% of
the assets of the Fund would be invested in such securities. In addition, the
Fund may not invest more than 1% of its total assets or $1 million (whichever is
greater) in the securities of a single issuer included in clause (ii) above.
Determinations of comparable quality are made by LB Research in accordance with
procedures established by the Board of Trustees.
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<PAGE> 29
U.S. Government Obligations: The types of U.S. Government obligations in
which the Fund may invest include, but are not limited to: direct obligations of
the U.S. Treasury, such as U.S. Treasury bills, bonds and notes; and instruments
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
which are backed by the full faith and credit of the United States, the credit
of the agency or instrumentality (a governmental agency organized under federal
charter with government supervision) issuing the obligations, or the issuer's
right to borrow from the U.S. Treasury. These U.S. Government obligations may
include notes, bonds and discount notes issued by following agencies: Federal
Land Banks; Central Bank for Cooperatives; Federal Intermediate Credit Banks;
Federal Home Loan Banks; Farmers Home Administration; and Federal National Home
Mortgage Association.
Bank Instruments: The Fund invests only in instruments of domestic and
foreign banks and savings and loans if they have capital and surplus of over
$100,000,000 or the principal amount of the instrument in which the Fund is
investing is insured by the Federal Deposit Insurance Corporation (FDIC),
including domestic or Eurodollar certificates of deposit, demand and time
deposits, savings shares and bankers' acceptances.
Asset-Backed Securities: Asset-backed securities represent interests in
pools of consumer loans such as credit card receivables, leases on equipment
such as computers and other financial instruments. These securities provide a
flow-through of interest and principal payments as payments are received on the
loans or leases and may be supported by letters of credit or similar guarantees
of payment by a financial institution. These securities are subject to the risks
of non-payment of the underlying loans as well as the risks of prepayment. An
interest in a bank sponsored master trust which holds the receivables for a
major international credit card is an example of an asset backed security; an
interest in a trust which holds the customer receivable for a large consumer
products company is another example.
For information on other investment policies of the Fund, see "Additional
Investment Practices" below.
ADDITIONAL INVESTMENT PRACTICES
Various of the Funds may purchase the following securities or may engage
in the following transactions.
REPURCHASE AGREEMENTS
Each of the Funds may engage in repurchase agreement transactions in
pursuit of its investment objective. A repurchase agreement consists of a
purchase and a simultaneous agreement to resell for later delivery at an agreed
upon price and rate of interest U.S. Government obligations. The Fund or its
custodian will take possession of the obligations subject to a repurchase
agreement. If the original seller of a security subject to a repurchase
agreement fails to repurchase the security at the agreed upon time, the Fund
could incur a loss due to a drop in the market value of the security during the
time it takes the Fund to either sell the security or take action to enforce the
original seller's agreement to repurchase the security. Also, if a defaulting
original seller filed for bankruptcy or became insolvent, disposition of such
security might be delayed by pending court action. The Fund may only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are found by LB Research (or the Sub-advisor) to be
creditworthy.
RESTRICTED SECURITIES
Subject to the limitations on illiquid securities noted above, the Funds
may buy or sell restricted securities in accordance with Rule 144A under the
Securities Act of 1933, as amended ("Rule 144A Securities"). Securities may be
resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
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<PAGE> 30
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of a Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, a Fund may be adversely impacted by the
subjective valuation of such securities in the absence of an active market for
them.
REVERSE REPURCHASE AGREEMENTS
Each of the Funds except the LB Money Market Fund also may enter into
reverse repurchase agreements, which are similar to borrowing cash. A reverse
repurchase agreement is a transaction in which the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument's market value in
cash, with an agreement that at a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements may
enable the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not assure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time. The Fund will engage in
reverse repurchase agreements which are not in excess of 60 days to maturity and
will do so to avoid borrowing cash and not for the purpose of investment
leverage or to speculate on interest rate changes.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued and delayed
delivery basis. When-issued and delayed delivery transactions arise when U.S.
Government obligations and other types of securities are bought by the Fund with
payment and delivery taking place in the future. The settlement dates of these
transactions, which may be a month or more after entering into the transaction,
are determined by mutual agreement of the parties. There are no fees or other
expenses associated with these types of transactions other than normal
transaction costs. To the extent a Fund engages in when-issued and delayed
delivery transactions, it will do so for the purpose of acquiring portfolio
instruments consistent with its investment objective and policies and not for
the purpose of investment leverage or to speculate on interest rate changes. On
the settlement date, the value of such instruments may be less than the cost
thereof. When effecting when-issued and delayed delivery transactions, cash,
cash equivalents or high grade debt obligations of a dollar amount sufficient to
make payment for the obligations to be purchased will be segregated at the trade
date and maintained until the transaction has been settled.
LENDING SECURITIES
Consistent with applicable regulatory requirements, each of the Funds may
from time to time lend the securities it holds to broker-dealers, provided that
such loans are made pursuant to written agreements and are continuously secured
by collateral in the form of cash, U.S. Government securities, irrevocable
standby letters of credit or other liquid securities in an amount at all times
equal to at least the market value of the loaned securities plus the accrued
interest and dividends. For the period during which the securities are on loan,
the lending Fund will be entitled to receive the interest and dividends, or
amounts equivalent thereto, on the loaned securities and a fee from the borrower
or interest on the investment of the cash collateral. The right to terminate the
loan will be given to either party subject to appropriate notice. Upon
termination of the loan, the borrower will return to the Fund securities
identical to the loaned securities.
The primary risk in lending securities is that the borrower may become
insolvent on a day on which the loaned security is rapidly increasing in value.
In such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending Fund
would be an unsecured creditor with respect to such shortage and might not be
able to recover all or any
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<PAGE> 31
thereof. However, this risk may be minimized by a careful selection of borrowers
and securities to be lent and by monitoring collateral.
No Fund will not lend securities to broker-dealers affiliated with LB
Research or the Sub-advisor. LB Research believes that this will not affect the
Fund's ability to maximize its securities lending opportunities. No Fund may
lend any security or make any other loan if, as a result, more than one-third of
its total assets would be lent to other parties.
PUT AND CALL OPTIONS (ALL FUNDS EXCEPT THE LB MONEY MARKET FUND)
Selling ("Writing" Covered Call Options: Certain of the Funds may from
time to time sell ("write") covered call options on any portion of its portfolio
as a hedge to provide partial protection against adverse movements in prices of
securities in those Funds and, subject to the limitations described below, for
the non- hedging purpose of attempting to create additional income. A call
option gives the buyer of the option, upon payment of a premium, the right to
call upon the writer to deliver a specified amount of a security on or before a
fixed date at a predetermined ("strike") price. As the writer of a call option,
a Fund assumes the obligation to deliver the underlying security to the holder
of the option on demand at the strike price.
If the price of a security hedged by a call option falls below or remains
below the strike price of the option, a Fund will generally not be called upon
to deliver the security. A Fund will, however, retain the premium received for
the option as additional income, offsetting all or part of any decline in the
value of the security. If the price of a hedged security rises above or remains
above the strike price of the option, the Fund will generally be called upon to
deliver the security. In this event, a Fund limits its potential gain by
limiting the value it can receive from the security to the strike price of the
option plus the option premium.
Buying Call Options: Certain of the Funds may also from time to time
purchase call options on securities in which those Funds may invest. As the
holder of a call option, a Fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). A Fund
generally will purchase such options as a hedge to provide protection against
adverse movements in the prices of securities which the Fund intends to
purchase. In purchasing a call option, a Fund would realize a gain if, during
the option period, the price of the underlying security increased by more than
the amount of the premium paid. A Fund would realize a loss equal to all or a
portion of the premium paid if the price of the underlying security decreased,
remained the same, or did not increase by more than the premium paid.
Buying Put Options: Certain of the Funds may from time to time purchase
put options on any portion of its portfolio. A put option gives the buyer of the
option, upon payment of a premium, the right to deliver a specified amount of a
security to the writer of the option on or before a fixed date at a
predetermined ("strike") price. A Fund generally will purchase such options as a
hedge to provide protection against adverse movements in the prices of
securities in the Fund. In purchasing a put option, a Fund would realize a gain
if, during the option period, the price of the security declined by an amount in
excess of the premium paid. A Fund would realize a loss equal to all or a
portion of the premium paid if the price of the security increased, remained the
same, or did not decrease by more than the premium paid.
Options on Foreign Currencies: The LB World Growth Fund may also write
covered call options and purchase put and call options on foreign currencies as
a hedge against changes in prevailing levels of currency exchange rates.
Selling Put Options: The Funds may not sell put options, except in the
case of a closing purchase transaction (see Closing Transactions).
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Index Options: As part of its options transactions, certain of the Funds
may also purchase and sell call options and purchase put options on stock and
bond indices. Options on securities indices are similar to options on a security
except that, upon the exercise of an option on a securities index, settlement is
made in cash rather than in specific securities.
Closing Transactions: Certain of the Funds may dispose of options which
they have written by entering into "closing purchase transactions". Those Funds
may dispose of options which they have purchased by entering into "closing sale
transactions". A closing transaction terminates the rights of a holder, or the
obligation of a writer, of an option and does not result in the ownership of an
option.
A Fund realizes a profit from a closing purchase transaction if the
premium paid to close the option is less than the premium received by the Fund
from writing the option. The Fund realizes a loss if the premium paid is more
than the premium received. The Fund may not enter into a closing purchase
transaction with respect to an option it has written after it has been notified
of the exercise of such option.
A Fund realizes a profit from a closing sale transaction if the premium
received to close out the option is more than the premium paid for the option. A
Fund realizes a loss if the premium received is less than the premium paid.
Spreads and Straddles: Certain of the Funds may also engage in "straddle"
and "spread" transactions in order to enhance return, which is a speculative,
non-hedging purpose. A straddle is established by buying both a call and a put
option on the same underlying security, each with the same exercise price and
expiration date. A spread is a combination of two or more call options or put
options on the same security with differing exercise prices or times to
maturity. The particular strategies employed by a Fund will depend on LB
Research's or the Sub-advisor's perception of anticipated market movements.
Negotiated Transactions: Certain of the Funds will generally purchase and
sell options traded on a national securities or options exchange. Where options
are not readily available on such exchanges, a Fund may purchase and sell
options in negotiated transactions. A Fund effects negotiated transactions only
with investment dealers and other financial institutions deemed creditworthy by
its investment adviser. Despite the investment adviser's or sub-advisor's best
efforts to enter into negotiated options transactions with only creditworthy
parties, there is always a risk that the opposite party to the transaction may
default in its obligation to either purchase or sell the underlying security at
the agreed upon time and price, resulting in a possible loss by the Fund. This
risk is described more completely in the section of this Prospectus entitled,
"Risks of Transactions in Options and Futures". Options written or purchased by
a Fund in negotiated transactions are illiquid and there is no assurance that a
Fund will be able to effect a closing purchase or closing sale transaction at a
time when its Investment Adviser or Sub-advisor believes it would be
advantageous to do so. In the event the Fund is unable to effect a closing
transaction with the holder of a call option written by the Fund, the Fund may
not sell the security underlying the option until the call written by the Fund
expires or is exercised. The underlying securities on such transactions will
also be considered illiquid and are subject to the Fund's 15% illiquid
securities limitations.
Limitations: A Fund will not purchase any option if, immediately
thereafter, the aggregate cost of all outstanding options purchased and held by
the Fund would exceed 5% of the market value of the Fund's total assets. A Fund
will not write any option if, immediately thereafter, the aggregate value of the
Fund's securities subject to outstanding options would exceed 30% of the market
value of the Fund's total assets.
FINANCIAL FUTURES AND OPTIONS ON FUTURES (ALL FUNDS EXCEPT THE LB MONEY MARKET
FUND)
Selling Futures Contracts: Certain of the Funds may sell financial futures
contracts ("futures contracts") as a hedge against adverse movements in the
prices of securities in those Funds. Such contracts may involve futures on items
such as U.S. Government Treasury bonds, notes and bills, government
mortgage-backed securities;
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corporate and municipal bond indices; and stock indices. A futures contract sale
creates an obligation for the Fund, as seller, to deliver the specific type of
instrument called for in the contract at a specified future time for a specified
price. In selling a futures contract, the Fund would realize a gain on the
contract if, during the contract period, the price of the securities underlying
the futures contract decreased. Such a gain would be expected to approximately
offset the decrease in value of the same or similar securities in the Fund. The
Fund would realize a loss if the price of the securities underlying the contract
increased. Such a loss would be expected to approximately offset the increase in
value of the same or similar securities in the Fund.
Futures contracts have been designed by and are traded on boards of trade
which have been designated "contract markets" by the Commodity Futures Trading
Commission ("CFTC"). These boards of trade, through their clearing corporations,
guarantee performance of the contracts. Although the terms of some financial
futures contracts specify actual delivery or receipt of securities, in most
instances these contracts are closed out before the settlement due date without
the making or taking of delivery of the securities. Other financial futures
contracts, such as futures contracts on a securities index, by their terms call
for cash settlements. The closing out of a futures contract is effected by
entering into an offsetting purchase or sale transaction.
When a Fund sells a futures contract, or a call option on a futures
contract, it is required to make payments to the commodities broker which are
called "margin" by commodities exchanges and brokers.
The payment of "margin" in these transactions is different than purchasing
securities "on margin". In purchasing securities "on margin" an investor pays
part of the purchase price in cash and receives an extension of credit from the
broker, in the form of a loan secured by the securities, for the unpaid balance.
There are two categories of "margin" involved in these transactions: initial
margin and variation margin. Initial margin does not represent a loan between a
Fund and its broker, but rather is a "good faith deposit" by a Fund to secure
its obligations under a futures contract or an option. Each day during the term
of certain futures transactions, a Fund will receive or pay "variation margin"
equal to the daily change in the value of the position held by the Fund.
Buying Futures Contracts: Certain of the Funds may also purchase financial
futures contracts as a hedge against adverse movements in the prices of
securities which they intend to purchase. A futures contract purchase creates an
obligation by a Fund, as buyer, to take delivery of the specific type of
instrument called for in the contract at a specified future time for a specified
price. In purchasing a futures contract, a Fund would realize a gain if, during
the contract period, the price of the securities underlying the futures contract
increased. Such a gain would approximately offset the increase in cost of the
same or similar securities which a Fund intends to purchase. a Fund would
realize a loss if the price of the securities underlying the contract decreased.
Such a loss would approximately offset the decrease in cost of the same or
similar securities which a Fund intends to purchase.
Options on Futures Contracts: Certain of the Funds may also sell ("write")
covered call options on futures contracts and purchase put and call options on
futures contracts in connection with hedging strategies. A Fund may not sell put
options on futures contracts. An option on a futures contract gives the buyer of
the option, in return for the premium paid for the option, the right to assume a
position in the underlying futures contract (a long position if the option is a
call and a short position if the option is a put). The writing of a call option
on a futures contract constitutes a partial hedge against declining prices of
securities underlying the futures contract to the extent of the premium received
for the option. The purchase of a put option on a futures contract constitutes a
hedge against price declines below the exercise price of the option and net of
the premium paid for the option. The purchase of a call option constitutes a
hedge, net of the premium, against an increase in cost of securities which a
Fund intends to purchase.
Currency Futures Contracts and Options: The LB World Growth Fund may also
sell and purchase currency futures contracts (or options thereon) as a hedge
against changes in prevailing levels of currency exchange rates. Such contracts
may be traded on U.S. or foreign exchanges. The Fund will not use such contracts
or options for leveraging purposes.
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Limitations: Certain of the Funds may engage in futures transactions, and
transactions involving options on futures, only on regulated commodity exchanges
or boards of trade. A Fund will not enter into a futures contract or purchase or
sell related options if immediately thereafter (a) the sum of the amount of
initial margin deposits on the Fund's existing futures and related options
positions and premiums paid for options with respect to futures and options used
for non-hedging purposes would exceed 5% of the market value of the Fund's total
assets or (b) the sum of the then aggregate value of open futures contracts
sales, the aggregate purchase prices under open futures contract purchases, and
the aggregate value of futures contracts subject to outstanding options would
exceed 30% of the market value of the Fund's total assets. In addition, in
instances involving the purchase of futures contracts or call options thereon, a
Fund will maintain cash or cash equivalents, less any related margin deposits,
in an amount equal to the market value of such contracts. "Cash and cash
equivalents" may include cash, government securities, or liquid high quality
debt obligations.
HYBRID INVESTMENTS (ALL FUNDS EXCEPT THE LB MONEY MARKET FUND)
As part of its investment program and to maintain greater flexibility, the
Fund may invest in hybrid instruments (a potentially high risk derivative) which
have the characteristics of futures, options and securities. Such instruments
may take a variety of forms, such as debt instruments with interest or principal
payments determined by reference to the value of a currency, security index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options, currencies and securities,
including volatility and illiquidity. Under certain conditions, the redemption
value of a hybrid instrument could be zero. The Fund does not expect to hold
more than 5% of its total assets in hybrid instruments. For a discussion of
hybrid investments and the risks involved therein, see the Trust's Statement of
Additional Information under "Additional Information Concerning Certain
Investment Techniques".
RISKS OF TRANSACTIONS IN OPTIONS AND FUTURES
There are certain risks involved in the use of futures contracts, options
on securities and securities index options, and options on futures contracts, as
hedging devices. There is a risk that the movement in the prices of the index or
instrument underlying an option or futures contract may not correlate perfectly
with the movement in the prices of the assets being hedged. The lack of
correlation could render a Fund's hedging strategy unsuccessful and could result
in losses. The loss from investing in futures transactions is potentially
unlimited.
There is a risk that LB Research or the Sub-advisor could be incorrect in
their expectations about the direction or extent of market factors such as
interest rate movements. In such a case a Fund would have been better off
without the hedge. In addition, while the principal purpose of hedging is to
limit the effects of adverse market movements, the attendant expense may cause a
Fund's return to be less than if hedging had not taken place. The overall
effectiveness of hedging therefore depends on the expense of hedging and LB
Research's or the Sub-advisor's accuracy in predicting the future changes in
interest rate levels and securities price movements.
A Fund will generally purchase and sell options traded on a national
securities or options exchange. Where options are not readily available on such
exchanges a Fund may purchase and sell options in negotiated transactions. When
a Fund uses negotiated options transactions it will seek to enter into such
transactions involving only those options and futures contracts for which there
appears to be an active secondary market. There is nonetheless no assurance that
a liquid secondary market such as an exchange or board of trade will exist for
any particular option or futures contract at any particular time. If a futures
market were to become unavailable, in the event of an adverse movement, a Fund
would be required to continue to make daily cash payments of maintenance margin
if it could not close a futures position. If an options market were to become
unavailable and a closing transaction could not be entered into, an option
holder would be able to realize profits or limit losses only by exercising an
option, and an option writer would remain obligated until exercise or
expiration. In addition, exchanges may establish daily price fluctuation limits
for options and futures contracts, and may halt trading if a contract's price
moves upward or downward more than the limit in a given day. On volatile trading
days when the price fluctuation limit is reached
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or a trading halt is imposed, it may be impossible for a Fund to enter into new
positions or close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and potentially could
require a Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, a Fund's access to other assets
held to cover its options or futures positions could also be impaired.
When conducting negotiated options transactions there is a risk that the
opposite party to the transaction may default in its obligation to either
purchase or sell the underlying security at the agreed upon time and price. In
the event of such a default, a Fund could lose all or part of benefit it would
otherwise have realized from the transaction, including the ability to sell
securities it holds at a price above the current market price or to purchase a
security from another party at a price below the current market price.
The Funds intend to continue to meet the requirements of federal law to be
treated as a regulated investment company. For taxable years of a Fund that
began on or prior to August 5, 1997, one of these requirements is that a Fund
realize less than 30% of its annual gross income from the sale of securities
held for less than three months. Accordingly, the extent to which a Fund may
engage in futures contracts and related options may be materially limited by
this 30% test. Options activities of a Fund may increase the amount of gains
from the sale of securities held for less than three months, because gains from
the expiration of, or from closing transactions with respect to, call options
written by a Fund will be treated as short-term gains and because the exercise
of call options written by the Fund would cause it to sell the underlying
securities before it otherwise might. For each taxable year of a Fund beginning
after August 5, 1997, a Fund will no longer be subject to the 30% test described
above.
Finally, if a broker or clearing member of an options or futures clearing
corporation were to become insolvent, a Fund could experience delays and might
not be able to trade or exercise options or futures purchased through that
broker or clearing member. In addition, a Fund could have some or all of its
positions closed out without its consent. If substantial and widespread, these
insolvencies could ultimately impair the ability of the clearing corporations
themselves.
TEMPORARY DEFENSIVE INVESTMENTS
The LB Opportunity Growth Fund, LB World Growth Fund, LB Fund, LB Mid Cap
Growth Fund, LB High Yield Fund, LB Income Fund, and LB Municipal Bond Fund, may
hold up to 100% of their assets in cash or short-term debt securities for
temporary defensive position when, in the opinion of LB Research or the Sub-
advisor such a position is more likely to provide protection against unfavorable
market conditions than adherence to the Funds' other investment policies. The
types of short-term instruments in which the Funds may invest for such purposes
include short-term money market securities such as repurchase agreements and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, Eurodollar certificates of deposit,
commercial paper and banker's acceptances issued by domestic and foreign
corporations and banks. When investing in short-term money market obligations
for temporary defensive purposes, a Fund will invest only in securities rated at
the time of purchase Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, F-1 or
F-2 by Fitch Investors Service, Inc., or unrated instruments that are determined
by LB Research or the Sub-advisor to be of a comparable level of quality. When a
Fund adopts a temporary defensive position its investment objective may not be
achieved.
INVESTMENT LIMITATIONS
In seeking to lessen investment risk, each Fund operates under certain
investment restrictions. The restrictions in the following paragraphs may not be
changed with respect to any Fund except by a vote of a majority of the
outstanding voting securities of that Fund.
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No Fund may, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is defined
in the Investment Company Act of 1940) if, as a result, the Fund would own more
than 10% of the outstanding voting securities of such issuer or the Fund would
have more than 5% of its total assets invested in the securities of such issuer.
The LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World Growth Fund, LB
Fund, LB High Yield Fund, LB Income Fund, and LB Money Market Fund may not
invest in a security if the transaction would result in 25% or more of the
Fund's total assets being invested in any one industry.
A Fund other than the LB Money Market Fund may borrow (through reverse
repurchase agreements or otherwise) up to one-third of its total assets. If a
Fund borrows money its share price will be subject to greater fluctuation until
the borrowing is paid off. If a Fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage. If
borrowings, including reverse repurchase agreements, exceed 5% of a Fund's total
assets, such Fund will not purchase portfolio securities.
For further information on these and other investment restrictions,
including nonfundamental investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.
INVESTMENT RISKS
Special risks are associated with investments in some of the Funds, beyond
the standard level of risks. These risks are described below. An investor should
take into account his or her investment objectives and ability to absorb a loss
or decline in his or her investment when considering an investment in such
Funds. Investors in certain of the Funds assume an above average risk of loss,
and should not consider an investment those Funds to be a complete investment
program.
LB OPPORTUNITY GROWTH FUND INVESTMENT RISKS
The LB Opportunity Growth Fund is aggressively managed and invests
primarily in the stocks of smaller, less seasoned companies many of which are
traded on an over-the-counter basis, rather than on a national exchange. These
companies represent a relatively higher degree of risk than do the stocks of
larger, more established companies. The companies the LB Opportunity Growth Fund
invests in also tend to be more dependent on the success of a single product
line and have less experienced management. They tend to have smaller market
shares, smaller capitalization, and less access to sources of additional
capital. As a result, these companies tend to have less ability to cope with
problems and market downturns and their shares of stock tend to be less liquid
and more volatile in price.
LB MID CAP GROWTH FUND INVESTMENT RISKS
Stocks in mid cap companies entail greater risk than the stocks of larger,
well-established companies. These companies tend to have smaller revenues,
narrower product lines, less management depth and experience, smaller shares of
their product or service markets, fewer financial resources, and less
competitive strength than larger companies. Also, mid cap companies usually
reinvest a high portion of their earnings in their own businesses and therefore
lack a predictable dividend yield. Since investors frequently buy these stocks
because of their expected above average earnings growth, earnings levels that
fail to meet expectations often result in sharp price declines of such stocks.
In addition, in many instances, the frequency and volume of trading of mid
cap companies is substantially less than is typical of larger companies.
Therefore, the securities of such companies may be subject to wider price
fluctuations. The spreads between the bid and asked prices of the securities of
these companies in the over-the-counter market typically are larger than the
spreads for more actively-traded
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companies. As a result, the Fund could incur a loss if it determined to sell
such a security shortly after its acquisition. When making large sales, the Fund
may have to sell portfolio holdings at discounts from quoted prices or may have
to make a series of small sales over an extended period of time due to the
trading volume of such securities. Investors should be aware that, based on the
foregoing factors, an investment in the Fund may be subject to greater price
fluctuations than an investment in a fund that invests primarily in larger more
established companies.
LB WORLD GROWTH FUND INVESTMENT RISKS
The Fund, may invest in stocks of foreign issuers and in "ADRs" "EDRs" of
foreign stocks. When investing in foreign stocks, ADRs and EDRs, the Fund
assumes certain additional risks that are not present with investments in stocks
of domestic companies. These risks include political and economic developments
such as possible expropriation or confiscatory taxation that might adversely
affect the market value of such stocks, ADRs and EDRs. In addition, there may be
less publicly available information about such foreign issuers than about
domestic issuers, and such foreign issuers may not be subject to the same
accounting, auditing and financial standards and requirements as domestic
issuers.
OTHER RISKS OF FOREIGN INVESTING INCLUDE:
Foreign Securities: Investments in securities of foreign issuers may
involve risks that are not present with domestic investments. While investments
in foreign securities are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risks. Sovereign risk includes local political or economic
developments, potential nationalization, withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from being
brought back to the United States). Compared to United States issuers, there is
generally less publicly available information about foreign issuers and there
may be less governmental regulation and supervision of foreign stock exchanges,
brokers and listed companies. Fixed brokerage commissions on foreign securities
exchanges are generally higher than in the United States. Foreign issuers are
not generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers. Securities of some foreign issuers are less liquid and their prices are
more volatile than securities of comparable domestic issuers. In some countries,
there may also be the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, difficulty in enforcing
contractual and other obligations, political or social instability or
revolution, or diplomatic developments which could affect investments in those
countries. Settlement of transactions in some foreign markets may be delayed or
less frequent than in the United States, which could affect the liquidity of
investments. For example, securities which are listed on foreign exchanges or
traded in foreign markets may trade on days (such as Saturday) when the Fund
does not compute its price or accept orders for the purchase, redemption or
exchange of its shares. As a result, the net asset value of the Fund may be
significantly affected by trading on days when shareholders cannot make
transactions. Further, it may be more difficult for the Trust's agents to keep
currently informed about corporate actions which may affect the price of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., increasing the risk of delayed
settlements or loss of certificates for portfolio securities.
Investments by the Fund in foreign companies may require the Fund to
hold securities and funds denominated in a foreign currency. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. Thus, the Fund's net asset value per share will be
affected by changes in currency exchange rates. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders of the Fund. They generally are
determined by the forces of supply and demand in foreign exchange markets and
the relative merits of investment in different countries, actual or perceived
changes in interest rates or other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks
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or the failure to intervene, or by currency controls or political developments
in the U.S. or abroad. In addition, the Fund may incur costs in connection with
conversions between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are often
heightened for investments in emerging or developing countries.
Developing Countries: Investing in developing countries involves certain
risks not typically associated with investing in U.S. securities, and imposes
risks greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: the risk of nationalization or expropriation of
assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; social, economic and political uncertainty and
instability (including the risk of war); more substantial government involvement
in the economy; higher rates of inflation; less government supervision and
regulation of the securities markets and participants in those markets; controls
on foreign investment and limitations on repatriation of invested capital and on
the Fund's ability to exchange local currencies for U.S. dollars; unavailability
of currency hedging techniques in certain developing countries; the fact that
companies in developing countries may be smaller, less seasoned and newly
organized companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets.
American Depository Receipts (ADRs) and European Depository Receipts
(EDRs): ADRs are dollar-denominated receipts generally issued by a domestic bank
that represents the deposit of a security of a foreign issuer. ADRs may be
publicly traded on exchanges or over-the-counter in the United States. EDRs are
receipts similar to ADRs and are issued and traded in Europe. ADRs and EDRs may
be issued as sponsored or unsponsored programs. In sponsored programs, the
issuer makes arrangements to have its securities traded in the form of ADRs or
EDRs. In unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, the issuers of
unsponsored ADRs or EDRs are not obligated to disclose material information in
the United States and, therefore, the import of such information may not be
reflected in the market value of such securities.
Currency Fluctuations: Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Fund's assets denominated in that currency. Such changes will also
affect a Fund's income. Generally, when a given currency appreciates against the
dollar (the dollar weakens) the value of a Fund's securities denominated in that
currency will rise. When a given currency depreciates against the dollar (the
dollar strengthens) the value of a Fund's securities denominated in that
currency would be expected to decline.
INVESTMENT RISKS OF HIGH YIELD SECURITIES (LB HIGH YIELD FUND AND LB MID CAP
GROWTH FUND)
Investment in high yield, high risk securities (sometimes referred to as
"junk bonds") involves a greater degree of risk than investment in higher
quality securities. Investment in high yield, high risk securities involves
increased financial risk due to the higher risk of default by the issuers of
bonds and other debt securities having quality rating of "Ba" or lower by
Moody's or "BB" or lower by Standard & Poor's. The higher risk of default may be
due to higher debt leverage ratios, a history of low profitability or losses, or
other fundamental factors that weaken the ability of the issuer to service its
debt obligations.
In addition to the factors of issuer creditworthiness described above,
high yield, high risk securities generally involve a number of additional market
risks. These risks include:
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Youth and Growth of High Yield, High Risk Market: The high yield, high
risk bond market is relatively new. While many of the high yield issues
currently outstanding have endured an economic recession, there can be no
assurance that this will be true in the event of increased interest rates or
widespread defaults brought about by a more severe and sustained economic
downturn.
Sensitivity to Interest Rate and Economic Changes: The market value of
high yield, high risk securities have been found to be less sensitive to
interest rate changes on a short-term basis than higher-rated investments, but
more sensitive to adverse economic developments or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may be more likely to experience
financial stress which would impair their ability to service their principal and
interest payment obligations or obtain additional financing. In the event the
issuer of a bond defaults on payments, the LB High Yield Fund may incur
additional expenses in seeking recovery. In periods of economic change and
uncertainty, market values of high yield, high risk securities and the LB High
Yield Fund's assets value may become more volatile. Furthermore, in the case of
zero coupon or payment-in-kind high yield, high risk securities, market values
tend to be more greatly affected by interest rate changes than securities which
pay interest periodically and in cash. Changes in the market value of securities
owned by the LB High Yield Fund will not affect cash income but will affect the
net asset value of the Fund's shares.
Payment Expectations: High yield, high risk securities, like higher
quality securities, may contain redemption or call provisions, which allow the
issuer to redeem a security in the event interest rates drop. In this event, the
LB High Yield Fund would have to replace the issue with a lower yielding
security, resulting in a decreased yield for investors.
Liquidity and Valuation: High yield, high risk securities at times tend to
be more thinly traded and are less likely to have an estimated retail secondary
market than investment grade securities. This may adversely impact the LB High
Yield Fund's ability to dispose of particular issues and to accurately value
securities in the LB High Yield Fund's portfolios. Also, adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
market values and liquidity, especially on thinly traded issues.
Taxation: High yield, high risk securities structured as zero coupon or
payment-in-kind issues may require the LB High Yield Fund to report interest on
such securities as income even though the LB High Yield Fund receives no cash
interest on such securities until the maturity or payment date. The LB High
Yield Fund may be required to sell other securities to generate cash to make any
required dividend distribution.
LIMITING INVESTMENT RISK
LB Research believes that the risks of investing in high yield, high risk
securities can be reduced by the use of professional portfolio management
techniques including:
Credit Research: LB Research will perform it owns credit analysis in
addition to using recognized rating agencies and other sources, including
discussions with the issuer's management, the judgment of other investment
analysts and its own judgment. The adviser's credit analysis will consider such
factors as the issuer's financial soundness, its responsiveness to changes in
interest rates and business conditions, its anticipated cash flow, asset values,
interest or dividend coverage and earnings.
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<PAGE> 40
Diversification: The LB High Yield Fund invests in widely diversified
portfolio of securities to minimize the impact of a loss in any single
investment and to reduce portfolio risk. As of October 31, 1996, the LB High
Yield Fund held securities of 126 corporate issuers, and the LB High Yield
Fund's holdings had the following credit quality characteristics:
<TABLE>
<CAPTION>
Percentage of
Investment Net Assets
---------- -------------
<S> <C>
Short-term securities
AAA equivalent........................................ 5.7%
Government obligations..................................... --
Corporate obligations
AAA/Aaa............................................... --
AA/Aa................................................. --
A/A................................................... --
BBB/Baa............................................... 0.2%
BB/Ba................................................. 5.7%
B/B................................................... 46.9%
CCC/Caa............................................... 8.6%
CC/Ca................................................. .01%
D/D................................................... .03%
Not rated............................................. 16.1%
Other Net Assets...................................... 16.8%
-----
Total...................................................... 100.0%
=====
</TABLE>
Economic and Market Analysis: LB Research will analyze current
developments and trends in the economy and in the financial markets. The LB High
Yield Fund may invest in higher quality securities in the event that investment
in high yield, high risk securities is deemed to present unacceptable market or
financial risk.
BUYING SHARES OF THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
INITIAL PURCHASES
The Funds are a family of mutual funds offering investment opportunities
to members of Lutheran Brotherhood and to Lutheran institutions, Lutheran church
organizations, trusts, and employee benefit plans. Lutheran Brotherhood
membership is open to any person who is (1) baptized in the Christian faith or
affiliated with a Lutheran church organization and (2) professes to be a
Lutheran, or to any non-Lutheran who is a spouse, dependent child, or grandchild
of a member or qualified proposed member.
To make your first purchase of the Class A or Class B shares of the Funds:
o complete and sign an account application included in this booklet;
o enclose a check made payable to the Lutheran Brotherhood Family of
Funds
P-37
<PAGE> 41
o mail your application and check to Lutheran Brotherhood Securities
Corp., 625 Fourth Avenue S., Minneapolis, MN 55415.
SUBSEQUENT PURCHASES
To purchase additional shares of any of The Lutheran Brotherhood Family of
Funds, send a check payable to the Fund to the "LB Family of Funds" together
with a completed To Invest By Mail form. You may also buy additional Fund shares
through:
o your LB Securities representative;
o the Systematic Investment Plan (SIP), under which you authorize
automatic monthly payments to the Fund from your checking account;
o the automatic Payroll Deduction Plan;
o Invest-by-Phone; or
o Federal Reserve or bank wire.
INVEST-BY-PHONE
The Fund's Invest-by-Phone service allows you to telephone LB Securities
to request the purchase of Fund shares. You may elect this feature on your
account application or you may complete an Account Features Request permitting
LB Securities to accept your telephoned requests. When LB Securities receives
your telephoned request, it will draw funds directly from your preauthorized
bank account at a commercial or savings bank or credit union. The bank or credit
union must be a member of the Automated Clearing House system. To use this
service, you may call 800-328-4552 before 4:00 p.m. (Eastern time). Funds will
be withdrawn from your bank or credit union account and shares will be purchased
for you at the price next calculated by the Fund after receipt of funds from
your bank. This service may also be used to redeem shares. See "Redeeming
Shares."
FEDERAL RESERVE OR BANK WIRE
You may purchase shares by Federal Reserve or bank wire directly to
Norwest Bank Minnesota, N.A. This method will result in a more rapid investment
in Fund shares. To wire Funds:
Notify LB Securities of a pending wire, call: (800) 328-4552
Wire to: Norwest Bank of Minneapolis, NA
Norwest Bank
6th Street and Marquette Avenue
Minneapolis, MN 55479
ABA Routing #: 091000019
Account #: 00-003-156
Account Name: Lutheran Brotherhood Securities Corp.
Use text message to indicate:
Transfer for --shareholder name(s), fund number and account number, LB
Representative name and number.
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<PAGE> 42
Your LB Securities representative can explain any of these investment plans.
MINIMUM INVESTMENTS REQUIRED
Minimum investments required for purchases of Class A or Class B shares of
each of The Lutheran Brotherhood Family of Funds are outlined below.
<TABLE>
<CAPTION>
First Additional
Purchase Purchases
--------- -----------
<S> <C> <C>
Lutheran Brotherhood Opportunity Growth Fund $ 500(1) $ 50
Lutheran Brotherhood Mid Cap Growth Fund $ 500(1) $ 50
Lutheran Brotherhood World Growth Fund $ 500(1) $ 50
Lutheran Brotherhood Fund $ 500(1) $ 50
Lutheran Brotherhood High Yield Fund $ 500(1) $ 50
Lutheran Brotherhood Income Fund $ 500(1) $ 50
Lutheran Brotherhood Municipal Bond Fund $ 500(2) $ 50
Lutheran Brotherhood Money Market Fund $1,500(3) $100
</TABLE>
- ----------------------
(1 ) $50 initial purchase under Systematic Investment Plan, payroll deduction
plans, and for tax-deferred retirement plans.
(2) $50 initial purchase under Systematic Investment Plan and payroll
deduction plans.
(3) $100 initial purchase under Systematic Investment Plan and payroll
deduction plans.
EXCHANGING SHARES BETWEEN FUNDS
Shareholders of any of the Funds of The Lutheran Brotherhood Family of
Funds may exchange their shares for available shares of the same class of any of
the other Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to minimum investment requirements.
Exchanges between classes of the same Fund are not permitted.
If you exchange Class A shares of a Fund for which you have previously
paid an initial sales charge for Class A shares of another Fund, you will not be
charged an initial sales charge for the exchange. You may also exchange Class A
shares of LB Money Market Fund that you previously acquired through an exchange
for Class A shares of other Funds for which you paid an initial sales charge at
relative net asset value. However, if you exchange Class A shares of the LB
Money Market Fund that were not previously acquired through an exchange for
Class A shares of any other Fund, you will be subject to the initial sales
charge applicable to an initial investment in the Class A shares of such Fund.
If you exchange Class B shares of one Fund for Class B shares of another
Fund, you will not be charged any contingent deferred sales charge ("CDSC") that
would otherwise be due at the time of the exchange. Instead, the period of time
you held the Class B shares that are being exchanged will be combined with the
period of time that you hold the acquired Class B shares for purposes of
calculating any CDSC that may be payable when you subsequently redeem the
acquired Class B shares. If you exchange Class B shares of a Fund for Class B
shares of the LB Money Market Fund, the period of time you hold the Class B
shares of LB Money Market Fund will not be counted for purposes of calculating
any CDSC. If you subsequently exchange the LB Money Market Fund Class B shares
into Class B shares of another Fund, you may include
P-39
<PAGE> 43
the period of time that you held Class B shares of a Fund prior to an exchange
into Class B shares of LB Money Market Fund for purposes of calculating any
CDSC.
Each exchange constitutes a sale of shares requiring the calculation of a
capital gain or loss for tax reporting purposes. To obtain an exchange form or
to receive more information about making exchanges between Funds, contact your
LB Securities representative. This exchange offer may be modified or terminated
in the future. If the exchange offer is materially modified or terminated, you
will receive at least 60 days prior notice.
TELEPHONE EXCHANGES
You may make the type of exchanges between Funds described above by
telephone unless otherwise indicated on the account application. You may make an
unlimited number of telephone exchanges. Telephone exchanges must be for a
minimum amount of $500. Telephone exchanges may be made into new or existing
Fund or LB Money Market Fund accounts, and all accounts involved in telephone
exchanges must have the same ownership registration. To request a telephone
exchange, call toll-free (800) 328-4552.
The Funds reserve the right to refuse a wire or telephone redemption or
exchange if it is reasonably believed to be unauthorized. Procedures for
redeeming or exchanging Fund shares by wire or telephone may be modified or
terminated at any time by the Funds. When requesting a redemption or exchange by
telephone, shareholders should have available the correct account registration
and account number or tax identification number. All telephone redemptions and
exchanges are recorded and written confirmations are subsequently mailed to an
address of record. Neither the Funds nor LB Securities will be liable for
following redemption or exchange instructions received by telephone, which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. The
Funds and LB Securities will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds and/or LB
Securities may be liable for any losses due to unauthorized or fraudulent
instructions in the absence of following these procedures.
WHAT YOUR SHARES WILL COST
The offering price of the Fund is the next determined net asset value
(which will fluctuate) plus any applicable sales charge. See "Multiple Class
System" below.
NET ASSET VALUE OF YOUR SHARES
LB Money Market Fund seeks to maintain a stable $1.00 net asset value
pursuant to procedures established by the Board of Trustees in connection with
the amortized cost method of portfolio valuation. The net asset value for the
other seven Funds varies with the value of their investments. Each Fund
determines its net asset value for a particular class by adding the value of
Fund assets attributable to such class, subtracting the Fund's liabilities
attributable to such class, and dividing the result by the number of shares of
that class outstanding.
The Funds determine their net asset value on each day the New York Stock
Exchange is open for business, or any other day as required under the rules of
the Securities and Exchange Commission. The calculation is made as of the close
of regular trading of the New York Stock Exchange (currently 4:00 p.m. Eastern
time) after the Fund has declared any applicable dividends.
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<PAGE> 44
MULTIPLE CLASS SYSTEM
SUMMARY
The Trust has adopted a system of multiple classes of shares for each of
the Funds (the "Multiple Class System"). The Multiple Class System permits you
to choose the class of shares that you believe to be the most advantageous for
you, given the amount of your purchase, the length of time you anticipate
holding the shares and other factors. You will be able to determine whether in
your particular circumstances it is more advantageous to incur an initial sales
charge through purchase of Class A shares and be subject to lower ongoing
charges or to have your entire initial purchase price invested in Class B shares
of the Fund with the investment being subject thereafter to higher ongoing Rule
12b-1 distribution fees for the first five years that such shares are held and a
CDSC if the shares are redeemed within the first five years after purchase.
The major differences between the two classes of shares offered by this
prospectus are as follows:
<TABLE>
<CAPTION>
Class A Class B
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales Charges(a) Initial sales charge at time of investment CDSC of 5% to 1% applies to any shares
of up to 4.0% depending on amount of redeemed within first five years following
investment(b) their purchase; no CDSC after five years
- ---------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Distribution Fee(C) None 0.75% for first five years(d); Class B shares
convert automatically to Class A shares
after five years
- ---------------------------------------------------------------------------------------------------------------------------------
Shareholder Servicing Fee 0.25% each year(d) 0.25% each year(d)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------
(a) Class A shares purchases of $500,000 or more are not subject to an initial
sales charge.
(b) Class A shares of the LB Money Market Fund are not subject to such
charges.
(c) Class B shares of the LB Money Market Fund are not subject to a Rule 12b-1
distribution fee.
(d) As a percentage of average daily net assets.
In deciding which class of shares to purchase, you should consider the
amount of the investment, the length of time the investment is expected to be
held, the initial sales charge or CDSC and the ongoing shareholder servicing fee
and Rule 12b-1 distribution fee, among other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.0% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested. Class B shareholders pay no initial
sales charge. For Class B shareholders, therefore, the entire purchase amount is
immediately invested in the applicable Fund, but a CDSC of up to 5.0% will apply
to shares redeemed within five years of purchase.
If you qualify for a reduced initial sales charge for the purchase of
Class A shares, you might elect that option to take advantage of the lower
ongoing fees that characterize Class A shares compared with Class B shares
(because no Rule 12b-1 distribution fees are assessed for the Class A shares).
All purchases of $100,000 or more must be made in Class A shares or if the
purchaser is qualified, in Institutional Class shares.
Class A and Class B shares are assessed an annual shareholder servicing
fee of 0.25% of average daily net assets for as long as the shares are held.
Class B shares (except for the Class B shares of the LB Money Market Fund) are
also assessed an annual distribution fee of 0.75% of average daily net assets,
but automatically convert into Class A shares at the end of five years following
the date of purchase. See "Distribution and Shareholder Servicing Plans" below.
P-41
<PAGE> 45
CLASS A SHARES
Initial Sales Charges. Initial sales charges apply to purchases of Class A
shares of each Fund except the LB Money Market Fund. These sales charges vary
from 0% to 4% of the offering price, depending upon the amount purchased,
including the value of existing investments. The larger your purchase, the
smaller the sales charge. Offering prices in this table apply to purchases by an
individual or by an individual together with spouse and children under the age
of 21. The LB Money Market Fund has no initial sales charge.
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE
AS A AS A
PERCENTAGE OF PERCENTAGE OF
AMOUNT INVESTED OFFERING PRICE AMOUNT INVESTED
- --------------- -------------- ---------------
<S> <C> <C>
$500,000 or more 0% 0%
$250,000 and above but less than $500,000 1% 1%
$100,000 and above but less than $250,000 2% 2%
$50,000 and above but less than $100,000 3% 3.1%
$25,000 and above but less than $50,000 3.75% 3.9%
Less than $25,000 4% 4.2%
</TABLE>
Reduction in Initial Sales Charges. Ways to reduce the initial sales
charge assessed on the purchase of Class A shares include:
Cumulative Discount: All current holdings of shares of LB Opportunity
Growth Fund, LB Mid Cap Growth Fund, LB World Growth Fund, LB Fund, LB High
Yield Fund, LB Income Fund, or LB Municipal Bond Fund, will be aggregated to
permit you to enjoy any initial sales charge reduction allowed for larger sales
of Class A shares. The Funds will combine purchases, including the value of
existing investments, made by you, your spouse and your children under age 21,
of both Class A and Class B shares when it calculates your initial sales charge.
You must inform LB Securities that you qualify for this discount.
Reinvestment of Dividends: Class A and Class B shares purchased by
automatic reinvestment of dividends will not be subject to any sales charges.
Thirteen-month Letter of Intent: If you intend to accumulate $25,000 or
more, including the value of existing investments, in Class A or Class B shares
of one or more of the Funds (except the LB Money Market Fund) within the next 13
months, you may sign a letter of intent and receive a reduced sales charge on
purchases of any Class A shares.
Reinvestment upon Redemption: If you redeem any or all of your Class A or
Class B shares of LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World
Growth Fund, LB Fund, LB High Yield Fund, LB Income Fund, or LB Municipal Bond
Fund shares or received cash dividends from one of the Funds, you may reinvest
the amount in Class A shares of any of these seven Funds without paying a sales
charge. You must make your reinvestment within 90 days after redeeming your
Class A shares or Class B Shares.
Funds from Lutheran Brotherhood and Other Life Insurance and Annuities: If
Class A shares of any Fund are purchased with lump sum proceeds (does not apply
to periodic payments) that are payable in the form of death benefits from any
life insurance or annuity contract, insured endowment benefits, or matured
annuity benefits issued by Lutheran Brotherhood, and are purchased within 90
days of the issuance of such benefits, the sales charge, if any, for such Class
A shares will be reduced to one-half of the usual charge for such a purchase. If
additional Class A shares are also purchased with benefits payable under similar
contracts or policies of other insurance companies, and such benefits have
become payable as a result of
P-42
<PAGE> 46
the same occurrence for which the Lutheran Brotherhood benefits became payable,
the sales charge, if any, for such additional purchase will also be reduced to
one-half of the usual charge for such a purchase. To qualify for the reduction
in sales charge, either such purchase must be made within 90 days of the date
that such benefits were issued.
Purchases by Tax-exempt Organizations: Class A shares of any Fund are
available at one-half of the regular sales charge, if any, if purchased by
organizations qualifying for tax-exemption under Sections 501(c)(3) and
501(c)(13) of the Internal Revenue Code. Section 501(c)(3) generally would
include organizations such as community chests, churches, universities and
colleges, libraries and other foundations or organizations operated exclusively
for charitable purposes. Section 501(c)(13) would generally include companies
such as cemetery companies and other companies owned and operated exclusively
for the benefit of their members and also includes not-for-profit companies.
Automatic Conversion of Class A Shares to Institutional Class Shares.
Class A shares, including any shares representing reinvestments of dividends or
capital gains distributions with respect to such shares, will automatically
convert to Institutional Class shares if the shareholder becomes ineligible to
hold Class A shares. Lutheran institutions and Lutheran church organizations
with accounts of at least $100,000 are not eligible to hold Class A shares.
Consequently, any such account in Class A shares would be subject to automatic
conversion to Institutional Class shares. The Fund will provide such Class A
shareholders with prior notice of any such automatic conversion. Any automatic
conversion will take place on the basis of relative net asset values of the two
classes.
Institutional Class shares are offered to Lutheran institutions, Lutheran
church organizations and certain other institutional investors as may be
determined by the Trust from time to time, subject in each case to a minimum
investment in each Fund of $100,000. There is no sales load imposed in
connection with the purchase of Institutional Class shares and such shares are
not subject to any Rule 12b-1 fee or shareholder servicing fee. Because the
sales charges and expenses vary between the Class A shares, Class B shares and
Institutional Class shares, performance will vary with respect to each class. A
copy of the Institutional Class prospectus may be obtained by writing LB
Securities or by calling toll free (800) 328-4552.
CLASS B SHARES
Contingent Deferred Sales Charges. The public offering price of Class B
shares is the net asset value per share of the Class B shares next determined
after the purchase order and funds are received. No sales charge is imposed at
the time of purchase. Therefore, the applicable Fund will receive the full
amount of the investor's purchase payment. However, a CDSC may be imposed upon
redemptions of Class B shares as described below. Investments in Class B shares
of $100,000 or more per purchase will not be accepted. Because of the reduced
sales charges available on such purchases, Class A shares (or Institutional
Class shares if the investor is eligible) must be purchased instead. Class B
shares of the LB Money Market Fund are offered solely in exchange for Class B
shares of other Funds of The Lutheran Brotherhood Family of Funds.
Class B shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents (1) reinvestment of dividends or
capital gains distributions, (2) capital appreciation of shares redeemed or (3)
shares held more than five years. The amount of any applicable CDSC will be
calculated by multiplying the net asset value of shares subject to the charge at
the time of purchase or redemption, whichever is less, by the applicable
percentage shown in the table below:
P-43
<PAGE> 47
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge as
a Percentage of the Lower of Net
Asset Value at Purchase or
Redemption During Redemption
----------------- -----------------------------------
<S> <C>
1st Year Since Purchase........... 5%
2nd Year Since Purchase........... 4
3rd Year Since Purchase........... 3
4th Year Since Purchase........... 2
5th Year Since Purchase........... 1
</TABLE>
In determining the applicability and rate of any CDSC, it will be assumed
that a redemption of Class B shares is made first of shares representing
reinvestment of dividends and capital gains distributions and then of the
remaining shares held by the shareholder for the longest period of time. These
determinations will result in any CDSC being imposed at the lowest possible
rate. The holding period for purposes of applying a CDSC on shares of a Fund
acquired through an exchange from another Fund will include the holding period
of the shares from which such shares were exchanged. However, if you exchange
Class B shares of any other Fund for Class B shares of the LB Money Market Fund,
the CDSC will stop declining during the period your investment is in the LB
Money Market Fund Class B shares. For federal income tax purposes, the amount of
the CDSC will reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any CDSC will be paid to LB
Securities.
Contingent Deferred Sales Charge Waivers
The CDSC will be waived for a total or partial redemption made due to the
death or disability (caused by injury or the sudden onset of a life threatening
illness) of a sole individual shareholder (but not for shares held in joint
accounts or "family," "living" or other trusts) and for excess contribution
returns and redemptions from an IRA/TSCA when the shareholder is age 70 1/2 or
older.
Conversion of Class B Shares to Class A Shares
Your Class B shares will automatically convert into Class A shares of
the same Fund at the end of five years following the issuance of the Class B
shares and consequently will no longer be subject to the higher expenses borne
by Class B shares. In addition, all of the Class B shares of such Fund held by
you at the end of such period that represent the reinvestment of dividends or
capital gains distributions will also be automatically converted to Class A
shares at such time. Holding periods of shares of a Fund that are exchanged for
Class B shares of another Fund will be counted toward the five-year period.
Holding periods of Class B shares of the LB Money Market Fund will not be
counted toward the five-year period.
DISTRIBUTION AND SHAREHOLDER SERVICING PLANS
The Trust has adopted a Distribution Plan (the "12b-1 Plan") under Rule
12b-1 of the 1940 Act with respect to the Class B shares of each Fund except for
the LB Money Market Fund. Under the provisions of the 12b-1 Plan, the Funds each
pay LB Securities at an annual rate of .75% of the average daily net assets of
its Class B shares. The fees collected under the 12b-1 Plan are used by LB
Securities to finance activities primarily intended to result in the sale of the
Class B shares of the Fund. Payments to LB Securities under the 12b-1 Plan are
not directly tied to expenses and payments under the 12b-1 Plan may be more or
less than actual expenses incurred by LB Securities. The excess of fees received
over expenditures may constitute a "profit" to LB Securities.
P-44
<PAGE> 48
In addition, the Trust has adopted shareholder servicing plans for the
Class A and Class B shares of each of the Funds (the "Shareholder Servicing
Plans"). The Shareholder Servicing Plans permit the Funds to pay a shareholder
servicing fee for shareholder support services to shareholders such as, among
other things, assisting in designating and changing dividend options, account
designations and addresses and answering inquiries regarding account status and
history, the manner in which purchases and redemptions may be effected,
assisting the LB Securities field force and other financial intermediaries in
responding to shareholders, recruiting, training and assisting in qualifying the
field force, providing the field force with educational material and technology
equipment to assist shareholders, providing the field force with various
benefits, and making available facilities to enable shareholders to obtain
information concerning their investments. Pursuant to the Shareholder Servicing
Plans, each Fund pays LB Securities a fee of .25% of the average daily net
assets of the Class A and Class B shares. Collectively, the 12b-1 Plan and
the Shareholder Servicing Plans are referred to as the Plans.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
effectively limits the annual expenditures which any of the Funds may incur
under the Plans to 1%, of which 0.75% may be used to pay distribution expenses
and 0.25% may be used to pay shareholders services fees. The NASD Rule also
effectively limits the aggregate amount which each of the Funds may pay for
distribution costs to 6.25% of gross share sales of a class since the inception
of any asset-based sales charge plus interest at the prime rate plus 1% on
unpaid amounts thereof (less any contingent deferred sales charges received by
LB Securities). This limitation does not apply to shareholder service fees.
RECEIVING YOUR ORDER
Shares of the Funds are issued on days on which the New York Stock
Exchange is open. The net asset value of the shares you are buying will be
determined at the close of the regular trading session of the New York Stock
Exchange after your order is received.
Your order will be considered received when your check or other payment is
received in good order by the home office of LB Securities. The Funds reserve
the right to reject any purchase request.
CERTIFICATES AND STATEMENTS
As transfer agent for the Funds, LB Securities will maintain a share
account for you. Share certificates will not be issued. Systematic Investment
Plan, Systematic Withdrawal Plan and Systematic Exchange Plan transactions, as
well as dividend transactions (including dividends reinvested to other funds)
will be confirmed on the quarterly consolidated statement. All other
transactions will be reported as they occur.
REDEEMING SHARES
One of the advantages of owning shares in The Lutheran Brotherhood Family
of Funds is the rapid access you have to your investment. Once your request for
redemption has been received at the home office of LB Securities, your shares
will be redeemed at the next computed net asset value on any day on which the
New York Stock Exchange is open for business, or any other day as required under
the rules of the Securities and Exchange Commission. That net asset value may be
more or less than the net asset value at the time you bought the shares. Class B
shares are subject to a CDSC if such shares are redeemed during the five years
following purchase of such shares. See "Multiple Class System -- Class B
Shares."
You may redeem your shares at any time you choose. The redemption method
you choose will determine exactly when you will receive your funds.
All eight Lutheran Brotherhood funds allow you to redeem your shares:
o in writing;
P-45
<PAGE> 49
o through Redeem-by-Phone; or
o through the Fund's systematic withdrawal plan.
The LB Money Market Fund also allows you to redeem Class A shares by
writing a check, or by using your VISA debit card.
WRITTEN REQUESTS
To redeem all or some of your shares, send a written request to:
Lutheran Brotherhood Securities Corp.
625 Fourth Avenue South
Minneapolis, Minnesota 55415
Your Signature: Your signature on the redemption request must be
guaranteed by:
o a trust company or commercial bank;
o a savings association;
o a credit union; or
o a securities broker, dealer, exchange, association, or clearing
agency.
The Fund will not accept signatures that are notarized by a notary public.
Receiving Your Check: Normally, each Fund will mail you a check within one
business day after it receives a proper redemption request, but in no event more
than three days, unless the Fund has not received payment for the shares to be
redeemed. (See "Redemption before Purchase Instruments Clear.")
REDEEM BY PHONE
If you have completed an Account Features Request, you may redeem shares
with a net asset value of at least $1,000 and have them transmitted
electronically to your commercial bank by the second business day after your
redemption request. This feature is NOT available on IRA or other Tax Deferred
Plans.
SYSTEMATIC WITHDRAWAL
Shareholders owning or buying shares with a net asset value of at least
$5,000 may order automatic monthly, quarterly, semiannual or annual redemptions
in any amount. The proceeds will be sent to the shareholder or other designated
payee, or may be deposited in the shareholder's commercial bank, savings bank or
credit union.
Income dividends and capital gains distributions will continue to be
reinvested in additional Fund shares. Shares will be redeemed as necessary to
make automatic payments to the shareholder.
You may, at any time, elect to have Federal income taxes withheld from
your IRA or TSCA distributions, or change the amount currently being withheld.
To make the election, please complete and return a Redemption form, or the
Systematic Withdrawal section or the IRA/TSCA Distributions section of the
Account Features Application which includes the IRS required Substitute W4P.
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Shareholders who are making automatic withdrawals ordinarily should not
purchase Fund shares, but rather should terminate withdrawals in order to avoid
sales charges.
WRITING A CHECK
Redeeming by check allows you to continue earning daily income dividends
until your check clears. This service is offered for Class A shares of LB Money
Market Fund only.
Establishing check writing privilege: Upon opening your Class A share LB
Money Market Account, State Street Bank will automatically establish an LB Money
Market Fund checking account for you.
Using your LB Money Market checking account: With a LB Money Market Fund
checking account, you may redeem your shares simply by writing a check in any
amount over $250. However, you may not write a check for the entire balance of
your account. If you redeem shares by check before State Street Bank has
collected your payment for shares purchased by check, State Street Bank will
return your check marked "insufficient funds."
The check may be cashed or deposited like any other check. When it is
received by State Street Bank for payment, the bank will present the check to
the Fund and redeem enough of your shares to cover the amount. The redemption
will be made at the net asset value on the date that State Street Bank presents
the check. Your canceled checks and a statement will be sent to you each month.
When you open a LB Money Market Fund checking account, you will be subject
to State Street Bank's checking account rules and regulations. State Street Bank
and the LB Money Market Fund have the right to modify or terminate checking
account privileges or to charge for establishing or maintaining a checking
account. There are no current charges for establishing or maintaining a checking
account.
VISA DEBIT CARDS
At your request, and subject to approval State Street Bank will issue a
VISA debit card to you. This service is offered for Class A shares of LB Money
Market Fund only.
With a VISA debit card, you authorize the redemption of your shares by
using the card. The VISA debit card may be used to purchase merchandise or
services from merchants honoring VISA or to obtain cash advances (which a bank
may limit to $5,000 per account per day for merchandise and services, $600 per
account for cash advances) from any bank honoring VISA.
Redeeming your shares: a) Purchases. Purchase transactions are escrowed,
or held against your current Money Market account balance. At month end the
total escrowed purchases are redeemed from your Money Market account. b) Cash
Advances. Enough shares will be redeemed from your LB Money Market Fund account
on the date the cash advance advice reaches State Street Bank. You will continue
to earn daily income dividends on Fund shares up to the date they are redeemed.
Rules and fees: When you receive a LB Money Market Fund VISA debit card,
you will be subject to State Street Bank's VISA account regulations. State
Street Bank charges an annual VISA fee of $25 to cover its fees and
administrative costs. State Street also charges a fee of $1.50 each time an
Automated Teller Machine (ATM) is used. In addition to that fee, the bank that
owns the ATM machine may also charge a fee for each transaction. Enough shares
will be redeemed automatically from your account to pay the fee. Lost or stolen
cards should be reported immediately to State Street Bank at
toll-free (800) 543-6325.
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State Street Bank and the LB Money Market Fund have the right to modify or
terminate the VISA debit card privilege or to impose additional charges for
establishing or maintaining a VISA account upon 30 days prior written notice.
Statements: In addition to the quarterly LB Money Market Fund account
statement, you will receive a monthly statement from State Street Bank listing
VISA transactions.
DIVIDENDS ON REDEMPTION
If you redeem all your shares, the redemption proceeds will include all
dividends to which you have become entitled since they were last paid.
REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR
If you redeem shares purchased by check before State Street Bank has
collected your payment for such shares, State Street Bank reserves the right to
hold payment on such redemption until it is reasonably satisfied that the
investment has been collected (which could take up to 15 days from the purchase
date).
UNDELIVERABLE MAIL
If mail from LB Securities to a shareholder is returned as undeliverable
on two or more consecutive occasions, LB Securities will not send any future
mail to the shareholder unless it receives notification of a correct mailing
address for the shareholder. Any dividends that would be payable by check to
such shareholders will be held in escrow by LB Securities until LB Securities
receives notification of the shareholder's correct mailing address or until it
becomes escheatable under the applicable state law.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the Funds
may redeem shares in any account if the net asset value of shares in the account
falls below a certain minimum. The required minimum net asset value for Class A
and Class B share accounts is $500 for all Funds except LB Money Market Fund,
which has a minimum net asset value for Class A and Class B share accounts of
$1,000.
Before shares are redeemed to close an account, the shareholder is
notified in writing and allowed 60 days to purchase additional shares. Shares
will not be redeemed if the account's value drops below the minimum only because
of market fluctuations.
BACKUP WITHHOLDING
When you sign your account application you will be asked to certify that
your social security or taxpayer identification number is correct and that you
are not subject to 31% backup withholding for failure to report income to the
IRS. If you violate IRS regulations, the IRS can generally require the Funds to
withhold 31% of your taxable distributions and redemptions.
FOR MORE INFORMATION
For more information about the Fund or your shares, see your LB Securities
representative or call toll-free: at (800) 328-4552.
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DIVIDENDS AND CAPITAL GAINS
DIVIDENDS
Each Fund declares and pays dividends from net income at regular
intervals. LB High Yield Fund, LB Income Fund, and LB Municipal Bond Fund
declare and pay dividends monthly. LB Fund declares and pays dividends
quarterly. LB Opportunity Growth Fund, LB Mid Cap Growth Fund and LB World
Growth Fund each declare and pay dividends annually in years that the relevant
Fund has accumulated enough net income to require the payment of a dividend. LB
Money Market Fund declares dividends daily and pays accumulated dividends
monthly. Dividends are determined in the same manner and are paid in the same
amount, regardless of class, except for such differences as are attributable to
differential class expenses.
Unless you ask to receive all or a portion of your dividends in cash, they
will automatically be reinvested in shares of the Fund. You may also choose to
have your dividends reinvested into an existing account in another Fund within
The Lutheran Brotherhood Family of Funds. On the dividend payable date, your
dividend will be invested in the designated Fund account at net asset value. In
order to receive your dividends in cash, you must notify LB Securities in
writing or indicate this choice in the appropriate place on your account
application. Your request to receive all or a portion of your dividends and
other distributions in cash must be received by LB Securities at least ten days
before the record date of the dividend or other distribution.
STATEMENTS
You will receive quarterly statements of dividends and capital gains paid
the previous quarter.
CAPITAL GAINS
The Funds distribute their realized gains in accordance with federal tax
regulations. Distributions from any net realized capital gains will usually be
declared in December.
TAXES
As with any investment, you should consider the tax implications of an
investment in the Funds. The following discussion is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. In particular, the following discussion does not address the
taxation of foreign shareholders in the Funds. You should consult with your tax
advisor with specific reference to your own tax situation.
FUNDS' TAX STATUS
The Funds expect to pay no federal income tax because they intend to meet
the requirements of the Internal Revenue Code applicable to regulated investment
companies and to receive the special tax treatment afforded to such companies.
SHAREHOLDERS' TAX POSITION
Except for dividends you receive from LB Municipal Bond Fund, unless you
are otherwise exempt, you will be required to pay federal income tax on any
dividends and other distribution that you receive. This applies whether you
receive dividends or distributions in cash or as additional shares. To the
extent any of the Funds earn interest from U.S. Government obligations, a number
of states may allow pass-through treatment and permit shareholders to exclude a
portion of their dividends from state income tax. For corporate shareholders,
dividends paid to shareholders may qualify for the 70% dividends received
deduction to the extent the Fund earns dividend
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income from domestic corporations. The Funds will mail annually to each
shareholder advice as to the tax status of each year's dividends and
distributions.
You will not be required to pay federal income tax on (i) the conversion
of Class B shares to Class A shares at the end of the five-year period following
issuance of the Class B shares or (ii) the automatic conversion of Class A
shares to Institutional Class shares that occurs when the shareholder is no
longer eligible to hold Class A shares.
You will not be required to pay federal income tax on any LB Municipal
Bond Fund dividends you receive which represent net interest received on
tax-exempt municipal bonds. The portion of that Fund's distributions
representing net interest income from taxable temporary investments, market
discount on tax-exempt municipal bonds, and net short-term capital gains
realized by the Fund, if any, will be taxable to shareholders as ordinary
income. Most of that Fund's income is expected to be free of federal income tax.
This applies whether you receive dividends in cash or as additional shares. The
Fund's income, however, is not necessarily free from state income taxes. State
laws differ on this issue and shareholders are advised to consult their own tax
advisers. The Fund will provide to shareholders an annual breakdown of the
percentage of its income from each state. Information on the tax status of
dividends will be provided annually. You should also note that income that is
not subject to federal income tax may nonetheless have to be considered along
with other adjusted gross income in determining whether any Social Security
payments received by you are subject to federal income tax. If the LB Municipal
Bond Fund holds certain "private activity bonds" issued after August 7, 1986,
shareholders will need to include as an item of tax preference for purposes of
the federal alternative minimum tax that portion of the dividends paid by that
Fund derived from interest received on such bonds. The maximum federal
alternative minimum tax rate is 28% for individuals. In addition, corporations
will need to take into account all exempt-interest dividends paid by that Fund
in determining certain adjustments for the federal alternative minimum tax and
the environmental tax.
Dividends and certain interest income earned by a Fund from foreign
securities may be subject to foreign withholding taxes or other income taxes. In
the event that more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of stock or securities in foreign corporations, a
Fund may elect, for U.S. income tax purposes, to treat certain foreign taxes
paid by it as paid by its shareholders. Should a Fund make that election, a pro
rata portion of such foreign taxes paid by the Fund will constitute income to
you (in addition to taxable dividends actually received by you), and you may be
entitled to claim an offsetting tax credit or itemized deduction for that amount
of foreign taxes.
For federal income tax purposes, all dividends paid by the Fund that are
derived from taxable net investment income and net short-term capital gains are
taxable as ordinary income whether reinvested or received in cash unless you are
exempt from taxation or entitled to tax deferral. Distributions paid by the Fund
from net long-term capital gains (including such distributions paid by the LB
Municipal Bond Fund), whether received in cash or reinvested in additional
shares, are taxable as long-term capital gain. The capital gain holding period
for this purpose is determined by the length of time the Fund has held the
security and not the length of time you have held shares in the Fund. For
non-corporate taxpayers, however, net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) will be taxed at a
maximum marginal rate of 28%.
The Taxpayer Relief Act of 1997 (the "Act") alters the taxation of net
capital gain income. Under the Act, individuals, trusts and estates that hold
capital investments for more than 18 months may be taxed at a maximum long-term
capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than 12 months
but not more than 18 months may be taxed at a maximum mid-term capital gain rate
of 28% on the sale or exchange of those investments. Net short-term capital
gains remain taxable as ordinary income. The Act allows the Internal Revenue
Service to prescribe regulations on how the Act's new capital gain rates will
apply to sales of capital assets by "pass-thru
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entities," which include regulated investment companies such as the Funds. To
date regulations have not yet been prescribed, and it remains unclear how the
Act's new rates will apply to capital gain dividends or undistributed capital
gains, including for example the extent, if any, to which capital gain dividends
or undistributed capital gains from the Funds will be taxed to individuals at
the new rates for mid-term capital gains rather than the long-term capital gain
rates. Investors are urged to consult their own tax advisors with respect to the
new rules contained in the Act.
OPTIMUM ACCOUNT(R)
LB Securities offers Optimum Account to all LB Money Market Fund Class A
shareholders. The features of Optimum Account include the following:
o VISA Debit Card Privilege. You can use the VISA card to purchase
merchandise or obtain cash advances. Purchase transactions are
escrowed, or held against your current Money Market Account balance.
At month end the total escrowed purchases are redeemed from your
money market account. Although the escrowed shares are not available
for use, they do continue to earn interest. All cash advances are
redeemed from your account immediately.
o Checkwriting Privileges. You can write as many checks as you want
with no minimum and at no charge per check. Checks will be returned
to you for recordkeeping. State Street Bank will redeem enough shares
from your LB Money Market Fund account to cover the checks you write
on the date the check reaches the Bank.
o Tax-free Money Market Fund. You have access to Tax-Free Instruments
Trust, a money market fund with dividends exempt from federal income
tax.
o Discount Brokerage. You can use Optimum Account Discount Brokerage
Services for direct purchases of general securities.
o Automatic Settlement. Purchase and sale transactions for general
securities placed through Optimum Account Discount Brokerage Services
will clear automatically through your LB Money Market Fund account.
o Automatic Purchases and Redemptions. You may arrange to have your
Social Security or payroll check automatically invested in your LB
Money Market Fund account. You can also arrange to have Class A
shares of LB Money Market Fund redeemed to pay Lutheran Brotherhood
insurance premiums.
o Toll-free Telephone Exchange. You can call toll-free to effect
exchanges among accounts with the same class of shares in The
Lutheran Brotherhood Family of Funds and Tax-Free Instruments Trust.
You may also transfer money from your local bank account to any
mutual fund in The Lutheran Brotherhood Family of Funds.
o Monthly Consolidated Statement. In lieu of an immediate confirmation
of LB Money Market Fund financial transactions, you will receive your
monthly Optimum Account statement. The monthly statement will report
all activity in your accounts held in The Lutheran Brotherhood Family
of Funds, Tax-Free Instruments Trust, Optimum Account Discount
Brokerage Account, and VISA Debit cards.
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o Toll-free Customer Service. You can initiate the transactions
described above and receive up-to-the-minute information on your
account by calling the Optimum Account Customer Service
Representatives toll-free (800) 421-3997.
o Newsletter. Money management tips and information about Optimum
Account will be sent to you on a regular basis through the quarterly
newsletter offered to Optimum Account holders.
In the future, LB Securities may offer additional features to shareholders
in Optimum Account. In addition, LB Securities may, from time to time, offer
certain items of nominal value to any shareholder or investor deciding to
participate in Optimum Account.
There is a one-time new account fee of $25 for the Optimum Account
package. This fee is waived for LB Money Market Fund Class A shareholders who
already have the LB Money Market Fund VISA debit card when they add the features
of Optimum Account. A monthly administrative fee of $5.00 is charged. These fees
will be automatically redeemed from your LB Money Market Fund account each
month.
IRAS AND OTHER TAX-DEFERRED PLANS
Shares of the Fund may be selected as investments for Individual
Retirement Accounts, the qualified Lutheran Brotherhood prototype plans for the
self-employed, qualified pension and profit-sharing plans and tax-sheltered
custodial accounts (403(b) plans). There are additional fees and procedural
requirements for such plans. See your LB Securities registered representative
for more details.
FUND PERFORMANCE
From time to time, quotations of the Funds' performance in terms of yield
or total return may be included in advertisements, sales literature, or
shareholder reports. Total return and yield information for the Funds are
computed separately for each class of shares of the Funds. Any variations in
shareholder servicing fees, Rule 12b-1 fees or sales charges among the classes
offered now or in the future by the Funds will have an impact on such
performance data. Shares of the Funds had no class designations until October
31, 1997 when designations were assigned based upon the sales charges, Rule
12b-1 fees and shareholder servicing fees. Performance data for periods prior to
that date do not reflect Rule 12b-1 fees for the Class B shares and shareholder
servicing fees for the Class A and B shares, which will adversely affect
performance after that date. However, historical performance has been restated
to reflect the revised initial sales charge schedule for the Class A shares and
the CDSC for the Class B shares that are effective October 31, 1997. All
performance data for periods after October 31, 1997 will reflect Rule 12b-1
fees, shareholder servicing fees, and such sales charges. All performance
figures are based on historical results and are not intended to indicate future
performance. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different class
of shares.
"Total returns" are based on the change in value of an investment in a
Fund for a specified period. "Average annual total return" is the average annual
compounded rate of return of an investment in a Fund at the maximum public
offering price, if applicable, assuming the investment has been held for one
year, five years and ten years as of a stated ending date. (If the Fund has not
been in operation for at least ten years, the life of the Fund will be used
where applicable.) Average annual return quotations assume a constant rate of
growth. Actual performance fluctuates and will vary from the quoted results for
periods of time within the quoted periods. "Cumulative total return" represents
the cumulative change in value of an investment in a Fund over a stated period.
Average annual total return may be accompanied with nonstandard total return
information computed in the same manner, but for differing periods and with or
without annualizing the total return or taking sales charges
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into account. These calculations assume that all dividends and capital gains
distributions during the period were reinvested in shares of a Fund.
The yield of the LB High Yield Fund, LB Income Fund, LB Municipal Bond
Fund and LB Money Market Fund refers to the income generated by an investment in
the Fund. A Fund's yield is computed by dividing the net investment income,
after recognition of all recurring charges, per share earned during the most
recent month or other specified 30-day period by the applicable maximum offering
price per share on the last day of such period and annualizing the result. The
yield of the LB Money Market Fund refers to the income generated by an
investment in that Fund over a specified seven-day period. The LB Municipal Bond
Fund's tax-equivalent yield is a hypothetical current yield that the Fund's
actual current yield is comparable to when the shareholder is assumed to pay
federal income tax on the entire hypothetical yield at a specific tax rate.
Yields for a Fund are expressed as annualized percentages. The "effective yield"
of the LB Money Market Fund is expressed similarly but, when annualized, the
income earned by an investment in that Fund is assumed to be reinvested and will
reflect the effects of compounding.
The average annual total return and yield results take initial sales
charges (for the Class A shares) and the CDSC (for the Class B shares) into
account, if applicable, but do not take into account recurring and nonrecurring
charges for optional services which only certain shareholders elect and which
involve nominal fees. Where sale charges are not applicable and therefore not
taken into account in the calculation of average annual total return and yield,
the results will be increased. Any voluntary waiver of fees or assumption of
expenses will also increase performance results.
The Funds' performance reported from time to time in advertisements and
sales literature may be compared to generally accepted indices or analyses such
as those provided by Lipper Analytical Service, Inc., Standard & Poor's and Dow
Jones. Performance ratings reported periodically in financial publications such
as "Money Magazine", "Forbes", "Business Week", "Fortune", "Financial Planning"
and the "Wall Street" Journal will be used.
THE FUNDS AND THEIR SHARES
All the Funds in The Lutheran Brotherhood Family of Funds, except the LB
World Growth Fund and LB Mid Cap Growth Fund, were organized in 1993 as series
of The Lutheran Brotherhood Family of Funds, a Delaware business trust. Each of
those Funds is the successor to a fund of the same name that previously operated
as a separate corporation or trust pursuant to a reorganization that was
effective as of November 1, 1993. The LB World Growth Fund and LB Mid Cap Growth
Fund began operating as a series of the LB Family of Funds on September 5, 1995
and May 30, 1997, respectively. The fiscal year end of the Trust and each Fund
is October 31. Prior to October 31, 1997, the shares of the Funds had no
specific class designations. As of that date, Class A, Class B and Institutional
Class shares were authorized by the Board of Trustees of the Trust. The Trust
has reserved the right to create other classes of shares in the future.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Shares of a Fund when issued are fully paid and nonassessable by the
Trust. Shares of a Fund represent an identical interest in the same portfolio of
investments of the Fund and have the same rights, privileges and preferences,
except with respect to: (a) the designation of each class; (b) the sales charge
applicable to each class; (c) the Rule 12b-1 distribution fees and shareholder
servicing fees borne by each class; (d) the expenses allocable exclusively to
each class, if any; and (e) voting rights on matters exclusively affecting a
single class.
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The differences in Rule 12b-1 fees and shareholder servicing fees borne by each
class will result in different net asset values (except for LB Money Market
Fund) and dividends for the Class A and B shares. The Board of Trustees
authorized the creation of such shares by adopting a Multiple Class Plan
pursuant to Rule 18f-3 of the 1940 Act. Rule 18f-3 and the Trust's Master Trust
Agreement require shareholders of specific classes of shares to vote on certain
matters on a class-by-class basis.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meetings
unless required by the Investment Company Act of 1940. The Trustees may fill
vacancies on the Board or appoint new Trustees provided that immediately after
such action at least two-thirds of the Trustees have been elected by
shareholders. Under the Master Trust Agreement, any Trustee may be removed by
vote of two-thirds of the outstanding Trust shares or by three-fourths of the
Trustees; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, the relevant Fund or Funds will assist shareholders in
shareholder communications.
FUND MANAGEMENT
BOARD OF TRUSTEES
The Board of Trustees of the Trust is responsible for the management and
supervision of the Funds' business affairs and for exercising all powers except
those reserved to the shareholders.
INVESTMENT ADVISER
Investment decisions for each of the Funds, except the LB World Growth
Fund, are made by LB Research, subject to the overall direction of the Board of
Trustees. LB Research provides investment research and supervision of the Funds'
investments and conducts a continuous program of investment evaluation and
appropriate disposition and reinvestment of the Funds' assets. LB Research
assumes the expense of providing the personnel to perform its advisory
functions. Lutheran Brotherhood, the indirect parent company of LB Research,
also serves as the investment adviser for LB Series Fund, Inc.
Michael A. Binger, Assistant Vice President of LB Research, has been the
portfolio manager of LB Opportunity Growth Fund since October 31, 1994.
Mr. Binger has been with LB Research since 1987.
James M. Walline, Vice President of LB Research and Vice President of the
Funds has been the portfolio manager of LB Fund since October 31, 1994.
Mr. Walline has been with LB Research since 1969.
Brian Thorkelson, Assistant Vice President of LB Research, serves as the
portfolio manager of LB Mid Cap Growth Fund. Mr. Thorkelson has been with LB
Research since 1989, previously serving as a securities analyst for LB Research
and Lutheran Brotherhood.
Thomas N. Haag, Assistant Vice President of LB Research, has been the
portfolio manager of LB High Yield Fund since 1992. Mr. Haag has been with LB
Research since 1986.
Charles E. Heeren, Vice President of LB Research has been the portfolio
manager of LB Income Fund since 1987. Mr. Heeren has been with LB Research
since 1976.
Janet I. Grangaard, Assistant Vice President of LB Research, has been
portfolio manager of LB Municipal Bond Fund since January 1, 1994. Prior to that
time she served as associate portfolio manager of that Fund. Ms. Grangaard has
been with LB Research since 1988.
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Gail R. Onan, Assistant Vice President of LB Research, has been the
portfolio manager of LB Money Market Fund since January 1, 1994. Prior to that
time she served as associate portfolio manager of that Fund. Ms. Onan has been
with LB Research since 1986.
LB Research has engaged Rowe Price-Fleming International, Inc.
("Price-Fleming") as investment sub-advisor for Lutheran Brotherhood World
Growth Fund. Price-Fleming was founded in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings Limited. Price-Fleming
is one of the world's largest international mutual fund asset managers with
approximately $22.2 billion under management as of December 31, 1995 in its
offices in Baltimore, London, Tokyo and Hong Kong. Price-Fleming has an
investment advisory group that has day-to-day responsibility for managing the
Fund and developing and executing the Fund's investment program. The members of
the advisory group are listed below.
Martin G. Wade, Christopher Alderson, Peter Askew, David Boardman,
Richard J. Bruce, Mark T.J. Edwards, John R. Forde, Robert C. Howe, James B.M.
Seddon, Benedict R.F. Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 27 years of experience
with Fleming Group (Fleming Group includes Robert Fleming Holdings Ltd. and/or
Jardine Fleming International Holdings Ltd.) in research, client service and
investment management, including assignments in the Far East and the United
States.
Peter Askew joined Price-Fleming in 1988 and has 20 years of experience
managing multicurrency fixed income portfolios. Christopher Alderson joined
Price-Fleming in 1988, and has nine years of experience with the Fleming Group
in research and portfolio management, including an assignment in Hong Kong.
David Boardman joined Price-Fleming in 1988 and has 21 years experience in
managing multicurrency fixed income portfolios. Richard J. Bruce joined
Price-Fleming in 1991 and has seven years of experience in investment management
with the Fleming Group in Tokyo. Mark J.T. Edwards joined Price-Fleming in 1986
and has 15 years of experience in financial analysis, including three years in
Fleming European research. John R. Ford joined Price-Fleming in 1982 and has 16
years of experience with Fleming Group in research and portfolio management,
including assignments in the Far East and the United States. Robert C. Howe
joined Price-Fleming in 1986 and has 16 years of experience in economic research
in Japan. James B.M. Seddon joined Price-Fleming in 1987 and has nine years of
experience in investment management. Benedict R.F. Thomas joined Price-Fleming
in 1988 and has seven years of portfolio management experience, including
assignments in London and Baltimore. David J.L. Warren joined Price-Fleming in
1984 and has 16 years experience in equity research, fixed income research and
portfolio management, including an assignment in Japan.
LB Research and Price-Fleming personnel may invest in securities for their
own account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
LB Research receives an annual investment advisory fee from each Fund. The
advisory contract between LB Research and the Trust provides for the following
advisory fees: LB Opportunity Growth Fund pays an advisory fee equal to .75% of
average daily net assets up to $100 million, .65% of average daily net assets
over $100 million but not over $250 million, .60% of average daily net assets
over $250 million but not over $500 million, .55% of average daily net assets
over $500 million but not over $1 billion, and .50% of average daily net assets
over $1 billion. LB Mid Cap Growth Fund pays an advisory fee equal to .70% of
average daily net assets up to $100 million, .65% of average daily net assets
over $100 million but not over $250 million, .60 % of average daily net assets
over $250 million but not over $500 million, .55% of average daily net assets
over $500 million but not over $1 billion and .50% of average daily net assets
over $1 billion. LB World Growth Fund pays and advisory fee equal to 1.25% of
average daily net assets up to $20 million, 1.10% of average daily net assets
over $20 million but not over $50 million, and 1.00% of average daily net assets
over $50 million. LB Fund pays an advisory fee equal to .65% of average daily
net assets of $500 million or less, .60% of average daily net assets over $500
million but not over $1 billion, and .55% of average daily net assets over $1
billion. LB High Yield Fund pays an advisory fee equal to .65% of
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average daily net assets of $500 million or less, .60% of average daily net
assets over $500 million but not over $1 billion, and .55% of average daily
assets over $1 billion. LB Income Fund pays an advisory fee equal to .60% of
average daily net assets of $500 million or less, .575% of average daily net
assets over $500 million but not over $1 billion, and .55% of average daily net
assets over $1 billion. LB Municipal Bond Fund pays an advisory fee equal to
.575% of average daily net assets of $500 million or less, .5625% of average
daily net assets over $500 million but not over $1 billion, and .55% of average
daily net assets over $1 billion. LB Money Market Fund pays an advisory fee
equal to .50% of average daily net assets of $500 million or less, .475% of
average daily net assets on the next $500 million of average daily net assets,
.45% of average daily net assets on the next $500 million of average daily net
assets, .425% of average daily net assets on the next $500 million of average
daily net assets, and .40% of average daily net assets over $2 billion.
Effective October 31, 1997, LB Research voluntarily agreed to permanently
waive a portion of its advisory fee for each of the Funds equal to .25% of the
average daily net assets of the Fund. This .25% waiver applies to the
contractual rates of compensation in the previous paragraph at each level of
average daily net assets.
During the most recent fiscal year of each Fund, LB Research received fees
amounting to the following percentages of each Fund's average daily net assets:
<TABLE>
<S> <C>
LB Opportunity Growth Fund 0.69%
LB World Growth Fund* 0.90%
LB Fund 0.64%
LB High Yield Fund 0.64%
LB Income Fund 0.59%
LB Municipal Bond Fund 0.57%
LB Money Market Fund** 0.44%
</TABLE>
- ------------
* After giving effect to a fee waiver of 0.18%.
** After giving effect to a fee waiver of 0.06%.
LB Research pays the Sub-advisor for the LB World Growth Fund an annual
sub-advisory fee for the performance of sub-advisory services. The fee payable
is equal to a percentage of that Fund's average daily net assets. The percentage
decreases as the Fund's assets increase. For purposes of determining the
percentage level of the sub-advisory fee for the Fund, the assets of the Fund
are combined with the assets of the LB Series Fund, Inc. World Growth Portfolio,
another fund with investment objectives and policies that are similar to the LB
World Growth Fund and for which the Sub-advisor also provides sub-advisory
services. The sub-advisory fee LB Research pays the Sub-advisor is equal to the
LB World Growth Fund's pro rata share of the combined assets of the Fund and the
LB Series Fund, Inc. World Growth Portfolio and is equal to .75% of combined
average daily net assets up to $20 million, .60% of combined average daily net
assets over $20 million but not over $50 million, and .50% of combined average
daily net assets over $50 million. When the combined assets of the LB World
Growth Fund and the LB Series Fund, Inc. World Growth Portfolio exceed $200
million, the sub-advisory fee for the LB World Growth Fund is equal to .50% of
all of the Fund's average daily net assets. At September 30, 1997 the combined
assets of LB World Growth Fund and World Growth Portfolio totaled $369.4
million.
LB Research has further undertaken, until October 31, 1998 and thereafter
until further notice to LB Mid Cap Growth Fund to waive its advisory fee and if
necessary, to bear certain expenses associated with operating the Fund in order
to limit the Fund's total operating expenses for the Class A shares and Class B
shares to an annual rate of 1.95% and 2.70%, respectively, of the average daily
net assets of the Fund. LB Research has further undertaken, until October 31,
1998, and thereafter until further notice to
P-56
<PAGE> 60
LB World Growth Fund, to waive its advisory fee in order to limit the Fund's
total operating expenses for Class A shares and Class B shares to an annual rate
of 1.95% and 2.70%, respectively, of the average net assets of the relevant
class. LB Research has further undertaken, until October 31, 1998 and thereafter
until further notice to LB Money Market Fund, to waive its advisory fees in
order to limit LB Money Market Fund's total operating expenses for the Class A
and Class B shares to 0.95% of the average net assets of each class.
Effective January 1, 1997, LB Research has also voluntarily agreed to
waive 5 basis points (0.05%) from the advisory fees payable by the LB Fund, LB
High Yield Fund, LB Income Fund, and LB Municipal Bond Fund. These voluntary
partial waivers of advisory fees may be discontinued at any time.
FUND ADMINISTRATION
ADMINISTRATIVE SERVICES
LB Securities, the Funds' distributor, provides administrative personnel
and services necessary to operate the Funds on a daily basis at for a fee equal
to 0.02% of each Fund's daily net assets.
During the fiscal year ended October 31, 1996, the Funds paid the
following amounts to LB Securities for administrative services:
<TABLE>
<S> <C>
LB Opportunity Growth Fund $51,379
LB World Growth Fund $ 8,217
LB Fund $163,270
LB High Yield Fund $148,767
LB Income Fund $207,659
LB Municipal Bond Fund $142,190
LB Money Market Fund $ 87,973
</TABLE>
CUSTODIAN
State Street Bank and Trust Company ("State Street Bank") is custodian of
the Funds' cash and securities.
TRANSFER AGENT
LB Securities serves as transfer agent for the Funds, with the assistance
of Norwest Bank Minnesota, N.A., respecting cash transactions.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP is the independent accountants for the Funds.
DESCRIPTION OF DEBT RATINGS
Moody's Investors Service, Inc. describes grades of corporate debt
securities and "Prime-1" and "Prime-2" commercial paper as follows:
P-57
<PAGE> 61
BONDS:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
COMMERCIAL PAPER:
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
o Leading market positions in well-established industries.
P-58
<PAGE> 62
o High rates of return of funds employed.
o Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of senior short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earning trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation describes grades of corporate debt
securities and "A" commercial paper as follows:
BONDS:
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitments on the obligation is still strong.
BBB Debt rated BBB exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitments
on the obligation in this category than in higher rated categories.
BB Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity of the obligor to meet its financial commitments on
the obligation. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
B Debt rated B is more vulnerable to nonpayment but currently has the
capacity to meet its financial commitments on the obligation. Adverse
business, financial, or economic conditions will likely impair the
obligor's capacity or willingness to meet its financial commitments on
the obligation.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC is vulnerable to nonpayment, and is dependent upon
favorable business, financial, and economic conditions for the obligor
to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitments on the
obligation.
P-59
<PAGE> 63
The CCC rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B- rating.
CC The rating CC typically is currently highly vulnerable to nonpayment.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken but payments on the obligation
are being continued.
D Debt rated D is in payment default. The D rating category is used when
payments are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action if
payments on the obligation are jeopardized.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
Commercial Paper: Commercial paper rated A by Standard & Poor's
Corporation has the following characteristics: liquidity ratios are better than
the industry average; long-term senior debt rating is "A" or better (however, in
some cases a "BBB" long-term rating may be acceptable); the issuer has access to
at least two additional channels of borrowing; basic earnings and cash flow have
an upward trend with allowances made for unusual circumstances. Also, the
issuer's industry typically is well established, the issuer has a strong
position within its industry and the reliability and quality of management is
unquestioned. Issuers rated A are further referred to by use of numbers 1, 2 and
3 to denote relative strength within this classification.
P-60
<PAGE> 64
HOW TO INVEST
o Complete and sign the General Application
o Enclose a check made payable to The Lutheran Brotherhood Family of
Funds
o Mail your application and check to:
Lutheran Brotherhood Securities Corp.
625 Fourth Avenue South
Minneapolis, Minnesota 55415
ADDRESSES
Lutheran Brotherhood
Lutheran Brotherhood Research Corp.
Lutheran Brotherhood Securities Corp.
The Lutheran Brotherhood Family of Funds
625 Fourth Avenue South
Minneapolis, Minnesota 55415
State Street Bank and Trust Company
P.O. Box 1591
Boston, Massachusetts 02104
Norwest Bank Minnesota, N.A.
Sixth & Marquette Avenue
Minneapolis, Minnesota 55402
Price Waterhouse LLP
3100 Multifoods Tower
33 South Sixth Street
Minneapolis, Minnesota 55402
P-61
<PAGE> 65
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
LUTHERAN BROTHERHOOD FUND
LUTHERAN BROTHERHOOD HIGH YIELD FUND
LUTHERAN BROTHERHOOD INCOME FUND
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
LUTHERAN BROTHERHOOD MONEY MARKET FUND
NO LOAD
INSTITUTIONAL CLASS SHARES
PROSPECTUS October 31, 1997
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND ("LB Opportunity Growth
Fund") seeks long term growth of capital by investing primarily in a
professionally managed diversified portfolio of smaller capitalization common
stocks. See page P-.
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND ("LB Mid Cap Growth Fund")
seeks to achieve long term growth of capital by investing primarily in a
professionally managed diversified portfolio of common stocks of companies with
medium market capitalizations. See page P-.
LUTHERAN BROTHERHOOD WORLD GROWTH FUND ("LB World Growth Fund") seeks
high total return from long-term growth of capital by investing primarily in a
professionally managed diversified portfolio of common stocks of established,
non-U.S. companies. See page P-.
LUTHERAN BROTHERHOOD FUND ("LB Fund") seeks growth of capital and income
by investing in a professionally managed diversified portfolio of common stocks
and other securities issued by leading companies. See page P-18.
LUTHERAN BROTHERHOOD HIGH YIELD FUND ("LB High Yield Fund") seeks high
current income by investing primarily in a professionally managed diversified
portfolio of high yield, high risk securities. The Fund will also consider
growth of capital as a secondary investment objective. See page P-.
LUTHERAN BROTHERHOOD INCOME FUND ("LB Income Fund") seeks high current
income while preserving principal, with possible long term growth of capital, by
investing primarily in a professionally managed diversified portfolio of debt
securities and dividend paying common and preferred stocks. See page P-.
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND ("LB Municipal Bond Fund")
seeks to provide high current income exempt from federal income tax by investing
primarily in a professionally managed diversified portfolio of municipal bonds.
See page P-.
LUTHERAN BROTHERHOOD MONEY MARKET FUND ("LB Money Market Fund") seeks to
provide current income consistent with stability of principal. See page P-.
Lutheran Brotherhood Research Corp. ("LB Research"), an indirect
wholly-owned subsidiary of Lutheran Brotherhood, serves as investment adviser
for the Funds listed above (each, a "Fund"). Lutheran
<PAGE> 66
Brotherhood and LB Research personnel have developed skills in the investment
advisory business over the past 26 years, and Lutheran Brotherhood personnel
have extensive skill in managing assets, with over $11.7 billion in assets under
management as of September 30, 1996, including over $7.4 billion in mutual fund
assets. Lutheran Brotherhood Securities Corp. ("LB Securities") serves as
distributor for The Lutheran Brotherhood Family of Funds. LB Research currently
engages Rowe Price-Fleming International, Inc. ("Price-Fleming" or
"Sub-advisor") as investment sub-advisor for LB World Growth Fund.
Each Fund is a diversified series of The Lutheran Brotherhood Family of
Funds (the "Trust"), an open-end management investment company.
Each Fund offers three classes of shares: Class A shares, Class B shares
and Institutional Class shares. The shares offered by this Prospectus are the
Institutional Class shares which are offered only to Lutheran institutions,
Lutheran church organizations and to certain other institutional investors as
may be determined by the Trust from time to time, subject in each case to a
minimum investment of $100,000. As of October 31, 1997, all of the then
outstanding shares of each Fund were redesignated as Class A shares and,
immediately thereafter, shares held by Lutheran institutions and church
organizations with accounts of at least $100,000 were automatically converted to
Institutional Class shares. The Class A and B shares of the Funds are offered
through a separate prospectus. A copy of the prospectus for the Class A and
Class B shares may be obtained by writing LB Securities or by calling toll free
(800) 328-4552.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Funds before investing. It should be retained
for future reference. A Statement of Additional Information about the Funds
dated October 31, 1997 has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference in this Prospectus. It
is available, at no charge, upon request by writing LB Securities or by calling
toll free (800) 328-4552. The SEC maintains a web site (http://www.sec.gov) that
contains the Statement of Additional Information, material incorporated by
reference herein and other information regarding the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN LB MONEY MARKET FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
P-2
<PAGE> 67
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Fund Expenses....................................................P-4
Financial Highlights........................................................P-8
Investment Objectives and Policies..........................................P-17
Investment Limitations......................................................P-31
Investment Risks............................................................P-32
Buying Shares of The Lutheran Brotherhood Family of Fund....................P-36
Net Asset Value of Your Shares..............................................P-39
Multiple Class System.......................................................P-39
Receiving Your Order........................................................P-39
Certificates and Statements.................................................P-40
Redeeming Shares............................................................P-40
Dividends and Capital Gains.................................................P-42
Taxes.......................................................................P-42
Fund Performance............................................................P-44
The Funds and Their Shares..................................................P-45
Fund Management.............................................................P-46
Fund Administration.........................................................P-49
Description of Debt Ratings.................................................P-50
How to Invest...............................................................P-53
Addresses...................................................................P-53
</TABLE>
P-3
<PAGE> 68
SUMMARY OF FUND EXPENSES
INSTITUTIONAL CLASS
<TABLE>
<CAPTION>
LB OPPORTUNITY GROWTH FUND
LB MID CAP GROWTH FUND
LB WORLD GROWTH FUND
LB FUND
LB HIGH YIELD FUND
LB INCOME FUND LB
LB MUNICIPAL BOND FUND MONEY MARKET FUND (3)
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases
("as a percentage of offering price) None None
Maximum Sales Charge Imposed on Reinvested
Dividends ("as a percentage of offering price) None None
Maximum Deferred Sales Charge
("as a percentage of net asset value at time of
purchase or redemption, whichever is lower None None
Redemption Fees ("as a percentage
of amount redeemed, if applicable) None None
Exchange Fees None None
- ---------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (1) 0.44%
12b-1 Fees -
Other Expenses 0.59%
-----
Total Fund Operating Expenses ("after waiver) (1) 1.03%
====
- ---------------------
</TABLE>
P-4
<PAGE> 69
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of estimated average net assets)
Management Fees ("after waiver) (2) 0.00%
12b-1 Fees -
Other Expenses("after waiver) 1.70%
----
Total Fund Operating Expenses (after waiver) 1.70%
====
- ---------------------
</TABLE>
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (3) .65%
12b-1 Fees -
Other Expenses 1.05%
----
Total Fund Operating Expenses ("after waiver) (3) 1.70%
====
- ---------------------
</TABLE>
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (4) .39%
12b-1 Fees -
Other Expenses) .33%
----
Total Fund Operating Expenses ("after waiver) (4) .72%
===
- ---------------------
</TABLE>
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD HIGH YIELD FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (5) .39%
12b-1 Fees -
Other Expenses .27%
----
Total Fund Operating Expenses ("after waiver) (5) .66%
===
- ---------------------
</TABLE>
P-5
<PAGE> 70
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD INCOME FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (6) .34%
12b-1 Fees -
Other Expenses .24%
----
Total Fund Operating Expenses ("after waiver) (6) .58%
===
- ---------------------
</TABLE>
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver) (7) .32%
12b-1 Fees
Other Expenses .17%
----
Total Fund Operating Expenses ("after waiver) (7) .49%
===
- --------------------
</TABLE>
<TABLE>
<S> <C>
LUTHERAN BROTHERHOOD MONEY MARKET FUND
ANNUAL FUND OPERATING EXPENSES
("as a percentage of average net assets)
Management Fees ("after waiver)(8) .13%
12b-1 Fees -
Other Expenses .57%
----
Total Fund Operating Expenses ("after waiver)(8) .70%
===
- ---------------------
</TABLE>
(1) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Opportunity Growth Fund. Without the
waiver, Management Fees and Total Operating Expenses would be 0.69% and
1.28% respectively.
(2) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Mid Cap Growth Fund. LB Research has
further undertaken, until October 31, 1998, and thereafter until further
notice to the LB Mid Cap Growth Fund, to waive its advisory fee and, if
necessary, to bear certain expenses associated with operating LB Mid Cap
Growth Fund in order to limit the Fund's total operating expenses for
the Institutional Class shares to an annual rate of 1.70% of average net
assets of the Institutional Class. Management Fees, Other Expenses, and
Total Fund Operating Expenses for LB Mid Cap Growth Fund would be 0.70%,
2.54%, and 3.24%, respectively, of estimated average net assets of the
Fund for the Institutional Class without such waivers.
(3) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB World Growth Fund. LB Research has
further undertaken, until October 31, 1998 and thereafter until further
notice to LB World Growth Fund, to limit the Fund's total operating
expenses for the Institutional Class to an annual rate of 1.70%, of the
average net assets of the Institutional Class by means of a voluntary
waiver of its advisory fee. Management Fees and Total Fund Operating
Expenses for LB World Growth Fund would be 1.08% and 2.13%,
respectively, of the average net assets of the Fund without such
waivers.
(4) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Fund. Without the waiver, Management Fees
and Total Operating Expenses would have been 0.64% and 0.97%,
respectively. See "Fund Management".
P-6
<PAGE> 71
(5) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB High Yield Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.64% and
0.91%, respectively. See "Fund Management".
(6) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Income Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.59% and
0.83%, respectively. See "Fund Management".
(7) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Municipal Bond Fund. Without the waiver,
Management Fees and Total Operating Expenses would have been 0.57% and
0.74%, respectively. See "Fund Management".
(8) Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee equal to .25% of the
average daily net assets of LB Money Market Fund. LB Research has
further undertaken, until October 31, 1998 and thereafter until further
notice to the Fund, to limit the LB Money Market Fund's total operating
expenses for the Institutional Class shares to 0.70%, of the average net
assets of the class by means of a voluntary waiver of its advisory fee.
Management Fees and Total Fund Operating Expenses would be 0.50% and
1.07%, of average net assets, respectively without such waivers.
EXAMPLE:
YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT AND ASSUMING (1) 5%
ANNUAL RETURN AND (2) REDEMPTION AT THE END OF EACH TIME PERIOD:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
LB Opportunity Growth Fund $11 $33 $57 $126
LB Mid Cap Growth Fund $17 $54
LB World Growth Fund $17 $54 $92 $201
LB Fund $7 $23 $40 $89
LB High Yield Fund $7 $21 $37 $82
LB Income Fund $6 $19 $32 $73
LB Municipal Bond Fund $5 $16 $27 $62
LB Money Market Fund $8 $24 $42 $94
</TABLE>
YOU WOULD PAY THE FOLLOWING EXPENSES ON THE SAME INVESTMENT, ASSUMING NO
REDEMPTION:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
LB Opportunity Growth Fund $11 $33 $57 $126
LB Mid Cap Growth Fund $17 $54
LB World Growth Fund $17 $54 $92 $201
LB Fund $7 $23 $40 $89
LB Mid Cap Growth Fund
LB High Yield Fund $7 $21 $37 $82
LB Income Fund $6 $19 $32 $73
LB Municipal Bond Fund $5 $16 $27 $62
LB Money Market Fund $8 $24 $42 $94
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED AS A REPRESENTATION OF PAST OR
FUTURE RETURN OR EXPENSES. ACTUAL RETURN OR EXPENSES MAY BE GREATER OR LESS THAN
SHOWN.
The purpose of the table above is to assist the investor in
understanding the various costs and expenses that an investor will bear directly
or indirectly. Actual expense levels for the current and future years may vary
from the amounts shown. The table does not reflect charges for optional services
elected by certain shareholders. For more complete information and descriptions
of various costs and expenses, see "Multiple Class System" and "Fund
Administration".
P-7
<PAGE> 72
FINANCIAL HIGHLIGHTS
The tables below for each of the Funds except LB Mid Cap Growth Fund,
to the extent and for the periods indicated in its report (except for the period
ended April 30, 1997), have been examined by Price Waterhouse LLP, independent
accountants, whose reports are included in the Annual Reports to Shareholders
for the fiscal year ended October 31, 1996. The tables should be read in
conjunction with the financial statements and notes thereto that appear in such
reports, which are incorporated by reference into the Statement of Additional
Information. The table below for LB Mid Cap Growth Fund is unaudited and should
be read in conjunction with the unaudited financial statements of such Fund and
notes thereto included in the Statement of Additional Information. Shares of the
Fund had no class designations until October 31, 1997, when designations were
assigned based on the sales charges, Rule 12b-1 fees and shareholder servicing
fees applicable to shares sold thereafter. The financial data below only covers
periods prior to the adoption of class designations.
P-8
<PAGE> 73
LB OPPORTUNITY GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Six Months For the Period
Ended January 8, 1993
April 30, 1997 Year Ended Year Ended Year Ended (effective date) to
(For a share outstanding throughout (unaudited) 10/31/96 10/31/95 10/31/94 October 31, 1993
the period)(a) --------------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ..... $ 13.62 $ 13.83 $10.76 $10.66 $ 8.43
------- ------- ------ ------ ------
Investment Operations:
Net Investment Income ................. (0.05) (0.11) (0.09) (0.06) (0.07)
Net Realized and Unrealized Gain (Loss)
on Investment ....................... (2.66) 2.63 3.16 0.16 2.30
------- ------- ------ ------ ------
Total from Investment Operations ......... (2.71) 2.52 3.07 0.10 2.23
------- ------- ------ ------ ------
Less Distributions:
Distributions from Net Realized Gain
on Investments ...................... (1.49) (2.73) -- -- --
------- ------- ------ ------ ------
Net Asset Value, End of Period ........... $ 9.42 $ 13.62 $13.83 $10.76 $10.66
======= ======= ====== ====== ======
Total Investment Return at Net Asset
Value(%)(b) -21.91% 21.27% 28.53% 0.94% 26.45%
Net Assets, End of Period (in millions) $224.0 $265.8 $165.7 $ 99.6 $ 40.8
Ratio of Expenses to Average Net Assets (%) 1.32%(c) 1.28% 1.43% 1.66% 2.33%(c)
Ratio of Net Investment Income to Average
Net Assets (%)......................... -0.84%(c) -0.92% -0.88% -0.83% -1.76%(c)
Portfolio Turnover (%).................... 43% 176% 213% 64% 97%
Average commission rate(d)................ $0.0487 $0.0488 N/A N/A N/A
</TABLE>
- ---------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated
as capital items that increase the cost basis of securities purchased, or
reduce the proceeds of securities sold.
P-9
<PAGE> 74
LB Mid Cap Growth Fund
CLASS A SHARES
<TABLE>
<CAPTION>
Four Months Ended
September 30, 1997
(unaudited)
------------------
<S> <C>
(For a share outstanding throughout the period) (a)
Net Asset Value, Beginning of Period ...................... $ 9.25
--------
Investment Operations:
Net Investment Loss ....................................... (0.01)
Net Realized and Unrealized Gain
(Loss) on Investments ................................... 1.44
--------
Total from Investment Operations .......................... 1.43
--------
Net Asset Value, End of Period ............................ $ 10.68
========
Total Investment Return at
Net Asset Value (b) ...................................... 15.46%
Net Assets, End of Period ($ in millions) ................. $ 12.1
Ratio of Expenses to Average
Net Assets ............................................... 1.95%(c)
Ratio of Net Investment Loss to
Average Net Assets ....................................... 0.84%(c)
Portfolio Turnover Rate ................................... 54%
Average commission rate (d) ............................... $ 0.0582
</TABLE>
- ----------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of a sales charge.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred
in connection with execution of portfolio transactions during the
period, divided by the sum of all portfolio shares purchased and sold
during the period that were subject to a commission. Broker commissions
are treated as capital items that increase the cost basis of securities
purchased, or reduce the proceeds of securities sold.
P-10
<PAGE> 75
LB WORLD GROWTH FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Six Months For the Period From
Ended September 5, 1995
April 30, 1997 Year Ended (effective date) to
(For a share outstanding throughout the period)(a) (unaudited) October 31, 1996 October 31, 1995
-------------- ---------------- -------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $ 9.48 $ 8.44 $ 8.50
------- ------- ------
Income From Investment Operations:
Net Investment Income............................ -- 0.04 0.01
Net Realized and Unrealized Gain (Loss)
on Investments................................ 0.46 1.02 (0.07)
------- ------- ------
Total from Investment Operations...................... 0.46 1.06 (0.06)
------- ------- ------
Less Distributions from:
Net Investment Income............................ (0.04) (0.02) --
Net Realized Gains on Investments................ (0.04) -- --
------- ------- ------
Total Distributions................................... (0.08) (0.02) --
------- ------- ------
Net Asset Value, End of Period........................ $ 9.86 $ 9.48 $ 8.44
======= ======= ======
Total Investment Return at Net Asset Value(b)......... 4.94% 12.53% -0.71%
Net Assets, End of Period (in millions)............... $ 65.9 $ 52.9 $ 14.0
Ratio of Expenses to Average Net Assets............... 1.91%(c) 1.95%(d) 1.95%(c,d)
Ratio of Net Investment Income to Average Net Assets.. 0.09%(c) 0.67%(d) 1.60%(c,d)
Portfolio Turnover Rate............................... 9% 11% 0%
Average commission rate(e)............................ $0.0256 $0.0216 N/A
</TABLE>
- ------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Effective September 5, 1995, Lutheran Brotherhood Research Corp. (LBRC)
has voluntarily undertaken to limit the Fund's expense ratio at 1.95%. Had
LBRC not undertaken such action, the ratio of expenses to average net
assets would have been 2.13% and 2.89%, and the ratio of net investment
income to average net assets would have been 0.49% and 0.66%,
respectively, for the year ended October 31, 1996 and for the period from
September 5, 1995 to October 31, 1995.
(e) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated
as capital items that increase the cost basis of securities purchased, or
reduce the proceeds of securities sold.
P-11
<PAGE> 76
LB FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................... $ 23.07 $ 21.19 $17.67 $18.85 $18.53
------- ------- ------ ------ ------
Investment Operations:
Net Investment Income .................... 0.10 0.20 0.22 0.19 0.29
Net Realized and Unrealized Gain (Loss)
on Investments ........................ 2.71 3.33 3.52 (0.20) 1.04
------- ------- ------ ------ ------
Total from Investment Operations ......... 2.81 3.53 3.74 (0.01) 1.33
------- ------- ------ ------ ------
Less Distributions from:
Net Investment Income ................. (0.10) (0.20) (0.22) (0.20) (0.28)
Net Realized Gain on Investments ...... (1.76) (1.45) -- (0.97) (0.73)
------- ------- ------ ------ ------
Total Distributions ...................... 1.86 (1.65) (0.22) (1.17) (1.01)
------- ------- ------ ------ ------
Net Asset Value End of Period ............ $ 24.02 $ 23.07 $21.19 $17.67 $18.85
======= ======= ====== ====== ======
Total Investment Return a
Net Asset Value(%)(b) ................. 12.64% 17.61% 21.34% -0.11% 7.41%
Net Assets, End of Period (in millions) .. $ 873.2 $ 768.8 $645.5 $548.6 $527.3
Ratio of Expenses to Average Net Assets(%) 0.91%(c,e) 0.97% 1.02% 1.04% 1.01%(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................ 0.85%(c,e) 0.94% 1.15% 1.10% 2.15%(c)
Portfolio Turnover (%) ................... 26% 91% 127% 234% 237%
Average commission rate(d) ............... $0.0598 $0.0664 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................... $19.14 $17.10 $15.83 $15.97 $14.44 $18.38
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income .................... 0.27 0.32 0.37 0.36 0.47 0.49
Net Realized and Unrealized Gain (Loss)
on Investments ........................ 1.42 3.90 1.34 1.32 1.54 (2.19)
------ ------ ------ ------ ------ ------
Total from Investment Operations ......... 1.69 4.22 1.71 1.68 2.01 (1.70)
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income ................. (0.27) (0.31) (0.38) (0.32) (0.48) (0.48)
Net Realized Gain on Investments ...... (2.03) (1.87) (0.06) (1.50) -- (1.76)
------ ------ ------ ------ ------ ------
Total Distributions ...................... (2.30) (2.18) (0.44) (1.82) (0.48) (2.24)
------ ------ ------ ------ ------ ------
Net Asset Value End of Period ............ $18.53 $19.14 $17.10 $15.83 $15.97 $14.44
====== ====== ====== ====== ====== ======
Total Investment Return a
Net Asset Value(%)(b) ................. 9.47% 24.67% 10.92% 9.77% 14.26% -8.70%
Net Assets, End of Period (in millions) .. $460.9 $380.3 $303.4 $273.3 $275.9 $258.9
Ratio of Expenses to Average Net Assets(%) 0.97% 1.00% 1.05% 1.04% 1.08% 1.07%
Ratio of Net Investment Income to
Average Net Assets (%) ................ 1.44% 1.69% 2.21% 1.99% 3.24% 2.69%
Portfolio Turnover (%) ................... 249% 175% 148% 145% 89% 88%
Average commission rate(d) ............... N/A N/A N/A N/A N/A N/A
</TABLE>
- ----------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred in
connection with execution of portfolio transactions during the period,
divided by the sum of all portfolio shares purchased and sold during the
period that were subject to a commission. Broker commissions are treated
as capital items that increase the cost basis of securities purchased, or
reduce the proceeds of securities sold.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Fund. Had LB
Research not undertaken such action, the ratio of expenses to average net
assets would have been 0.94% and the ratio of net investment income to
average net assets would have been 0.82%.
P-12
<PAGE> 77
LB HIGH YIELD FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .................... $ 9.21 $ 9.03 $ 8.86 $ 9.73 $ 9.12
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ..................... 0.42 0.84 0.83 0.83 0.61
Net Realized and Unrealized Gain (Loss)
on Investments ......................... (0.30) 0.17 0.24 (0.86) 0.60
------ ------ ------ ------ ------
Total from Investment Operations .......... 0.12 1.01 1.07 (0.03) 1.21
------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income .................. (0.44) (0.83) (0.85) (0.82) (0.60)
Net Realized Gain on Investments ....... (0.03) -- (0.05) (0.02) --
------ ------ ------ ------ ------
Total Distributions ....................... (0.47) (0.83) (0.90) (0.84) (0.60)
------ ------ ------ ------ ------
Net Asset Value End of Period ............. $ 8.86 $ 9.21 $ 9.03 $ 8.86 $ 9.73
====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b) .................. 1.31% 11.64% 12.93% -0.47% 13.72%
Net Assets, End of Period (in millions) ... $741.5 $703.1 $594.3 $499.6 $440.3
Ratio of Expenses to Average Net Assets (%) 0.86%(c,d) 0.91% 0.93% 0.95% 0.94%(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................. 9.32%(c,d) 9.23% 9.53% 8.92% 8.72%(c)
Portfolio Turnover ........................ 59% 104% 71% 50% 66%
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31,
-------------------------------------------------------------
1993 1992 1991 1990 1989 1988*
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .................... $ 8.45 $ 6.72 $ 7.93 $ 9.72 $ 9.86 $10.44
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ..................... 0.88 0.93 0.92 1.12 1.14 0.87
Net Realized and Unrealized Gain (Loss)
on Investments ......................... 0.68 1.72 (1.21) (1.76) (0.17) (0.60)
------ ------ ------ ------ ------ ------
Total from Investment Operations .......... 1.56 2.65 (0.29) (0.64) 0.97 0.27
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income .................. (0.89) (0.92) (0.92) (1.15) (1.11) (0.85)
Net Realized Gain on Investments ....... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions ....................... (0.89) (0.92) (0.92) (1.15) (1.11) (0.85)
------ ------ ------ ------ ------ ------
Net Asset Value End of Period ............. $ 9.12 $ 8.45 $ 6.72 $ 7.93 $ 9.72 $ 9.86
====== ====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b) .................. 19.51% 41.59% -3.98% -7.52% 10.52% 3.54%
Net Assets, End of Period (in millions) ... $330.2 $217.0 $137.0 $149.6 $126.5 $ 61.3
Ratio of Expenses to Average Net Assets (%) 0.99% 1.16% 1.23% 1.19% 1.21% 1.50%(c)
Ratio of Net Investment Income to
Average Net Assets (%) ................. 10.04% 11.95% 12.51% 12.23% 11.72% 10.95%(c)
Portfolio Turnover ........................ 86% 145% 120% 86% 73% 67%
</TABLE>
- -------------------
* For the period April 3, 1987 (effective date) to January 31, 1988.
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB High Yield
Fund. Had LB Research not undertaken such action, the ratio of expenses to
average net assets would have been 0.89% and the ratio of net investment
income to average net assets would have been 9.29%.
P-13
<PAGE> 78
LB INCOME FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .......... $ 8.50 $ 8.72 $ 8.01 $ 9.43 $ 9.10
------ ------ ------ ------ --------
Investment Operations:
Net Investment Income ........... 0.27 0.57 0.59 0.58 0.47
Net Realized and Unrealized Gain
(Loss) on Investments ........ (0.17) (0.19) 0.69 (1.19) 0.33
------ ------ ------ ------ --------
Total from Investment Operations 0.10 0.38 1.28 (0.61) 0.80
------ ------ ------ ------ --------
Less Distributions from:
Net Investment Income ........ (0.28) (0.60) (0.57) (0.56) (0.47)
Net Realized Gain on
Investments ................ -- -- -- (0.25) --
------ ------ ------ ------ --------
Total Distributions ............. (0.28) (0.60) (0.57) (0.81) (0.47)
------ ------ ------ ------ --------
Net Asset Value End of Period ... $ 8.32 $ 8.50 $ 8.72 $ 8.01 $ 9.43
====== ====== ====== ====== ========
Total Investment Return at
Net Asset Value(%)(b) ........ 1.20% 4.56% 16.53% -6.81% 8.97%
Net Assets, End of
Period (in millions) ......... $793.0 $871.0 $942.1 $907.2 $1,042.2
Ratio of Expenses to Average
Net Assets (%) ............... 0.81%(c,e) 0.83% 0.83% 0.82% 0.80%(c,d)
Ratio of Net Investment Income to
Average Net Assets (%) ....... 6.50%(c,e) 6.61% 7.01% 6.77% 6.87%(c,d)
Portfolio Turnover (%) .......... 53% 142% 131% 155% 84%
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31,
-----------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .......... $ 8.79 $ 8.35 $ 8.47 $ 8.52 $ 8.62 $ 9.07
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ........... 0.66 0.72 0.78 0.82 0.80 0.80
Net Realized and Unrealized Gain
(Loss) on Investments ........ 0.31 0.44 (0.11) (0.06) (0.10) (0.44)
------ ------ ------ ------ ------ ------
Total from Investment Operations 0.97 1.16 0.67 0.76 0.70 0.36
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income ........ (0.66) (0.72) (0.79) (0.81) (0.80) (0.81)
Net Realized Gain on
Investments ................ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions ............. (0.66) (0.72) (0.79) (0.81) (0.80) (0.81)
------ ------ ------ ------ ------ ------
Net Asset Value End of Period ... $ 9.10 $ 8.79 $ 8.35 $ 8.47 $ 8.52 $ 8.62
====== ====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b) ........ 11.50% 14.48% 8.39% 9.18% 8.69% 4.53%
Net Assets, End of
Period (in millions) ......... $944.6 $819.5 $736.5 $719.8 $725.5 $711.8
Ratio of Expenses to Average
Net Assets (%) ............... 0.90% 0.97% 1.02% 1.02% 1.03% 1.03%
Ratio of Net Investment Income to
Average Net Assets (%) ....... 7.40% 8.38% 9.85% 9.53% 9.52% 9.47%
Portfolio Turnover (%) .......... 104% 117% 118% 113% 68% 48%
</TABLE>
- ------------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) During the nine month period ended October 31, 1993, Lutheran Brotherhood
Research Corp. (LBRC) undertook a voluntary reduction of the Fund's
investment advisory fee equal to 0.05% of average daily net assets. Had
LBRC not undertaken such action, the ratio of expenses to average net
assets would have been 0.79% and the ratio of net investment income to
average net assets would have been 6.77%.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Income
Fund. Had LB Research not undertaken such action, the ratio of expenses
to average net assets would have been 0.84% and the ratio of net
investment income to average net assets would have been 6.47%.
P-14
<PAGE> 79
LB MUNICIPAL BOND FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ................ $ 8.60 $ 8.58 $ 7.88 $ 9.00 $ 8.52
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ................. 0.22 0.44 0.45 0.46 0.37
Net Realized and Unrealized Gain
(Loss) on Investments .............. (0.07) 0.01 0.70 (0.96) 0.51
------ ------ ------ ------ ------
Total from Investment Operations ...... 0.15 0.45 1.15 0.50 0.88
------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income .............. (0.23) (0.43) (0.45) (0.46) (0.37)
Net Realized Gain on
Investments ...................... -- -- -- (0.16) (0.03)
------ ------ ------ ------ ------
Total Distributions ................... (0.23) (0.43) (0.45) (0.62) (0.40)
------ ------ ------ ------ ------
Net Asset Value End of Period ......... $ 8.52 $ 8.60 $ 8.58 $ 7.88 $ 9.00
====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b) .............. 1.71% 5.33% 14.97% -5.93% 10.73%
Net Assets, End of
Period (in millions) ............... $586.7 $609.5 $628.7 $595.2 $629.7
Ratio of Expenses to Average
Net Assets (%) ..................... 0.71%(c,e) 0.74% 0.74% 0.75% 0.74%(c,d)
Ratio of Net Investment Income
to Average Net Assets (%) .......... 5.20%(c,e) 5.14% 5.43% 5.44% 5.69%(c,d)
Portfolio Turnover (%) ................ 8% 33% 36% 38% 46%
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31,
----------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ............ $ 8.45 $ 8.32 $ 8.15 $ 8.18 $ 8.09 $ 8.45
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ............. 0.53 0.56 0.58 0.58 0.60 0.59
Net Realized and Unrealized Gain
(Loss) on Investments .......... 0.28 0.29 0.16 (0.02) 0.07 (0.37)
------ ------ ------ ------ ------ ------
Total from Investment Operations .. 0.81 0.85 0.74 0.56 0.67 0.22
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income .......... (0.52) (0.56) (0.57) (0.59) (0.58) (0.58)
Net Realized Gain on
Investments .................. (0.22) (0.16) -- -- -- --
------ ------ ------ ------ ------ ------
Total Distributions ............... (0.74) (0.72) (0.57) (0.59) (0.58) (0.58)
------ ------ ------ ------ ------ ------
Net Asset Value End of Period ..... $ 8.52 $ 8.45 $ 8.32 $ 8.15 $ 8.18 $ 8.09
====== ====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(%)(b) .......... 9.96% 10.64% 9.54% 7.02% 8.70% 2.95%
Net Assets, End of
Period (in millions) ........... $532.6 $448.4 $382.5 $348.2 $306.5 $283.6
Ratio of Expenses to Average
Net Assets (%) ................. 0.80% 0.83% 0.86% 0.86% 0.92% 0.91%
Ratio of Net Investment Income
to Average Net Assets (%) ...... 6.22% 6.65% 7.06% 7.04% 7.37% 7.39%
Portfolio Turnover (%) ............ 77% 78% 68% 60% 70% 61%
</TABLE>
- ------------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
(c) Computed on an annualized basis.
(d) During the nine month period ended October 31, 1993, Lutheran Brotherhood
Research Corp. (LBRC) undertook a voluntary reduction of the Fund's
investment advisory fee equal to 0.05% of average daily net assets. Had
LBRC not undertaken such action, the ratio of expenses to average net
assets would have been 0.79% and the ratio of net investment income to
average net assets would have been 5.64%.
(e) Effective January 1, 1997, LB Research voluntarily agreed to waive five
basis points (0.05%) from the advisory fees payable by the LB Municipal
Bond Fund. Had LB Research not undertaken such action, the ratio of
expenses to average net assets would have been 0.74% and the ratio of net
investment income to average net assets would have been 5.17%.
P-15
<PAGE> 80
LB MONEY MARKET FUND
CLASS A SHARES
<TABLE>
<CAPTION>
Nine
Months
(For a share outstanding Six Months Ended Year Year Year ended
throughout the period)(a) April 30, 1997 Ended Ended Ended Oct. 31
(unaudited) 10/31/96 10/31/95 10/31/94 1993
----------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ............... 0.02 0.05 0.05 0.03 0.02
------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income ............... (0.02) (0.05) (0.05) (0.03) (0.02)
------ ------ ------ ------ ------
Net Asset Value, End of Period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value (%)(b) ............... 2.28% 4.63% 4.95% 2.89% 1.63%
Net Assets, End of
Period (in millions) ............. $439.3 $417.6 $341.1 $276.9 $275.1
Ratio of Expenses to Average
Net Assets (%) ................... 0.95%(c,d) 1.01%(d) 1.10%(d) 1.10%(d) 1.10%(c,d)
Ratio of Net Investment Income
to Average Net Assets (%) ........ 4.55%(c,d) 4.53%(d) 4.85%(d) 2.85%(d) 2.16%(c,d)
</TABLE>
<TABLE>
<CAPTION>
Years Ended January 31,
-------------------------------------------------------------
1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Investment Operations:
Net Investment Income ............... 0.03 0.05 0.07 0.08 0.07 0.06
------ ------ ------ ------ ------ ------
Less Distributions from:
Net Investment Income ............... (0.03) (0.05) (0.07) (0.08) (0.07) (0.06)
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total Investment Return at Net
Asset Value (%)(b) ............... 2.77% 5.10% 7.40% 8.44% 7.01% 5.98%
Net Assets, End of
Period (in millions) ............. $317.0 $412.3 $473.4 $423.5 $309.3 $263.6
Ratio of Expenses to Average
Net Assets (%) ................... 1.10%(d) 1.08% 1.07% 1.09% 1.07% 1.07%
Ratio of Net Investment Income
to Average Net Assets (%) ........ 2.76%(d) 5.01% 7.16% 8.10% 6.83% 5.80%
</TABLE>
- ----------------------
(a) All per share amounts have been rounded to the nearest cent.
(b) Total return is based on the change in net asset value during the period
and assumes reinvestment of all distributions.
(c) Computed on an annualized basis.
(d) Effective February 1, 1992 through March 31, 1996, Lutheran Brotherhood
Research Corp. (LBRC) had voluntarily undertaken to limit the Fund's
expense ratio to 1.10% of annual average daily net assets. Effective April
1, 1996, LBRC voluntarily lowered the expense limit prospectively to 0.95%
of average daily net assets. Had LBRC not undertaken such action to limit
expenses, the ratio of expenses to average net assets would have been
1.05%, 1.07%, 1.18%, 1.36%, 1.44% and 1.23% and the ratio of net
investment income to average net assets would have been 4.45%, 4.47%,
4.77%, 2.59%, 1,82% and 2.63%, respectively, for the six months ended
April 30, 1997, the years ended October 31, 1996 1995 and 1994, the nine
month period ended October 31, 1993 and the year ended January 31, 1993.
P-16
<PAGE> 81
INVESTMENT OBJECTIVES AND POLICIES
Each of the Funds in The Lutheran Brotherhood Family of Funds has a
separate investment objective and investment policies for the pursuit of that
objective. The investment objective of each Fund is fundamental and may not be
changed without the approval of shareholders of that Fund. Except as otherwise
indicated in this Prospectus, the investment policies of each Fund may be
changed from time to time by the Board of Trustees of the Trust. There is no
assurance that any of the Funds will achieve its investment objective, but it
will strive to do so by following the policies set forth below.
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
The investment objective of the LB Opportunity Growth Fund is to achieve
long term growth of capital.
The Fund will pursue its objective by seeking realized and unrealized
capital gains through the active management of a portfolio consisting primarily
of common stocks. Such active management may involve a high level of portfolio
turnover. The Fund will invest primarily in common stocks of domestic and
foreign companies that in the opinion of LB Research have a potential for above
average sales and earnings growth that is expected to lead to capital
appreciation. The Fund's investment adviser believes that over a long period of
time, smaller companies that have a competitive advantage will be able to grow
faster than larger companies, leading to a higher rate of growth in capital. For
a description of the risks associated with investments in such companies, see
"Investment Risks - LB Opportunity Growth Fund Investment Risks".
The Fund may also invest in bonds and preferred stocks, convertible
bonds, convertible preferred stocks, warrants, American Depository Receipts
(ADR's) and other debt or equity securities. In addition, the Fund may invest in
U.S. Government securities or cash. The Fund will not use any minimum level of
credit quality. At no time will the Fund invest more than 5% of its net assets
in debt obligations. Debt obligations may be rated less than investment grade,
which is defined as having a quality rating below "Baa", as rated by Moody's
Investors Service, Inc. ("Moody's"), or below "BBB", as rated by Standard &
Poor's Corporation ("S&P"). For a description of Moody's and S&P's ratings, see
"Description of Debt Ratings". Securities rated below investment grade are
considered to be speculative and involve certain risks, including a higher risk
of default and greater sensitivity to interest rate and economic changes.
LB Research will use fundamental investment research techniques to seek
out those companies that have a competitively superior product or service in an
unsaturated market with large potential for growth. These will often be
companies with shorter histories and less seasoned operations. Many of such
companies will have market capitalizations that are less than $1 billion, with
lower daily trading volume in their stocks and less overall liquidity than
larger, more well established companies. LB Research anticipates that the common
stocks of such companies may increase in market value more rapidly than the
stocks of other companies.
The Fund will focus primarily on companies that possess superior
earnings prospects over a three to five year time horizon. The stocks that the
Fund invests in may be traded on national exchanges or in the over-the-counter
market ("OTC"). There will be no limit on the proportion of the Fund's
investment portfolio that may consist of OTC stocks.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. While LB Research
does not intend to select portfolio securities for the specific purpose of
trading them within a short period of time, LB Research does intend to use an
active method of management which will result in the sale of some securities
after a relatively brief holding period. This method of management necessarily
results in higher cost to the Fund due to the fees associated
P-17
<PAGE> 82
with portfolio securities transactions. A higher portfolio turnover rate may
also result in taxes on realized capital gains to be borne by shareholders.
However, it is LB Research's belief that this method of management can produce
added value to the Fund and its shareholders that exceeds the additional costs
of such transactions. The annual portfolio turnover rates of the Fund for the
fiscal years ended October 31, 1996 and October 31, 1995 were 176% and 213%,
respectively.
For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
The investment objective of the LB Mid Cap Growth Fund is to achieve
long term growth of capital. The Fund will pursue its objective by investing
primarily in a professionally managed diversified portfolio of common stocks of
companies with medium market capitalizations. LB Research defines companies with
medium market capitalizations ("mid cap companies") as companies with
capitalizations ranging from $1 billion to $5 billion at the time of the Fund's
investment. The Fund will seek to invest in companies that have a track record
of earnings growth or the potential for continued above average growth. The Fund
will normally invest at least 65% of its total assets in common stocks of mid
cap companies. LB Research will use both fundamental and technical investment
research techniques to seek out these companies.
The stocks that the Fund invests in may be traded on national exchanges
or in the over-the-counter market ("OTC"). There will be no limit on the
proportion of the Fund's investment portfolio that may consist of OTC stocks.
Many mid cap companies have lower daily trading volume in their stocks
and less overall liquidity than larger, more well established companies. The
common stocks of such companies may have greater price volatility than the
stocks of other larger companies. For a description of these and other risks
associated with investments in such companies, see "Investment Risks - LB Mid
Cap Growth Fund Investment Risks".
The Fund may also invest in other types of securities, including bonds,
preferred stocks, convertible bonds, convertible preferred stocks, warrants,
American Depository Receipts (ADR's), common stocks of companies falling outside
the medium market capitalization range, and other debt or equity securities. In
addition, the Fund may invest in U.S. Government securities or cash. The Fund
will not use any minimum level of credit quality. At no time will the Fund
invest more than 5% of its net assets in debt obligations. Debt obligations may
be rated less than investment grade, which is defined as having a quality rating
below "Baa", as rated by Moody's Investors Service, Inc. ("Moody's"), or below
"BBB", as rated by Standard & Poor's Corporation ("S&P"). For a description of
Moody's and S&P's ratings, see "Description of Debt Ratings". Securities rated
below investment grade (sometimes referred to as "high yield" or "junk bonds")
are considered to be speculative and involve certain risks, including a higher
risk of default and greater sensitivity to interest rate and economic changes.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. While LB Research
does not intend to select portfolio securities for the specific purpose of
trading them within a short period of time, LB Research does intend to use an
active method of management which will result in the sale of some securities
after a relatively brief holding period. This method of management necessarily
results in higher cost to the Fund due to the fees associated with portfolio
securities transactions. A higher portfolio turnover rate may also result in
taxes on realized capital gains to be borne by shareholders. However, it is LB
Research's belief that this method of management can produce added value to the
Fund and its shareholders that exceeds the additional costs of such
transactions. The annual portfolio turnover rate of the Fund is generally
expected not to exceed 100%.
P-18
<PAGE> 83
See "Taxes". For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
The investment objective of the LB World Growth Fund is to seek total
return from long-term growth of capital. The Fund will pursue its objective
principally through investments in common stocks of established, non-U.S.
companies. Total return consists of capital appreciation or depreciation,
dividend income, and currency gains or losses.
The Fund intends to diversify investments broadly among countries and to
normally have at least three different countries represented in the Fund. The
Fund may invest in countries of the Far East and Western Europe as well as South
Africa, Australia, Canada and other areas (including developing countries). As a
temporary defensive measure, the Fund may invest substantially all of its assets
in one or two countries.
In seeking its objective, the Fund will invest primarily in common
stocks of established foreign companies which have the potential for growth of
capital. In order to increase total return, the Fund may also invest in bonds
and preferred stocks, convertible bonds, convertible preferred stocks, warrants,
American Depository Receipts (ADR's) and other debt or equity securities. In
addition, the Fund may invest in U.S. Government securities or cash. The Fund
will not use any minimum level of credit quality. At no time will the Fund
invest more than 5% of its net assets in debt obligations or other securities
that may be converted to debt obligations. Debt obligations may be rated less
than investment grade, which is defined as having a quality rating below "Baa",
as rated by Moody's Investors Service, Inc. ("Moody's"), or below "BBB", as
rated by Standard & Poor's Corporation ("S&P"). Debt obligations rated "Baa" or
"BBB" are considered to have speculative characteristics. For a description of
Moody's and S&P's ratings, see "Description of Debt Ratings". Securities rated
below investment grade are considered to be speculative and involve certain
risks, including a higher risk of default and greater sensitivity to interest
rate and economic changes.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Sub-advisor considers the following
factors: prospects for relative economic growth between foreign countries;
expected levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range of individual
investment opportunities available to international investors.
In analyzing companies for investment, the Sub-advisor looks for one or
more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound financial
and accounting policies and overall financial strength; strong competitive
advantages; effective research and product development and marketing; efficient
service; pricing flexibility; strength of management; and general operating
characteristics which will enable the companies to compete successfully in their
market place. While current dividend income is not a prerequisite in the
selection of portfolio companies, the companies in which the Fund invests
normally will have a record of paying dividends, and will generally be expected
to increase the amounts of such dividends in future years as earnings increase.
The Fund's investments also may include, but are not limited to,
European Depository Receipts ("EDRs"), other debt and equity securities of
foreign issuers, and the securities of foreign investment funds or trusts
(including passive foreign investment companies). For a discussion of the risks
involved in foreign investing see the section of this Prospectus entitled
"Foreign Issuers".
P-19
<PAGE> 84
The Fund may engage in certain forms of options and futures transactions
that are commonly known as derivative securities transactions. These derivative
securities transactions are identified and described in the sections of this
Prospectus entitled "Put and Call Options" and "Financial Futures and Options on
Futures."
The Fund may use foreign currency exchange-related securities including
foreign currency warrants, principal exchange rate linked securities, and
performance indexed paper. The Fund does not expect to hold more than 5% of its
total assets in foreign currency exchange-related securities.
The Fund will normally conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through entering into forward contracts
to purchase or sell foreign currencies. The Fund will generally not enter into a
forward contract with a term of greater than one year.
The Fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when Sub-advisor believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another currency, it
may enter into a forward contract to sell or buy the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Under certain circumstances, the Fund may commit a substantial portion
of the entire value of its portfolio to the consummation of these contracts.
Sub-advisor will consider the effect such a commitment of its portfolio to
forward contracts would have on the investment program of the Fund and the
flexibility of the Fund to purchase additional securities. Although forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be accurately predicted and the Fund's total return could be adversely
affected as a result.
For a discussion of foreign currency contracts and the risks involved
therein, see the section of this Prospectus entitled, "Investment Risks."
The Fund will not generally trade in securities for short-term profits,
but, when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. The annual portfolio turnover rate of the
Fund for the fiscal year ended October 31, 1996 and for the period ended
October 31, 1995 were 11% and 5%, respectively.
For more information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD FUND
The investment objective of the LB Fund is to seek growth of capital and
income.
The Fund seeks to achieve its objective by investing in securities
issued by leading companies. The Fund may invest in the common stocks and other
securities of leading companies, including corporate bonds, notes, preferred
stock, and warrants. The Fund may also invest in U.S. Government securities and
cash. For purposes of the Fund's investment objective, companies are deemed
"leading" in terms of market share, asset size, cash flow and other fundamental
factors.
P-20
<PAGE> 85
LB Research will use fundamental investment research techniques to seek
out those companies that have a leading position within their industry or within
the capital markets generally. LB Research will focus upon market shares, growth
in sales and earnings, market capitalization and asset size and competitive
dominance. These will often be mature companies with a lengthy history and
seasoned operations. Many of them will have market capitalizations in excess of
$1 billion.
The Fund may dispose of securities held for a short period if the Fund's
investment adviser believes such disposition to be advisable. LB Research
intends to use an active method of management and may select portfolio
securities for the specific purpose of trading them within a short period of
time, which will result in the sale of some securities after a relatively brief
holding period. This method of management necessarily results in higher cost to
the Fund due to the fees associated with portfolio securities transactions.
However, it is LB Research's belief that this method of management can produce
added value to the Fund and its shareholders that exceeds the additional costs
of such transactions. The annual portfolio turnover rates of the Fund for the
fiscal years ended October 31, 1996 and October 31, 1995 were 91% and 127%,
respectively.
For information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD HIGH YIELD FUND
The investment objective of the LB High Yield Fund is to obtain high
current income and, secondarily, growth of capital.
The Fund seeks to achieve its investment objectives by investing
primarily in a diversified portfolio of professionally managed high yield, high
risk securities, many of which involve greater risks than higher quality
investments. The Fund may invest in high yield, high risk bonds, notes,
debentures and other income producing debt obligations and dividend paying
preferred stocks. These securities are commonly known as "junk bonds". High
yield, high risk securities will ordinarily carry a quality rating "Ba" or lower
by Moody's, "BB" or lower by S&P, or, if not rated, such securities will be of
comparable quality as determined by the Fund's investment adviser. The Fund will
use no minimum level of quality rating and may purchase and hold securities in
default. Securities having a quality rating of Ba or BB and lower are considered
to be speculative. See "Investment Risks - LB High Yield Fund Investment Risks".
For a description of Moody's and S&P's ratings, see "Description of Debt
Ratings".
The Fund may also invest in common stocks, warrants to purchase stocks,
bonds or preferred stock convertible into common stock, and other equity
securities. Investments in such securities will be made in pursuit of the income
and capital growth objectives of the Fund, but at no time will the Fund invest
more than 20% of its total assets in equity securities.
As a nonfundamental policy, during normal market conditions the Fund
will maintain at least 65% of its total assets, taken at market value, in lower
rated securities. The Fund may invest, without limit, in short-term money market
instruments when, in the opinion of LB Research, short-term investments provide
a better opportunity for achieving the Fund's objectives than do longer term
investments. When making short-term investments for such purpose, the Fund will
not be limited to a minimum quality level and may use unrated instruments.
The Fund does not intend to engage in short-term trading but may dispose
of securities held for a short time if LB Research believes such disposition to
be advisable. The annual portfolio turnover rates of the Fund for the fiscal
years ended October 31, 1996 and October 31, 1995 were 104% and 71%,
respectively.
P-21
<PAGE> 86
For information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD INCOME FUND
The investment objective of the LB Income Fund is to seek high current
income while preserving principal. The Fund's secondary investment objective is
to obtain long-term growth of capital in order to maintain investors' purchasing
power.
The Fund seeks to achieve its investment objectives by investing
primarily in debt securities such as bonds, notes, debentures, mortgage-backed
securities, other income producing debt obligations, and preferred stocks rated
"Baa" or higher by Moody's or "BBB" or higher by S&P. If not rated, such
securities will be of comparable quality in the opinion of LB Research.
Securities rated BBB or Baa, although considered to be investment grade or
higher, have speculative characteristics. If a portfolio security=s quality
rating drops below investment grade after the Fund has acquired the security,
the Fund may continue to hold the security in its portfolio. A description of
the ratings that are given to debt securities by Moody's and S&P and the
standards applied by them in assigning these ratings may be found at end of this
Prospectus.
The Fund may from time to time invest in debt securities that are not
rated as investment grade. For a description of the risks of investing in such
securities, see the section of this Prospectus entitled "Investment Risks of
High Yield Securities". The Fund may also invest in common stock and bonds and
preferred stock that are convertible into common stock. No more than 10% of the
Fund's total assets will be invested in common stock and no more than 25% of the
value of the total assets will be invested in all securities described in this
paragraph.
Debt securities may bear fixed or variable rates of interest. They may
involve equity features such as conversion or exchange rights, warrants for the
acquisition of common stock of the same or a different issuer, participation
based on revenues, sales or profits, or the purchase of common stock in a unit
transaction (where corporate debt securities and common stock are offered as a
unit).
The Fund may engage in short-term trading and dispose of securities held
for a short time if LB Research believes such disposition to be advisable. This
method of management necessarily results in higher cost to the Fund due to the
fees associated with portfolio securities transactions. However, it is LB
Research's belief that this method of management can produce added value to the
Fund and its shareholders that exceeds the additional costs of such
transactions. The annual portfolio turnover rates of the Fund for the fiscal
years ended October 31, 1996 and October 31, 1995 were 142% and 131%,
respectively.
For information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
The investment objective of the LB Municipal Bond Fund is to provide its
shareholders with a high level of current income which is exempt from federal
income tax.
The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of municipal bonds. Municipal bonds are debt obligations
issued by or on behalf of states (including the District of Columbia),
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest from which is exempt
from federal income tax. At least 80% of
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<PAGE> 87
the Fund's total assets will be invested in municipal bonds unless LB Research
determines that market conditions call for a temporary defensive posture.
The Fund does not generally intend to purchase securities if, as a
result of such purchase, more than 25% of the value of its total assets would be
invested in the securities of governmental subdivisions located in any one
state, territory or possession of the United States. The Fund may invest more
than 25% of the value of its total assets in industrial development bonds. As to
industrial development bonds, the Fund may invest up to 25% of its total assets
in securities issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds or
electric power project revenue bonds, or in industrial development revenue bonds
which are based, directly or indirectly, on the credit of private entities in
any one industry. This may make the Fund more susceptible to economic, political
or regulatory occurrences affecting a particular industry or sector and increase
the potential for fluctuation of net asset value.
Municipal Bonds: Municipal bonds are generally issued to finance public
works, such as bridges and highways, housing, mass transportation projects,
schools and hospitals. Municipal bonds are also issued to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions and facilities. The two principal classifications of
municipal bonds are "general obligation" and "revenue" bonds. General obligation
bonds are secured by the issuer's pledge and ability to raise taxes to repay the
principal and interest. Revenue bonds are repayable only from the income earned
from the facility financed by the bond or other specific source of revenue. For
example, income earned by a housing development can be used to repay the bonds
that raised the funds for its construction.
Industrial Development Bonds: Industrial development bonds are
considered municipal bonds if the interest paid on them is exempt from federal
income tax. Industrial development bonds which qualify as municipal bonds are
almost always revenue bonds. They are issued by or on behalf of public
authorities to raise money for privately-operated housing facilities, sports
facilities, convention or trade show centers, airports, mass transit, port
facilities, parking areas, air or water pollution control facilities and certain
local facilities for water supply, gas, electricity or sewage disposal.
Municipal Bonds Suitable for Investment: The Fund generally restricts
its investments to municipal bonds rated Aaa, Aa, A or Baa by Moody's, or AAA,
AA, A or BBB by S&P. Municipal bonds in the lowest rated category have
speculative characteristics. The Fund also may invest in municipal bonds (but
not industrial development bonds) that are not rated by Moody's or S&P but, in
the opinion of LB Research, would qualify for Standard & Poor's BBB or Moody's
Baa rating. Subsequent to its purchase by the Fund, an issue of municipal bonds
may cease to be rated or its rating may be reduced below the minimums required
for purchase by the Fund. Neither event requires the elimination of such
obligation from the Fund's portfolio, but LB Research will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio.
The annual portfolio turnover rates of the Fund for the fiscal years
ended October 31, 1996 and October 31, 1995 were 33% and 36%, respectively.
For information on other investment policies of the Fund, see
"Additional Investment Practices" below.
LUTHERAN BROTHERHOOD MONEY MARKET FUND
The LB Money Market Fund's investment objective is current income
consistent with stability of principal.
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<PAGE> 88
The Fund pursues this investment objective by investing in a portfolio
of money market instruments that mature in 397 days or less in order to obtain
current income and maintain a stable principal. The dollar-weighted average
maturity of money market instruments held by the LB Money Market Fund will be 90
days or less. The policy of the Fund is generally to hold instruments until
maturity. However, the Fund may attempt to increase yield by trading portfolio
securities to take advantage of short-term market variations.
Permissible LB Money Market Fund investments include, but are not
limited to: U.S. Treasury bills and all other marketable obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
instruments of domestic and foreign banks and savings and loans; prime
commercial paper; variable amount demand master notes; repurchase agreements;
instruments secured by the obligations described above and asset-backed
securities.
The Fund will not purchase a security (other than U.S. Government
obligations) unless the security (i) is rated by at least two nationally
recognized statistical rating organizations (NRSROs) with the highest rating
assigned to short-term debt securities (or, if rated by only one NRSRO by that
NRSRO, or if not rated, is determined to be of comparable quality), or (ii) is
rated by at least two such NRSROs within the two highest ratings assigned to
short-term debt securities (or, if rated by only one NRSRO by that NRSRO, or if
not rated, is determined to be of comparable quality) and not more than 5% of
the assets of the Fund would be invested in such securities. In addition, the
Fund may not invest more than 1% of its total assets or $1 million (whichever is
greater) in the securities of a single issuer included in clause (ii) above.
Determinations of comparable quality are made by LB Research in accordance with
procedures established by the Board of Trustees.
U.S. Government Obligations: The types of U.S. Government obligations in
which the Fund may invest include, but are not limited to: direct obligations of
the U.S. Treasury, such as U.S. Treasury bills, bonds and notes; and instruments
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
which are backed by the full faith and credit of the United States, the credit
of the agency or instrumentality (" governmental agency organized under federal
charter with government supervision) issuing the obligations, or the issuer's
right to borrow from the U.S. Treasury. These U.S. Government obligations may
include notes, bonds and discount notes issued by following agencies: Federal
Land Banks; Central Bank for Cooperatives; Federal Intermediate Credit Banks;
Federal Home Loan Banks; Farmers Home Administration; and Federal National Home
Mortgage Association.
Bank Instruments: The Fund invests only in instruments of domestic and
foreign banks and savings and loans if they have capital and surplus of over
$100,000,000 or the principal amount of the instrument in which the Fund is
investing is insured by the Federal Deposit Insurance Corporation (FDIC),
including domestic or Eurodollar certificates of deposit, demand and time
deposits, savings shares and bankers= acceptances.
Asset-Backed Securities: Asset-backed securities represent interests in
pools of consumer loans such as credit card receivables, leases on equipment
such as computers and other financial instruments. These securities provide a
flow-through of interest and principal payments as payments are received on the
loans or leases and may be supported by letters of credit or similar guarantees
of payment by a financial institution. These securities are subject to the risks
of non-payment of the underlying loans as well as the risks of prepayment. An
interest in a bank sponsored master trust which holds the receivables for a
major international credit card is an example of an asset backed security; an
interest in a trust which holds the customer receivable for a large consumer
products company is another example.
For information on other investment policies of the Fund, see
"Additional Investment Practices" below.
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<PAGE> 89
ADDITIONAL INVESTMENT PRACTICES
Various of the Funds may purchase the following securities or may engage
in the following transactions.
REPURCHASE AGREEMENTS
Each of the Funds may engage in repurchase agreement transactions in
pursuit of its investment objective. A repurchase agreement consists of a
purchase and a simultaneous agreement to resell for later delivery at an agreed
upon price and rate of interest U.S. Government obligations. The Fund or its
custodian will take possession of the obligations subject to a repurchase
agreement. If the original seller of a security subject to a repurchase
agreement fails to repurchase the security at the agreed upon time, the Fund
could incur a loss due to a drop in the market value of the security during the
time it takes the Fund to either sell the security or take action to enforce the
original seller=s agreement to repurchase the security. Also, if a defaulting
original seller filed for bankruptcy or became insolvent, disposition of such
security might be delayed by pending court action. The Fund may only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are found by LB Research (or the Sub-advisor) to be
creditworthy.
REVERSE REPURCHASE AGREEMENTS
Each of the Funds except the LB Money Market Fund also may enter into
reverse repurchase agreements, which are similar to borrowing cash. A reverse
repurchase agreement is a transaction in which the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument=s market value in
cash, with an agreement that at a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. The use of reverse repurchase agreements may
enable the Fund to avoid selling portfolio instruments at a time when a sale may
be deemed to be disadvantageous, but the ability to enter into reverse
repurchase agreements does not assure that the Fund will be able to avoid
selling portfolio instruments at a disadvantageous time. The Fund will engage in
reverse repurchase agreements which are not in excess of 60 days to maturity and
will do so to avoid borrowing cash and not for the purpose of investment
leverage or to speculate on interest rate changes.
RESTRICTED SECURITIES
Subject to the limitations on illiquid securities noted above, the Funds
may buy or sell restricted securities in accordance with Rule 144A under the
Securities Act of 1933, as amended ("Rule 144A Securities"). Securities may be
resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of a Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, a Fund may be adversely impacted by the
subjective valuation of such securities in the absence of an active market for
them.
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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Funds may purchase securities on a when-issued and delayed
delivery basis. When-issued and delayed delivery transactions arise when U.S.
Government obligations and other types of securities are bought by the Fund with
payment and delivery taking place in the future. The settlement dates of these
transactions, which may be a month or more after entering into the transaction,
are determined by mutual agreement of the parties. There are no fees or other
expenses associated with these types of transactions other than normal
transaction costs. To the extent a Fund engages in when-issued and delayed
delivery transactions, it will do so for the purpose of acquiring portfolio
instruments consistent with its investment objective and policies and not for
the purpose of investment leverage or to speculate on interest rate changes. On
the settlement date, the value of such instruments may be less than the cost
thereof. When effecting when-issued and delayed delivery transactions, cash,
cash equivalents or high grade debt obligations of a dollar amount sufficient to
make payment for the obligations to be purchased will be segregated at the trade
date and maintained until the transaction has been settled.
LENDING SECURITIES
Consistent with applicable regulatory requirements, each of the Funds
may from time to time lend the securities it holds to broker-dealers, provided
that such loans are made pursuant to written agreements and are continuously
secured by collateral in the form of cash, U.S. Government securities,
irrevocable standby letters of credit or other liquid securities in an amount at
all times equal to at least the market value of the loaned securities plus the
accrued interest and dividends. For the period during which the securities are
on loan, the lending Fund will be entitled to receive the interest and
dividends, or amounts equivalent thereto, on the loaned securities and a fee
from the borrower or interest on the investment of the cash collateral. The
right to terminate the loan will be given to either party subject to appropriate
notice. Upon termination of the loan, the borrower will return to the Fund
securities identical to the loaned securities.
The primary risk in lending securities is that the borrower may become
insolvent on a day on which the loaned security is rapidly increasing in value.
In such event, if the borrower fails to return the loaned security, the existing
collateral might be insufficient to purchase back the full amount of the
security loaned, and the borrower would be unable to furnish additional
collateral. The borrower would be liable for any shortage, but the lending Fund
would be an unsecured creditor with respect to such shortage and might not be
able to recover all or any thereof. However, this risk may be minimized by a
careful selection of borrowers and securities to be lent and by monitoring
collateral.
No Fund will not lend securities to broker-dealers affiliated with LB
Research or the Sub-advisor. LB Research believes that this will not affect the
Fund's ability to maximize its securities lending opportunities. No Fund may
lend any security or make any other loan if, as a result, more than one-third of
its total assets would be lent to other parties.
PUT AND CALL OPTIONS ("ALL FUNDS EXCEPT THE LB MONEY MARKET FUND)
Selling ("Writing" Covered Call Options: Certain of the Funds may from
time to time sell ("write") covered call options on any portion of its portfolio
as a hedge to provide partial protection against adverse movements in prices of
securities in those Funds and, subject to the limitations described below, for
the non-hedging purpose of attempting to create additional income. A call option
gives the buyer of the option, upon payment of a premium, the right to call upon
the writer to deliver a specified amount of a security on or before a fixed date
at a predetermined ("strike") price. As the writer of a call option, a Fund
assumes the obligation to deliver the underlying security to the holder of the
option on demand at the strike price.
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If the price of a security hedged by a call option falls below or
remains below the strike price of the option, a Fund will generally not be
called upon to deliver the security. A Fund will, however, retain the premium
received for the option as additional income, offsetting all or part of any
decline in the value of the security. If the price of a hedged security rises
above or remains above the strike price of the option, the Fund will generally
be called upon to deliver the security. In this event, a Fund limits its
potential gain by limiting the value it can receive from the security to the
strike price of the option plus the option premium.
Buying Call Options: Certain of the Funds may also from time to time
purchase call options on securities in which those Funds may invest. As the
holder of a call option, a Fund has the right to purchase the underlying
security or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). A Fund
generally will purchase such options as a hedge to provide protection against
adverse movements in the prices of securities which the Fund intends to
purchase. In purchasing a call option, a Fund would realize a gain if, during
the option period, the price of the underlying security increased by more than
the amount of the premium paid. A Fund would realize a loss equal to all or a
portion of the premium paid if the price of the underlying security decreased,
remained the same, or did not increase by more than the premium paid.
Buying Put Options: Certain of the Funds may from time to time purchase
put options on any portion of its portfolio. A put option gives the buyer of the
option, upon payment of a premium, the right to deliver a specified amount of a
security to the writer of the option on or before a fixed date at a
predetermined ("strike") price. A Fund generally will purchase such options as a
hedge to provide protection against adverse movements in the prices of
securities in the Fund. In purchasing a put option, a Fund would realize a gain
if, during the option period, the price of the security declined by an amount in
excess of the premium paid. A Fund would realize a loss equal to all or a
portion of the premium paid if the price of the security increased, remained the
same, or did not decrease by more than the premium paid.
Options on Foreign Currencies: The LB World Growth Fund may also write
covered call options and purchase put and call options on foreign currencies as
a hedge against changes in prevailing levels of currency exchange rates.
Selling Put Options: The Funds may not sell put options, except in the
case of a closing purchase transaction (see Closing Transactions).
Index Options: As part of its options transactions, certain of the Funds
may also purchase and sell call options and purchase put options on stock and
bond indices. Options on securities indices are similar to options on a security
except that, upon the exercise of an option on a securities index, settlement is
made in cash rather than in specific securities.
Closing Transactions: Certain of the Funds may dispose of options which
they have written by entering into "closing purchase transactions". Those Funds
may dispose of options which they have purchased by entering into "closing sale
transactions". A closing transaction terminates the rights of a holder, or the
obligation of a writer, of an option and does not result in the ownership of an
option.
A Fund realizes a profit from a closing purchase transaction if the
premium paid to close the option is less than the premium received by the Fund
from writing the option. The Fund realizes a loss if the premium paid is more
than the premium received. The Fund may not enter into a closing purchase
transaction with respect to an option it has written after it has been notified
of the exercise of such option.
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A Fund realizes a profit from a closing sale transaction if the premium
received to close out the option is more than the premium paid for the option. A
Fund realizes a loss if the premium received is less than the premium paid.
Spreads and Straddles: Certain of the Funds may also engage in
"straddle" and "spread" transactions in order to enhance return, which is a
speculative, non-hedging purpose. A straddle is established by buying both a
call and a put option on the same underlying security, each with the same
exercise price and expiration date. A spread is a combination of two or more
call options or put options on the same security with differing exercise prices
or times to maturity. The particular strategies employed by a Fund will depend
on LB Research's or the Sub-advisor's perception of anticipated market
movements.
Negotiated Transactions: Certain of the Funds will generally purchase
and sell options traded on a national securities or options exchange. Where
options are not readily available on such exchanges, a Fund may purchase and
sell options in negotiated transactions. A Fund effects negotiated transactions
only with investment dealers and other financial institutions deemed
creditworthy by its investment adviser. Despite the investment adviser=s or
Sub-advisor's best efforts to enter into negotiated options transactions with
only creditworthy parties, there is always a risk that the opposite party to the
transaction may default in its obligation to either purchase or sell the
underlying security at the agreed upon time and price, resulting in a possible
loss by the Fund. This risk is described more completely in the section of this
Prospectus entitled, "Risks of Transactions in Options and Futures". Options
written or purchased by a Fund in negotiated transactions are illiquid and there
is no assurance that a Fund will be able to effect a closing purchase or closing
sale transaction at a time when its Investment Adviser or Sub-advisor believes
it would be advantageous to do so. In the event the Fund is unable to effect a
closing transaction with the holder of a call option written by the Fund, the
Fund may not sell the security underlying the option until the call written by
the Fund expires or is exercised. The underlying securities on such transactions
will also be considered illiquid and are subject to the Fund's 15% illiquid
securities limitations.
Limitations: A Fund will not purchase any option if, immediately
thereafter, the aggregate cost of all outstanding options purchased and held by
the Fund would exceed 5% of the market value of the Fund's total assets. A Fund
will not write any option if, immediately thereafter, the aggregate value of the
Fund's securities subject to outstanding options would exceed 30% of the market
value of the Fund's total assets.
FINANCIAL FUTURES AND OPTIONS ON FUTURES ("ALL FUNDS EXCEPT THE LB MONEY MARKET
FUND)
Selling Futures Contracts: Certain of the Funds may sell financial
futures contracts ("futures contracts") as a hedge against adverse movements in
the prices of securities in those Funds. Such contracts may involve futures on
items such as U.S. Government Treasury bonds, notes and bills, government
mortgage-backed securities; corporate and municipal bond indices; and stock
indices. A futures contract sale creates an obligation for the Fund, as seller,
to deliver the specific type of instrument called for in the contract at a
specified future time for a specified price. In selling a futures contract, the
Fund would realize a gain on the contract if, during the contract period, the
price of the securities underlying the futures contract decreased. Such a gain
would be expected to approximately offset the decrease in value of the same or
similar securities in the Fund. The Fund would realize a loss if the price of
the securities underlying the contract increased. Such a loss would be expected
to approximately offset the increase in value of the same or similar securities
in the Fund.
Futures contracts have been designed by and are traded on boards of
trade which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC"). These boards of trade, through their clearing
corporations, guarantee performance of the contracts. Although the terms of some
financial futures contracts specify actual delivery or receipt of securities, in
most instances these contracts are closed out before the settlement due date
without the making or taking of delivery of the
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securities. Other financial futures contracts, such as futures contracts on a
securities index, by their terms call for cash settlements. The closing out of a
futures contract is effected by entering into an offsetting purchase or sale
transaction.
When a Fund sells a futures contract, or a call option on a futures
contract, it is required to make payments to the commodities broker which are
called "margin" by commodities exchanges and brokers.
The payment of "margin" in these transactions is different than
purchasing securities "on margin". In purchasing securities "on margin" an
investor pays part of the purchase price in cash and receives an extension of
credit from the broker, in the form of a loan secured by the securities, for the
unpaid balance. There are two categories of "margin" involved in these
transactions: initial margin and variation margin. Initial margin does not
represent a loan between a Fund and its broker, but rather is a "good faith
deposit" by a Fund to secure its obligations under a futures contract or an
option. Each day during the term of certain futures transactions, a Fund will
receive or pay "variation margin" equal to the daily change in the value of the
position held by the Fund.
Buying Futures Contracts: Certain of the Funds may also purchase
financial futures contracts as a hedge against adverse movements in the prices
of securities which they intend to purchase. A futures contract purchase creates
an obligation by a Fund, as buyer, to take delivery of the specific type of
instrument called for in the contract at a specified future time for a specified
price. In purchasing a futures contract, a Fund would realize a gain if, during
the contract period, the price of the securities underlying the futures contract
increased. Such a gain would approximately offset the increase in cost of the
same or similar securities which a Fund intends to purchase. a Fund would
realize a loss if the price of the securities underlying the contract decreased.
Such a loss would approximately offset the decrease in cost of the same or
similar securities which a Fund intends to purchase.
Options on Futures Contracts: Certain of the Funds may also sell
("write") covered call options on futures contracts and purchase put and call
options on futures contracts in connection with hedging strategies. A Fund may
not sell put options on futures contracts. An option on a futures contract gives
the buyer of the option, in return for the premium paid for the option, the
right to assume a position in the underlying futures contract (a long position
if the option is a call and a short position if the option is a put). The
writing of a call option on a futures contract constitutes a partial hedge
against declining prices of securities underlying the futures contract to the
extent of the premium received for the option. The purchase of a put option on a
futures contract constitutes a hedge against price declines below the exercise
price of the option and net of the premium paid for the option. The purchase of
a call option constitutes a hedge, net of the premium, against an increase in
cost of securities which a Fund intends to purchase.
Currency Futures Contracts and Options: The LB World Growth Fund may
also sell and purchase currency futures contracts (or options thereon) as a
hedge against changes in prevailing levels of currency exchange rates. Such
contracts may be traded on U.S. or foreign exchanges. The Fund will not use such
contracts or options for leveraging purposes.
Limitations: Certain of the Funds may engage in futures transactions,
and transactions involving options on futures, only on regulated commodity
exchanges or boards of trade. A Fund will not enter into a futures contract or
purchase or sell related options if immediately thereafter (a) the sum of the
amount of initial margin deposits on the Fund's existing futures and related
options positions and premiums paid for options with respect to futures and
options used for non-hedging purposes would exceed 5% of the market value of the
Fund's total assets or (b) the sum of the then aggregate value of open futures
contracts sales, the aggregate purchase prices under open futures contract
purchases, and the aggregate value of futures contracts subject to outstanding
options would exceed 30% of the market value of the Fund's total assets. In
addition, in instances involving the purchase of futures contracts or call
options thereon, a Fund will
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maintain cash or cash equivalents, less any related margin deposits, in an
amount equal to the market value of such contracts. "Cash and cash equivalents"
may include cash, government securities, or liquid high quality debt
obligations.
HYBRID INVESTMENTS (ALL FUNDS EXCEPT THE LB MONEY MARKET FUND)
As part of its investment program and to maintain greater flexibility,
the Fund may invest in hybrid instruments (A potentially high risk derivative)
which have the characteristics of futures, options and securities. Such
instruments may take a variety of forms, such as debt instruments with interest
or principal payments determined by reference to the value of a currency,
security index or commodity at a future point in time. The risks of such
investments would reflect both the risks of investing in futures, options,
currencies and securities, including volatility and illiquidity. Under certain
conditions, the redemption value of a hybrid instrument could be zero. The Fund
does not expect to hold more than 5% of its total assets in hybrid instruments.
For a discussion of hybrid investments and the risks involved therein, see the
Trust's Statement of Additional Information under "Additional Information
Concerning Certain Investment Techniques".
RISKS OF TRANSACTIONS IN OPTIONS AND FUTURES
There are certain risks involved in the use of futures contracts,
options on securities and securities index options, and options on futures
contracts, as hedging devices. There is a risk that the movement in the prices
of the index or instrument underlying an option or futures contract may not
correlate perfectly with the movement in the prices of the assets being hedged.
The lack of correlation could render a Fund's hedging strategy unsuccessful and
could result in losses. The loss from investing in futures transactions is
potentially unlimited.
There is a risk that LB Research or the Sub-advisor could be incorrect
in their expectations about the direction or extent of market factors such as
interest rate movements. In such a case a Fund would have been better off
without the hedge. In addition, while the principal purpose of hedging is to
limit the effects of adverse market movements, the attendant expense may cause a
Fund's return to be less than if hedging had not taken place. The overall
effectiveness of hedging therefore depends on the expense of hedging and LB
Research's or the Sub-advisor's accuracy in predicting the future changes in
interest rate levels and securities price movements.
A Fund will generally purchase and sell options traded on a national
securities or options exchange. Where options are not readily available on such
exchanges a Fund may purchase and sell options in negotiated transactions. When
a Fund uses negotiated options transactions it will seek to enter into such
transactions involving only those options and futures contracts for which there
appears to be an active secondary market. There is nonetheless no assurance that
a liquid secondary market such as an exchange or board of trade will exist for
any particular option or futures contract at any particular time. If a futures
market were to become unavailable, in the event of an adverse movement, a Fund
would be required to continue to make daily cash payments of maintenance margin
if it could not close a futures position. If an options market were to become
unavailable and a closing transaction could not be entered into, an option
holder would be able to realize profits or limit losses only by exercising an
option, and an option writer would remain obligated until exercise or
expiration. In addition, exchanges may establish daily price fluctuation limits
for options and futures contracts, and may halt trading if a contrAct's price
moves upward or downward more than the limit in a given day. On volatile trading
days when the price fluctuation limit is reached or a trading halt is imposed,
it may be impossible for a Fund to enter into new positions or close out
existing positions. If the secondary market for a contract is not liquid because
of price fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require a
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Fund to continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, a Fund's access to other assets held to cover
its options or futures positions could also be impaired.
When conducting negotiated options transactions there is a risk that the
opposite party to the transaction may default in its obligation to either
purchase or sell the underlying security at the agreed upon time and price. In
the event of such a default, a Fund could lose all or part of benefit it would
otherwise have realized from the transaction, including the ability to sell
securities it holds at a price above the current market price or to purchase a
security from another party at a price below the current market price.
The Funds intend to continue to meet the requirements of federal law to
be treated as a regulated investment company. For taxable years of a Fund that
began on or prior to August 5, 1997, one of these requirements is that a Fund
realize less than 30% of its annual gross income from the sale of securities
held for less than three months. Accordingly, the extent to which a Fund may
engage in futures contracts and related options may be materially limited by
this 30% test. Options activities of a Fund may increase the amount of gains
from the sale of securities held for less than three months, because gains from
the expiration of, or from closing transactions with respect to, call options
written by a Fund will be treated as short-term gains and because the exercise
of call options written by the Fund would cause it to sell the underlying
securities before it otherwise might. For each taxable year of a Fund beginning
after August 5, 1997, a Fund will no longer be subject to the 30% test described
above.
Finally, if a broker or clearing member of an options or futures
clearing corporation were to become insolvent, a Fund could experience delays
and might not be able to trade or exercise options or futures purchased through
that broker or clearing member. In addition, a Fund could have some or all of
its positions closed out without its consent. If substantial and widespread,
these insolvencies could ultimately impair the ability of the clearing
corporations themselves.
TEMPORARY DEFENSIVE INVESTMENTS
The LB Opportunity Growth Fund, LB World Growth Fund, LB Fund, LB Mid
Cap Growth Fund, LB High Yield Fund, LB Income Fund, and LB Municipal Bond Fund,
may hold up to 100% of their assets in cash or short-term debt securities for
temporary defensive position when, in the opinion of LB Research or the
Sub-advisor such a position is more likely to provide protection against
unfavorable market conditions than adherence to the Funds' other investment
policies. The types of short-term instruments in which the Funds may invest for
such purposes include short-term money market securities such as repurchase
agreements and securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, certificates of deposit, Eurodollar certificates
of deposit, commercial paper and banker=s acceptances issued by domestic and
foreign corporations and banks. When investing in short-term money market
obligations for temporary defensive purposes, a Fund will invest only in
securities rated at the time of purchase Prime-1 or Prime-2 by Moody's, A-1 or
A-2 by S&P, F-1 or F-2 by Fitch Investors Service, Inc., or unrated instruments
that are determined by LB Research or the Sub-advisor to be of a comparable
level of quality. When a Fund adopts a temporary defensive position its
investment objective may not be achieved.
INVESTMENT LIMITATIONS
In seeking to lessen investment risk, each Fund operates under certain
investment restrictions. The restrictions in the following paragraphs may not be
changed with respect to any Fund except by a vote of a majority of the
outstanding voting securities of that Fund.
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No Fund may, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is defined
in the Investment Company Act of 1940) if, as a result, the Fund would own more
than 10% of the outstanding voting securities of such issuer or the Fund would
have more than 5% of its total assets invested in the securities of such issuer.
The LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World Growth Fund, LB
Fund, LB High Yield Fund, LB Income Fund, and LB Money Market Fund may not
invest in a security if the transaction would result in 25% or more of the
Fund's total assets being invested in any one industry.
A Fund other than the LB Money Market Fund may borrow (through reverse
repurchase agreements or otherwise) up to one-third of its total assets. If a
Fund borrows money its share price will be subject to greater fluctuation until
the borrowing is paid off. If a Fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage. If
borrowings, including reverse repurchase agreements, exceed 5% of a Fund's total
assets, such Fund will not purchase portfolio securities.
For further information on these and other investment restrictions,
including nonfundamental investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.
INVESTMENT RISKS
Special risks are associated with investments in some of the Funds,
beyond the standard level of risks. These risks are described below. An investor
should take into account his or her investment objectives and ability to absorb
a loss or decline in his or her investment when considering an investment in
such Funds. Investors in certain of the Funds assume an above average risk of
loss, and should not consider an investment those Funds to be a complete
investment program.
LB OPPORTUNITY GROWTH FUND INVESTMENT RISKS
The LB Opportunity Growth Fund is aggressively managed and invests
primarily in the stocks of smaller, less seasoned companies many of which are
traded on an over-the-counter basis, rather than on a national exchange. These
companies represent a relatively higher degree of risk than do the stocks of
larger, more established companies. The companies the LB Opportunity Growth Fund
invests in also tend to be more dependent on the success of a single product
line and have less experienced management. They tend to have smaller market
shares, smaller capitalization, and less access to sources of additional
capital. As a result, these companies tend to have less ability to cope with
problems and market downturns and their shares of stock tend to be less liquid
and more volatile in price.
LB MID CAP GROWTH FUND INVESTMENT RISKS
Stocks in mid cap companies entail greater risk than the stocks of
larger, well-established companies. These companies tend to have smaller
revenues, narrower product lines, less management depth and experience, smaller
shares of their product or service markets, fewer financial resources, and less
competitive strength than larger companies. Also, mid cap companies usually
reinvest a high portion of their earnings in their own businesses and therefore
lack a predictable dividend yield. Since investors frequently buy these stocks
because of their expected above average earnings growth, earnings levels that
fail to meet expectations often result in sharp price declines of such stocks.
In addition, in many instances, the frequency and volume of trading of
mid cap companies is substantially less than is typical of larger companies.
Therefore, the securities of such companies may be subject to wider price
fluctuations. The spreads between the bid and asked prices of the securities
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of these companies in the over-the-counter market typically are larger than the
spreads for more actively-traded companies. As a result, the Fund could incur a
loss if it determined to sell such a security shortly after its acquisition.
When making large sales, the Fund may have to sell portfolio holdings at
discounts from quoted prices or may have to make a series of small sales over an
extended period of time due to the trading volume of such securities. Investors
should be aware that, based on the foregoing factors, an investment in the Fund
may be subject to greater price fluctuations than an investment in a fund that
invests primarily in larger more established companies.
LB WORLD GROWTH FUND INVESTMENT RISKS
The Fund, may invest in stocks of foreign issuers and in "ADRs" "EDRs"
of foreign stocks. When investing in foreign stocks, ADRs and EDRs, the Fund
assumes certain additional risks that are not present with investments in stocks
of domestic companies. These risks include political and economic developments
such as possible expropriation or confiscatory taxation that might adversely
affect the market value of such stocks, ADRs and EDRs. In addition, there may be
less publicly available information about such foreign issuers than about
domestic issuers, and such foreign issuers may not be subject to the same
accounting, auditing and financial standards and requirements as domestic
issuers.
OTHER RISKS OF FOREIGN INVESTING INCLUDE:
Foreign Securities: Investments in securities of foreign issuers may
involve risks that are not present with domestic investments. While investments
in foreign securities are intended to reduce risk by providing further
diversification, such investments involve sovereign risk in addition to credit
and market risks. Sovereign risk includes local political or economic
developments, potential nationalization, withholding taxes on dividend or
interest payments, and currency blockage (which would prevent cash from being
brought back to the United States). Compared to United States issuers, there is
generally less publicly available information about foreign issuers and there
may be less governmental regulation and supervision of foreign stock exchanges,
brokers and listed companies. Fixed brokerage commissions on foreign securities
exchanges are generally higher than in the United States. Foreign issuers are
not generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers. Securities of some foreign issuers are less liquid and their prices are
more volatile than securities of comparable domestic issuers. In some countries,
there may also be the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, difficulty in enforcing
contractual and other obligations, political or social instability or
revolution, or diplomatic developments which could affect investments in those
countries. Settlement of transactions in some foreign markets may be delayed or
less frequent than in the United States, which could affect the liquidity of
investments. For example, securities which are listed on foreign exchanges or
traded in foreign markets may trade on days (such as Saturday) when the Fund
does not compute its price or accept orders for the purchase, redemption or
exchange of its shares. As a result, the net asset value of the Fund may be
significantly affected by trading on days when shareholders cannot make
transactions. Further, it may be more difficult for the Trust's agents to keep
currently informed about corporate actions which may affect the price of
portfolio securities. Communications between the U.S. and foreign countries may
be less reliable than within the U.S., increasing the risk of delayed
settlements or loss of certificates for portfolio securities.
Investments by the Fund in foreign companies may require the Fund to
hold securities and funds denominated in a foreign currency. Foreign investments
may be affected favorably or unfavorably by changes in currency rates and
exchange control regulations. Thus, the Fund's net asset value per share will be
affected by changes in currency exchange rates. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders of the Fund. They generally are
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determined by the forces of supply and demand in foreign exchange markets and
the relative merits of investment in different countries, actual or perceived
changes in interest rates or other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene, or by currency controls or political developments in
the U.S. or abroad. In addition, the Fund may incur costs in connection with
conversions between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are often
heightened for investments in emerging or developing countries.
Developing Countries: Investing in developing countries involves certain
risks not typically associated with investing in U.S. securities, and imposes
risks greater than, or in addition to, risks of investing in foreign, developed
countries. These risks include: the risk of nationalization or expropriation of
assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; social, economic and political uncertainty and
instability (including the risk of war); more substantial government involvement
in the economy; higher rates of inflation; less government supervision and
regulation of the securities markets and participants in those markets; controls
on foreign investment and limitations on repatriation of invested capital and on
the Fund's ability to exchange local currencies for U.S. dollars; unavailability
of currency hedging techniques in certain developing countries; the fact that
companies in developing countries may be smaller, less seasoned and newly
organized companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material information
about issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets.
American Depository Receipts (ADRs) and European Depository Receipts
(EDRs): ADRs are dollar-denominated receipts generally issued by a domestic bank
that represents the deposit of a security of a foreign issuer. ADRs may be
publicly traded on exchanges or over-the-counter in the United States. EDRs are
receipts similar to ADRs and are issued and traded in Europe. ADRs and EDRs may
be issued as sponsored or unsponsored programs. In sponsored programs, the
issuer makes arrangements to have its securities traded in the form of ADRs or
EDRs. In unsponsored programs, the issuer may not be directly involved in the
creation of the program. Although regulatory requirements with respect to
sponsored and unsponsored programs are generally similar, the issuers of
unsponsored ADRs or EDRs are not obligated to disclose material information in
the United States and, therefore, the import of such information may not be
reflected in the market value of such securities.
Currency Fluctuations: Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Fund's assets denominated in that currency. Such changes will also
affect a Fund's income. Generally, when a given currency appreciates against the
dollar (the dollar weakens) the value of a Fund's securities denominated in that
currency will rise. When a given currency depreciates against the dollar (the
dollar strengthens) the value of a Fund's securities denominated in that
currency would be expected to decline.
INVESTMENT RISKS OF HIGH YIELD SECURITIES (LB HIGH YIELD FUND AND LB MID CAP
GROWTH FUND)
Investment in high yield, high risk securities (sometimes referred to as
"junk bonds") involves a greater degree of risk than investment in higher
quality securities. Investment in high yield, high risk securities involves
increased financial risk due to the higher risk of default by the issuers of
bonds and other debt securities having quality rating of "Ba" or lower by
Moody's or "BB" or lower by Standard &
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Poor's. The higher risk of default may be due to higher debt leverage ratios, a
history of low profitability or losses, or other fundamental factors that weaken
the ability of the issuer to service its debt obligations.
In addition to the factors of issuer creditworthiness described above,
high yield, high risk securities generally involve a number of additional market
risks. These risks include:
Youth and Growth of High Yield, High Risk Market: The high yield, high
risk bond market is relatively new. While many of the high yield issues
currently outstanding have endured an economic recession, there can be no
assurance that this will be true in the event of increased interest rates or
widespread defaults brought about by a more severe and sustained economic
downturn.
Sensitivity to Interest Rate and Economic Changes: The market value of
high yield, high risk securities have been found to be less sensitive to
interest rate changes on a short-term basis than higher-rated investments, but
more sensitive to adverse economic developments or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may be more likely to experience
financial stress which would impair their ability to service their principal and
interest payment obligations or obtain additional financing. In the event the
issuer of a bond defaults on payments, the LB High Yield Fund may incur
additional expenses in seeking recovery. In periods of economic change and
uncertainty, market values of high yield, high risk securities and the LB High
Yield Fund's assets value may become more volatile. Furthermore, in the case of
zero coupon or payment-in-kind high yield, high risk securities, market values
tend to be more greatly affected by interest rate changes than securities which
pay interest periodically and in cash. Changes in the market value of securities
owned by the LB High Yield Fund will not affect cash income but will affect the
net asset value of the Fund's shares.
Payment Expectations: High yield, high risk securities, like higher
quality securities, may contain redemption or call provisions, which allow the
issuer to redeem a security in the event interest rates drop. In this event, the
LB High Yield Fund would have to replace the issue with a lower yielding
security, resulting in a decreased yield for investors.
Liquidity and Valuation: High yield, high risk securities at times tend
to be more thinly traded and are less likely to have an estimated retail
secondary market than investment grade securities. This may adversely impact the
LB High Yield Fund's ability to dispose of particular issues and to accurately
value securities in the LB High Yield Fund's portfolios. Also, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease market values and liquidity, especially on thinly traded issues.
Taxation: High yield, high risk securities structured as zero coupon or
payment-in-kind issues may require the LB High Yield Fund to report interest on
such securities as income even though the LB High Yield Fund receives no cash
interest on such securities until the maturity or payment date. The LB High
Yield Fund may be required to sell other securities to generate cash to make any
required dividend distribution.
LIMITING INVESTMENT RISK
LB Research believes that the risks of investing in high yield, high
risk securities can be reduced by the use of professional portfolio management
techniques including:
Credit Research: LB Research will perform it owns credit analysis in
addition to using recognized rating agencies and other sources, including
discussions with the issuer's management, the judgment of other investment
analysts and its own judgment. The adviser's credit analysis will consider such
factors as
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the issuer's financial soundness, its responsiveness to changes in interest
rates and business conditions, its anticipated cash flow, asset values, interest
or dividend coverage and earnings.
Diversification: The LB High Yield Fund invests in widely diversified
portfolio of securities to minimize the impact of a loss in any single
investment and to reduce portfolio risk. As of October 31, 1996, the LB High
Yield Fund held securities of 126 corporate issuers, and the LB High Yield
Fund's holdings had the following credit quality characteristics:
<TABLE>
<CAPTION>
Percentage of
Investment Net Assets
---------- -------------
<S> <C>
Short-term securities
AAA equivalent..................................... 5.7%
Government obligations.................................. --
Corporate obligations
AAA/Aaa............................................ --
AA/Aa.............................................. --
A/A................................................ --
BBB/Baa............................................ 0.2%
BB/Ba.............................................. 5.7%
B/B................................................ 46.9%
CCC/Caa............................................ 8.6%
CC/Ca.............................................. .01%
D/D................................................ .03%
Not rated.......................................... 16.1%
Other Net Assets................................... 16.8%
-----
Total................................................... 100.0%
=====
</TABLE>
Economic and Market Analysis: LB Research will analyze current
developments and trends in the economy and in the financial markets. The LB High
Yield Fund may invest in higher quality securities in the event that investment
in high yield, high risk securities is deemed to present unacceptable market or
financial risk.
BUYING SHARES OF THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
INITIAL PURCHASES
Institutional Class shares are offered to certain Lutheran institutions,
Lutheran church organizations and certain other institutional investors as may
be determined by the Trust from time to time, subject in each case to a minimum
investment in each Fund of $100,000. There is no sales load imposed in
connection with the purchase of Institutional Class shares.
To make your first purchase of Institutional Class shares of the Funds:
o complete and sign an Institutional Account application;
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o enclose a check made payable to the "LB Family of Funds;" and
o mail your application and check to Lutheran Brotherhood Securities
Corp., 625 Fourth Avenue S., Minneapolis, MN 55415.
SUBSEQUENT PURCHASES
To purchase additional shares of any of The Lutheran Brotherhood Family
of Funds, send a check payable to the LB Family of Funds to LB Securities
together with a completed To Invest By Mail form. You may also buy additional
Fund shares through:
o your LB Securities representative;
o the Systematic Investment Plan (SIP), under which you authorize
automatic monthly payments to the Fund from your checking account;
o the automatic Payroll Deduction Plan;
o Invest-by-Phone; or
o Federal Reserve or bank wire.
INVEST-BY-PHONE
The Fund's Invest-by-Phone service allows you to telephone LB Securities
to request the purchase of Fund shares. You may elect this feature on your
account application or you may complete an Account Features Request permitting
LB Securities to accept your telephoned requests. When LB Securities receives
your telephoned request, it will draw funds directly from your preauthorized
bank account at a commercial or savings bank or credit union. The bank or credit
union must be a member of the Automated Clearing House system. To use this
service, you may call 800-328-4552 before 4:00 p.m. (Eastern time). Funds will
be withdrawn from your bank or credit union account and shares will be purchased
for you at the price next calculated by the Fund after receipt of funds from
your bank. This service may also be used to redeem shares. See "Redeeming
Shares."
FEDERAL RESERVE OR BANK WIRE
You may purchase shares by Federal Reserve or bank wire directly to
Norwest Bank Minnesota, N.A. This method will result in a more rapid investment
in Fund shares. To wire Funds:
Notify LB Securities of a pending wire, call: (800) 328-4552
Wire to: Norwest Bank of Minneapolis, NA
Norwest Bank
6th Street and Marquette Avenue
Minneapolis, MN 55479
ABA Routing #: 091000019
Account #: 00-003-156
Account Name: Lutheran Brotherhood Securities Corp.
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Use text message to indicate:
Transfer for -shareholder name(s), fund number and account number, LB
Representative name and number.
Your LB Securities representative can explain any of these investment plans.
MINIMUM INVESTMENTS REQUIRED
The minimum investment required for Institutional Class Shares of a Fund
is $100,000 for an initial purchase and $1,000 for additional purchases.
EXCHANGING SHARES BETWEEN FUNDS
Shareholders of any of the Funds of The Lutheran Brotherhood Family of
Funds may exchange their shares for available shares of the same class of any of
the other Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to minimum investment requirements.
Each such exchange constitutes a sale of shares requiring the calculation of a
capital gain or loss for tax reporting purposes. To obtain an exchange form or
to receive more information about making exchanges between funds, contact your
LB Securities representative. This exchange offer may be modified or terminated
in the future. If the exchange offer is materially modified or terminated, you
will receive at least 60 days prior notice. Exchanges between classes of the
same Fund are not permitted.
TELEPHONE EXCHANGES
You may make the type of exchanges between Funds described above by
telephone unless otherwise indicated on the account application. You may make an
unlimited number of telephone exchanges. Telephone exchanges must be for a
minimum amount of $1,000. Telephone exchanges may be made into new or existing
Fund or LB Money Market Fund accounts, and all accounts involved in telephone
exchanges must have the same ownership registration. To request a telephone
exchange, call toll-free (800) 328-4552.
The Funds reserve the right to refuse a wire or telephone redemption or
exchange if it is reasonably believed to be unauthorized. Procedures for
redeeming or exchanging Fund shares by wire or telephone may be modified or
terminated at any time by the Funds. When requesting a redemption or exchange by
telephone, shareholders should have available the correct account registration
and account number or tax identification number. All telephone redemptions and
exchanges are recorded and written confirmations are subsequently mailed to an
address of record. Neither the Funds nor LB Securities will be liable for
following redemption or exchange instructions received by telephone, which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. The
Funds and LB Securities will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds and/or LB
Securities may be liable for any losses due to unauthorized or fraudulent
instructions in the absence of following these procedures.
WHAT YOUR SHARES WILL COST
The offering price of the Fund is the next determined net asset value
(which will fluctuate). Currently there is no sales load imposed in connection
with the purchase of Institutional Class shares.
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NET ASSET VALUE OF YOUR SHARES
LB Money Market Fund seeks to maintain a stable $1.00 net asset value
pursuant to procedures established by the Board of Trustees in connection with
the amortized cost method of portfolio valuation. The net asset value for the
other seven Funds varies with the value of their investments. Each Fund
determines its net asset value for a particular class by adding the value of
Fund assets attributable to such class, subtracting the Fund's liabilities
attributable to such class, and dividing the result by the number of shares of
that class outstanding.
The Funds determine their net asset value on each day the New York Stock
Exchange is open for business, or any other day as required under the rules of
the Securities and Exchange Commission. The calculation is made as of the close
of regular trading of the New York Stock Exchange (currently 4:00 p.m. Eastern
time) after the Fund has declared any applicable dividends.
MULTIPLE CLASS SYSTEM
SUMMARY
The Trust has adopted a system of multiple classes of shares for each of
the Funds (the "Multiple Class System") consisting of Class A shares, Class B
shares and Institutional Class shares.
Institutional Class shares are offered to Lutheran institutions,
Lutheran church organizations and certain other institutional investors as may
be determined by the Trust from time to time, subject in each case to a minimum
investment in each Fund of $100,000. There is no sales load imposed in
connection with the purchase of Institutional Class shares and such shares are
not subject to any Rule 12b-1 fee or shareholder servicing fee. Because the
sales charges and expenses vary between the Class A and B shares and
Institutional Class shares, performance will vary will respect to each class. A
copy of the Class A and Class B prospectus may be obtained by writing LB
Securities or by calling toll free (800) 328-4552.
Automatic Conversion of Class A Shares to Institutional Class Shares.
Class A shares, including any shares received as dividends or
distributions with respect to such shares, will automatically convert to
Institutional Class shares if the shareholder becomes ineligible to hold Class A
shares. Lutheran institutions and Lutheran church organizations with accounts of
at least $100,000 are not eligible to hold Class A shares. Consequently, any
such account in Class A shares would be subject to automatic conversion to
Institutional Class shares. The Fund will provide such Class A shareholders with
prior notice of any such automatic conversion. Any automatic conversion will
take place on the basis of relative net asset values of the two classes.
RECEIVING YOUR ORDER
Shares of the Funds are issued on days on which the New York Stock
Exchange is open. The net asset value of the shares you are buying will be
determined at the close of the regular trading session of the New York Stock
Exchange after your order is received.
Your order will be considered received when your check or other payment
is received in good order by the home office of LB Securities. The Funds reserve
the right to reject any purchase request.
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CERTIFICATES AND STATEMENTS
As transfer agent for the Funds, LB Securities will maintain a share
account for you. Share certificates will not be issued. Systematic Investment
Plan, Systematic Withdrawal Plan and Systematic Exchange Plan transactions, as
well as dividend transactions (including dividends reinvested to other funds)
will be confirmed on the quarterly consolidated statement. All other
transactions will be reported as they occur.
REDEEMING SHARES
One of the advantages of owning shares in The Lutheran Brotherhood
Family of Funds is the rapid access you have to your investment. Once your
request for redemption has been received at the home office of LB Securities,
your shares will be redeemed at the next computed net asset value on any day on
which the New York Stock Exchange is open for business, or any other day as
required under the rules of the Securities and Exchange Commission. That net
asset value may be more or less than the net asset value at the time you bought
the shares.
You may redeem your shares at any time you choose. The redemption method
you choose will determine exactly when you will receive your funds.
All eight Lutheran Brotherhood funds allow you to redeem your shares:
o in writing;
o through Redeem-by-Phone; or
o through the Fund's systematic withdrawal plan.
WRITTEN REQUESTS
To redeem all or some of your shares, send a written request to:
Lutheran Brotherhood Securities Corp.
625 Fourth Avenue South
Minneapolis, Minnesota 55415
Authorized Signature: The signature of an authorized representative of
your institution on the redemption request must be guaranteed by:
o a trust company or commercial bank;
o a savings association;
o a credit union; or
o a securities broker, dealer, exchange, association, or clearing
agency.
The Fund will not accept signatures that are notarized by a notary
public.
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Receiving Your Check: Normally, each Fund will mail you a check within
one business day after it receives a proper redemption request, but in no event
more than three days, unless the Fund has not received payment for the shares to
be redeemed. (See "Redemption before Purchase Instruments Clear.")
REDEEM BY PHONE
If you have completed an Account Features Request, you may redeem shares
with a net asset value of at least $1,000 and have them transmitted
electronically to your commercial bank by the second business day after your
redemption request.
SYSTEMATIC WITHDRAWAL
Shareholders owning or buying shares with a net asset value of at least
$150,000 may order automatic monthly, quarterly, semiannual or annual
redemptions in any amount. The proceeds will be sent to the shareholder or other
designated payee, or may be deposited in the shareholder's commercial bank,
savings bank or credit union.
Income dividends and capital gains distributions will continue to be
reinvested in additional Fund shares. Shares will be redeemed as necessary to
make automatic payments to the shareholder.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, the
Funds may redeem shares in any account if the net asset value of Institutional
Class shares in the account falls below $100,000 for all Funds.
Before shares are redeemed to close an account, the shareholder is
notified in writing and allowed 60 days to purchase additional shares. Shares
will not be redeemed if the account's value drops below the minimum only because
of market fluctuations.
BACKUP WITHHOLDING
When you sign your account application you will be asked to certify that
your social security or taxpayer identification number is correct and that you
are not subject to 31% backup withholding for failure to report income to the
IRS. If you violate IRS regulations, the IRS can generally require the Funds to
withhold 31% of your taxable distributions and redemptions.
FOR MORE INFORMATION
For more information about the Fund or your shares, see your LB
Securities representative or call toll-free (800) 328-4552.
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DIVIDENDS AND CAPITAL GAINS
DIVIDENDS
Each Fund declares and pays dividends from net income at regular
intervals. LB High Yield Fund, LB Income Fund, and LB Municipal Bond Fund
declare and pay dividends monthly. LB Fund declares and pays dividends
quarterly. LB Opportunity Growth Fund, LB Mid Cap Growth Fund and LB World
Growth Fund each declare and pay dividends annually in years that the relevant
Fund has accumulated enough net income to require the payment of a dividend. LB
Money Market Fund declares dividends daily and pays accumulated dividends
monthly.
Unless you ask to receive all or a portion of your dividends in cash,
they will automatically be reinvested in shares of the Fund. You may also choose
to have your dividends reinvested into an existing account in another Fund
within The Lutheran Brotherhood Family of Funds. On the dividend payable date,
your dividend will be invested in the designated Fund account at net asset
value. In order to receive your dividends in cash, you must notify LB Securities
in writing or indicate this choice in the appropriate place on your account
application. Your request to receive all or a portion of your dividends and
other distributions in cash must be received by LB Securities at least ten days
before the record date of the dividend or other distribution.
STATEMENTS
You will receive quarterly statements of dividends and capital gains
paid the previous quarter.
CAPITAL GAINS
The Funds distribute their realized gains in accordance with federal tax
regulations. Distributions from any net realized capital gains will usually be
declared in December.
TAXES
As with any investment, you should consider the tax implications of an
investment in the Funds. The following discussion is only a short summary of the
important tax considerations generally affecting the Funds and their
shareholders. In particular, the following discussion does not address the
taxation of foreign shareholders in the Funds. You should consult with your tax
advisor with specific reference to your own tax situation.
FUNDS' TAX STATUS
The Funds expect to pay no federal income tax because they intend to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.
SHAREHOLDERS' TAX POSITION
Except for dividends you receive from LB Municipal Bond Fund, unless you
are otherwise exempt, you will be required to pay federal income tax on any
dividends and other distribution that you receive. This applies whether you
receive dividends or distributions in cash or as additional shares. To the
extent any of the Funds earn interest from U.S. Government obligations, a number
of states may allow pass-through treatment and permit shareholders to exclude a
portion of their dividends from state income
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tax. For corporate shareholders, dividends paid to shareholders may qualify for
the 70% dividends received deduction to the extent the Fund earns dividend
income from domestic corporations. The Funds will mail annually to each
shareholder advice as to the tax status of each year's dividends and
distributions.
You will not be required to pay federal income tax on the automatic
conversion of Class A shares to Institutional Class shares that occurs when the
shareholder is no longer eligible to hold Class A shares.
You will not be required to pay federal income tax on any LB Municipal
Bond Fund dividends you receive which represent net interest received on
tax-exempt municipal bonds. The portion of that Fund's distributions
representing net interest income from taxable temporary investments, market
discount on tax-exempt municipal bonds, and net short-term capital gains
realized by the Fund, if any, will be taxable to shareholders as ordinary
income. Most of that Fund's income is expected to be free of federal income tax.
This applies whether you receive dividends in cash or as additional shares. The
Fund's income, however, is not necessarily free from state income taxes. State
laws differ on this issue and shareholders are advised to consult their own tax
advisers. The Fund will provide to shareholders an annual breakdown of the
percentage of its income from each state. Information on the tax status of
dividends will be provided annually. You should also note that income that is
not subject to federal income tax may nonetheless have to be considered along
with other adjusted gross income in determining whether any Social Security
payments received by you are subject to federal income tax. If the LB Municipal
Bond Fund holds certain "private activity bonds" issued after August 7, 1986,
shareholders will need to include as an item of tax preference for purposes of
the federal alternative minimum tax that portion of the dividends paid by that
Fund derived from interest received on such bonds. The maximum federal
alternative minimum tax rate is 28% for individuals. In addition, corporations
will need to take into account all exempt-interest dividends paid by that Fund
in determining certain adjustments for the federal alternative minimum tax and
the environmental tax.
Dividends and certain interest income earned by a Fund from foreign
securities may be subject to foreign withholding taxes or other income taxes. In
the event that more than 50% of the value of a Fund's total assets at the close
of its taxable year consists of stock or securities in foreign corporations, a
Fund may elect, for U.S. income tax purposes, to treat certain foreign taxes
paid by it as paid by its shareholders. Should a Fund make that election, a pro
rata portion of such foreign taxes paid by the Fund will constitute income to
you (in addition to taxable dividends actually received by you), and you may be
entitled to claim an offsetting tax credit or itemized deduction for that amount
of foreign taxes.
For federal income tax purposes, all dividends paid by the Fund that are
derived from taxable net investment income and net short-term capital gains are
taxable as ordinary income whether reinvested or received in cash unless you are
exempt from taxation or entitled to tax deferral. Distributions paid by the Fund
from net long-term capital gains (including such distributions paid by the LB
Municipal Bond Fund), whether received in cash or reinvested in additional
shares, are taxable as long-term capital gain. The capital gain holding period
for this purpose is determined by the length of time the Fund has held the
security and not the length of time you have held shares in the Fund. For
non-corporate taxpayers, however, net capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss) will be taxed at a
maximum marginal rate of 28%.
The Taxpayer Relief Act of 1997 (the "Act") alters the taxation of net
capital gain income. Under the Act, individuals, trusts and estates that hold
capital investments for more than 18 months may be taxed at a maximum long-term
capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than 12 months
but not more than 18 months may be taxed at a maximum mid-term capital gain rate
of 28% on the sale or exchange of those investments. Net short-term capital
gains remain taxable as ordinary income. The Act allows the
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Internal Revenue Service to prescribe regulations on how the Act's new capital
gain rates will apply to sales of capital assets by "pass-thru entities," which
include regulated investment companies such as the Funds. To date regulations
have not yet been prescribed, and it remains unclear how the Act's new rates
will apply to capital gain dividends or undistributed capital gains, including
for example the extent, if any, to which capital gain dividends or undistributed
capital gains from the Funds will be taxed to individuals at the new rates for
mid-term capital gains rather than the long-term capital gain rates. Investors
are urged to consult their own tax advisors with respect to the new rules
contained in the Act.
FUND PERFORMANCE
From time to time, quotations of the Funds' performance in terms of
yield or total return may be included in advertisements, sales literature, or
shareholder reports. Total return and yield information for the Funds are
computed separately for each class of shares of the Funds. Any variations in
shareholder servicing fees, Rule 12b-1 fees or sales charges among the classes
offered now or in the future by the Funds will have an impact on such
performance data. Shares of the Funds had no class designations until October
31, 1997 when designations were assigned based upon the sales charges, Rule
12b-1 fees and shareholder servicing fees. Institutional Class shares are not
currently subject to such sales charges, Rule 12b-1 fees or shareholder
servicing fees. All performance figures are based on historical results and are
not intended to indicate future performance. Performance data or rankings for a
given class of shares should be interpreted carefully by investors who hold or
may invest in a different class of shares.
"Total returns" are based on the change in value of an investment in a
Fund for a specified period. "Average annual total return" is the average annual
compounded rate of return of an investment in a Fund at the maximum public
offering price, if applicable, assuming the investment has been held for one
year, five years and ten years as of a stated ending date. (If the Fund has not
been in operation for at least ten years, the life of the Fund will be used
where applicable.) Average annual return quotations assume a constant rate of
growth. Actual performance fluctuates and will vary from the quoted results for
periods of time within the quoted periods. "Cumulative total return" represents
the cumulative change in value of an investment in a Fund over a stated period.
Average annual total return may be accompanied with nonstandard total return
information computed in the same manner, but for differing periods and with or
without annualizing the total return or taking sales charges into account. These
calculations assume that all dividends and capital gains distributions during
the period were reinvested in shares of a Fund.
The yield of the LB High Yield Fund, LB Income Fund, LB Municipal Bond
Fund and LB Money Market Fund refers to the income generated by an investment in
the Fund. A Fund's yield is computed by dividing the net investment income,
after recognition of all recurring charges, per share earned during the most
recent month or other specified 30-day period by the applicable maximum offering
price per share on the last day of such period and annualizing the result. The
yield of the LB Money Market Fund refers to the income generated by an
investment in that Fund over a specified seven-day period. The LB Municipal Bond
Fund's tax-equivalent yield is a hypothetical current yield that the Fund's
actual current yield is comparable to when the shareholder is assumed to pay
federal income tax on the entire hypothetical yield at a specific tax rate.
Yields for a Fund are expressed as annualized percentages. The "effective yield"
of the LB Money Market Fund is expressed similarly but, when annualized, the
income earned by an investment in that Fund is assumed to be reinvested and will
reflect the effects of compounding.
The average annual total return and yield results take sales charges
into account, if applicable, but do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees. Where sale charges are not applicable and
therefore not taken into account in the calculation of average annual total
return and yield, the results will be increased. Any voluntary waiver of fees or
assumption of expenses will also increase performance results.
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The Funds' performance reported from time to time in advertisements and
sales literature may be compared to generally accepted indices or analyses such
as those provided by Lipper Analytical Service, Inc., Standard & Poor's and Dow
Jones. Performance ratings reported periodically in financial publications such
as "Money Magazine", "Forbes", "Business Week", "Fortune", "Financial Planning"
and the "Wall Street" Journal will be used. In addition, subject to applicable
law and regulations, the Funds may refer to performance ratings reported by
Lipper Analytical Services, and other organizations, that reflects performance
data for periods prior to the introduction of the current class designations and
periods after such designations went into effect.
THE FUNDS AND THEIR SHARES
All the Funds in The Lutheran Brotherhood Family of Funds, except the LB
World Growth Fund and LB Mid Cap Growth Fund, were organized in 1993 as series
of The Lutheran Brotherhood Family of Funds, a Delaware business trust. Each of
those Funds is the successor to a fund of the same name that previously operated
as a separate corporation or trust pursuant to a reorganization that was
effective as of November 1, 1993. The LB World Growth Fund and LB Mid Cap Growth
Fund began operating as a series of the LB Family of Funds on September 5, 1995
and May 30, 1997, respectively. The fiscal year end of the Trust and each Fund
is October 31. Prior to October 31, 1997, the shares of the Funds had no
specific class designations. As of that date, Class A, Class B and Institutional
Class shares were authorized by the Board of Trustees of the Trust. The Trust
has reserved the right to create other classes of shares in the future.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Shares of a Fund when issued are fully and nonassessable by the Trust.
Shares of Fund represent an identical interest in the same portfolio of
investments of the Fund and have the same rights, privileges and preferences,
except with respect to: (a) the designation of each class; (b) the sales charge
applicable to each class; (c) the Rule 12b-1 distribution fees and shareholder
servicing fees borne by each class; (d) the expenses allocable exclusively to
each class, if any; and (e) voting rights on matters exclusively affecting a
single class. The differences in fees and expenses borne by each class will
result in different net asset values (except for LB Money Market Fund) and
dividends for the classes. Each share has one vote (with proportionate voting
for fractional shares) irrespective of net asset value. The Board of Trustees
authorized the creation of such shares by adopting a Multiple Class Plan
pursuant to Rule 18f-3 of the 1940 Act. Rule 18f-3 and the Trust's Master Trust
Agreement require shareholders of specific classes of shares to vote on certain
matters on a class-by-class basis. The Trust has reserved the right to create
other classes of shares in the future.
Under the Trust's Master Trust Agreement, no annual or regular meeting
of shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the Investment Company Act of 1940. The Trustees may
fill vacancies on the Board or appoint new Trustees provided that immediately
after such action at least two-thirds of the Trustees have been elected by
shareholders. Under the Master Trust Agreement, any Trustee may be removed by
vote of two-thirds of the outstanding Trust shares or by three-fourths of the
Trustees; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, the relevant Fund or Funds will assist shareholders in
shareholder communications.
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<PAGE> 110
FUND MANAGEMENT
BOARD OF TRUSTEES
The Board of Trustees of the Trust is responsible for the management and
supervision of the Funds' business affairs and for exercising all powers except
those reserved to the shareholders.
INVESTMENT ADVISER
Investment decisions for each of the Funds, except the LB World Growth
Fund, are made by LB Research, subject to the overall direction of the Board of
Trustees. LB Research provides investment research and supervision of the Funds'
investments and conducts a continuous program of investment evaluation and
appropriate disposition and reinvestment of the Funds' assets. LB Research
assumes the expense of providing the personnel to perform its advisory
functions. Lutheran Brotherhood, the indirect parent company of LB Research,
also serves as the investment adviser for LB Series Fund, Inc.
Michael A. Binger, Assistant Vice President of LB Research, has been the
portfolio manager of LB Opportunity Growth Fund since October 31, 1994.
Mr. Binger has been with LB Research since 1987.
James M. Walline, Vice President of LB Research and Vice President of
the Funds has been the portfolio manager of LB Fund since October 31, 1994.
Mr. Walline has been with LB Research since 1969.
Brian Thorkelson, Assistant Vice President of LB Research, serves as the
portfolio manager of LB Mid Cap Growth Fund. Mr. Thorkelson has been with LB
Research since 1989, previously serving as a securities analyst for LB Research
and Lutheran Brotherhood.
Thomas N. Haag, Assistant Vice President of LB Research, has been the
portfolio manager of LB High Yield Fund since 1992. Mr. Haag has been with LB
Research since 1986.
Charles E. Heeren, Vice President of LB Research has been the portfolio
manager of LB Income Fund since 1987. Mr. Heeren has been with LB Research since
1976.
Janet I. Grangaard, Assistant Vice President of LB Research, has been
portfolio manager of LB Municipal Bond Fund since January 1, 1994. Prior to that
time she served as associate portfolio manager of that Fund. Ms. Grangaard has
been with LB Research since 1988.
Gail R. Onan, Assistant Vice President of LB Research, has been the
portfolio manager of LB Money Market Fund since January 1, 1994. Prior to that
time she served as associate portfolio manager of that Fund. Ms. Onan has been
with LB Research since 1986.
LB Research has engaged Rowe Price-Fleming International, Inc.
("Price-Fleming") as investment sub-advisor for Lutheran Brotherhood World
Growth Fund. Price-Fleming was founded in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings Limited. Price-Fleming
is one of the world's largest international mutual fund asset managers with
approximately $22.2 billion under management as of December 31, 1995 in its
offices in Baltimore, London, Tokyo and Hong Kong. Price-Fleming has an
investment advisory group that has day-to-day responsibility for managing the
Fund and developing and executing the Fund's investment program. The members of
the advisory group are listed below.
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<PAGE> 111
Martin G. Wade, Christopher Alderson, Peter Askew, David Boardman,
Richard J. Bruce, Mark T.J. Edwards, John R. Forde, Robert C. Howe, James B.M.
Seddon, Benedict R.F. Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 27 years of experience
with Fleming Group (Fleming Group includes Robert Fleming Holdings Ltd. and/or
Jardine Fleming International Holdings Ltd.) in research, client service and
investment management, including assignments in the Far East and the United
States.
Peter Askew joined Price-Fleming in 1988 and has 20 years of experience
managing multicurrency fixed income portfolios. Christopher Alderson joined
Price-Fleming in 1988, and has nine years of experience with the Fleming Group
in research and portfolio management, including an assignment in Hong Kong.
David Boardman joined Price-Fleming in 1988 and has 21 years experience in
managing multicurrency fixed income portfolios. Richard J. Bruce joined
Price-Fleming in 1991 and has seven years of experience in investment management
with the Fleming Group in Tokyo. Mark J.T. Edwards joined Price-Fleming in 1986
and has 15 years of experience in financial analysis, including three years in
Fleming European research. John R. Ford joined Price-Fleming in 1982 and has 16
years of experience with Fleming Group in research and portfolio management,
including assignments in the Far East and the United States. Robert C. Howe
joined Price-Fleming in 1986 and has 16 years of experience in economic research
in Japan. James B.M. Seddon joined Price-Fleming in 1987 and has nine years of
experience in investment management. Benedict R.F. Thomas joined Price-Fleming
in 1988 and has seven years of portfolio management experience, including
assignments in London and Baltimore. David J.L. Warren joined Price-Fleming in
1984 and has 16 years experience in equity research, fixed income research and
portfolio management, including an assignment in Japan.
LB Research and Price-Fleming personnel may invest in securities for
their own account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
LB Research receives an annual investment advisory fee from each Fund.
The advisory contract between LB Research and the Trust provides for the
following advisory fees: LB Opportunity Growth Fund pays an advisory fee equal
to .75% of average daily net assets up to $100 million, .65% of average daily
net assets over $100 million but not over $250 million, .60% of average daily
net assets over $250 million but not over $500 million, .55% of average daily
net assets over $500 million but not over $1 billion, and .50% of average daily
net assets over $1 billion. LB Mid Cap Growth Fund pays an advisory fee equal to
.70% of average daily net assets up to $100 million, .65% of average daily net
assets over $100 million but not over $250 million, .60 % of average daily net
assets over $250 million but not over $500 million, .55% of average daily net
assets over $500 million but not over $1 billion and .50% of average daily net
assets over $1 billion. LB World Growth Fund pays and advisory fee equal to
1.25% of average daily net assets up to $20 million, 1.10% of average daily net
assets over $20 million but not over $50 million, and 1.00% of average daily net
assets over $50 million. LB Fund pays an advisory fee equal to .65% of average
daily net assets of $500 million or less, .60% of average daily net assets over
$500 million but not over $1 billion, and .55% of average daily net assets over
$1 billion. LB High Yield Fund pays an advisory fee equal to .65% of average
daily net assets of $500 million or less, .60% of average daily net assets over
$500 million but not over $1 billion, and .55% of average daily assets over $1
billion. LB Income Fund pays an advisory fee equal to .60% of average daily net
assets of $500 million or less, .575% of average daily net assets over $500
million but not over $1 billion, and .55% of average daily net assets over $1
billion. LB Municipal Bond Fund pays an advisory fee equal to .575% of average
daily net assets of $500 million or less, .5625% of average daily net assets
over $500 million but not over $1 billion, and .55% of average daily net assets
over $1 billion. LB Money Market Fund pays an advisory fee equal to .50% of
average daily net assets of $500 million or less, .475% of average daily net
assets on the next $500 million of average daily net
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<PAGE> 112
assets, .45% of average daily net assets on the next $500 million of average
daily net assets, .425% of average daily net assets on the next $500 million of
average daily net assets, and .40% of average daily net assets over $2 billion.
Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee for each of the Funds equal to
.25% of the average daily net assets of the Fund. This .25% waiver applies to
the contractual rates of compensation in the previous paragraph at each level of
average daily net assets.
During the most recent fiscal year of each Fund, LB Research received
fees amounting to the following percentages of each Fund's average daily net
assets:
<TABLE>
<S> <C>
LB Opportunity Growth Fund 0.69%
LB World Growth Fund* 0.90%
LB Fund 0.64%
LB High Yield Fund 0.64%
LB Income Fund 0.59%
LB Municipal Bond Fund 0.57%
LB Money Market Fund** 0.44%
</TABLE>
- ------------
* After giving effect to a fee waiver of 0.18%.
** After giving effect to a fee waiver of 0.06%.
LB Research pays the Sub-advisor for the LB World Growth Fund an annual
sub-advisory fee for the performance of sub-advisory services. The fee payable
is equal to a percentage of that Fund's average daily net assets. The percentage
decreases as the Fund's assets increase. For purposes of determining the
percentage level of the sub-advisory fee for the Fund, the assets of the Fund
are combined with the assets of the LB Series Fund, Inc. World Growth Portfolio,
another fund with investment objectives and policies that are similar to the LB
World Growth Fund and for which the Sub-advisor also provides sub-advisory
services. The sub-advisory fee LB Research pays the Sub-advisor is equal to the
LB World Growth Fund's pro rata share of the combined assets of the Fund and the
LB Series Fund, Inc. World Growth Portfolio and is equal to .75% of combined
average daily net assets up to $20 million, .60% of combined average daily net
assets over $20 million but not over $50 million, and .50% of combined average
daily net assets over $50 million. When the combined assets of the LB World
Growth Fund and the LB Series Fund, Inc. World Growth Portfolio exceed $200
million, the sub-advisory fee for the LB World Growth Fund is equal to .50% of
all of the Fund's average daily net assets. At September 30, 1997 the combined
assets of LB World Growth Fund and World Growth Portfolio totaled $369.4
million.
LB Research has further undertaken, until October 31, 1998 and
thereafter until further notice to LB Mid Cap Growth Fund to waive its advisory
fee and if necessary, to bear certain expenses associated with operating the
Fund in order to limit the Fund's total operating expenses for the Institutional
Class shares to an annual rate of 1.70% of the average daily net assets of such
class. LB Research has further undertaken, until October 31, 1998, and
thereafter until further notice to LB World Growth Fund, to waive its advisory
fee in order to limit the Fund's total operating expenses for Institutional
Class shares to an annual rate of 1.70% of the average net assets of such class.
LB Research has further undertaken, until October 31, 1998 and thereafter until
further notice to LB Money Market Fund, to waive its advisory fees in order to
limit LB Money Market Fund's total operating expenses for the Institutional
Class shares to 0.70% of the average net assets of such class.
Effective January 1, 1997, LB Research has also voluntarily agreed to
waive 5 basis points
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<PAGE> 113
(0.05%) from the advisory fees payable by the LB Fund, LB High Yield Fund, LB
Income Fund, and LB Municipal Bond Fund. These voluntary partial waivers of
advisory fees may be discontinued at any time.
FUND ADMINISTRATION
ADMINISTRATIVE SERVICES
LB Securities, the Funds' distributor, provides administrative personnel
and services necessary to operate the Funds on a daily basis at for a fee equal
to 0.02 percent of each Fund's daily net assets.
During the fiscal year ended October 31, 1996, the Funds paid the
following amounts to LB Securities for administrative services:
<TABLE>
<S> <C>
LB Opportunity Growth Fund $51,379
LB World Growth Fund $ 8,217
LB Fund $163,270
LB High Yield Fund $148,767
LB Income Fund $207,659
LB Municipal Bond Fund $142,190
LB Money Market Fund $ 87,973
</TABLE>
CUSTODIAN
State Street Bank and Trust Company ("State Street Bank") is custodian
of the Funds' cash and securities.
TRANSFER AGENT
LB Securities serves as transfer agent for the Funds, with the
assistance of Norwest Bank Minnesota, N.A., respecting cash transactions.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP is the independent accountants for the Funds.
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<PAGE> 114
DESCRIPTION OF DEBT RATINGS
Moody's Investors Service, Inc. describes grades of corporate debt
securities and "Prime-1" and "Prime-2" commercial paper as follows:
BONDS:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
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<PAGE> 115
COMMERCIAL PAPER:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return of funds employed.
o Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of senior short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earning trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Standard & Poor's Corporation describes grades of corporate debt
securities and "A" commercial paper as follows:
BONDS:
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories. However, the obligor's capacity to meet its financial
commitments on the obligation is still strong.
BBB Debt rated BBB exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitments
on the obligation in this category than in higher rated categories.
BB Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity of the obligor to meet its financial commitments on
the obligation. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BBB-
rating.
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<PAGE> 116
B Debt rated B is more vulnerable to nonpayment but currently has the
capacity to meet its financial commitments on the obligation. Adverse
business, financial, or economic conditions will likely impair the
obligor=s capacity or willingness to meet its financial commitments on
the obligation.
The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC is vulnerable to nonpayment, and is dependent upon
favorable business, financial, and economic conditions for the obligor
to meet its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not
likely to have the capacity to meet its financial commitments on the
obligation.
The CCC rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied B or B- rating.
CC The rating CC typically is currently highly vulnerable to nonpayment.
C The rating C typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed or similar action has been taken but payments on the obligation
are being continued.
D Debt rated D is in payment default. The D rating category is used when
payments are not made on the date due even if the applicable grace
period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition or the taking of similar action if
payments on the obligation are jeopardized.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
Commercial Paper: Commercial paper rated A by Standard & Poor's
Corporation has the following characteristics: liquidity ratios are better than
the industry average; long-term senior debt rating is "A" or better (however, in
some cases a "BBB" long-term rating may be acceptable); the issuer has access to
at least two additional channels of borrowing; basic earnings and cash flow have
an upward trend with allowances made for unusual circumstances. Also, the
issuer's industry typically is well established, the issuer has a strong
position within its industry and the reliability and quality of management is
unquestioned. Issuers rated A are further referred to by use of numbers 1, 2 and
3 to denote relative strength within this classification.
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<PAGE> 117
HOW TO INVEST
o Complete and sign the General Application
o Enclose a check made payable to The Lutheran Brotherhood Family of
Funds:
o Mail your application and check to:
Lutheran Brotherhood Securities Corp.
625 Fourth Avenue South
Minneapolis, Minnesota 55415
ADDRESSES
Lutheran Brotherhood
Lutheran Brotherhood Research Corp.
Lutheran Brotherhood Securities Corp.
The Lutheran Brotherhood Family of Funds
625 Fourth Avenue South
Minneapolis, Minnesota 55415
State Street Bank and Trust Company
P.O. Box 1591
Boston, Massachusetts 02104
Norwest Bank Minnesota, N.A.
Sixth & Marquette Avenue
Minneapolis, Minnesota 55402
Price Waterhouse LLP
3100 Multifoods Tower
33 South Sixth Street
Minneapolis, Minnesota 55402
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<PAGE> 118
LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
LUTHERAN BROTHERHOOD FUND
LUTHERAN BROTHERHOOD HIGH YIELD FUND
LUTHERAN BROTHERHOOD INCOME FUND
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
LUTHERAN BROTHERHOOD MONEY MARKET FUND
SERIES OF
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 31, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies and Restrictions....................................... 2
Additional Information Concerning Certain Investment Techniques............ 4
Fund Management............................................................10
Investment Advisory Services...............................................13
Administrative Services....................................................16
Distribution and Shareholder Services......................................17
Brokerage Transactions.....................................................19
Code of Ethics.............................................................21
Purchasing Shares..........................................................21
Sales Charges..............................................................21
Net Asset Value............................................................22
Redeeming Shares...........................................................24
Tax Status.................................................................24
General Information........................................................25
Calculation of Performance Data............................................26
Report of Independent Public Accountants and Financial Statements..........30
</TABLE>
The Lutheran Brotherhood Family of Funds (the "Trust") offers eight
Funds, each of which offer three classes of shares: Class A, Class B and
Institutional Class shares. Class A and B shares are offered through a combined
prospectus and Institutional Class shares are offered through a separate
prospectus. Each such prospectus is referred to hereinafter as a "prospectus".
This Statement of Additional Information should be read in conjunction with the
prospectus dated October 31, 1997 for the applicable class of the Lutheran
Brotherhood Opportunity Growth Fund ("LB Opportunity Growth Fund"), Lutheran
Brotherhood Mid Cap Growth Fund ("LB Mid Cap Growth Fund"), Lutheran Brotherhood
World Growth Fund ("LB World Growth Fund"), Lutheran Brotherhood Fund ("LB
Fund"), Lutheran Brotherhood High Yield Fund ("LB High Yield Fund"), Lutheran
Brotherhood Income Fund ("LB Income Fund"), Lutheran Brotherhood Municipal Bond
Fund ("LB Municipal Bond Fund") and Lutheran Brotherhood Money Market Fund ("LB
Money Market Fund") series of The Lutheran Brotherhood Family of Funds (the
"Trust"). This Statement is not a prospectus itself. To receive a copy of either
prospectus, write to Lutheran Brotherhood Securities Corp., 625 Fourth Avenue
South, Minneapolis, Minnesota 55415 or call toll-free (800) 328-4552.
FOR MORE INFORMATION, CALL TOLL-FREE
(800) 328-4552
<PAGE> 119
INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "Investment Limitations" in the Fund's
Prospectus, the Fund has adopted certain fundamental and nonfundamental
investment policies.
The fundamental investment restrictions for the Fund are set forth
below. These fundamental investment restrictions may not be changed by a Fund
except by the affirmative vote of a majority of the outstanding voting
securities of that Fund as defined in the Investment Company Act of 1940. (Under
the Investment Company Act of 1940, a "vote of the majority of the outstanding
voting securities" means the vote, at a meeting of security holders duly called,
(i) of 67% or more of the voting securities present at a meeting if the holders
of more than 50% of the outstanding voting securities are present or represented
by proxy or (ii) of more than 50% of the outstanding voting securities,
whichever is less (a "1940 Act Majority Vote").) Under these restrictions, with
respect to each Fund:
(1) The Fund may not borrow money, except that the Fund may borrow
money (through the issuance of debt securities or otherwise) in
an amount not exceeding one-third of the Fund's total assets
immediately after the time of such borrowing.
(2) The Fund may not purchase or sell commodities or commodity
contracts, except that the Fund may invest in financial futures
contracts, options thereon and similar instruments.
(3) The Fund may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments, except
that the Fund may invest in securities or other instruments
backed by real estate or securities of companies engaged in the
real estate business or that invest or deal in real estate.
(4) The Fund may not engage in underwriting or agency distribution of
securities issued by others; provided, however, that this
restriction shall not be construed to prevent or limit in any
manner the power of the Fund to purchase and resell restricted
securities or securities for investment.
(5) The Fund may not lend any of its assets except portfolio
securities. The purchase of corporate or U.S. or foreign
governmental bonds, debentures, notes, certificates of
indebtedness, repurchase agreements or other debt securities of
an issuer permitted by the Fund's investment objective and
policies will not be considered a loan for purposes of this
limitation.
(6) The Fund may not with respect to 75% of its total assets,
purchase the securities of any issuer (except Government
Securities, as such term is defined in the Investment Company Act
of 1940) if, as a result, the Fund would own more than 10% of the
outstanding voting securities of such issuer or the Fund would
have more than 5% of its total assets invested in the securities
of such issuer.
(7) The Fund may not issue senior securities, except as permitted
under the Investment Company Act of 1940 or any exemptive order
or rule issued by the Securities and Exchange Commission.
(8) The Fund may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities
of a single open-end management investment company with
substantially the same fundamental investment objectives,
policies, and limitations as the Fund.
(9) The Fund may not invest in a security if the transaction would
result in 25% or more of the Fund's total assets being invested
in any one industry. This restriction does not apply to the LB
Municipal Bond Fund.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, with respect to the
Fund:
2
<PAGE> 120
(1) The Fund may not purchase securities on margin or sell securities
short, except that the Fund may obtain short-term credits
necessary for the clearance of securities transactions and make
short sales against the box. The deposit or repayment of initial
or variation margin in connection with financial futures
contracts or related options will not be deemed to be a purchase
of securities on margin.
(2) The Fund may not purchase or sell interests in oil, gas and other
mineral exploration or development programs or leases, although
it may invest in securities of companies that do.
(3) The Fund may not purchase the securities of any issuer (other
than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result,
more than 5% of the value of its total assets would be invested
in the securities of business enterprises (which does not include
issuers of asset-backed securities) that, including predecessors,
have a record of less than three years of continuous operations.
(4) The Fund may not purchase or retain the securities of any issuer
if the officers and Trustees of the Fund or its investment
adviser owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
(5) The Fund may not invest in securities of other investment
companies, except to the extent permitted under the Investment
Company Act of 1940 or except by purchases in the open market
involving only customary brokers' commissions, or securities
acquired as dividends or distributions or in connection with a
merger, consolidation or similar transaction or other exchange.
(6) The Fund may not invest in warrants, if at the time of such
investment (a) more than 5% of the value of the Fund's total
assets would be invested in warrants or (b) more than 2% of the
value of the Fund's total assets would be invested in warrants
that are not listed on the New York Stock Exchange or the
American Stock Exchange (and for this purpose, warrants attached
to securities will be deemed to have no value).
(7) The LB Money Market Fund may not write, purchase, or sell puts,
calls, or any combination of puts and calls.
(8) The LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World
Growth Fund, LB Fund, LB High Yield Fund, LB Income Fund, and LB
Municipal Bond Fund may not invest more than 15% of its net
assets in illiquid securities, including repurchase agreements
maturing in more than seven days. The LB Money Market Fund may
not invest more than 10% of its net assets in illiquid
securities, including repurchase agreements maturing in more than
seven days.
(9) The Fund will not purchase any security while borrowings,
including reverse repurchase agreements, representing more than
5% of the Fund's total assets are outstanding.
(10) The LB Mid Cap Growth Fund may not write put options but may
write covered call options and purchase put and call options.
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<PAGE> 121
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Some of the investment instruments, techniques and methods which may be
used by each Fund to aid in achieving its investment objective, and the risks
attendant thereto, are described below. Other risk factors and investment
methods may be described in the "Investment Objectives and Policies" and
"Investment Risks" sections of the Funds' Prospectus.
SHORT SALES AGAINST THE BOX
The Funds may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box". A short sale is
a transaction in which a Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where a Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
FOREIGN FUTURES AND OPTIONS
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers who trade foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, funds received from customers for foreign futures or foreign
options transactions may not be provided the same protections as funds received
in respect of transactions on United States futures exchanges. In addition, the
price of any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the foreign
exchange rate between the time your order is placed and the time it is
liquidated, offset or exercised.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign Currency Warrants. Foreign currency warrants are warrants which
entitle the holder to receive from their issuer an amount of cash (generally,
for warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed
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<PAGE> 122
on exchanges. Foreign currency warrants may be exercisable only in certain
minimum amounts, and an investor wishing to exercise warrants who possesses less
than the minimum number required for exercise may be required either to sell the
warrants or to purchase additional warrants, thereby incurring additional
transaction costs. In the case of any exercise of warrants, there may be a time
delay between the time a holder of warrants gives instructions to exercise and
the time the exchange rate relating to exercise is determined, during which time
the exchange rate could change significantly, thereby affecting both the market
and cash settlement values of the warrants being exercised. The expiration date
of the warrants may be accelerated if the warrants should be delisted from an
exchange or if their trading should be suspended permanently, which would result
in the loss of any remaining "time value" of the warrants (i.e., the difference
between the current market value and the exercise value of the warrants), and,
in the case the warrants were "out-of-the-money," in a total loss of the
purchase price of the warrants. Warrants are generally unsecured obligations of
their issuers and are not standardized foreign currency options issued by the
Options Clearing Corporation ("OCC"). Unlike foreign currency options issued by
OCC, the terms of foreign exchange warrants generally will not be amended in the
event of governmental or regulatory actions affecting exchange rates or in the
event of the imposition of other regulatory controls affecting the international
currency markets. The initial public offering price of foreign currency warrants
is generally considerably in excess of the price that a commercial user of
foreign currencies might pay in the interbank market for a comparable option
involving significantly larger amounts of foreign currencies. Foreign currency
warrants are subject to significant foreign exchange risk, including risks
arising from complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar; "reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Hybrid Instruments. Hybrid Instruments (a type of potentially high risk
derivative) have recently been developed and combine the elements of futures
contracts or options with those of debt, preferred equity or a depository
instrument (hereinafter "Hybrid Instruments"). Often these Hybrid Instruments
are indexed to the price of a commodity, particular currency, or a domestic
foreign debt or equity securities index. Hybrid Instruments may take a variety
of forms, including, but not limited to, debt instruments with interest or
principal payments or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in time, preferred
stock with dividend rates determined by reference to the value of a currency, or
convertible securities with the conversion terms related to a particular
commodity.
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<PAGE> 123
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the discussion
of futures, options, and forward contracts herein for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). In addition, because the purchase and sale of Hybrid Instruments could
take place in an over-the-counter market or in a private transaction between the
Fund and the seller of the Hybrid Instrument, the creditworthiness of the contra
party to the transaction would be a risk factor which the Fund would have to
consider. Hybrid Instruments also may not be subject to regulation of the
Commodities Futures Trading Commission ("CFTC"), which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which regulates the offer
and sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
INVESTMENT RISKS OF FOREIGN INVESTING
There are special risks in investing in the LB World Growth Fund, as
discussed in the Prospectus. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which the
Fund will invest ("Portfolio Companies"). Many of the risks are more pronounced
for investments in developing or emerging countries. Although there is no
universally accepted definition, a developing country is generally considered to
be a country which is in the initial stages of its industrialization cycle with
a per capita gross national product of less than $5,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the Fund,
and there can be no assurance that the Fund's investment policies will be
successful, or that its investment objective will be attained. The Fund is
designed for individual and institutional investors seeking to diversify beyond
the United States in an actively researched and managed portfolio, and is
intended for long-term investors who can accept the risks entailed in investment
in foreign securities. In addition to the general risks of foreign investing
described in the Trust's Prospectus, other risks include:
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment in
certain of such countries and may increase the cost and expenses of a Fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
Additional or different restrictions may be imposed at any time by these or
other countries in which a Fund invests. In addition, the repatriation of both
investment income and capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the need for
certain government consents. Although these restrictions may in the future make
it undesirable to invest in these countries, the Advisor and Sub-advisor do not
believe that any current repatriation restrictions would affect its decision to
invest in these countries.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Fund's portfolio securities may be less
liquid and more volatile than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. Fixed commissions on
foreign stock exchanges are generally higher than negotiated commissions on
United States exchanges, although a Fund will endeavor to achieve the most
favorable net results on its portfolio transactions. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the United States. Moreover, settlement practices for
transactions in
6
<PAGE> 124
foreign markets may differ from those in United States markets, and may include
delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. For example, the Philippines' National Assembly was dissolved in
1986 following a period of intense political unrest and the removal of President
Marcos. During the 1960's, the high level of communist insurgency in Malaysia
paralyzed economic activity, but by the 1970's these communist forces were
suppressed and normal economic activity resumed. In 1991, the existing
government in Thailand was overthrown in a military coup. In addition,
significant external political risks currently affect some foreign countries.
Both Taiwan and China still claim sovereignty of one another and there is a
demilitarized border between North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economics. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
Information and Supervision. There is generally less publicly available
information about foreign companies comparable to reports and ratings that are
published about companies in the United States. Foreign companies are also
generally not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to United
States companies.
Taxes. The dividends and interest payable on certain of a Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
A shareholder otherwise subject to United States federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Fund.
Costs. Investors should understand that the expense ratio of the Fund
can be expected to be higher than investment companies investing in domestic
securities since the cost of maintaining the custody of foreign securities and
the rate of advisory fees paid by the Fund are higher.
Other. With respect to certain foreign countries, especially developing
and emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Fund, political or
social instability, or diplomatic developments which could affect investments by
U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of the Fund's assets invested in such countries and these authorities may not
qualify as a
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<PAGE> 125
foreign custodian under the Investment Company Act of 1940 and exemptive relief
from such Act may be required. All of these considerations are among the factors
which could cause significant risks and uncertainties to investment in Eastern
Europe and Russia. The Fund will only invest in a company located in, or a
government of, Eastern Europe or Russia, if the Sub-advisor believes the
potential return justifies the risk. To the extent any securities issued by
companies in Eastern Europe and Russia are considered illiquid, the Fund will be
required to include such securities within its 15% restriction on investing in
illiquid securities.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Fund may invest in investment portfolios which have been authorized
by the governments of certain countries specifically to permit foreign
investment in securities of companies listed and traded on the stock exchanges
in these respective countries. The Fund's investment in these portfolios is
subject to the provisions of the 1940 Act discussed below. If the Fund invests
in such investment portfolios, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Investment Manager), but also will bear indirectly similar
expenses of the underlying investment portfolios. In addition, the securities of
these investment portfolios may trade at a premium over their net asset value.
Apart from the matters described herein, the Fund is not aware at this
time of the existence of any investment or exchange control regulations which
might substantially impair the operations of the Fund as described in the
Trust's Prospectus and this Statement. It should be noted, however, that this
situation could change at any time.
Foreign Currency Transactions. The Fund will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Fund enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Fund's portfolio securities denominated in such foreign
currency. Alternatively, where appropriate, the Fund may hedge all or part of
its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Fund may enter into a forward contract
where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Fund. The precise matching of
the forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Fund will also not enter into such forward contracts or maintain a
net exposure to such contracts where the consummation of the contracts would
obligate the Fund to deliver an amount of foreign currency in excess of the
value of the Fund's portfolio securities or other assets denominated in that
currency. The Fund, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Fund's portfolio securities or other assets to which the
forward contracts relate (including accrued interest to the maturity of the
forward on such securities) provided the excess amount is "covered" by liquid,
high-grade debt securities, denominated in any currency, at least equal at all
times to the amount of such excess. For these purposes "the securities or other
assets to which the forward contracts relate may be securities or assets
denominated in a single currency, or where proxy forwards are used, securities
denominated in more than one currency. Under normal circumstances, consideration
of the prospect for currency parities will be incorporated into the longer term
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investment decisions made with regard to overall diversification strategies.
However, the Sub-advisor believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best interests
of the Fund will be served.
At the maturity of a forward contract, the Fund may either sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract obligating it to purchase, on
the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute precision
the market value of portfolio securities at the expiration of the forward
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security is less than the amount of foreign currency the
Fund is obligated to deliver and if a decision is made to sell the security and
make delivery of the foreign currency. Conversely, it may be necessary to sell
on the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver. However, as noted, in order to avoid excessive
transactions and transaction costs, the Fund may use liquid, high-grade debt
securities denominated in any currency, to cover the amount by which the value
of a forward contract exceeds the value of the securities to which it relates.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If the Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between the Fund's entering into a forward contract for the
sale of a foreign currency and the date it enters into an offsetting contract
for the purchase of the foreign currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent of the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
The Fund's dealing in forward foreign currency exchange contracts will
generally be limited to the transactions described above. However, the Fund
reserves the right to enter into forward foreign currency contracts for
different purposes and under different circumstances. Of course, the Fund is not
required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. It will do so from time to time, and investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Fund is subject to certain percentage
limitations under the 1940 Act and certain states relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Fund's total assets may be invested in such
securities.
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For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
FUND MANAGEMENT
The officers and Trustees of the Trust and their addresses, positions
with the Trust, and principal occupations are set forth below. As of September
30, 1997 the officers and Trustees own less than 1% of any Fund's outstanding
shares.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION DURING THE
PAST 5 YEARS
<S> <C> <C>
Rolf F. Bjelland* Chairman, Trustee and Executive Vice President and Chief
625 Fourth Avenue South President Investment Officer, Lutheran
Minneapolis, MN Brotherhood; President and Director,
Age 59 Lutheran Brotherhood Research Corp;
Director and Vice President-Investments,
Lutheran Brotherhood Variable Insurance
Products Company; Director and Executive
Vice President, Lutheran Brotherhood
Financial Corporation; Director, Lutheran
Brotherhood Securities Corp.; Director,
Lutheran Brotherhood Real Estate Products
Company; Director, Chairman and President of
LB Series Fund, Inc.
Charles W. Arnason Trustee Lawyer in private practice; formerly
101 Judd Street, Suite 1 member of Head, Hempel. Seifert &
P.O. Box 150 Vander Weide; formerly Executive
Marine-On St. Croix, MN Director of Minnesota Technology
Age 69 Corridor; formerly Senior Vice
President, Secretary and General Counsel of
Cowles Media Company; Officer, Director or
Trustee of various community non-profit
boards and organizations; Director of LB
Series Fund, Inc.
Herbert F. Eggerding, Jr. Trustee Retired Executive Vice President and
12587 Glencroft Dr. Chief Financial Officer, Petrolite
St. Louis, MO Corporation; Director, Wheat Ridge
Age 60 Foundation; Director, Lutheran
Charities Association of St. Louis,
MO; Director of LB Series Fund, Inc.
Connie M. Levi Trustee Retired President of the Greater
P.O. Box 675325 Minneapolis Chamber of Commerce;
Rancho Santa Fe, CA Director or member of numerous
Age 58 governmental, public service and
non-profit boards and organizations;
Director of LB Series Fund, Inc.
</TABLE>
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<PAGE> 128
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION DURING THE
PAST 5 YEARS
<S> <C> <C>
Noel K. Estenson Chairman, CENEX, Inc.; Director of
CENEX, Inc. LB Series Fund, Inc.
P.O. Box 64089
St. Paul, MN
Age 58
Bruce J. Nicholson* Trustee Executive Vice President and Chief
625 Fourth Avenue South Financial Officer, Lutheran
Minneapolis, MN Brotherhood; Director, Executive Vice
Age 50 President and Chief Financial Officer,
Lutheran Brotherhood Financial
Corporation; Director, Lutheran
Brotherhood Research Corp; Director,
Lutheran Brotherhood Securities Corp.;
Director and Chief Financial Officer,
Lutheran Brotherhood Variable
Insurance Products Company; Director,
Lutheran Brotherhood Real Estate
Products Company; Director, LB Series
Fund, Inc.
Ruth E. Randall Trustee Retired Interim Dean, Division of
25 Stanley, #A2 Continuing Studies, University of
West Hartford, CT Nebraska-Lincoln; formerly Associate
Age 68 Dean, Teachers College and Professor,
Department of Educational
Administration, Teachers College,
University of Nebraska-Lincoln;
Commissioner of Education for the
State of Minnesota; Director or member
of numerous governmental, public
service and non-profit boards and
organizations; Director of LB Series
Fund, Inc.
James R. Olson Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President, Lutheran Brotherhood
Minneapolis, MN Variable Insurance Products Company;
Age 55 Vice President, Lutheran Brotherhood
Research Corp.; Vice President,
Lutheran Brotherhood Research Corp.;
Vice President, Lutheran Brotherhood
Securities Corp.; Vice President,
Lutheran Brotherhood Real Estate
Products Company; Vice President of
LB Series Fund, Inc.
Richard B. Ruckdashel Vice President Assistant Vice President, Lutheran
625 Fourth Avenue South Brotherhood; Vice President of LB
Minneapolis, MN Series Fund, Inc.
Age 42
</TABLE>
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<PAGE> 129
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION DURING THE
PAST 5 YEARS
<S> <C> <C>
James M. Walline Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President, Lutheran Brotherhood
Minneapolis, MN Research Corp.; Vice President,
Age 52 Lutheran Brotherhood Variable
Insurance Products Company; Vice
President of LB Series Fund, Inc.
Wade M. Voigt Treasurer Assistant Vice President, Mutual Fund
625 Fourth Avenue South Accounting, Lutheran Brotherhood;
Minneapolis, MN Treasurer of LB Series Fund, Inc.
Age 41
Otis F. Hilbert Secretary and Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Counsel, Vice President and Secretary,
Minneapolis, MN Lutheran Brotherhood Securities Corp.;
Age 60 Counsel and Secretary of Lutheran
Brotherhood Research Corp.; Vice
President and Secretary, Lutheran
Brotherhood Real Estate Products
Company; Vice President and Assistant
Secretary, Lutheran Brotherhood
Variable Insurance Products Company;
Secretary and Vice President of LB
Series Fund, Inc.
</TABLE>
- ---------------------
(*) "Interested person" of the Fund as defined in the Investment Company Act
of 1940 by virtue of his positions with affiliated entities referred to
elsewhere herein.
Lutheran Brotherhood, directly and through its wholly-owned subsidiary
companies, owned 9.60% of the outstanding shares of LB World Growth Fund and
8.92% of the outstanding shares of LB Money Market Fund as of September 30,
1997.
COMPENSATION OF TRUSTEES AND OFFICERS
The Funds make no payments to any of its officers for services performed
for the Fund. Trustees of the Trust who are not interested persons of the Trust
are paid an annual retainer fee by the Trust of $21,500 and an annual fee of
$9,000 per year to attend meetings of Board of Trustees.
Trustees who are not interested persons of the Trust are reimbursed by
the Trust for any expenses they may incur by reason of attending Board meetings
or in connection with other services they may perform in connection with their
duties as Trustees of the Trust. The Trustees receive no pension or retirement
benefits in connection with their service to the Fund.
For the fiscal year ended October 31, 1996, the Trustees of the Trust
received the following amounts of compensation either directly or in the form of
payments made into a deferred compensation plan:
12
<PAGE> 130
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ACCRUED ESTIMATED ANNUAL
NAME AND POSITION AGGREGATE AS PART OF FUND BENEFITS UPON TOTAL COMPENSATION
OF PERSON COMPENSATION FROM TRUST EXPENSES RETIREMENT PAID BY FUND AND FUND COMPLEX (1)
<S> <C> <C> <C> <C>
Rolf F. Bjelland(2) $0 $0 $0 $0
Chairman and Trustee
Charles W. Arnason $19,783 $0 $0 $29,000
Trustee
Herbert F. Eggerding, Jr. $19,783 $0 $0 $29,000
Trustee
Connie M. Levi $19,783 $0 $0 $29,000
Trustee
Bruce J. Nicholson(2) $0 $0 $0 $0
Trustee
Ruth E. Randall $19,783 $0 $0 $29,000
Trustee
</TABLE>
- -------------------------
(1) The "Fund Complex" includes The Lutheran Brotherhood Family of Funds
and LB Series Fund, Inc.
(2) "Interested person" of the Fund as defined in the Investment Company
Act of 1940.
INVESTMENT ADVISORY SERVICES
The Funds' investment adviser, LB Research, was organized as a
Pennsylvania corporation in 1969 and was reincorporated as a Minnesota
corporation in 1987. It has been in the investment advisory business since 1970.
LB Research is a wholly-owned subsidiary of Lutheran Brotherhood Financial
Corporation which, in turn, is a wholly-owned subsidiary of Lutheran
Brotherhood, a fraternal benefit society. The officers and directors of LB
Research who are affiliated with the Trust are set forth under "Fund
Management".
Investment decisions for each of the Funds, except the LB World Growth
Fund, are made by LB Research, subject to the overall direction of the Board of
Trustees. LB Research provides overall investment supervision of the LB World
Growth Fund's investments, with investment decisions for that Fund being made by
an investment sub-advisor. Except for the LB World Growth Fund, LB Research
provides investment research and supervision of each Fund's investments and
conducts a continuous program of investment evaluation and appropriate
disposition and reinvestment of each Fund's assets. LB Research assumes the
expense of providing the personnel to perform its advisory functions. Lutheran
Brotherhood, the indirect parent company of LB Research, also serves as the
investment adviser for LB Series Fund, Inc. The Master Advisory Contract (the
"Advisory Contract") for the Funds provides that Lutheran Brotherhood has
reserved the right to grant the non-exclusive use of the name "Lutheran
Brotherhood" or any derivative thereof to any other investment company,
investment adviser, distributor or other business enterprise, and to withdraw
from each Fund the use of the name "Lutheran Brotherhood". The name "Lutheran
Brotherhood" will continue to be used by each Fund as long as such use is
mutually agreeable to Lutheran Brotherhood and the Funds.
Investment decisions for the LB World Growth Fund are made by Rowe
Price-Fleming International, Inc. (the "Sub-advisor"), which LB Research has
engaged the sub-advisor for that Fund. The Sub-advisor manages that Fund on a
daily basis, subject to the overall direction of LB Research and the Funds'
Board of Trustees.
The Sub-advisor was founded in 1979 as a joint venture between T. Rowe
Price Associates, Inc. and Robert Fleming Holdings Limited. The Sub-advisor is
one of the world's largest international mutual fund asset managers with
approximately $17 billion under management as of December 31, 1994 in its
offices in Baltimore, London, Tokyo and Hong Kong.
13
<PAGE> 131
To the extent required under applicable state regulatory requirements,
the Investment Manager will reduce its management fee up to the amount of any
expenses (exclusive of interest, taxes, brokerage expenses, distribution
expenses, extra-ordinary items and any other items allowed to be excluded by
applicable state law) paid or incurred by any of the Funds in any fiscal year
which exceed specified percentages of the average daily net assets of such Fund
for such fiscal year. The most restrictive of such percentage limitations is
(which does not presently apply to any of the Funds) currently 2.5% of the first
$30 million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Contract provides that it shall continue in effect with
respect to each Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of such Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Contract or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Contract may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
The Sub-advisory Contract provides that it shall continue in effect with
respect to the LB World Growth Fund from year to year as long as it is approved
at least annually both (i) by a vote of a majority of the outstanding voting
securities of such Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Sub-advisory Contract or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Sub-advisory Contract may be terminated on 60 days' written notice
by either party and will terminate automatically in the event of its assignment,
as defined under the 1940 Act and regulations thereunder. Such regulations
provide that a transaction which does not result in a change of actual control
or management of an adviser is not deemed an assignment.
LB Research receives an annual investment advisory fee from each Fund.
The Advisory Contract provides for the following advisory fees: The advisory
contract between LB Research and the Trust provides for the following advisory
fees: LB Opportunity Growth Fund pays an advisory fee equal to .75% of average
daily net assets up to $100 million, .65% of average daily net assets over $100
million but not over $250 million, .60% of average daily net assets over $250
million but not over $500 million, .55% of average daily net assets over $500
million but not over $1 billion, and .50% of average daily net assets over $1
billion. LB Mid Cap Growth Fund pays an advisory fee equal to .70% of average
daily net assets up to $100 million, .65% of average daily net assets over $100
million but not over $250 million, .60 % of average daily net assets over $250
million but not over $500 million, .55% of average daily net assets over $500
million but not over $1 billion and .50% of average daily net assets over $1
billion. LB World Growth Fund pays and advisory fee equal to 1.25% of average
daily net assets up to $20 million, 1.10% of average daily net assets over $20
million but not over $50 million, and 1.00% of average daily net assets over $50
million. LB Fund pays an advisory fee equal to .65% of average daily net assets
of $500 million or less, .60% of average daily net assets over $500 million but
not over $1 billion, and .55% of average daily net assets over $1 billion. LB
High Yield Fund pays an advisory fee equal to .65% of average daily net assets
of $500 million or less, .60% of average daily net assets over $500 million but
not over $1 billion, and .55% of average daily assets over $1 billion. LB Income
Fund pays an advisory fee equal to .60% of average daily net assets of $500
million or less, .575% of average daily net assets over $500 million but not
over $1 billion, and .55% of average daily net assets over $1 billion. LB
Municipal Bond Fund pays an advisory fee equal to .575% of average daily net
assets of $500 million or less, .5625% of average daily net assets over $500
million but not over $1 billion, and .55% of average daily net assets over $1
billion. LB Money Market Fund pays an advisory fee equal to .50% of average
daily net assets of $500 million or less, .475% of average daily net assets on
the next $500 million of average daily net assets, .45% of average daily net
assets on the next $500 million of average daily net assets, .425% of average
14
<PAGE> 132
daily net assets on the next $500 million of average daily net assets, and .40%
of average daily net assets over $2 billion.
Effective October 31, 1997, LB Research voluntarily agreed to
permanently waive a portion of its advisory fee for each of the Funds equal to
.25% of the average daily net assets of the Fund. This .25% waiver applies to
the contractual rates of compensation in the previous paragraph at each level of
average daily net assets.
Effective January 1, 1997, LB Research has also voluntarily agreed to
waive 5 basis points (0.05%) from the advisory fees payable by the LB Fund, LB
High Yield Fund, LB Income Fund, and LB Municipal Bond Fund. These voluntary
partial waivers of advisory fees may be discontinued at any time.
LB Research has further undertaken, until October 31, 1998 and
thereafter until further notice to LB Mid Cap Growth Fund to waive its advisory
fee and if necessary, to bear certain expenses associated with operating the
Fund in order to limit the Fund's total operating expenses for the Class A
shares, Class B shares and Institutional Class shares to an annual rate of
1.95%, 2.70%, and 1.70%, respectively, of the average daily net assets of the
relevant class. LB Research has further undertaken, until October 31, 1998, and
thereafter until further notice to LB World Growth Fund, to waive its advisory
fee in order to limit the Fund's total operating expenses for Class A shares,
Class B shares and Institutional Class shares to an annual rate of 1.95%, 2.70%
and 1.70%, respectively, of the average net assets of the relevant class. LB
Research has further undertaken, until October 31, 1998 and thereafter until
further notice to LB Money Market Fund, to waive its advisory fees in order to
limit LB Money Market Fund's total operating expenses for the Class A, Class B
shares and Institutional Class shares to 0.95%, 0.95%, and 0.70%, respectively
of the average net assets of the relevant class.
The total dollar amounts paid to LB Research under the investment
advisory contract then in effect for the last three fiscal years (other than LB
World Growth Fund, which is in its second year of operations, and LB Mid Cap
Growth Fund, which is in its first year of operations) are as follows:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund $ 1,563,341 $ 938,166 $ 522,579
LB World Growth Fund 392,419 17,787 --
LB Fund 4,529,474 3,726,938 3,430,253
LB High Yield Fund 4,150,072 3,509,710 3,091,898
LB Income Fund 5,330,930 5,431,506 5,721,652
LB Municipal Bond Fund 3,551,045 3,504,880 3,554,569
LB Money Market Fund 1,922,505 1,538,307 1,373,199
</TABLE>
LB Research waived fees with respect to LB World Growth Fund totaling
$66,807 for the fiscal year ended October 31, 1996, and $13,415 for the period
from September 5, 1995 to October 31, 1995. LB Research waived fees with respect
to LB Money Market Fund totaling $246,901 for the fiscal year ended October 31,
1996, $253,844 for the fiscal year ended October 31, 1995, and $709,407 for the
fiscal year ended October 31, 1994.
LB Research pays the Sub-advisor for the LB World Growth Fund an annual
sub-advisory fee for the performance of sub-advisory services. The fee payable
is equal to a percentage of the that Fund's average daily net assets. The
percentage decreases as the Fund's assets increase. For purposes of determining
the percentage level of the sub-advisory fee for the Fund, the assets of the
Fund are combined with the assets of the World Growth Portfolio of LB Series
Fund, Inc., another fund with investment objectives and policies that are
similar to the LB World Growth Fund and for which the Sub-advisor also provides
sub-advisory services. The sub-advisory fee LB Research pays the Sub-advisor is
equal to the World Growth Fund's pro rata share of the combined assets of the
Fund and the World Growth Portfolio of LB Series Fund, Inc. and is equal to .75%
of combined average daily net assets up
15
<PAGE> 133
to $20 million, .60% of combined average daily net assets over $20 million but
not over $50 million, and .50% of combined average daily net assets over $50
million. When the combined assets of the LB World Growth Fund and the World
Growth Portfolio of LB Series Fund, Inc. exceed $200 million, the sub-advisory
fee for the LB World Growth Fund is equal to .50% of all of the Fund's average
daily net assets. At September 30, 1997, the combined assets of LB World Growth
Fund and World Growth Portfolio totaled $369.4 million.
The total dollar amount paid by LB Research to the Sub-advisor of the LB
World Growth Fund under the investment sub-advisory contract for the fiscal
period ended October 31, 1996 is $211,461.
ADMINISTRATIVE SERVICES
Lutheran Brotherhood Securities Corp. ("LB Securities") provides
administrative personnel and services necessary to operate the Funds on a daily
basis for a fee equal to 0.025 percent of the Funds' average daily net assets.
Prior to January 1, 1996, the fee equaled 0.025 percent of the Fund's average
daily net assets. During 1996, the fee equalled 0.0225 percent of the Fund's
average daily net assets. Beginning January 1, 1997, the annual fee will be
equal to .02 percent of the Fund's average daily net assets. The total dollar
amounts paid to LB Securities for administrative services for the last three
fiscal years are as follows:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund $ 51,379 $ 33,788 $ 22,108
LB World Growth Fund 8,217 56 --
LB Fund 163,270 144,572 115,321
LB High Yield Fund 148,767 136,969 109,494
LB Income Fund 207,659 215,922 123,528
LB Municipal Bond Fund 142,190 151,391 119,601
LB Money Market Fund 87,973 85,688 97,563
</TABLE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds' investments.
TRANSFER AGENT
LB Securities provides transfer agency services necessary to the Funds
on a daily basis for a fee that is based on the number of shareholder accounts.
The total dollar amounts paid to LB Securities for transfer agency services for
the last three fiscal years are as follows:
16
<PAGE> 134
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund $ 865,339 $ 582,903 $ 368,236
LB World Growth Fund 169,451 4,983 --
LB Fund 1,610,381 1,478,056 1,386,545
LB High Yield Fund 1,061,296 944,128 811,121
LB Income Fund 1,382,275 1,398,946 1,409,791
LB Municipal Bond Fund 516,423 517,010 501,350
LB Money Market Fund 1,239,592 1,211,889 1,383,080
</TABLE>
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 3100 Multifoods Tower, 33 South Sixth Street,
Minneapolis, Minnesota 55402, serves as the Trust's independent accountants,
providing professional services including audits of the Funds' annual financial
statements, assistance and consultation in connection with Securities and
Exchange Commission filings, and review of the annual income tax returns filed
on behalf of the Funds.
DISTRIBUTION AND SHAREHOLDER SERVICES
PLAN OF DISTRIBUTION AND DISTRIBUTION CONTRACT
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1
under the 1940 Act (the "12b-1 Plan") with respect to the Class B shares of each
Fund except for the LB Money Market Fund. General information about the 12b-1
Plan is set forth under "Distribution and Shareholder Servicing Plans" in the
prospectus regarding the Class A and B shares. The 12b-1 Plan permits, among
other things, payment by each such Fund for the purpose of (1) making payments
to underwriters, securities dealers and others engaged in the sale of Class B
shares, including payments to LB Securities to be used to compensate or
reimburse the LB Securities and others (including affiliates of LB Securities)
engaged in the distribution and marketing of Class B shares or furnishing
assistance to investors on an ongoing basis, and (2) providing reimbursement of
direct out-of-pocket expenditures incurred by LB Securities in connection with
the distribution and marketing of Class B shares, (3) providing reimbursements
of payments of commissions to LB Securities's field force and others involved in
the distribution of the Class B shares at the time of purchase, plus interest at
a rate not to exceed prime plus 1% on the amount of unreimbursed commissions and
(4) providing payment of expenses relating to the formulation and implementation
of marketing strategies and promotional activities such as direct mail
promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of sales literature, the
preparation, printing and distribution of prospectuses of the Trust and reports
for recipients other than existing shareholders of the Trust, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Trust may, from time to time, deem
advisable. The Trust and the Funds are authorized to engage in the activities
listed above, and in other activities primarily intended to result in the sale
of Class B shares, either directly or through other persons with which the Trust
has entered into agreements pursuant to the 12b-1 Plan.
The 12b-1 Plan provides that it may not be amended to increase
materially the costs which a Fund may bear pursuant to the 12b-1 Plan without
approval by a 1940 Act Majority Vote of the Class B shareholders and that other
material amendments of the 12b-1 Plan must be approved by the Trustees, and by
the Trustees who are neither "interested persons" (as defined in the 1940 Act)
of the Trust nor have any direct or indirect financial interest in the operation
of the 12b-1 Plan or in any related agreement (the "Qualified Trustees"), by
vote cast in person at a meeting called for the purpose of considering such
amendments. While the 12b-1 Plan is in effect, the selection and nomination of
the Trustees of the Trust who are not "interested persons" of the Trust has been
committed to the discretion of the Trustees who are not "interested persons" of
the Trust. The 12b-1 Plan was initially approved by the Board of Trustees,
including a majority of the Qualified Trustees, on September 9, 1997, and is
subject to annual approval, by the Board of Trustees and by the Qualified
Trustees by vote cast in person at a meeting
17
<PAGE> 135
called for the purpose of voting on the 12b-1 Plan. The 12b-1 Plan is terminable
with respect to the Class B shares of any Fund at any time by a vote of a
majority of the Qualified Trustees or by 1940 Act Majority Vote of the Class B
shareholders of such Fund. A quarterly report of the amounts expended under the
12b-1 Plan and the purposes for which such expenditures were incurred must be
made to the Trustees for their review.
The Funds' distributor, LB Securities, is a Pennsylvania corporation
organized in 1969. LB Securities is a wholly-owned subsidiary of LB Research and
is located in Minneapolis, Minnesota. The officers and directors of LB
Securities who are affiliated with the Trust are set forth under "Fund
Management". Under a First Amended and Restated Distribution Contract dated
October 31, 1997 (the "Distribution Contract"), LB Securities is granted the
right to sell Class A, B and Institutional Class shares of the Funds as agent
for the Trust. LB Securities agrees to use its best efforts to secure purchasers
for the shares of the Funds. In connection with the services to be provided by
LB Securities under the Distribution Contract, LB Securities receives from each
Fund other than LB Money Market Fund an amount with respect to Class B shares
determined at an annual rate of .75% of the average daily net asset value
represented by such shares, such amount to be paid in arrears at the end of each
calendar month. The Distribution Contract was initially approved by the Board of
Trustees including a majority of the Qualified Trustees, on September 9, 1997,
and will continue in effect from year to year so long as its continuance is
approved at least annually by the Board of Trustees and the Qualified Trustees.
SHAREHOLDER SERVICING PLANS
The Trust has adopted shareholder servicing plans (each a "Shareholder
Servicing Plan") for the Class A and Class B shares of each Fund (including LB
Money Market Fund). Such plans are more fully described in the prospectus for
the Class A and Class B shares under the caption "Distribution and Shareholder
Servicing Plans". Each Shareholder Servicing Plan provides that the relevant
class may spend annually, directly or indirectly, up to .25% of the average
daily value of the net assets attributable to the relevant class for shareholder
servicing activities. Under the Distribution Contract, LB Securities has agreed
to undertake certain shareholder servicing activities on behalf of the Funds in
exchange for a fee of .25% of the average daily value of the net assets
represented by Class A and Class B shares. A quarterly report of the amounts
expended under the Shareholder Servicing Plans, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. Each
Shareholder Servicing Plans may be amended by a majority of the Qualified
Trustees or by a 1940 Act Majority Vote by shareholders of the respective class.
The Shareholder Servicing Plans have been approved, and are subject to annual
approval, by the Board of Trustees and the Qualified Trustees.
UNDERWRITING COMMISSIONS
The total dollar amounts of gross underwriting commissions on sales of
shares of the LB Opportunity Growth Fund, LB Fund, LB High Yield Fund, LB Income
Fund, and LB Municipal Bond paid to LB Securities for the last three fiscal
years, and the amounts retained by LB Securities for such years, are as follows:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
----------------------- ------------------------ ------------------------
Gross Amount Gross Amount Gross Amount
Commissions Retained Commissions Retained Commissions Retained
<S> <C> <C> <C> <C> <C> <C>
LB Opportunity Growth Fund $2,272,864 $499,118 $1,423,809 $315,636 $2,365,893 $521,089
LB World Growth Fund 857,697 187,621 153,713 33,490 -- --
LB Fund 2,306,035 504,687 1,609,270 352,617 2,173,982 491,875
LB High Yield Fund 3,372,402 742,668 2,422,070 530,028 2,932,618 646,449
LB Income Fund 1,486,518 324,229 1,325,519 288,981 2,862,681 618,854
LB Municipal Bond Fund 988,150 215,239 989,735 212,445 2,015,891 440,929
</TABLE>
18
<PAGE> 136
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
In connection with the management of the investment and reinvestment of
the assets of the Funds, the Advisory Contract authorizes LB Research, acting by
its own officers, directors or employees or by a duly authorized subcontractor,
including the Sub-advisor, to select the brokers or dealers that will execute
purchase and sale transactions for the Funds. In executing portfolio
transactions and selecting brokers or dealers, if any, LB Research and the
Sub-advisor will use reasonable efforts to seek on behalf of the Funds the best
overall terms available. In assessing the best overall terms available for any
transaction, LB Research and the Sub-advisor will consider all factors it deems
relevant, including the breadth of the market in and the price of the security,
the financial condition and execution capability of the broker or dealer, and
the reasonableness of the commission, if any (for the specific transaction and
on a continuing basis). In evaluating the best overall terms available, and in
selecting the broker or dealer, if any, to execute a particular transaction, LB
Research and the Sub-advisor may also consider the brokerage and research
services (as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) provided to any other accounts over which LB Research or the
Sub-advisor or an affiliate of LB Research or the Sub-advisor exercises
investment discretion. LB Research and the Sub-advisor may pay to a broker or
dealer who provides such brokerage and research services a commission for
executing a portfolio transaction which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if,
but only if, LB Research or the Sub-advisor determines in good faith that such
commission was reasonable in relation to the value of the brokerage and research
services provided.
To the extent that the receipt of the above-described services may
supplant services for which LB Research or the Sub-advisor might otherwise have
paid, it would, of course, tend to reduce the expenses of LB Research or the
Sub-advisor.
The investment decisions for a Fund are and will continue to be made
independently from those of other investment companies and accounts managed by
LB Research, the Sub-advisor, or their affiliates. Such other investment
companies and accounts may also invest in the same securities as a Fund. When
purchases and sales of the same security are made at substantially the same time
on behalf of such other investment companies and accounts, transactions may be
averaged as to the price and available investments allocated as to the amount in
a manner which LB Research and its affiliates believe to be equitable to each
investment company or account, including the Fund. In some instances, this
investment procedure may affect the price paid or received by a Fund or the size
of the position obtainable or sold by a Fund.
ROWE PRICE-FLEMING AFFILIATED TRANSACTIONS
Subject to applicable SEC rules, as well as other regulatory
requirements, the Sub-advisor of the LB World Growth Fund may allocate orders to
brokers or dealers affiliated with the Sub-advisor. Such allocation shall be in
such amounts and proportions as the Sub-advisor shall determine and the Fund's
Sub-advisor will report such allocations either to LB Research, which will
report such allocations to the Board of Trustees, or, if requested, directly to
the Board of Trustees.
19
<PAGE> 137
BROKERAGE COMMISSIONS
During the last three fiscal years, the Funds paid the following
brokerage fees:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund $ 472,846 $ 197,461 $ 68,483
LB World Growth Fund* 108,394 24,302 --
LB Fund 1,349,473 1,787,109 3,106,422
LB High Yield Fund 36,567 47,583 21,925
LB Income 92,838 61,164 83,788
LB Municipal Bond Fund 7,399 9,518 17,558
LB Money Market Fund -- -- --
</TABLE>
- --------------------
* Amount paid to affiliated broker-dealer is $4,028 for the fiscal year
ended October 31, 1996 and $250 for the period ended October 31, 1995.
Of the brokerage fee amounts stated above and underwriting concessions
of dealers from whom the Funds purchased newly issued debt securities, the
following percentages were paid to firms which provided research, statistical,
or other services to LB Research or the Sub-advisor in connection with the
management of the Funds:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund 0.60% 0.22% 9.06%
LB World Growth Fund 0.48 0.08 --
LB Fund 7.17 8.10 9.21
LB High Yield Fund 0.24 0.70 0.67
LB Income Fund 6.41 0.62 0.47
LB Municipal Bond Fund -- -- --
LB Money Market Fund -- -- --
</TABLE>
PORTFOLIO TURNOVER RATE
The rate of portfolio turnover in the Funds will not be a limiting
factor when LB Research or the Sub-advisor deems changes in a Fund's portfolio
appropriate in view of its investment objectives. As a result, while a Fund will
not purchase or sell securities solely to achieve short term trading profits, a
Fund may sell portfolio securities without regard to the length of time held if
consistent with the Fund's investment objective. A higher degree of equity
portfolio activity will increase brokerage costs to a Fund. The portfolio
turnover rate is computed by dividing the dollar amount of securities purchased
or sold (whichever is smaller) by the average value of securities owned during
the year. Short-term investments such as commercial paper and short-term U.S.
Government securities are not considered when computing the turnover rate.
For the last three fiscal years, the portfolio turnover rates of the LB
Opportunity Growth Fund, LB World Growth Fund, LB Fund, LB High Yield Fund, LB
Income Fund, and LB Municipal Bond Fund were as follows:
<TABLE>
<CAPTION>
10/31/96 10/31/95 10/31/94
<S> <C> <C> <C>
LB Opportunity Growth Fund 176% 213% 64%
LB World Growth Fund 11% 0% --
LB Fund 91% 127% 234%
LB High Yield Fund 104% 71% 50%
LB Income Fund 142% 131% 155%
LB Municipal Bond Fund 33% 36% 38%
</TABLE>
The portfolio turnover rate for LB Mid Cap Growth Fund is not expected
to exceed 100% during its initial year of operations although the actual rate
could be higher.
20
<PAGE> 138
CODE OF ETHICS
The Trust has adopted a code of ethics that imposes certain limitations
and restrictions on personal securities transactions by persons having access to
Fund investment information, including portfolio managers. Such access persons
may not purchase any security being offered under an initial public offering,
any security for which one of the Funds has a purchase or sale order pending, or
any security currently under active consideration for purchase or sale by a
Fund. Additionally, portfolio managers of the Funds may not purchase or sell any
security within seven days before or after any transaction in such security by
the Fund that he or she manages. In order for the Trust to monitor the personal
investment transactions, all access persons must obtain the approval of an
officer of the Trust designated by the Trustees before they may purchase or sell
any security and they must have all such transactions reported to such officer
by the broker-dealer through which the transaction was accomplished.
PURCHASING SHARES
Initial purchases of Fund shares must be made by check and accompanied
by an application. Subsequent purchases may be made by:
- check;
- Federal Reserve or bank wire;
- Invest-by-Phone;
- Systematic Investment Plan (SIP); and
- automatic payroll deduction.
Use of checks, Federal Reserve or bank wire and Invest-by-Phone is
explained in the General Information section of the Fund's prospectus under
"Buying Shares of The Lutheran Brotherhood Family of Funds".
SYSTEMATIC INVESTMENT PLAN
Under the Systematic Investment Plan program, funds may be withdrawn
monthly from the shareholder's checking account and invested in the Funds. LB
Securities representatives will provide shareholders with the necessary
authorization forms.
AUTOMATIC PAYROLL DEDUCTION
Under the Automatic Payroll Deduction program, funds may be withdrawn
monthly from the payroll account of any eligible shareholder of a Fund and
invested in a Fund. To be eligible for this program, the shareholder's employer
must permit and be qualified to conduct automatic payroll deductions. LB
Securities representatives will provide shareholders with the necessary
authorization forms.
SALES CHARGES
Purchases of Fund shares other than the Institutional Class shares carry
either an initial sales charges (Class A) or contingent deferred sales charge
(Class B) as explained in the section of the Funds' prospectus relating to such
shares entitled, "Sales Charges", which also lists ways to reduce or avoid sales
charges on subsequent purchases.
In addition to the situations described in the prospectus, sales charges
are waived when shares are purchased by:
- directors and regular full-time and regular part-time
employees of Lutheran Brotherhood and its subsidiaries;
21
<PAGE> 139
- registered representatives of LB Securities; and
- any trust, pension, profit-sharing or other benefit plan for
such persons.
FULL-TIME EMPLOYEES
Regular full-time and regular part-time employees of Lutheran
Brotherhood are persons who are defined as such by the Lutheran Brotherhood
Human Resources Policy Manual.
RESTRICTION ON SALE OF SHARES PURCHASED
Sales to any of the persons or groups mentioned in this section are made
only with the purchaser's written promise that the shares will not be resold,
except through redemption or repurchase by or on behalf of a Fund.
NET ASSET VALUE
LB OPPORTUNITY GROWTH FUND, LB MID CAP GROWTH FUND, LB WORLD GROWTH FUND, LB
FUND, LB HIGH YIELD FUND, LB INCOME FUND, AND LB MUNICIPAL BOND FUND
The net asset value per share is determined at the close of each day
the New York Stock Exchange is open, or any other day as provided by Rule 22c-1
under the Investment Company Act of 1940. Determination of net asset value may
be suspended when the Exchange is closed or if certain emergencies have been
determined to exist by the Securities and Exchange Commission, as allowed by the
Investment Company Act of 1940.
Net asset value is determined by adding the market or appraised value
of all securities and other assets attributable to each class of shares;
subtracting liabilities attributable to such class; and dividing the result by
the number of shares of such class outstanding.
The market value of each Fund's portfolio securities is determined at
the close of regular trading of the New York Stock Exchange (the "Exchange") on
each day the Exchange is open, except the day after Thanksgiving. The value of
portfolio securities is determined in the following manner:
- - Equity securities traded on the Exchange or any other national
securities exchange are valued at the last sale price. If there has
been no sale on that day or if the security is unlisted, it is valued
at prices within the range of the current bid and asked prices
considered best to represent value in the circumstances.
- - Equity securities not traded on a national securities exchange are
valued at prices within the range of the current bid and asked prices
considered best to represent the value in the circumstances, except
that securities for which quotations are furnished through the
nationwide automated quotation system approved by the NASDAQ will be
valued at their last sales prices so furnished on the date of
valuation, if such quotations are available for sales occurring on that
day.
- - Bonds and other income securities traded on a national securities
exchange will be valued at the last sale price on such national
securities exchange that day. LB Research may value such securities on
the basis of prices provided by an independent pricing service or
within the range of the current bid and asked prices considered best to
represent the value in the circumstances, if those prices are believed
to better reflect the fair market value of such exchange listed
securities.
- - Bonds and other income securities not traded on a national securities
exchange will be valued within the range of the current bid and asked
prices considered best to represent the value in the circumstances.
Such securities may also be valued on the basis of prices provided by
an independent pricing service if those prices are believed to reflect
the fair market value of such securities.
22
<PAGE> 140
For all Funds other than the Money Market Fund, short-term securities
with maturities of 60 days or less are valued at amortized cost; those with
maturities greater than 60 days are valued at the mean between bid and asked
price.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider institutional
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data employed in
determining valuation for such securities.
All other securities and assets will be appraised at fair value as
determined by the Board of Trustees.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in computing the net asset value of shares of a
Fund are determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of the Exchange. Occasionally, events
affecting the value of such securities and exchange rates may occur between the
times at which they are determined and the close of the Exchange, which will not
be reflected in the computation of net asset values. If during such periods
events occur which materially affect the value of such securities, the
securities will be valued at their fair market value as determined in good faith
by the Trustees of the Fund.
For purposes of determining the net asset value of shares of a Fund all
assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars quoted by a major bank that is a regular participant
in the foreign exchange market or on the basis of a pricing service that takes
into account the quotes provided by a number of such major banks.
LB MONEY MARKET FUND
The net asset value for each share of the LB Money Market Fund remains
at $1.00.
USE OF AMORTIZED COST METHOD
The Trustees have determined that the best method for determining the
value of portfolio securities of the LB Money Market Fund is the amortized cost
method. The Executive Committee will continue to assess this method of valuation
and recommend changes to assure that the Fund's portfolio instruments are
properly valued.
The LB Money Market Fund's use of the amortized cost method of valuing
portfolio securities depends on its compliance with an order (the "Order") of
permanent exemption from certain provisions of the Investment Company Act of
1940 granted by the Securities and Exchange Commission. Under the Order, the
Fund's Trustees must establish procedures reasonably designed to stabilize the
net asset value per share as computed for purposes of distribution and
redemption at $1.00 per share, taking into account current market conditions and
the Fund's investment objective.
The Trustee's procedures include monitoring the relationship between
the amortized cost value per share and a net asset value per share based upon
available indications of market value. The Trustees will decide if any steps
should be taken if there is a difference of more than .5% between the two. The
Trustees will take any steps they consider appropriate (such as redemption in
kind or shortening the average portfolio maturity) to minimize any material
dilution or other unfair results arising from differences between the two
methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Order requires that the LB Money Market Fund limit its investments
to instruments that, in the opinion of the Trustees, present minimal credit
risks and that are of high quality as determined by any major
23
<PAGE> 141
rating agency. If they are not rated, the Trustees must determine that the
instrument is of comparable quality. It also calls for the Fund to maintain a
dollar weighted average portfolio maturity (not more than 90 days) appropriate
to its objective of maintaining a stable net asset value of $1.00 per share.
The Order also allows the purchase of any instrument with a remaining
maturity of more than one year. Should the disposition of a portfolio security
result in a dollar weighted average portfolio maturity of more than 90 days, the
Fund will invest its available cash to reduce the maturity to 90 days or less as
soon as practicable. The 90-day maximum dollar-weighted average maturity
notwithstanding, it is the Fund's intention to not exceed a dollar-weighted
average maturity of 90 days.
It is the Fund's usual practice to hold portfolio securities to maturity
and realize par, unless sale or other disposition is mandated by redemption
requirements or other extraordinary circumstances. Under the amortized cost
method of valuation traditionally employed by institutions for valuation of
money market instruments, neither the amount of daily income nor the net asset
value is affected by any unrealized appreciation or depreciation of the
portfolio.
In periods of DECLINING interest rates, the indicated daily yield on
shares of the Fund computed by dividing the annualized daily income on the
Fund's portfolio by the net asset value computed as above may tend to be higher
than a similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of RISING interest rates, the indicated daily yield on
shares of the Fund computed by dividing the annualized daily income on the
Fund's portfolio by the net asset value as computed above may tend to be lower
than a similar computation made by using a method of calculation based upon
market prices and estimates.
CONVERSION TO FEDERAL FUNDS
It is the LB Money Market Fund's policy to be as fully invested as
possible so that maximum interest may be earned on money market instruments in
the Fund's portfolio. To the end, all payments from investors must be in federal
funds or be converted into federal funds when deposited to State Street Bank's
account at the Boston Federal Reserve Bank. This conversion must be made before
shares are purchased. State Street Bank will act as the investor's agent in
depositing checks and converting them to federal funds. State Street will
convert the funds and enter the investor's order for shares within two days of
receipt of the check.
REDEEMING SHARES
Shares may be redeemed with requests made:
- in writing;
- through Redeem-by-Phone; or
- through the Lutheran Brotherhood systematic withdrawal plan.
All methods of redemption are described in the Funds' prospectus under
"Redeeming Shares".
TAX STATUS
THE FUNDS' TAX STATUS
The Funds expect to pay no federal income tax because they intend to
meet requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, for each of
its tax years that has begun on or prior to August 5, 1997, among other
requirements:
24
<PAGE> 142
- derive at least 90% of its gross income from dividends,
interest, gains from the sale of securities, and certain
other investments;
- derive less than 30% of its gross income from the sale of
securities held less than three months (the "30% test");
- invest in securities within certain statutory limits; and
- distribute at least 90% of its ordinary income to
shareholders.
For any Fund tax year beginning after August 5, 1997, the Fund will have to
comply with each of the requirements listed above except the 30% test in order
to qualify for such treatment.
It is each Fund's policy to distribute substantially all of its income
on a timely basis, including any net realized gains on investments each year.
To avoid payment of a 4% excise tax, each Fund is also generally
required to distribute to shareholders at least 98% of its ordinary income
earned during the calendar year and 98% of its net capital gains realized during
the 12-month period ending October 31.
SHAREHOLDERS' TAX STATUS
Information on a shareholder's tax status is described in the Fund's
prospectus under "Taxes."
CAPITAL GAINS
While the Funds do not intend to engage in short-term trading, they may
dispose of securities held for only a short time if LB Research believes it to
be advisable. Such changes may result in the realization of capital gains. Each
Fund distributes its realized gains in accordance with federal tax regulations.
Distributions from any net realized capital gains will usually be declared in
December.
GENERAL INFORMATION
The Lutheran Brotherhood Family of Funds, a business trust organized
under the laws of the State of Delaware, was established pursuant to a Master
Trust Agreement dated July 15, 1993. The Trust is authorized
25
<PAGE> 143
to issue shares of beneficial interest, par value $.001 per share, divisible
into an indefinite number of different series and classes and operates as a
"series company" as provided by Rule 18f-2 under the 1940 Act. Currently, eight
series of the Trust exist and each series is authorized to issue three classes
of shares: Class A, Class B and Institutional Class shares. Effective October
31, 1997, all of the outstanding shares of the Funds were redesignated as Class
A shares and, immediately thereafter, shares held by Lutheran institutions and
church organizations with accounts of at least $100,000 were automatically
converted to Institutional Class shares. The attributes of the various classes
of shares are more fully described in their respective prospectus. The interests
of investors in the various series of the Trust will be separate and distinct.
The assets received by the Trust from the issue and sale of shares of a
Fund and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are specially allocated to each class of such Fund and
constitute the underlying assets of such Fund. The underlying assets of such
Fund are required to be segregated on the books of account, and are charged with
the expenses in respect of each class of the Fund and with a share of the
general expenses of the Trust. Under the Trust's Multiple Class Expense
Allocation Plan adopted under Rule 18f-3 of the 1940 Act, all expenses other
than Rule 12b-1 and shareholder servicing fees are allocated pro rata based on
the relative net assets of each class. Upon any liquidation of a Fund,
shareholders thereof are entitled to share pro rata in the net assets of each
class available for distribution.
Except for the LB World Growth Fund and the LB Mid Cap Growth Fund,
each Fund is the successor to a fund of the same name that previously operated
as a separate corporation or trust. At a Special Meeting of Shareholders of each
such fund held on October 28, 1993, the shareholders of each fund approved a
reorganization of the respective funds as separate series of the Trust, which
reorganization became effective on November 1, 1993. The LB World Growth Fund
and the LB Mid Cap Growth Fund commenced operations as a series of The Lutheran
Brotherhood Family of Funds on September 5, 1995 and May 30, 1997, respectively.
CALCULATION OF PERFORMANCE DATA
The total return and yield of the Class A, Class B and Institutional
Class shares will be calculated as set forth below. Total return and yield are
computed separately for each class of shares of the Funds. The performance data
listed below covers periods prior to the adoption of the current class
designations. Shares of the Funds had no class designations until October 31,
1997, when designations were assigned based upon the sales charges, Rule 12b-1
fees and shareholder servicing fees applicable to shares sold thereafter. Total
return and yield performance data for periods prior to October 31, 1997 have
been restated to reflect the revised initial sales charge schedule for the Class
A shares and the CDSC for the Class B shares that became effective on that date.
However, the total return and yield performance data have not been restated to
reflect Rule 12b-1 fees for the Class B shares and shareholder servicing fees
for the Class A and B shares, which will adversely affect performance after
October 31, 1997.
Future performance data will reflect Rule 12b-1 fees, shareholder
servicing fees and sales charges, where applicable, as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Shareholder Servicing Fee Sales Charge
---------- ------------------------- ------------
<S> <C> <C> <C>
Class
A None .25% of average daily Maximum 4.0% initial sales
charge net assets reflected(1)
B .75% of .25% of average daily 1- and 5- year periods reflect a
average daily(1) net assets 5% and 1% CDSC, respectively(1)
</TABLE>
26
<PAGE> 144
<TABLE>
<S> <C> <C> <C>
Institutional None None None
</TABLE>
- -----------------
(1) Except for LB Money Market Fund, which is not subject to initial sales
charges, CDSC or Rule 12b-1 fees.
Calculations of performance data for all Funds except LB Opportunity
Growth Fund in this section reflect the subsidization by Fund affiliates of fees
and expenses relating to the Fund during the subject period.
In the absence of such subsidization actual performance would be lower.
TOTAL RETURN
Average annual total return is computed by determining the average
annual compounded rates of return over the designated periods that, if applied
to the initial amount invested would produce the ending redeemable value,
according to the following formula:
P(1+T)(n) = ERV
[In the above formula "n" is an exponent.]
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical $1,000
payment made at the beginning of the designated
period
The calculation is based on the further assumptions that the maximum
initial sales charge applicable to the investment is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses are also taken into
account as described later herein.
The following table presents the average annual returns of the Class A
shares for the indicated periods ended April 30, 1997:
27
<PAGE> 145
AVERAGE ANNUAL TOTAL RETURNS FOR CLASS A SHARES FOR THE INDICATED PERIODS ENDED
APRIL 30, 1997*
<TABLE>
<CAPTION>
LB OPPORTUNITY GROWTH FUND LB FUND LB HIGH YIELD FUND
- -------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1 year -28.0% 1 year 14.19% 1 year 1.14%
Since Fund 9.72% 5 years 12.81% 5 years 9.46%
Inception
1/8/93
10 years 10.73% 10 Years 9.25%
</TABLE>
<TABLE>
<CAPTION>
LB INCOME FUND LB MUNICIPAL BOND FUND LB MONEY MARKET FUND
- -------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1 year 2.08% 1 year 2.06% 1 year 4.62%
5 years 5.87% 5 years 6.05% 5 years 3.67%
10 years 7.71% 10 years 7.51% 10 years 5.17%
</TABLE>
<TABLE>
<CAPTION>
LB WORLD GROWTH FUND
- ---------------------------
<S> <C>
1 Year 1.20%
Since Fund 7.43%
Inception
(9/5/95)
</TABLE>
* Reflects the revised initial sales charge schedule for the Class A
shares effective October 31, 1997. Does not reflect the shareholder
servicing fee applicable to the Class A shares after October 31, 1997.
YIELD
Yield is computed by dividing the net investment income per share earned
during a recent month or other specified 30-day period by the applicable maximum
offering price per share on the last day of the period and annualizing the
result, according to the following formula:
[A formula is expressed here that is as follows:
Yield is equal to 2 times the difference between the sixth power of a
number and 1, where that number is equal to the sum of the quotient of a divided
by b and 1.]
Where:
a = dividends and interest earned during the period minus
expenses accrued for the period (net of voluntary
expense reductions by the Investment Manager)
b = the average daily number of shares outstanding during
the period that were entitled to receive dividends
multiplied by the maximum offering price per share on
the last day of the period
28
<PAGE> 146
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Fund computes the yield to maturity of each obligation held by a
Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
In the case of a tax-exempt obligation issued without original issue
discount and having a current market discount, the coupon rate of interest is
used in lieu of the yield to maturity. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value exceeds the then-remaining portion of original issue discount
(market discount), the yield to maturity is the imputed rate based on the
original issue discount calculation. Where, in the case of a tax-exempt
obligation with original issue discount, the discount based on the current
market value is less than the then-remaining portion of original issue discount
(market premium), the yield to maturity is based on the market value. Dividend
income is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), a Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. Each Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter. The maximum offering price
includes, as applicable, a maximum sales charge of 4.0%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which are insured and/or often provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
The 30-day yield for the base period ended April 30, 1997, including the
maximum sales charge of 4% for the LB High Yield Fund, LB Income Fund and LB
Municipal Bond Fund were 9.37%, 6.11%, and 4.66%, respectively.
TAX EQUIVALENT YIELD
The LB Municipal Bond Fund may quote its tax equivalent yield. The LB
Municipal Bond Fund's tax equivalent yield is computed by dividing that portion
of such Fund's yield (computed as described under "Yield" above) which is
tax-exempt, by the complement of the combined federal and state maximum
effective marginal rate and adding the result to that portion, if any, of the
yield of such Fund that is not tax-exempt. The complement, for example, of a tax
rate of 31% is 69%, that is 1.00 - 0.31 = 0.69.
The LB Municipal Bond Fund's tax equivalent yields for the 30-day base
period ended April 30, 1997, including the maximum sales charge of 4% assuming a
tax rate of 15%, 28%, 31% and 39.6%, were 5.48%, 6.47%, 6.75% and 7.72%,
respectively.
29
<PAGE> 147
YIELD - MONEY MARKET FUND
When the LB Money Market Fund quotes a "current annualized" yield, it is
based on a specified recent seven calendar-day period. It is computed by (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period by 52.14 (365 divided by 7). The resulting yield
figure is carried to the nearest hundredth of one percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) all fees charge to all
shareholder accounts, in proportion to the length of the base period and the
Trust's average account size.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
<TABLE>
<S> <C>
Yield For 7-day Period Ended 4/30/97.............................. 4.66%
Effective Yield For 7-day Period Ended 4/30/97.................... 4.77%
</TABLE>
ACCRUED EXPENSES
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The average
annual total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees.
Accrued expenses include the subsidization by Fund affiliates of fees or
expenses relating to a Fund, during the subject period.
NONSTANDARDIZED TOTAL RETURN
A Fund may provide the above described average annual total return
results for periods which end no earlier than the most recent calendar quarter
end and which begin one, five and ten years before such quarter end and at the
commencement of such Fund's operations. In addition, a Fund may provide
nonstandardized total return results for differing periods, such as for the most
recent six months, and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except that the result may or may not be annualized, and as noted any
applicable sales charge may not be taken into account and therefore not deducted
from the hypothetical initial payment of $1,000.
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The Report of Independent Accountants and financial statements included
in the Annual Report to Shareholders for the fiscal year ended October 31, 1996
of the Funds (except for the LB Mid Cap Growth Fund) are a separate report
furnished with this Statement of Additional Information and are incorporated
herein by reference. In addition, the financial statements included in the
Semi-Annual Report to Shareholders for the period ended April 30, 1997 of the
Funds (except for the LB Mid Cap Growth Fund) are a separate report furnished
with this Statement of Additional Information and are incorporated herein by
reference. The
30
<PAGE> 148
following are unaudited financial statements of LB Mid Cap Growth Fund for the
period from commencement of operations (May 30, 1997) through September 30,
1997.
Lutheran Brotherhood Mid Cap Growth Fund
Portfolio of Investments
September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Shares Value
<S> <C> <C>
COMMON STOCKS - 90.7% (a)
Aerospace - 1.6%
1,540 Precision Castparts Corp............................................ $ 100,100
1,670 Sunstrand Corp...................................................... 96,234
------
196,334
-------
Airlines - 1.5%
5,870 Southwest Airlines Co............................................... 187,473
Automotive - 3.3%
4,860 Lear Corp........................................................... 239,355(b)
6,390 Mark IV Industries, Inc............................................. 171,731
-------
411,086
-------
Bank & Finance - 9.4%
4,960 City National Corp.................................................. 158,720
530 Crestar Financial Corp.............................................. 24,844
5,930 Firstar Corp........................................................ 214,963
3,100 PMI Group.......................................................... 177,669
3,745 Reinsurance Group of America........................................ 153,077
1,790 Salomon, Inc........................................................ 134,586
3,820 Summit Bancorp...................................................... 169,751
2,490 TCF Financial Corp.................................................. 145,509
-------
1,179,119
---------
Chemicals - 3.7%
4,200 Avery Dennison Corp................................................. 168,000
6,190 Crompton & Knowles Corp............................................. 164,422
2,800 Cytec Industries, Inc............................................... 134,050
-------
466,472
-------
Computer Software - 5.0%
4,460 Autodesk, Inc....................................................... 202,373
3,100 BMC Software, Inc................................................... 200,725(b)
5,430 Cambridge Technology Partners, Inc.................................. 194,462
1,500 Cognos, Inc......................................................... 35,625(b)
-------
633,185
-------
Computers & Office Equipment - 1.1%
2,720 Electronics for Imaging, Inc........................................ 138,720(b)
-------
Conglomerates - 1.3%
6,110 Whitman Corp........................................................ 166,498
-------
Drugs & Health Care - 8.4%
6,000 Alza Corp........................................................... 174,000(b)
4,040 Elan Corp. plc, ADS................................................. 202,253(b)
4,280 Forest Laboratories, Inc............................................ 180,295(b)
3,480 Rexall Sundown, Inc................................................. 158,775(b)
3,390 STERIS Corp......................................................... 139,414(b)
3,490 Watson Pharmaceuticals, Inc......................................... 208,527
---------
1,063,264
---------
Electric Utilities - 1.0%
3,820 Pacific Enterprises................................................. $ 129,402
---------
Electronics - 5.0%
3,690 Adaptec, Inc........................................................ 172,507
2,640 SCI Systems, Inc.................................................... 130,845(b)
5,890 Vishay Intertechnology, Inc......................................... 155,717(b)
4,780 VLSI Technology, Inc................................................ 165,806
-------
624,875
-------
</TABLE>
<PAGE> 149
<TABLE>
<S> <C> <C>
Healthcare Management - 5.7%
6,580 Humana, Inc......................................................... 156,686
9,090 MedPartners, Inc.................................................... 194,867(b)
1,960 Pediatrix Medical Group, Inc........................................ 86,485
5,210 PhyCor, Inc......................................................... 151,416(b)
2,650 Total Renal Care Holdings, Inc...................................... 132,500(b)
-------
721,954
-------
Hospital Management - 2.7%
5,210 Health Management Associates, Inc................................... 164,766(b)
4,120 Universal Health Services, Inc...................................... 178,190(b)
-------
342,956
-------
Leisure & Entertainment - 1.4%
3,940 Promus Hotel Corp................................................... 176,561(b)
-------
Media - 3.3%
3,100 Clear Channel Communications, Inc................................... 201,112(b)
7,950 Outdoor Systems, Inc................................................ 208,687(b)
-------
409,799
-------
Mining & Metals - 4.3%
3,520 Mueller Industries, Inc............................................. 159,940(b)
4,110 Steel Dynamics, Inc................................................. 96,585(b)
3,100 Titanium Metals Corp................................................ 115,475
3,470 UCAR International, Inc............................................. 165,692(b)
-------
537,692
-------
Office Products - 1.9%
5,510 Boise Cascade Office Products....................................... 104,001
3,760 US Office Products Company.......................................... 132,540
-------
236,541
-------
Oil & Oil Service - 3.9%
2,020 Cooper Cameron Corp................................................. 145,061(b)
2,110 Diamond Offshore Drilling, Inc...................................... 116,446(b)
2,490 Reading & Bates Corp................................................ 103,491
2,770 Sun Company, Inc.................................................... 121,361
-------
486,359
-------
Pollution Control - 1.4%
4,510 USA Waste Services, Inc............................................. 179,836(b)
-------
Publishing & Printing - 1.2%
5,560 Banta Corp.......................................................... $ 154,985
---------
Restaurants - 2.2%
5,810 Applebee's International, Inc....................................... 145,250
4,920 Outback Steakhouse, Inc............................................. 135,915
-------
281,165
-------
Retail - 5.3%
3,120 AutoZone, Inc....................................................... 93,600
6,500 Borders Group, Inc.................................................. 178,750(b)
2,040 Consolidated Stores Corp............................................ 85,425
4,270 General Nutrition Companies......................................... 124,364(b)
6,040 OfficeMax, Inc...................................................... 91,732(b)
2,440 Tiffany & Co........................................................ 103,700
-------
677,571
-------
Scientific Instruments - 2.1%
3,550 Waters Corp......................................................... 156,866
2,850 Thermo Instrument Systems, Inc...................................... 120,056
-------
276,922
-------
Services - 9.1%
7,510 AccuStaff, Inc...................................................... 236,565(b)
3,740 Culligan Water Technologies, Inc.................................... 172,040(b)
</TABLE>
2
<PAGE> 150
<TABLE>
<S> <C> <C>
5,020 Galileo International, Inc.......................................... 140,246
4,600 Sterling Commerce, Inc.............................................. 165,313(b)
2,300 Stewart Enterprises, Inc............................................ 100,625
7,420 SunGard Data Systems, Inc........................................... 179,935(b)
3,340 Sylvan Learning Systems, Inc........................................ 146,542
---------
1,141,266
---------
Telecommunications Equipment - 2.3%
4,260 ADC Telecommunications, Inc......................................... 138,450(b)
5,510 DSC Communications Corp............................................. 148,426
-------
286,876
-------
Telephone & Telecommunications - 2.6%
1,070 Century Telephone Enterprises....................................... 47,080
6,090 LCI International, Inc.............................................. 162,146
2,440 Telephone and Data Systems, Inc..................................... 109,800
-------
319,026
-------
Total Common Stock (cost $10,889,590)............................... 11,425,937
Principal
Amount
SHORT-TERM SECURITIES - 9.3%
$1,160,000 Federal Home Loan Mortgage Discount Notes,
6.05%, due 10/01/1997............................................... 1,160,000
---------
Total Investments (cost $12,049,590)................................ 12,585,937(c)
==========
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS:
(a) The categories of investments are shown as a percentage of total
investments of the Lutheran Brotherhood Mid Cap Growth Fund.
(b) Currently non-income producing.
(c) At September 30, 1997, the aggregate cost of securities for federal
income tax purposes was $12,049,590 and the net unrealized appreciation
of investments based on that cost was $536,347 which is comprised of
$689,343 aggregate gross unrealized appreciation and $152,996 aggregate
gross unrealized depreciation.
The accompanying notes are an integral part of the financial
statements.
3
<PAGE> 151
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value (cost,$12,049,590) ............ $ 12,585,937
Cash .............................................................. 9,354
Receivable for investment securities sold ......................... 149,095
Dividend receivable ............................................... 1,593
Unamortized organization costs .................................... 42,012
------------
Total assets ................................................... 12,787,991
------------
LIABILITIES:
Payable for investment securities purchased ....................... 629,159
Accrued expenses .................................................. 46,842
------------
Total liabilities .............................................. 676,001
NET ASSETS ........................................................ $ 12,111,990
============
NET ASSETS CONSIST OF:
Trust capital (1,134,490 shares of beneficial interest outstanding) $ 11,356,829
Accumulated net investment loss ................................... (16,327)
Accumulated net realized gain from sale of investments ............ 235,141
Unrealized net appreciation of investments ........................ 536,347
NET ASSETS ........................................................ $ 12,111,990
============
Net asset value and redemption price per share
($12,111,990 / 1,134,490 shares of beneficial interest outstanding) $ 10.68
============
Maximum public offering price per share
($10.68 / 0.95 for a 5% sales charge .............................. $ 11.24
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 152
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
STATEMENT OF OPERATIONS
For the period from May 30, 1997 to September 30, 1997
(unaudited)
INVESTMENT INCOME:
<TABLE>
<S> <C>
Income -
Dividend income ............................................. $ 6,805
Interest income ............................................. 14,799
---------
Total income ................................................ 21,604
---------
Expenses -
Investment advisory fee ..................................... 13,616
Transfer agent services ..................................... 13,957
Custodian fee ............................................... 973
Administrative personnel and services ....................... 389
Printing and postage ........................................ 2,280
Trust share registration costs .............................. 9,685
Auditing fees ............................................... 1,488
Legal fees .................................................. 23
Trustees' fees .............................................. 1,179
Amortization of organization costs .......................... 1,909
Miscellaneous ............................................... 331
---------
Total expenses before expense reimbursement ................. 45,830
Expense reimbursement from investment advisor ............... (7,899)
---------
Net Expenses ................................................ 37,931
---------
Net investment loss ......................................... (16,327)
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investment transactions ................ 235,141
Net change in unrealized appreciation of investments ........ 536,347
---------
Net gain on investments ..................................... 771,488
---------
Net increase in net assets resulting from operations ........ $ 755,161
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 153
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
For the period from
May 30, 1997
(effective date) to
September 30, 1997
INCREASE (DECREASE) IN NET ASSETS: (unaudited)
<TABLE>
<CAPTION>
OPERATIONS:
<S> <C>
Net investment loss .................................... $ (16,327)
Net realized gain (loss) on investments ................ 235,141
Net change in unrealized appreciation or
depreciation of investments ............................ 536,347
------------
Net increase in net assets resulting from
operations ............................................. 755,161
TRUST SHARE TRANSACTIONS:
Net proceeds from sale of shares ....................... 11,530,965
Cost of shares redeemed ................................ (174,136)
------------
Net change in net assets from trust share
transactions ........................................... 11,356,829
------------
Net increase in net assets ............................. 12,111,990
NET ASSETS:
Beginning of period .................................... 0
End of period .......................................... $ 12,111,990
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 154
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period (a)
For the period from
May 30, 1997
(effective date)
September 30, 1997
(unaudited)
<TABLE>
<S> <C>
Net asset value, beginning of period ........................ $ 9.25
------
Income From Investment Operations:
Net investment loss ......................................... (0.01)
Net realized and unrealized gain
(loss) on investments ..................................... 1.44
------
Total from investment operations ............................ 1.43
------
Net asset value, end of period .............................. $10.68
======
Total investment return at
net asset value (b) ....................................... 15.46%
Net assets, end of period ($ millions) ...................... $ 12.1
Ratio of expenses to average
net assets ................................................ 1.95%(c)
Ratio of net investment loss to
average net assets ........................................ 0.84%(c)
Portfolio turnover rate ..................................... 54%
Average commission rate (d) $0.0582
</TABLE>
- ----------
Notes to Financial Highlights:
(a) All per share amounts have been rounded to the nearest cent.
(b) Total investment return assumes dividend reinvestment and does not
reflect the effect of a sales charge.
(c) Computed on an annualized basis.
(d) Average commission rate is based on total broker commissions incurred
in connection with execution of portfolio transactions during the
period, divided by the sum of all portfolio shares purchased and sold
during the period that were subject to a commission. Broker commissions
are treated as capital items that increase the cost basis of securities
purchased, or reduce the proceeds of securities sold.
The accompanying notes are an integral part of the financial
statements.
7
<PAGE> 155
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
(1) ORGANIZATION
The Lutheran Brotherhood Mid Cap Growth Fund is organized as a separate
series of The Lutheran Brotherhood Family of Funds (the "Trust") which is a
Delaware business trust and a diversified, open-end investment company
registered under the Investment Company Act of 1940. The Trust is divided into
eight series (the "Fund(s)"), each with its own investment objective and
policies. The eight Funds of the Trust are: Lutheran Brotherhood Opportunity
Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund, Lutheran Brotherhood
World Growth Fund, Lutheran Brotherhood Fund, Lutheran Brotherhood High Yield
Fund, Lutheran Brotherhood Income Fund, Lutheran Brotherhood Municipal Bond Fund
and Lutheran Brotherhood Money Market Fund. The Lutheran Brotherhood Mid Cap
Growth Fund's registration was declared effective by the Securities and Exchange
Commission and began operations as a series of the Lutheran Brotherhood Family
of Funds on May 30, 1997.
(2) SIGNIFICANT ACCOUNTING POLICIES
Investment Security Valuations-
Securities traded on U.S. or foreign securities exchanges or included
in a national market system are valued at the last quoted sales price at the
close of each business day. Securities traded on the over-the-counter market and
listed securities for which no price is readily available are valued at prices
within the range of the current bid and asked prices considered best to
represent the value in the circumstances, based on quotes that are obtained from
an independent pricing service approved by the Board of Trustees. The pricing
service, in determining values of securities, takes into consideration such
factors as current quotations by broker/dealers, coupon, maturity, quality, type
of issue, trading characteristics, and other yield and risk factors it deems
relevant in determining valuations. Securities which cannot be valued by the
approved pricing service are valued using valuations obtained from dealers that
make markets in the securities. Exchange listed options and futures contracts
are valued at the last quoted sales price. Short-term securities with maturities
of 60 days or less are valued at amortized cost; those with maturities greater
than 60 days are valued at the mean between bid and asked price. All other
securities for which market values are not readily available are appraised at
fair value as determined in good faith by or under the direction of the Board of
Trustees.
Repurchase Agreements-
The Fund may engage in repurchase agreement transactions in pursuit of
its investment objective. When the Fund engages in such transactions, it is
policy to require the custodian bank to take possession of all securities held
as collateral in support of repurchase agreement investments. In addition, the
Fund monitors the market value of the underlying collateral on a daily basis. If
the seller defaults or if bankruptcy proceedings are initiated with respect to
the seller, the realization or retention of the collateral may be subject to
legal proceedings.
Investment Income-
Interest income is determined on the basis of interest or discount
earned on any short-term investments and interest earned on all other debt
securities, including accrual of original issue discount. Interest earned on
debt securities also includes amortization of premium and market discount.
Dividend income is recorded on the ex-dividend date.
Options and Financial Futures-
The Fund may buy put and call options, write covered call options and
buy and sell futures contracts. The Fund intends to use such derivative
instruments as hedges to facilitate buying or selling securities or to provide
protection against adverse movements in security prices or interest rates.
Option contracts are valued daily and unrealized appreciation or
depreciation is recorded. The Fund will realize a gain or loss upon expiration
or closing of the option transaction. When an option is exercised, the proceeds
on sale for a written call option or the cost of a security for purchased put
and call options is adjusted by the amount of premium received or paid.
Upon entering into a futures contract, the Fund is required to deposit
initial margin, either cash or securities in an amount equal to a certain
percentage of the contract value. Subsequent variation margin payments are made
or received by the Fund each day. The variation margin payments are equal to the
daily changes in the contract value and are recorded as unrealized gains and
losses. The Fund realizes a gain or loss when the contract is closed or expires.
Federal Income Taxes-
It is the policy of the Fund to comply with the provisions of the
Internal Revenue Code applicable to regulated investment companies and to
distribute to shareholders each year substantially all of their taxable income
on a timely basis, including any net realized gain on investments each year. It
is also the intention of the Fund to distribute an amount sufficient to avoid
imposition of any federal excise tax. Accordingly, no provision for federal
income tax is necessary.
8
<PAGE> 156
When-Issued and Delayed Delivery Transactions-
The Funds may engage in when-issued or delayed delivery transactions.
To the extent that a Fund engages in such transactions, it will do so for the
purpose of acquiring securities consistent with its investment objectives and
policies and not for the purpose of investment leverage or to speculate on
interest rate changes. On the trade date, assets of the Fund are segregated on
the Fund's records in a dollar amount sufficient to make payment for the
securities to be purchased. Income is not accrued until settlement date.
Organization Costs-
Organization costs incurred in connection with the start up and initial
registration of the Funds are capitalized and amortized over a period of 60
months from the date of commencement. If any initial shares are redeemed during
the amortization period, the redemption proceeds will be reduced by a pro-rata
portion of the unamortized balance at the time of redemption, in the same
proportion that the number of initial shares being redeemed bears to the number
of initial shares outstanding at the time of redemption.
Distributions to Shareholders-
Dividends from net investment income, if available, are declared and
paid annually. Net realized gains from securities transactions, if any, are
distributed at least annually after the close of the fiscal year. Dividends and
capital gain distributions to shareholders are recorded on the ex-dividend date.
Net investment income (loss) and net realized gain (loss) may differ
for financial statement and tax purposes. The character of distributions made
during the year from net investment income or net realized gains may differ from
their ultimate characterization for federal income tax purposes. Also, due to
timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the year that the income or net realized gains were
recorded by the Fund.
Other-
Investment transactions are accounted for on the date the investments
are purchased or sold. Realized gains and losses on investments and unrealized
appreciation an depreciation are determined on an identified cost basis, which
is the same basis used for federal income tax purposes.
The Fund is charged for the operating expenses that are directly
attributable to it. Fund operating expenses that cannot be directly attributable
to the Fund are either shared equally or allocated among the Funds based on the
relative net assets of each Fund or via other methodologies.
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses during
the reporting period. Actual results could differ from those estimates.
(3) FEES AND COMPENSATION PAID TO AFFILIATES
Investment Advisory Fees-
The Fund pays Lutheran Brotherhood Research Corp. (LBRC), the
investment advisor, a fee for its advisory services. The fee is accrued daily
and paid monthly. The fee is based on the following annual rates of average
daily net assets: 0.70% for the first $100 million in assets, 0.65% for the next
$150 million in assets, 0.60% for the next $250 million in assets, 0.55% for the
next $500 million in assets, and 0.50% for assets over $1 billion.
For the period ended September 30, 1997, the advisory fees of the LB
Mid Cap Growth Fund totaled $13,616 of which $7,899 were voluntarily waived by
LBRC to limit the Fund's expense ratio to 1.95% of average daily net assets.
LBRC can terminate its voluntary waiver of expenses at any time at its
discretion.
Sales Charges and Other Fees-
For the period ended September 30, 1997, Lutheran Brotherhood
Securities Corp. (LBSC), the Trust's distributor, received $207,614 in sales
charges paid by purchasers of Fund shares. Sales charges are not an expense of
the Fund and are not reflected in the financial statements of the Fund. LBSC
also received fees pursuant to an agreement to provide certain administrative
personnel and services to the Funds. Effective January 1, 1997, a new agreement
went into effect whereby LBSC will receive an annual fee equal to 0.02% of
average daily net assets. LBSC received $389 from the LB Mid Cap Growth Fund for
the period ended September 30, 1997. In addition, LBSC provides the Fund with
transfer agent services pursuant to an agreement and received $13,957 from the
LB Mid Cap Growth Fund for the period ended September 30, 1997.
The Fund have adopted a trustee fee deferral plan which allows the
Trustees to defer the receipt of all or a potion of their Trustee Fees. The
deferred fees remain in the fund and are invested within the Lutheran
Brotherhood Family of Funds until distribution in accordance with the plan.
Certain officers and non-independent trustees of the Fund are officers
and directors of LBRC and LBSC; however, they receive no compensation from the
Funds.
9
<PAGE> 157
(4) SECURITIES LENDING
To generate additional income, the Fund may participate in securities
lending program administered by the Fund's custodian bank. Securities are
periodically loaned to brokers, banks or other institutional borrowers of
securities, for which collateral in the form of cash, U.S. government
securities, or letter of credit is received by the custodian in an amount at
least equal to the market value of securities loaned. Collateral received in the
form of cash is invested in short-term investments by the custodian from which
earnings are shared between the borrower, the custodian and the Fund at
negotiated rates. The Fund bears the risk that it may experience delays in
recovery or even loss of rights in the collateral should the borrower of
securities fail financially. There were no security loans during the period
ended September 30, 1997.
(5) INVESTMENT TRANSACTIONS
Purchases and Sales of Investment Securities-
For the period ended September 30, 1997, the cost of purchases and the
proceeds from sales of investment securities other than U.S. Government and
short term securities were $13,641,485 and $2,987,035, respectively.
Investments in Options and Futures Contracts-
The movement in the price of the instrument underlying an option or
futures contract may not correlate perfectly with the movement in the prices of
the portfolio securities being hedged. A lack of correlation could render the
Fund's hedging strategy unsuccessful and could result in a loss to the Fund. In
the event that a liquid secondary market would not exist, the Fund could be
prevented from entering into a closing transaction which could result in
additional losses to the Fund.
(6) SHARES OF BENEFICIAL INTEREST
The Master Trust Agreement permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest ($0.001 par value)
of all of the Funds. Transactions in Fund shares were as follows:
LB Mid Cap
Growth Fund
Shares outstanding at October 31, 1996 -
<TABLE>
<S> <C>
Shares sold 1,151,393
Shares redeemed (16,903)
---------
Shares outstanding at September 30, 1997 1,134,490
=========
</TABLE>
10
<PAGE> 158
PART C
To the Registration Statement of
The Lutheran Brotherhood Family of Funds
Item 24. Financial Statements and Exhibits.
(a) Financial Statements: Included in the Statement of
Additional Information (Part B): Unaudited Financial Statements of LB Mid Cap
Growth Fund for the Four Month Period Ended September 30, 1997
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
(1) First Amended and Restated Master Trust Agreement of the Registrant (3)
(1)(b) Form of Amendment No. 1 to First Amended and Restated Master Trust Agreement
(4)
(1)(c) Form of Amendment No. 2 to First Amended and Restated Master Trust Agreement
(5)
(1)(d) Form of Amendment No. 3 to First Amended and Restated Master Trust Agreement
(1)
(2) By-Laws of the Registrant (2)
(3) Not applicable
(4) Not applicable
(5)(a) Form of Master Advisory Contract between the Registrant and Lutheran Brotherhood
Research Corp. (2)
(5)(b) Form of Amendment to Master Advisory Contract (4)
(5)(c) Form of Sub-Advisory Agreement between Lutheran Brotherhood Research Corp. and
Rowe Price-Fleming International, Inc. (4)
(6) Form of Amended and Restated Distribution Contract (1)
(7) Not applicable
(8)(a) Form of Custodian Contract between the Registrant and State Street Bank and Trust
Company (2)
(8)(b) Form of Amended and Restated Transfer Agency Agreement between the Registrant and
Lutheran Brotherhood Securities Corp. (1)
(8)(c) Form of Administrative Services Agreement between the Registrant and Lutheran
Brotherhood Securities Corp. (2)
(8)(d) Form of Amendment to Custodian Contract (4)
(8)(f) Administration Contract Between The Lutheran Brotherhood Family of Funds and
Lutheran Brotherhood Securities Corp. (4)
(8)(g) Form of Amendment to Administrative Services Agreement (4)
(8)(h) Form of Amendment to Custodian Contract (5)
(8)(j) Form of Amendment to Administration Contract (5)
(9) Not applicable
(10) Opinion and consent of counsel (1)
(11) Consent of Independent Accountants (1)
(12) Not applicable
(13)(a) Subscription and Investment Letter with respect to each of Lutheran Brotherhood
Opportunity Growth Fund, Lutheran Brotherhood Fund, Lutheran Brotherhood High
Yield Fund, Lutheran Brotherhood Income Fund, Lutheran Brotherhood Municipal
Bond Fund and Lutheran Brotherhood Money Market Fund (3)
(13)(b) Form of Subscription and Investment Letter with respect to Lutheran Brotherhood
World Growth Fund (4)
(13)(c) Form of Subscription and Investment Letter with respect to Lutheran Brotherhood Mid
Cap Growth Fund (5)
(14)(a)(i) Lutheran Brotherhood Defined Contribution Plan and Trust, Standardized Target Benefit
Plan and Trust Adoption Agreement, Target Benefit Plan and Trust Adoption Agreement,
Standardized Nonintegrated Profit Sharing Plan and Trust Adoption Agreement,
Standardized Nonintegrated Money Purchase Plan and Trust Adoption
</TABLE>
<PAGE> 159
<TABLE>
<S> <C>
Agreement, Standardized Integrated Profit Sharing Plan and Trust Adoption Agreement,
Standardized Integrated Money Purchase Plan and Trust Adoption Agreement, Integrated Money
Purchase Plan and Trust Adoption Agreement, Nonintegrated Money Purchase Plan and Trust
Adoption Agreement, Nonintegrated Profit Sharing Plan and Trust Adoption Agreement and
Integrated Profit Sharing Plan and Trust Adoption Agreement (2)
(14)(a)(ii) Lutheran Brotherhood Defined Benefit Plan and Trust, Standardized Nonintegrated
Defined Benefit Plan Adoption Agreement and Standardized Integrated Defined Benefit
Plan and Trust Adoption Agreement (2)
(14)(b) Lutheran Brotherhood Individual Retirement Account, Disclosure Statement and Custodial
Agreement (2)
(14)(c) Lutheran Brotherhood Self-Directed Individual Retirement Account, Supplemental
Disclosure Statement, Disclosure Statement and Custodial Agreement (2)
(14)(d) Lutheran Brotherhood Tax Sheltered Custodial Account (2)
(14)(e) Lutheran Brotherhood Prototype Simplified Employee Pension Plan (2)
(15)(a) Plan of Distribution Pursuant to Rule 12b-1 with respect to the Class B Shares (1)
(15)(b) Shareholder Servicing Plan with respect to the Class A Shares (1)
(15)(c) Shareholder Servicing Plan with respect to the Class B Shares (1)
(16) Schedule of computation of performance data provided in response to Item 22 of this
Registration Statement (3)
(18) Multiple Class Expense Allocation Plan Adopted Pursuant to Rule 18f-3 (1)
(19)(a) Powers of Attorney for Rolf F. Bjelland, Wade M. Voigt, Charles W. Arnason, Herbert
F. Eggerding, Jr., Luther O. Forde and Ruth E. Randall (3)
(19)(b) Power of Attorney for Connie M. Levi (3)
(19)(c) Power of Attorney for Bruce J. Nicholson (4)
(19)(d) Power of Attorney for Noel K. Estenson (1)
(27) Financial Data Schedule (1)
</TABLE>
- ------------------
(1) Filed herein
(2) Filed in Post-Effective Amendment No. 51 on August 27, 1993
(3) Filed in Post-Effective Amendment No. 52 on October 25, 1993
(4) Filed in Post-Effective Amendment No. 55 on June 16, 1995
(5) Filed in Post-Effective Amendment No. 58 on March 10, 1997
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities
As of July 31, 1997 the number of record holders of shares of
the Registrant were as follows:
<TABLE>
<CAPTION>
(1) (2)
Number of
Title of Class Record Holders
-------------- --------------
Shares of Beneficial Interest
<S> <C>
Lutheran Brotherhood Opportunity Growth Fund 56,290
LB Mid Cap Growth Fund 1,590
Lutheran Brotherhood World Growth Fund 15,902
Lutheran Brotherhood Fund 87,558
Lutheran Brotherhood High Yield Fund 56,415
Lutheran Brotherhood Income Fund 56,651
</TABLE>
2
<PAGE> 160
<TABLE>
<S> <C>
Lutheran Brotherhood Municipal Bond Fund 22,227
Lutheran Brotherhood Money Market Fund 56,298
</TABLE>
Item 27. Indemnification.
Under Article VI of the Registrant's Master Trust Agreement each of its
Trustees and officers or persons serving in such capacity with another entity at
the request of the Registrant ("Covered Person") shall be indemnified against
all liabilities, including, but not limited to, amounts paid in satisfaction of
judgments, in compromises or as fines or penalties, and expenses, including
reasonable legal and accounting fees, in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such Covered Person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Trustee or officer,
director or trustee, except with respect to any matter as to which it has been
determined that such Covered Person had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (such conduct referred to hereafter as
"Disabling Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by a court or
other body before which the proceeding was brought that the person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Registrant as defined in
section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion.
Under the Distribution Agreement between the Registrant and Lutheran
Brotherhood Securities Corp., the Registrant's distributor, the Registrant has
agreed to indemnify, defend and hold Lutheran Brotherhood Securities Corp., its
officers, directors, employees and agents and any person who controls Lutheran
Brotherhood Securities Corp. free and harmless from and against any loss, claim,
damage, liability and expense incurred by any of them arising out of or based
upon any untrue or alleged untrue statement of material fact, or the omission or
alleged omission to state a material fact necessary to make the statements made
not misleading, in a Registration Statement, the Prospectus or Statement of
Additional Information of the Registrant, or any amendment or supplement
thereto, unless such statement or omission was made in reliance upon written
information furnished by Lutheran Brotherhood Securities Corp.
Under the Amended and Restated Transfer Agent and Service Agreement
between the Registrant and Lutheran Brotherhood Securities Corp., the Registrant
has agreed, provided that Lutheran Brotherhood Securities Corp. has at all
relevant times acted in good faith and without negligence or willful misconduct,
to indemnify and hold Lutheran Brotherhood Securities Corp. harmless from and
against any and all losses, damages, costs, charges, attorneys fees, payments,
expenses and liability arising out of or attributable to (a) all actions of
Lutheran Brotherhood Securities Corp. or its agents or subcontractors required
to be taken under the Transfer Agency and Service Agreement or which arise out
of the Registrant's lack of good faith, negligence, or willful misconduct or the
breach of any representation or warranty of the Registrant under the Transfer
Agency and Service Agreement, (c) the reliance on or use by Lutheran Brotherhood
Securities Corp. or its agents or subcontractors of information, records or
documents which are furnished by or on behalf of Registrant, (d) the reliance on
or the carrying out by Lutheran Brotherhood Securities Corp. or its agents or
subcontractors of any instructions or requests by Registrant, or (e) the offer
or sale of shares of the Registrant unknown by Lutheran Brotherhood Securities
Corp. to be in violation of law.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act of 1933 may be permitted to trustees, officers,
underwriters and controlling persons of the Registrant, pursuant to Article VI
of the Registrant's Master Trust Agreement, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant
3
<PAGE> 161
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such trustee, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
Lutheran Brotherhood Research Corp. has been engaged in the investment
advisory business since 1970. Lutheran Brotherhood, the indirect parent company
of LB Research, also acts as investment adviser to LB Series Fund, Inc.
The directors and officers of Lutheran Brotherhood Research Corp. are
listed below, together with their principal occupations during the past two
years. (Their titles may have varied during that period.)
Directors:
Robert P. Gandrud, Chairman (President and Chief Executive Officer of Lutheran
Brotherhood)
Rolf F. Bjelland (Executive Vice President of Lutheran Brotherhood)
Bruce J. Nicholson (Executive Vice President of Lutheran Brotherhood)
Paul R. Ramseth (Executive Vice President of Lutheran Brotherhood)
William H. Reichwald (Executive Vice President of Lutheran Brotherhood)
Officers:
Rolf F. Bjelland, President
Anita J. T. Young, Treasurer (Vice President and Treasurer of Lutheran
Brotherhood)
Otis F. Hilbert, Secretary (Vice President of Lutheran Brotherhood)
Jerald E. Sourdiff, Controller (Senior Vice President and Controller of Lutheran
Brotherhood)
Charles E. Heeren, Vice President (Vice President of Lutheran Brotherhood)
James R. Olson, Vice President (Vice President of Lutheran Brotherhood)
James M. Walline, Vice President (Vice President of Lutheran Brotherhood)
Michael A. Binger, Assistant Vice President (Associate Portfolio Manager of
Lutheran Brotherhood)
Randall L. Boushek, Assistant Vice President (Vice President of Lutheran
Brotherhood)
Janet I. Grangaard, Assistant Vice President (Associate Portfolio Manager of
Lutheran Brotherhood)
Thomas N. Haag, Assistant Vice President (Assistant Vice President of Lutheran
Brotherhood)
Michael G. Landreville, Assistant Vice President (Associate Portfolio Manager of
Lutheran Brotherhood)
Gail R. Onan, Assistant Vice President (Associate Portfolio Manager of Lutheran
Brotherhood)
Brian Thorkelson, Assistant Vice President (Associate Portfolio Manager of
Lutheran Brotherhood)
Scott A. Vergin, Assistant Vice President (Associate Portfolio Manager of
Lutheran Brotherhood)
Marie A. Sorensen, Assistant Vice President (Assistant Vice President of
Lutheran Brotherhood)
James M. Odland, Assistant Secretary (Assistant Vice President of Lutheran
Brotherhood)
Randall L. Wetherille, Assistant Secretary (Assistant Vice President of Lutheran
Brotherhood)
The business address of each of the above directors and officers
employed by Lutheran Brotherhood is 625 Fourth Avenue South, Minneapolis,
Minnesota 55415.
The business and other connections of the officers and directors of Rowe
Price-Fleming International, Inc. ("Sub-advisor") are set forth in the Form ADV
of Sub-advisor currently on file with the Securities and Exchange Commission
(File No. 801-14713).
Item 29. Principal Underwriters.
4
<PAGE> 162
(a) Lutheran Brotherhood Securities Corp. also serves as
principal underwriter for LB Series Fund, Inc.
(b) Directors and officers of Lutheran Brotherhood
Securities Corp. are as follows:
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
------------------ --------------------- ---------------------
<S> <C> <C>
William H. Reichwald President --
625 Fourth Avenue South
Minneapolis, MN 55415
Robert P. Gandrud Chairman and Director --
625 Fourth Avenue South
Minneapolis, MN 55415
Otis F. Hilbert Vice President, Counsel Vice President
625 Fourth Avenue South and Secretary Secretary
Minneapolis, MN 55415
Anita J. T. Young Treasurer --
625 Fourth Avenue South
Minneapolis, MN 55415
</TABLE>
(c) Not Applicable.
Item 30. Location of Accounts and Records.
The Registrant maintains the records required to be maintained by it
under Rules 31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company Act of
1940 at its principal executive offices at 625 Fourth Avenue South, Minneapolis,
Minnesota 55415. Certain records, including records relating to Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 under the Investment Company Act of 1940 by the
Registrant's transfer agent or custodian at the following locations:
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C>
Lutheran Brotherhood Securities Corp. 625 Fourth Avenue South
Minneapolis, Minnesota 55415
Norwest Bank Minnesota, N.A. Sixth and Marquette Avenue
Minneapolis, Minnesota 55402
State Street Bank and Trust Company 225 Franklin Street
Boston, Massachusetts 02110
</TABLE>
Item 31. Management Services.
Not Applicable.
Item 32. Undertakings.
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
5
<PAGE> 163
The Registrant hereby undertakes, if requested to do so by the holders
of at least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a trustee
or trustees and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940.
6
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant certifies that it meets all of the
requirements for effectiveness of this Amendment to its Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this amendment to its Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Minneapolis and State of
Minnesota, on the 28th day of October, 1997.
THE LUTHERAN BROTHERHOOD
FAMILY OF FUNDS
By: /s/ Randall L. Wetherille
-----------------------------------
Randall L. Wetherille,
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
* Trustee and President October 28, 1997
- ------------------------------------ Principal Executive Officer
Rolf F. Bjelland
* Treasurer October 28, 1997
- ----------------------------------- Principal Financial and
Wade M. Voigt Accounting Officer
* Trustee October 28, 1997
- ------------------------------------
Charles W. Arnason
* Trustee October 28, 1997
- ------------------------------------
Herbert F. Eggerding, Jr.
* Trustee October 28, 1997
- ------------------------------------
Noel K. Estenson
* Trustee October 28, 1997
- ------------------------------------
Connie M. Levi
* Trustee October 28, 1997
- ------------------------------------
Bruce J. Nicholson
* Trustee October 28, 1997
- ------------------------------------
Ruth E. Randall
</TABLE>
* By: /s/ Randall L. Wetherille
-------------------------------
Randall L. Wetherille,
Attorney-in-Fact Under Powers
of Attorney filed herewith and
incorporated by reference from
Post-Effective Amendment Nos.
52 and 55.
7
<PAGE> 1
EXHIBIT (1)(d)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
AMENDMENT NO. 3
TO
THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
AMENDMENT NO. 3 to the First Amended and Restated Master Trust Agreement
dated as of September 1, 1993 (the "Agreement") of Lutheran Brotherhood Family
of Funds (the "Trust"), made as of the 24th day of October, 1997.
W I T N E S S E T H:
WHEREAS, Article VII, Section 7.3 of the Agreement provides that the
Agreement may be amended at any time, so long as such amendment does not
materially adversely affect the rights of any shareholder and so long as such
amendment is not in contravention of applicable law, including the Investment
Company Act of 1940, as amended, by an instrument in writing signed by an
officer of the Trust pursuant to a vote of a majority of the Trustees; and
WHEREAS, the Trustees have the authority under Section 4.1 of the Agreement
to issue classes of Shares (as defined in the Agreement) of any Sub-Trust (as
defined in the Agreement) or divide the Shares of any Sub-Trust into classes,
each class having such different dividend, liquidation, voting and other rights
as the Trustees may determine, and to establish and designate the specific
classes of Shares of each Sub-Trust; and
WHEREAS, on September 9, 1997, a majority of the Trustees voted to
authorize the establishment of three classes of Shares to be designated as the
"Class A", "Class B" and "Institutional Class" shares for each of the Lutheran
Brotherhood Fund, Lutheran Brotherhood Opportunity Growth Fund, Lutheran
Brotherhood Income Fund, Lutheran Brotherhood Municipal Bond Fund, Lutheran
Brotherhood Money Market Fund, Lutheran Brotherhood High Yield Fund, Lutheran
Brotherhood World Growth Fund and Lutheran Brotherhood Mid Cap Growth Fund
(together, the "Funds"), the establishment of such classes and the designations
thereof to become effective upon the effectiveness of an amendment to the
Trust's registration statement on Form N-1A describing said classes; and
WHEREAS, on September 9, 1997, a majority of the Trustees further voted
that upon the effectiveness of the establishment and designation of such
classes, all of the then issued and outstanding shares of each Fund shall be
redesignated as Class A shares of each such Fund; and
WHEREAS, the undersigned has been duly authorized by the Trustees to
execute and file this Amendment No. 3 to the Agreement; and
NOW, THEREFORE, effective upon the effectiveness of an amendment to the
Trust's registration statement on Form N-1A describing the classes referred to
herein, the Agreement is hereby amended as follows:
<PAGE> 2
1. The first paragraph of Article IV, Section 4.2 of the Agreement is
hereby amended to read in pertinent part as follows:
"Section 4.2 ESTABLISHMENT AND DESIGNATION OF SUB-TRUSTS AND CLASSES.
Without limiting the authority of the Trustees set forth in Section 4.1 to
establish and designate any further Sub-Trusts, the Trustees hereby establish
and designate eight Sub-Trusts: "Lutheran Brotherhood Fund", "Lutheran
Brotherhood Opportunity Growth Fund", "Lutheran Brotherhood Income Fund",
"Lutheran Brotherhood Municipal Bond Fund", "Lutheran Brotherhood Money Market
Fund", "Lutheran Brotherhood High Yield Fund", "Lutheran Brotherhood World
Growth Fund" and "Lutheran Brotherhood Mid Cap Growth Fund". Each such Sub-Trust
shall consist of three classes designated as the "Class A" shares, the "Class B"
shares, and the "Institutional Class" shares. The Shares of such Sub-Trusts and
any Shares of any further Sub-Trust or class thereof that may from time to time
be established and designated by the Trustees shall (unless the Trustees
otherwise determine with respect to some further Sub-Trust at the time of
establishing and designating the same) have the relative rights and preferences
contained in the Multiple Class Expense Allocation Plan as from time to time
adopted by the Trustees and, in addition, the following relative rights and
preferences:"
The undersigned hereby certifies that the Amendment set forth above has
been duly adopted in accordance with the provisions of the Agreement.
IN WITNESS WHEREOF, the undersigned has hereunto set his hands as of the
day and year first above written.
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
By: _________________________________
Name: Rolf F. Bjelland
Title: Chairman, Trustee and President
2
<PAGE> 1
EXHIBIT 6
FIRST AMENDED AND RESTATED
DISTRIBUTION CONTRACT
This First Amended and Restated Distribution Contract dated as of the 31st
day of October, 1997 between Lutheran Brotherhood Securities Corp., a
corporation organized under the laws of the State of Pennsylvania and having a
place of business in Minneapolis, Minnesota (sometimes herein referred to as the
"Distributor"), and The Lutheran Brotherhood Family of Funds, a Delaware
business trust organized under the laws of Delaware and having a principal place
of business in Minneapolis, Minnesota (sometimes herein referred to as the
"Trust") which offers shares of beneficial interest in different series or
Sub-Trusts representing interests in different portfolios of assets (each series
of Shares (or Sub-Trusts) being referred to herein as a "Fund"). Each Fund may
be divided into two or more classes of shares (the "Classes"). Presently, the
Trust has eight Funds, namely the Lutheran Brotherhood Fund, Lutheran
Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Income Fund, Lutheran
Brotherhood Municipal Bond Fund, Lutheran Brotherhood Money Market Fund,
Lutheran Brotherhood High Yield Fund, Lutheran Brotherhood Mid Cap Growth Fund
and Lutheran Brotherhood World Growth Fund (the "Existing Funds"). Each of the
Existing Funds currently consists of three Classes designated as the "Class A
Shares", "Class B Shares" and "Institutional Class Shares" (collectively, the
"Shares"). In the event that hereafter the Trust establishes one or more
additional Sub- Trusts (or Classes thereof) with respect to which it desires to
retain the Distributor, it shall so notify the Distributor in writing (the
"Notice"). If the Distributor is willing to render such services on the terms
provided for herein it shall execute and deliver the Notice to the Trust,
whereupon such Sub-Trust shall become a Fund hereunder (or such Class shall
become a Class hereunder) and such Notice shall be attached to this contract and
when attached shall be a part hereof.
WITNESSETH: In consideration of the agreements herein contained and for
other good and valuable consideration, receipt of which is hereby acknowledged,
it is agreed:
1. APPOINTMENT OF THE DISTRIBUTOR.
The Trust hereby appoints the Distributor as its exclusive agent to sell
and distribute Shares of each Fund of the Trust at the offering price thereof as
from time to time determined in the manner herein provided. The Distributor
hereby accepts such appointment and agrees during the term of this Contract to
provide the services and to assume the obligations herein set forth.
2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to arrange to sell, as exclusive agent for
the Trust, from time to time during the term of this Contract shares of each
Fund upon the terms described in each such Fund's Prospectus(es). As used in
this Contract, the term "Prospectus" shall mean any prospectus and the term
"Statement of Additional Information" shall mean any statement of additional
information included in the Trust's Registration Statement and the term
"Registration Statement" shall mean the Registration Statement, including
exhibits and
<PAGE> 2
financial statements, most recently filed by the Trust with the Securities and
Exchange Commission and effective under the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), as such Registration Statement is amended by any amendments thereto at
the time in effect.
(b) Upon commencement of the continuous public offering of Shares of any
Fund of the Trust, the Distributor will hold itself available to receive orders
satisfactory to the Distributor, for the purchase of Shares of that Fund and
will accept such order on behalf of the Trust as of the time of receipt of such
orders and will transmit such orders as are so accepted to the Trust's Transfer
Agent as promptly as practicable. Purchase orders shall be deemed effective at
the time and in the manner set forth in a Fund's Prospectus. The Trust shall
furnish the Distributor, with all possible promptness, advice regarding the
determination of the net asset value per share of each Fund.
(c) (i) CLASS A SHARES. The offering price of the Class A Shares of a
Fund shall be the net asset value (as described in the Master Trust Agreement of
the Trust, as amended from time to time and determined as set forth in the
Prospectus of such Fund and the Statement of Additional Information) per Share
for that Fund next determined following receipt of an order plus the applicable
sales charge, if any, calculated in the manner set forth in the Fund's
Prospectus. The Distributor shall receive the entire amount of the sales charge,
if any, as compensation for its services under this Contract, however, the
Distributor may reallow all or any portion of such sales charge to agents or
employees of the Distributor or other persons involved in the sale of Class A
Shares of a Fund. Shares of a Fund may be sold at prices that reflect scheduled
variations in, or elimination of, the sales charge to particular categories of
investors or transactions in accordance with a Fund's Prospectus and the
Statement of Additional Information; and
(ii) CLASS B SHARES. The offering price of the Class B Shares of a
Fund shall be the net asset value (as described in the Master Trust Agreement of
the Trust, as amended from time to time and determined as set forth in the
Prospectus of such Fund and the Statement of Additional Information) per Share
for that Fund next determined following receipt of an order. Class B Shares of
the Lutheran Brotherhood Money Market Fund shall be offered solely in exchange
for Class B Shares of other Funds. The Class B Shares (except for shares of
Lutheran Brotherhood Money Market Fund as set forth in the Fund's Prospectus)
shall also be subject to a contingent deferred sales charge ("CDSC") as
calculated in the manner set forth in the Fund's Prospectus. The Distributor
shall receive the entire amount of the CDSC, if any, as compensation for its
services under this Contract, however, the Distributor may reallow all or any
portion of such CDSC to agents or employees of the Distributor. Shares of a Fund
may be sold at prices that reflect scheduled variations in, or elimination of,
the CDSC to purchaser categories of investments or purchases in accordance with
a Fund's Prospectus and the Statement of Additional Information.
2
<PAGE> 3
(iii) INSTITUTIONAL CLASS SHARES. The offering price of the
Institutional Class Shares of a Fund shall be the net asset value (as described
in the Master Trust Agreement of the Trust, as amended from time to time and
determined as set forth in the Prospectus of such Fund and the Statement of
Additional Information) per Share for that Fund next determined following
receipt of an order. The Institutional Class Shares shall be sold without any
initial sales charge or CDSC to investors who meet the eligibility requirements
set forth in a Fund's Prospectus and the Statement of Additional Information.
(d) The Distributor shall use its best efforts and shall not be
obligated to arrange for sales of any certain number of Shares of a Fund and the
services of the Distributor to the Trust hereunder shall not be deemed to be
exclusive, and the Distributor shall be free to (i) render similar services to,
and act as underwriter or distributor in connection with the distribution of
shares of other investment companies, and (ii) engage in any other businesses
and activities from time to time.
(e) The Distributor is authorized on behalf of the Trust to repurchase
Shares of a Fund presented to it by shareholders or dealers at the price
determined in accordance with, and in the manner set forth in, the Prospectus of
such Fund.
(f) In addition to the services described above, the Distributor will
provide services on behalf of the Funds with respect to the Class B Shares
(except Lutheran Brotherhood Money Market Fund) as is more fully set forth in
the Plan of Distribution pursuant to Rule 12b-1 with regard to such Class B
Shares of even date herewith. For providing these services, the Distributor
shall be entitled, subject to the terms and conditions of the Plan of
Distribution Pursuant to Rule 12b-1 adopted with regard to the Class B Shares
except Lutheran Brotherhood Money Market Fund, to a fee at an annual rate of
.75% of the average daily value of net assets represented by such Class B
Shares.
(g) The Distributor shall also undertake certain shareholder servicing
activities on behalf of the Funds with respect to the Class A Shares, as is more
fully set forth in the Shareholder Servicing Plan with regard to the Class A
Shares of even date herewith. For providing these services, the Distributor
shall be entitled, subject to the terms and conditions of the Shareholder
Servicing Plan adopted with regard to the Class A Shares, to a fee at an annual
rate of .25% of the average daily value of net assets represented by such Class
A Shares.
(h) The Distributor shall also undertake certain shareholder servicing
activities on behalf of the Funds with respect to the Class B Shares, as is more
fully set forth in the Shareholder Servicing Plan with regard to the Class B
Shares of even date herewith. For providing these services, the Distributor
shall be entitled, subject to the terms and conditions of the Shareholder
Servicing Plan adopted with regard to the Class B Shares, to a fee at an annual
rate of .25% of the average daily value of net assets represented by such Class
B Shares.
3
<PAGE> 4
3. DUTIES OF THE TRUST.
(a) The Trust agrees to sell Shares of its Funds so long as it has
Shares available for sale except that the Trust expressly reserves and shall
have the right to limit the class or classes of persons to whom shares of any
Fund may be sold.
(b) The Trust shall keep the Distributor fully informed with regard to
its affairs and shall furnish to the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares of the Funds. This
shall include, without limitation, one certified copy of all financial
statements of the Funds prepared by independent public accountants and such
reasonable number of copies of a Fund's most current Prospectus, the Statement
of Additional Information and annual and interim reports as the Distributor may
request. The Trust shall cooperate fully in the efforts of the Distributor to
arrange for the sale of Shares of the Funds in the performance by the
Distributor of its duties under this Contract.
(c) The Trust shall take, from time to time, all necessary action to
register the Shares of the Funds under the 1933 Act, including payments of the
related filing fees, so that there will be available for sale such number of
Shares of the Funds as the Distributor may be expected to sell. The Trust agrees
to file from time to time such amendments, reports and other documents as may be
necessary in order that there may be no untrue statement of a material fact in
the Registration Statement or Prospectus of a Fund, or necessary in order that
there may be no omission to state a material fact in the Registration Statement
or Prospectus of a Fund which omission would make the statements therein, in
light of the circumstances under which they were made, misleading.
(d) The Trust shall use its best efforts to take all appropriate
actions, including, without limitation, the filing of notices, as may be
required to permit the sale of the Shares of the Funds and the Trust in such
states as the Distributor shall designate, and, if necessary or appropriate in
connection therewith, to qualify and maintain the qualification of the Trust as
a broker-dealer in such states. The Distributor shall furnish such information
and other material relating to its affairs and activities as may be requested by
the Trust in connection with such qualifications.
4. MANNER OF OFFERING.
The Distributor will conform to and comply with all applicable federal
securities laws and the securities laws of any jurisdiction in which it sells,
directly or indirectly, any Shares.
4
<PAGE> 5
5. RESERVATIONS OF RIGHTS BY THE TRUST.
Notwithstanding the foregoing, the Trust may distribute shares of any Fund
without the payment of any selling commission to the Distributor in the
following instances:
(a) Any Fund may issue shares to shareholders as stock dividends or
stock splits;
(b) Shareholders of any Fund may be permitted to reinvest any dividends
or other distributions in shares of that Fund at net asset value;
(c) In case any other investment company is merged into, consolidated
with, or acquired by any Fund, that Fund's shares may be issued in connection
with any such merger, consolidation, or acquisition at less than public offering
price, but not less than net asset value per share;
(d) Any Fund's shares may be sold at net asset value to officers,
trustees, fully licensed representatives and full-time employees of the Trust,
Lutheran Brotherhood Research Corp., the investment adviser to the Funds, or the
Distributor or to such other persons identified in any Fund's current prospectus
pursuant to Rule 22d-1 adopted under the 1940 Act.
6. ALLOCATION OF EXPENSES.
(a) The Trust will be responsible for, and shall pay the expenses of:
(i) providing all necessary services, including fees and
disbursements of counsel, related to preparation, setting in type, printing and
filing of any Registration Statement and/or Prospectus required under the
Securities Act of 1933, as amended, or under state securities law, covering its
Shares, and all amendments and supplements thereto, and preparing, setting in
type, printing and mailing periodic reports to existing shareholders;
(ii) the cost of all registration or qualification fees;
(iii) the cost of preparing temporary and permanent share
certificates for Shares of the Trust;
(iv) all federal and state (if any) issue and/or transfer taxes
payable upon the issue by or (in the case of treasury shares) transfer from
Trust to the Distributor of any and all Shares distributed hereunder.
5
<PAGE> 6
(b) The Distributor agrees that, after the Prospectus and periodic
reports have been set in type, it will bear the expense of printing and
distributing any copies thereof which are used in connection with the offering
of Shares to dealers or prospective investors. The Distributor further agrees
that it will bear the expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by dealers in
connection with the offering of Shares for sale to the public, and any expense
of advertising in connection with such offering. The Distributor will also pay
fees for services rendered by the transfer agent on behalf of the Distributor.
7. INDEPENDENT CONTRACTOR.
The Distributor shall be an independent contractor. The Distributor is
responsible for its own conduct, for the employment, control and conduct of its
agents and employees and for injury to such agents or employees or to others
through its agents or employees. The Distributor assumes full responsibility for
its agents and employees under applicable statutes and agrees to pay all
employer taxes hereunder.
8. INDEMNIFICATION.
The Trust agrees to indemnify, defend and hold the Distributor, its
officers, directors, employees and agents and any person who controls the
Distributor within the meaning of Section 15 of the 1933 Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "1934 Act"), free and
harmless from and against any and all losses, claims, damages, liabilities and
expenses (including the cost of investigating or defending such claims, damages
or liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, directors, employees and agents or any such
controlling person may incur under the 1933 Act, the 1934 Act, or under common
law or otherwise, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, a
Prospectus, or the Statement of Additional Information or arising out of or
based upon the omission or any alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such claims, damages, liabilities or expenses
arise out of or are based upon any untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by the Distributor to the Trust for use in the
Registration Statement, a Prospectus or a Statement of Additional Information.
The Distributor agrees to promptly notify the Trust of any event giving rise to
rights of indemnification hereunder, including any action brought against the
Distributor, its officers, directors, employees and agents or any such
controlling person, such notification to be given by letter or telegram
addressed to the Trust at its principal business office, but the Distributor's
failure to notify the Trust shall not relieve the Trust from any obligation it
may have to indemnify the Distributor hereunder or otherwise.
6
<PAGE> 7
The Distributor agrees to indemnify, defend and hold the Trust, its
Trustees and officers and any person who controls the Trust, if any, within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, free and
harmless from and against any and all losses, claims, damages, liabilities and
expenses (including the cost of investigating or defending such claims, damages
or liabilities and any counsel fees incurred in connection therewith) which the
Trust, its Trustees or officers or any such controlling person may incur under
the 1933 Act, or under common law or otherwise, but only to the extent that such
liability or expense incurred by the Trust, its Trustees or officers or such
controlling person arises out of or is based upon any untrue statement or
alleged untrue statement of a material fact contained in information furnished
in writing by Distributor to the Trust for use in the Registration Statement, a
Prospectus or the Statement of Additional Information. The Trust agrees to
promptly notify the Distributor of any event giving rise to rights of
indemnification hereunder, including any action brought against the Trust, its
Trustees or officers or any such controlling person, such notification being
given to the Distributor at its principal business office, but the Trust's
failure so to notify the Distributor shall not relieve the Distributor from any
obligation it may have to indemnify the Trust hereunder or otherwise.
9. TERM OF CONTRACT.
This Contract shall be executed and become effective with respect to all
Existing Funds on October 31, 1997, and, with respect to any additional Fund, on
the date of receipt by the Trust of the Notice from the Distributor that it is
willing to serve as Distributor with respect to such Fund. Unless terminated as
provided herein, this Contract shall continue in force for one (1) year from the
date of its execution and thereafter from year to year, provided continuance is
approved at least annually by either (i) the vote of a majority of the Trustees
of the Trust, or by the vote of a majority of the outstanding voting securities
of the Trust, and (ii) the vote of a majority of those Trustees of the Trust who
are not interested persons of the Trust and who have no direct or indirect
financial interest in any Plan of Distribution adopted by the Trust (or any Fund
or class of Shares thereof) or any agreements related to such plan(s)
("Qualified Trustees"), cast in person at a meeting called for the purpose of
voting on the approval. As used in this Section 10, the terms "vote of a
majority of the outstanding voting securities" and "interested person" shall
have the respective meanings specified in the 1940 Act and the rules enacted
thereunder as now in effect or as hereafter amended. In addition to termination
by failure to approve continuance or by assignment, this Contract may at any
time be terminated without the payment of any penalty by vote of a majority of
the Qualified Trustees, or by vote of a majority of the outstanding voting
securities of the Trust, on not more than sixty (60) days' written notice by the
Trust. This Contract may be terminated by the Distributor upon not less than
sixty (60) days' prior written notice to the Trust. This Contract supersedes any
prior agreement relating to the subject matter hereof between the parties.
7
<PAGE> 8
10. ASSIGNMENT.
This Contract may not be assigned by the Distributor and shall
automatically terminate in the event of an assignment (as defined in the 1940
Act) by the Distributor, provided, however, that the Distributor may employ such
other person, persons, corporation, or corporations, as it shall determine, in
order to assist it in carrying out this Contract.
11. AMENDMENT.
This Contract may be amended at any time by mutual agreement in writing of
the parties hereto, provided that any such amendment is approved by a majority
of the Qualified Trustees or by the holders of a majority of the Shares of the
Trust.
12. LIMITATION OF LIABILITY.
The Master Trust Agreement dated as of September 1, 1993, amended from time
to time, establishing the Trust, which is hereby referred to, provides that the
name Lutheran Brotherhood Family of Funds means the Trustees from time to time
serving (as Trustees but not personally) under said Master Trust Agreement. It
is expressly acknowledged and agreed that the obligations of the Trust hereunder
shall not be binding upon any of the shareholders, Trustees, officers, employees
or agents of the Trust, personally, but shall bind only the trust property of
the Trust, as provided its Master Trust Agreement. The execution and delivery of
this Contract have been authorized by the Trustees of the Trust and signed by
the President of the Trust, acting as such, and neither such authorization by
such Trustee nor such execution or delivery by such officer shall be deemed to
have been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of the Trust as provided
in its Master Trust Agreement. The obligations of any Fund hereunder shall be
the exclusive obligation of that Fund and the Distributor can only look to the
assets of that Fund to satisfy any debt or obligation incurred by the Fund
hereunder.
[Remainder of page intentionally left blank.]
8
<PAGE> 9
IN WITNESS WHEREOF, this Contract has been executed for the Distributor and
the Trust by their duly authorized offices as of the date first set forth above.
THE LUTHERAN BROTHERHOOD LUTHERAN BROTHERHOOD
FAMILY OF FUNDS SECURITIES CORP.
By: By:
--------------------- -----------------
ATTEST: ATTEST:
- ------------------------ --------------------
9
<PAGE> 1
Exhibit (8)(b)
AMENDED AND RESTATED TRANSFER AGENCY
AND SERVICE AGREEMENT
BETWEEN
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
AND
LUTHERAN BROTHERHOOD SECURITIES CORP.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Article 1 Terms of Appointment; Duties of LBSC
Article 2 Fees and Expenses
Article 3 Representations and Warranties of LBSC
Article 4 Representations and Warranties of the Trust
Article 5 Indemnification
Article 6 Covenants of the Trust and LBSC
Article 7 Duration and Termination of Agreement
Article 8 Assignment
Article 9 Amendment
Article 10 Minnesota Law to Apply
Article 11 Merger of Agreement
</TABLE>
1
<PAGE> 3
AMENDED AND RESTATED TRANSFER AGENCY
AND SERVICE AGREEMENT
AGREEMENT made as of the 31st day of October, 1997, by and between The Lutheran
Brotherhood Family of Funds, a Delaware Business Trust,having its principal
place of business at 625 Fourth Avenue South, Minneapolis, Minnesota 55415 (the
"Trust"), and Lutheran BrotherhoodSecurities Corp., a Pennsylvania corporation
having its principal place of business at 625 Fourth Avenue South, Minneapolis,
Minnesota 55415 ("LBSC").
WHEREAS, LBSC is engaged in the business of rendering transfer agency services
to open-end management investment companies and is registered as a transfer
agent under the Securities Exchange Act of 1934, as amended: and
WHEREAS, the Trust engages in business as an open-end management investment
company and is so registered under the Investment Company Act of 1940, as
amended; and
WHEREAS, the Trust is authorized to issue shares of beneficial interest in
separate series with each such series representing interests in a separate
portfolio of securities and other assets; and
WHEREAS, the Trust presently offers shares in eight series, such series being
Lutheran Brotherhood Opportunity Growth Fund; Lutheran Brotherhood Mid Cap
Growth Fund; Lutheran Brotherhood World Growth Fund; Lutheran Brotherhood Fund;
Lutheran Brotherhood High Yield Fund; Lutheran Brotherhood Income Fund; Lutheran
Brotherhood Municipal Bond Fund; Lutheran Brotherhood Money Market Fund,
together with all other series subsequently established by the Trust with
respect to which LBSC renders transfer agency services pursuant to the terms of
this agreement, being herein collectively referred to as the "Funds" and
individually as a "Fund"; and
WHEREAS, the Trust is authorized to issue shares of beneficial interest of each
Fund in separate classes with each such class of shares representing interests
in the same portfolio of securities and other assets; and
WHEREAS, the Trust has established a multiple class structure effective as of
the date hereof pursuant to which the Trust presently offers three classes of
shares in each of the Funds, such classes of shares consisting of Class A, Class
B, and Institutional Class shares, being herein collectively referred to as the
"Classes" and individually referred to as a "Class"; and
WHEREAS, the Trust and LBSC are parties to that certain Transfer Agency and
Service Agreement dated as of November 1, 1993 (the "Original Agreement"); and
WHEREAS, the Trust and LBSC desire to amend and restate the Original Agreement
to, among other things, reflect the establishment of the Classes; and
2
<PAGE> 4
WHEREAS, the Trust desires to appoint LBSC as its transfer agent, dividend
disbursing agent and agent in connection with certain other activities, and LBSC
desires to accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows.
ARTICLE 1 TERMS OF APPOINTMENT;
DUTIES OF LBSC
1.01 Subject to the terms and conditions set forth in this Agreement, the Trust
hereby employs and appoints LBSC to act as, and LBSC agrees to act as its
transfer agent for the Funds' authorized and issued shares of each Class of
their common stock, $.001 par value, ("Shares"), dividend disbursing agent and
agent in connection with any accumulation, open account or similar plans
provided to the shareholders of the Funds ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("Prospectus") of the Funds, including without limitation any periodic
investment plan or periodic redemption program.
1.02 LBSC agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by agreement
between the Trust and LBSC, LBSC shall:
(i) Receive for acceptance orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation thereof to the Custodian of the
Funds authorized pursuant to the Master Trust Agreement of the Trust (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number and Class of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions and
deliver the appropriate documentation thereto to the Custodian;
(iv) At the appropriate time as and when it receives moneys paid to it by the
Custodian with respect to any redemption, pay over or cause to be paid over in
the appropriate manner such moneys as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon receipt of
appropriate instructions;
3
<PAGE> 5
(vi) Prepare and transmit payments of dividends and distributions declared by
the Funds;
(vii) Maintain records of accounts for and advise the Funds and their
Shareholders as to the foregoing; and
(viii) Record the issuance of Shares of the Funds and maintain pursuant to SEC
Rule 17Ad-10(e), under the Securities Exchange Actof 1934, a record of the total
number of Shares of each Class of the Funds which are authorized, based upon
data provided to it by the Trust, issued and outstanding. LBSC shall also
provide the Trust on a regular basis with the total number of Shares of each
Class which are authorized and issued and outstanding and shall have no
obligation, when recording the issuance of Shares, to monitor the issuance of
such Shares or to take cognizance of any laws relating to the issuance or sale
of such Shares, which functions shall be the sole responsibility of the Trust.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), LBSC shall:
(i) perform all of the customary services of a transfer agent, dividend
disbursing agent and, as relevant, agent in connection with accumulation,
open-account or similar plans (including without limitation any periodic
investment or periodic redemption program), including but not limited
to:maintaining all Shareholder accounts, preparing Shareholder meeting lists,
mailing proxies, receiving and tabulating proxies, mailing Shareholder reports
and Prospectuses to current Shareholders, withholding taxes on accounts when
appropriate, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of accounts to Shareholders for all purchases and
redemption of Shares and other confirmable transactions in Shareholder accounts,
preparing and mailing activity statements for Shareholders, and providing
Shareholder account information and (ii) provide a system which will enable the
Funds to monitor the total number of Shares of each Class of each Fund sold in
each state. The Trust shall (i) identify to LBSC in writing those transactions
and assets to be treated as exempt from blue sky reporting in each state and
(ii) verify the establishment of transactions for each state on the system prior
to activation and thereafter monitor the daily activity for each state. The
responsibility of LBSC for the Trust's blue sky state registration status is
solely limited to the initial establishment of transactions subject to blue sky
compliance by the Trust and the reporting of such transactions to the Trust as
provided above. Procedures applicable to certain of these services may be
established from time to time by agreement between the Trust and LBSC.
4
<PAGE> 6
ARTICLE 2 FEES AND EXPENSES
2.01 For performance by LBSC pursuant to this Agreement, the Trust agrees to
pay LBSC annual maintenance fees for each Shareholder account of each Class of
the Funds as agreed to by the Trust and LBSC. Such fees and out-of-pocket
expenses and advances identified under Section 2.02 below may be changed from
time to time subject to mutual agreement between the Trust and LBSC.
2.02 In addition to the fees paid under Section 2.01 above, the Trust agrees to
reimburse LBSC for out-of-pocket expenses or advances incurred by LBSC for the
items set out in the fee schedule attached hereto. In addition, any other
expenses incurred by LBSC at the request or with the consent of the Trust, will
be reimbursed by the Trust. In no event will LBSC be reimbursed for such
out-of-pocket expenses for any items for which LBSC, Lutheran Brotherhood,
Lutheran Brotherhood Research Corp., or any other entity would be reimbursed by
the Trust under any other agreement, contract or reimbursement arrangement.
2.03 The Trust agrees to pay all fees and reimbursable expenses within five (5)
days following the receipt of the respective billing notice by the Trust.
Postage for mailing of dividends, proxy materials, Trust and Fund reports,
Prospectuses and other mailings to all Shareholder accounts shall be advanced to
LBSC at least seven (7) days prior to the mailing of such materials.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF LBSC
LBSC represents and warrants to the Trust that:
3.01 It is a corporation duly organized and existing and in good standing under
the laws of the State of Pennsylvania.
3.02 It is duly qualified to carry on its business in the State of Minnesota.
3.03 It is empowered under the applicable laws and by its Articles of
Incorporation and Bylaws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
5
<PAGE> 7
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE TRUST
The Trust warrants and represents to LBSC that:
4.01 It is a Delaware Business Trust duly organized and existing under the laws
of the State of Delaware.
4.02 It is empowered under applicable laws and by its Master Trust Agreement
and Bylaws to enter into and perform this Agreement.
4.03 All necessary proceedings required by said Master Trust Agreement and
Bylaws have been taken to authorize it to enter into this Agreement.
4.04 It is an open-end and diversified management investment company under the
Investment Company Act of 1940.
4.05 A registration under the Securities Act of 1933 is currently effective and
will remain effective, and appropriate state securities law filings have been
made and will continue to be made, with respect to all Shares of all Classes of
the Funds being offered for sale.
ARTICLE 5 INDEMNIFICATION
5.01 Provided that LBSC has, at all relevant times acted in good faith and
without negligence or willful misconduct, LBSC shall not be responsible for, and
the Trust shall indemnify and hold LBSC harmless from and against, any and all
losses, damages, costs, charges, attorney fees, payments, expenses and liability
arising out of or attributable to:
(a) All actions of LBSC or its agents or subcontractors required to be taken
pursuant to this Agreement.
(b) The Trust's refusal or failure to comply with the terms of this Agreement,
or which arises out of the Trust's lack of good faith, negligence, or willful
misconduct or which arises out of the breach any representation or warranty of
the Trust hereunder.
(c) The reliance on or the use by LBSC or its agents or subcontractors of
information, records or documents which
(i) are received by LBSC or its agents or subcontractors and furnished to it by
or on behalf of the Trust, and
(ii) have been prepared and/or maintained by the Trust or any other person or
firm on behalf of the Trust.
(d) The reliance on, or the carrying out by LBSC or its agents or subcontractors
of any instructions or requests by the Trust.
(e) The offer or sale of Shares unknown by LBSC to be in violation of any
requirement
6
<PAGE> 8
under federal securities laws or regulations or the securities laws or
regulations of any state that such Shares be registered in such state or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state, provided that LBSC has not knowingly violated or knowingly participated
in the violation of state and/or federal securities laws or regulations relative
to the offer and sale of such Shares.
5.02 In all instances in which LBSC shall seek indemnification under the
provisions of Section 5.01 for its actions or for its reliance on actions of the
Trust, all such actions must have been taken in good faith and without
negligence or willful misconduct and all such reliance must have been
reasonable.
5.03 LBSC shall indemnify and hold the Trust harmless from and against any and
all losses, damages, costs, charges, attorney fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by LBSC as a result of LBSC's lack of good faith, negligence or willful
misconduct.
5.04 At any time LBSC may apply to any officer of the Trust for instructions,
and may consult with legal counsel with respect to any matter arising in
connection with the services to be performed by LBSC under this Agreement, and
LBSC and its agents or subcontractors shall not be liable and shall be
indemnified by the Trust for any actions taken or omitted by it in reliance upon
such instructions or upon the opinion of such counsel. LBSC, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Trust, reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to LBSC or its
agents or subcontractors by machine readable input, telex, facsimile
transmission, CRT data entry or other similar means authorized by the Trust, and
shall not be held to have received notice of any change of authority of any
person, until receipt of written notice thereof from the Trust. LBSC, its agents
and subcontractors shall also be protected and indemnified in recognizing stock
certificates which are reasonably believed to bear the proper manual or
facsimile signatures of the officers of the Trust, and proper countersignatures
of any formal transfer agent or registrar, or of any co-transfer agent or
co-registrar.
5.05 In the event either party is unable to perform its obligations under the
terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, such party shall
not be liable for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.06 In order that the indemnification provisions contained in this Article 5
shall apply, upon the assertion of a claim for which either party may be
required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other
7
<PAGE> 9
party's written consent.
ARTICLE 6 COVENANTS OF THE TRUST AND LBSC
6.01 The Trust shall promptly furnish to LBSC the following:
(a) A certified copy of the resolution of the Board of Trustees of the Trust
authorizing the appointment of LBSC and the execution and delivery of this
Agreement.
(b) A copy of the Master Trust Agreement and Bylaws of the Trust and all
amendments thereto.
6.02 LBSC hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Trust for safekeeping of stock certificates, check
forms and facsimile signature imprinting devices, if any; and for the
preparation or use, and for account keeping of, such certificates, forms and
devices.
6.03 LBSC shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, LBSC agrees that all such records prepared or maintained
by LBSC relating to the services to be performed by LBSC hereunder are the
property of the Trust and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be surrendered promptly to the
Trust on and in accordance with its request.
6.04 LBSC and the Trust agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not voluntarily be disclosed to any other person, except
as may be required by law.
6.05 In case of any requests or demands for the inspection of the Shareholder
records of the Funds, LBSC will endeavor to notify the Trust and to secure
instructions from an authorized officer of the Trust as to such inspection. LBSC
reserves the right, however, to exhibit the Shareholder records to any person
when it is advised by its counsel that it may be held liable for the failure to
exhibit the Shareholder records to such person.
8
<PAGE> 10
ARTICLE 7 DURATION AND TERMINATION OF AGREEMENT
7.01 This Agreement shall become effective as of the date hereof. Unless
terminated as herein provided, this Agreement shall remain in full force and
effect for two years from the date hereof. Subsequent to such initial period of
effectiveness, this Agreement shall continue in full force and effect for
periods of one year thereafter so long as such continuance is approved at least
annually (a) by vote of a majority of the Trustees of the Trust and (b) by the
vote of a majority of the Trustees of the Trust who are not parties to this
agreement or "interested persons" (as defined by the Investment Company Act of
1940, as amended) of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
7.02 This Agreement may be terminated by either party upon one hundred twenty
(120) days written notice to the other.
7.03 Should the Trust exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and materials will be borne by
the Trust. Additionally, LBSC reserves the right to charge for any other
reasonable expenses associated with such termination and/or a charge equivalent
to the average of three (3) months' fees.
ARTICLE 8 ASSIGNMENT
8.01 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
ARTICLE 9 AMENDMENT
9.01 This Agreement may be amended or modified only by a written agreement
executed by both parties and authorized or approved by a resolution of the
majority of the Trustees of the Trust and the majority of the Trustees of the
Trust who are not parties to this agreement or "interested persons" (as defined
by the Investment Company Act of 1940, as amended) of any such party, cast in
person at a meeting called for the purpose of voting on such approval.
ARTICLE 10 MINNESOTA LAW TO APPLY
10.01 This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Minnesota.
9
<PAGE> 11
ARTICLE 11 MERGER OF AGREEMENT
11.01 This Agreement constitutes the entire agreement of the parties hereto and
supersedes any prior agreement with respect to the subject matter hereof whether
oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf under their seals by and through their duly
authorized officers, as of the day and year first written above.
THE LUTHERAN BROTHERHOOD LUTHERAN BROTHERHOOD
FAMILY OF FUNDS SECURITIES CORP.
By: By:
-------------------------- -------------------------------
Rolf F. Bjelland, President William H. Reichwald, President
ATTEST: ATTEST:
By: By:
-------------------------- -------------------------------
Otis F. Hilbert, Secretary Otis F. Hilbert, Secretary
10
<PAGE> 1
EXHIBIT 10
GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE
BOSTON,MASSACHUSETTS 02109-2881
TELEPHONE (617) 570-1000
TELECOPIER (617) 523-1231
October 27, 1997
The Lutheran Brotherhood Family of Funds
625 Fourth Avenue South
Minneapolis, Minnesota 55415
Gentlemen:
As counsel to The Lutheran Brotherhood Family of Funds (the "Trust"), a
Delaware business trust, we have been asked to render our opinion in connection
with the proposed issuance by the Trust of an indefinite number of Class A,
Class B and Institutional Class shares (the "Shares") of beneficial interest,
$.001 par value, of the Trust representing interests in Lutheran Brotherhood
Opportunity Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund, Lutheran
Brotherhood World Growth Fund, Lutheran Brotherhood Fund, Lutheran Brotherhood
High Yield Fund, Lutheran Brotherhood Income Fund, Lutheran Brotherhood
Municipal Bond Fund and Lutheran Brotherhood Money Market Fund, all as more
fully described in the Prospectuses (the "Prospectuses") and Statement of
Additional Information ("Statement of Additional Information") contained in
Post-Effective Amendment No. 60 (the "Amendment") to the Trust's Registration
Statement on form N-1A (File No. 2-25984) to be filed by the Trust.
We have examined the First Amended and Restated Master Trust Agreement of
the Trust dated September 1, 1993, as amended, the By-Laws of the Trust, records
of certain meetings of the Trustees of the Trust, the Prospectuses and Statement
of Additional Information contained in the Amendment, and such other documents,
records and certificates as we deemed necessary for the purposes of this
opinion.
Based upon the foregoing, we are of the opinion that the Shares, when sold
in accordance with the terms of the applicable Prospectus and Statement of
Additional Information in effect at the time of sale, will be legally issued,
fully paid and non-assessable by the Trust.
<PAGE> 2
GOODWIN, PROCTER & HOAR LLP
The Lutheran Brotherhood Family of Funds
October 31, 1997
Page 2
We hereby consent to being named in the Prospectuses and Statement of
Additional Information contained in the Amendment and to the filing of this
opinion as an exhibit to the Amendment.
Very truly yours,
/s/ Goodwin, Procter & Hoar LLP
------------------------------
GOODWIN, PROCTER & HOAR LLP
<PAGE> 1
Exhibit (11)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 60 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated December 9, 1996 relating to the financial
statements and financial highlights appearing in the October 31, 1996 Annual
Report to Shareholders of the Lutheran Brotherhood Family of Funds which is
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the headings "Financial Highlights" and
"Independent Accountants" in the Prospectus and under the heading "Independent
Accountants" in the Statement of additional Information.
/s/ Price Waterhouse LLP
- -----------------------------
Price Waterhouse LLP
Minneapolis, Minnesota
October 30, 1997
<PAGE> 1
EXHIBIT (15)(a)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
(CLASS B)
WHEREAS, The Lutheran Brotherhood Family of Funds, an unincorporated
association organized as a business trust under the laws of the State of
Delaware (the "Trust"), engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Trust is authorized (i) to issue shares of beneficial interest
in separate series, with the shares of each such series representing the
interests in a separate portfolio of securities and other assets, and (ii) to
divide the shares within each such series into two or more classes; and
WHEREAS, the Trust has established the following portfolio series: Lutheran
Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund,
Lutheran Brotherhood World Growth Fund, Lutheran Brotherhood Fund, Lutheran
Brotherhood High Yield Fund, Lutheran Brotherhood Income Fund, Lutheran
Brotherhood Municipal Bond Fund, and Lutheran Brotherhood Money Market Fund
(each such portfolio except for Lutheran Brotherhood Money Market Fund being
referred to herein individually as an "Initial Series" and collectively as the
"Initial Series" and such series, together with all other series subsequently
established by the Trust and made subject to this Plan, being referred to herein
individually as a "Series" and collectively as the "Series"); and
WHEREAS, the Trust has established three classes of shares, such classes
being referred to as "Class A", "Class B" and "Institutional Class"; and
WHEREAS, the Trust may be deemed a distributor of the Shares within the
meaning of Rule 12b-1 under the Act, and desires to adopt a Plan of Distribution
with respect to the Class B shares (the "Shares") of each Initial Series
pursuant to such Rule (the "Plan"); and
WHEREAS, the Trust may amend and restate its existing Distribution Contract
(the "Distribution Contract") dated as of November 1, 1993 with Lutheran
Brotherhood Securities Corp. ("LBSC") to reflect the establishment of Class A,
Class B and institutional class shares and to confirm the status of the
Distribution Contract as an "agreement related to a plan" within the meaning of
Rule 12b-1 under the Act; and
WHEREAS, the Trust may also enter into one or more agreements (the
Distribution Contract, as so amended and restated, and each such agreement being
referred to as an "Agreement") for distribution of the Shares with one or more
underwriters (LBSC and each such underwriter being referred to as a
"Distributor"); and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) and who have no direct
or indirect financial interest in the operation of the Plan or the Agreement and
any agreements relating
<PAGE> 2
to it (the "Qualified Trustees"), having determined, in the exercise of their
reasonable business judgment and in light of their fiduciary duties under state
law and under Section 36(a) and (b) of the Act, that there is a reasonable
likelihood that this Plan and the Agreement will benefit the Class B shares of
each Initial Series and its shareholders, have accordingly approved the Plan and
the Agreement by votes cast in person at a meeting called for the purpose of
voting on the Plan and the Agreement and any agreements related thereto.
NOW, THEREFORE, the Trust hereby adopts this Plan in accordance with Rule
12b- 1 under the Act, on the following terms and conditions:
1. DISTRIBUTION ACTIVITIES. Subject to the supervision of the Board of
Trustees, the Trust may engage, directly or indirectly, in financing any
activities primarily intended to result in the sale of Class B Shares,
including, but not limited to, the following: (1) making payments to
underwriters, securities dealers and others engaged in the sale of Shares,
including payments to the Distributor to be used to compensate or reimburse the
Distributor and others (including affiliates of the Distributor) engaged in the
distribution and marketing of Shares or furnishing assistance to investors on an
ongoing basis, and (2) providing reimbursement of direct out-of-pocket
expenditures incurred by the Distributor in connection with the distribution and
marketing of Shares, (3) providing reimbursements of payments of commissions to
the Distributor's field force and others involved in the distribution of the
Class B shares at the time of purchase, plus interest at a rate not to exceed
prime plus 1% on the amount of unreimbursed commissions and (4) providing
payment of expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of sales literature, the preparation,
printing and distribution of prospectuses of the Trust and reports for
recipients other than existing shareholders of the Trust, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Trust may, from time to time, deem
advisable. The Trust and the Series are authorized to engage in the activities
listed above, and in other activities primarily intended to result in the sale
of Class B shares, either directly or through other persons with which the Trust
has entered into Agreements pursuant to the Plan. Unreimbursed commissions shall
be the amount paid by Distributor to its field force less the amount received by
the Distributor as contingent deferred sales charges ("CDSCs") and less amounts
received as 12b-1 payments through the date of calculation.
2. MAXIMUM EXPENDITURES. The expenditures to be made by the Initial
Series pursuant to this Plan and the basis upon which payment of such
expenditures will be made shall be determined from time to time by the Trustees,
but in no event may such expenditures exceed the following: (i) with respect to
Shares of the Initial Series, an annual rate of .75% of the average daily value
of net assets represented by such Shares, and (ii) with respect to Shares of any
Series subsequently established by the Trust and made subject to this Agreement,
the annual rate as agreed upon and specified in an addendum hereto. The
expenditures to be made
2
<PAGE> 3
pursuant to this Plan shall commence with respect to Shares of a Series as of
the date on which this Plan becomes effective with respect to each such Series.
3. PAYMENTS. The Distributor shall be entitled to the entire amount of
the CDSC paid by shareholders of the Class B shares, if any, calculated in the
manner set forth in the prospectus and SAI of the Initial Series. Pursuant to
this Plan, the Trust shall also make periodic payments to the Distributor at the
annual rate provided for in the Agreement with respect to the Shares of each
Series. The Distributor shall in turn remit to and allocate among others
(including affiliates of the Distributor) in consideration of and as
reimbursement for expenses incurred in the provision of distribution and
marketing services and furnishing assistance to investors on an ongoing basis,
such amounts as the Distributor shall determine. Any amounts received by the
Distributor, whether paid under the Agreement or in the form of a CDSC, and not
so allocated may be retained by the Distributor as compensation to the
Distributor for providing services under the Agreement and/or as reimbursement
for expenses incurred in connection with the distribution and marketing of the
Shares and the servicing of investor accounts as contemplated by Section 1
hereof.
4. TERM AND TERMINATION.
(a) Initial Series. This Plan shall become effective with respect to
the Shares of each Initial Series as of the later of (i) the date on which an
amendment to the Registration Statement on Form N-1A with respect to the Shares
becomes effective under the Securities Act of 1933, as amended, or (ii) the date
on which each Initial Series commences offering the Shares to the public and
shall continue in effect with respect to the Shares (subject to Section 4(d)
hereof) until one year from the date of such effectiveness, unless the
continuation of this Plan shall have been approved with respect to the Shares in
accordance with the provisions of Section 4(c) hereof.
(b) Additional Series. This Plan shall become effective with respect
to the Shares of each additional Series established by the Trust after the date
hereof and made subject to this Plan upon commencement of the initial public
offering thereof (provided that the Plan has previously been approved with
respect to the Series by votes of a majority of both (i) the Board of Trustees
of the Trust and (ii) the Qualified Trustees, cast in person at a meeting held
before the initial public offering of such additional Series thereof and called
for the purpose of voting on such approval), and shall continue in effect with
respect to each such additional Series or class (subject to Section 4(d) hereof)
for one year thereafter, unless the continuation of this Plan shall have been
approved with respect to such additional Series in accordance with the
provisions of Section 4(c) hereof. The Distributor and the Trust on behalf of
each such additional Series shall each sign an addendum hereto agreeing to be
bound hereby and setting forth such specific and different terms as the parties
may agree upon, including, without implied limitation, the amount and purpose of
payments to be made hereunder.
3
<PAGE> 4
(c) Continuation. This Plan and the Agreement shall continue in effect
with respect to each Series subsequent to the initial term specified in Section
4(a) and (b) for so long as such continuance is specifically approved at least
annually by votes of a majority of both (i) the Board of Trustees of the Trust
and (ii) the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on this Plan, subject to any shareholder approval requirements
existing under applicable law.
(d) Termination.
(i) This Plan may be terminated at any time with respect to the
Shares of any Series thereof by vote of a majority of the Qualified Trustees, or
by vote of a majority of the outstanding voting Shares of that Series. For
purposes of the Plan, the term "vote of a majority of the outstanding voting
Shares" of any Series shall mean the vote of the lesser of (A) 67 percent or
more of the outstanding voting Shares present at such meeting, if the holders of
more than 50 percent of the outstanding voting Shares are present and
represented by proxy; or (B) 50 percent or more of the Shares. The Plan may
remain in effect with respect to a Series even if it has been terminated in
accordance with this Section 4(d) with respect to one or more other Series of
the Trust.
(ii) The Agreement may be terminated at any time, without penalty,
with respect to the Shares of any Series by vote of a majority of the Qualified
Trustees or by vote of a majority of the outstanding voting Shares of that
Series on sixty days' written notice to the Distributor. In addition, the
Agreement shall be terminated automatically in the event of its assignment.
5. AMENDMENTS. This Plan may not be amended to increase materially the
amount of distribution expenditures provided for in Section 2 hereof unless such
amendment is approved by a vote of a majority of the outstanding Shares of each
Series with respect to which a material increase in the amount of distribution
expenditures is proposed, and no material amendment to the Plan shall be made
unless approved in the manner provided for annual renewal in Section 4(c)
hereof. Otherwise, this Plan may be amended with respect to the Shares of a
Series by vote of a majority of the Qualified Trustees or the outstanding voting
Shares of that Series.
6. INDEPENDENT TRUSTEES. While this Plan is in effect with respect to any
Series, the selection and nomination of Trustees who are not interested persons
(as defined in the Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons.
7. QUARTERLY REPORTS. The Treasurer of the Trust and the Treasurer of the
Distributor shall provide to the Trustees of the Trust and the Trustees shall
review, at least quarterly, a written report of the amounts expended for
distribution pursuant to this Plan and the purposes for which such expenditures
were made.
4
<PAGE> 5
8. RECORDKEEPING. The Trust shall preserve copies of this Plan, the
Agreement and any related agreements and all reports made pursuant to Section 7
hereof, for a period of not less than six years from the date of this Plan and
the Agreement, the agreements or such reports, as the case may be, the first two
years in an easily accessible place.
Dated: SEPTEMBER 9, 1997
5
<PAGE> 1
EXHIBIT (15)(b)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
SHAREHOLDER SERVICING PLAN
(CLASS A)
WHEREAS, The Lutheran Brotherhood Family of Funds, an unincorporated
association organized as a business trust under the laws of the State of
Delaware (the "Trust"), engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Trust is authorized (i) to issue shares of beneficial interest
in separate series, with the shares of each such series representing the
interests in a separate portfolio of securities and other assets, and (ii) to
divide the shares within each such series into two or more classes;
WHEREAS, the Trust has established the following series: Lutheran
Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund,
Lutheran Brotherhood World Growth Fund, Lutheran Brotherhood Fund, Lutheran
Brotherhood High Yield Fund, Lutheran Brotherhood Income Fund, Lutheran
Brotherhood Municipal Bond Fund and Lutheran Brotherhood Money Market Fund (each
such portfolio being referred to herein individually as an "Initial Series" and
collectively as the "Initial Series" and such series, together with all other
series subsequently established by the Trust and made subject to this Plan,
being referred to herein individually as a "Series" and collectively as the
"Series"); and
WHEREAS, the Trust has established three classes of shares, such classes
being referred to as "Class A", "Class B" and "Institutional Class"; and
WHEREAS, the Trust desires to adopt a Shareholder Servicing Plan (the
"Plan") with respect to the Class A shares (the "Shares") of the Initial Series;
and
WHEREAS, the Trust may enter into one or more agreements related to the
Plan (each, an "Agreement") for the provision of shareholder servicing functions
with one or more organizations, including, without limitation Lutheran
Brotherhood Securities Corp. (each, an "Agent"); and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) and who have no direct
or indirect financial interest in the operation of the Plan or the Agreement and
any agreements relating to it (the "Qualified Trustees"), having determined, in
the exercise of their reasonable business judgment and in light of their
fiduciary duties under state law and under Section 36(a) and (b) of the Act,
that there is a reasonable likelihood that this Plan and the Agreement will
benefit the Class A shares of the Initial Series and its shareholders, have
accordingly approved the Plan and the Agreement by votes cast in person at a
meeting called for the purpose of voting on the Plan and the Agreement and any
agreements related thereto.
<PAGE> 2
NOW, THEREFORE, the Trust hereby adopts this Plan on the following terms
and conditions:
1. SHAREHOLDER SERVICING ACTIVITIES. Subject to the supervision of the
Board of Trustees, the Trust may engage, directly or indirectly, in financing
any activities relating to shareholder servicing functions, including without
limitation making payments to the Agent or affiliates of the Agent for one or
more of the following activities: (a) answering inquiries regarding account
status and history, the manner in which purchases and redemptions of the Shares
may be effected, and certain other matters pertaining to the Shares; (b)
assisting in designating and changing dividend options, account designations and
addresses; (c) assisting the field force and other financial intermediaries in
responding to and dealing with shareholders and prospective shareholders and all
matters related thereto; (d) recruiting, training and assisting in licensing and
qualifying the field force; (e) providing the field force with educational
material, technology equipment, including laptop computers and software,
designed to assist the field force to better serve and assist shareholders with
respect to their investments and financial planning; (f) providing the field
force with various benefits including retirement benefits, medical, hospital,
dental and life insurance; (g) making available facilities that enable or assist
shareholders to obtain current information concerning their investment in the
Trust and other financial information; and (h) developing and maintaining a
web-site for usage by shareholders of the Trust.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
Agreements pursuant to the Plan.
2. MAXIMUM EXPENDITURES. The expenditures to be made by the Initial Series
pursuant to this Plan and the basis upon which payment of such expenditures will
be made shall be determined from time to time by the Trustees, but in no event
may such expenditures exceed the following: (i) with respect to Shares of the
Initial Series, an annual rate of .25% of the average daily value of net assets
represented by such Shares, and (ii) with respect to Shares of any Series
subsequently established by the Trust and made subject to this Agreement, the
annual rate as agreed upon and specified in an addendum hereto. The expenditures
to be made pursuant to this Plan shall commence with respect to Shares of a
Series as of the date on which this Plan becomes effective with respect to each
such Series.
3. PAYMENTS. Pursuant to this Plan, the Trust shall make periodic payments
to the Agent at the annual rate provided for in the Agreement with respect to
the Shares of each Series. The servicing expenses of a particular class will be
borne solely by that class and no Series will use fees charged to one class
within a Series to support the marketing or servicing relating to any other
class within that Series or any other Series.
4. TERM AND TERMINATION.
(a) Initial Series. This Plan shall become effective with respect to
the Shares of the Initial Series as of the later of (i) the date on which an
amendment to the Registration
2
<PAGE> 3
Statement on Form N-1A with respect to the Shares becomes effective under the
Securities Act of 1933, as amended, or (ii) the date on which the Initial
Series commences offering the Shares to the public and shall continue in effect
with respect to the Shares (subject to Section 4(d) hereof) until one year from
the date of such effectiveness, unless the continuation of this Plan shall have
been approved with respect to the Shares in accordance with the provisions of
Section 4(d) hereof.
(b) Additional Series. This Plan shall become effective with respect to
the Shares of each additional Series established by the Trust after the date
hereof and made subject to this Plan upon commencement of the initial public
offering thereof (provided that the Plan has previously been approved with
respect to the Series by votes of a majority of both (i) the Board of Trustees
of the Trust and (ii) the Qualified Trustees, cast in person at a meeting held
before the initial public offering of such additional Series thereof and called
for the purpose of voting on such approval), and shall continue in effect with
respect to each such additional Series (subject to Section 4(d) hereof) for one
year thereafter, unless the continuation of this Plan shall have been approved
with respect to such additional Series in accordance with the provisions of
Section 4(c) hereof. The Agent and the Trust on behalf of each such additional
Series shall each sign an addendum hereto agreeing to be bound hereby and
setting forth such specific and different terms as the parties may agree upon,
including, without implied limitation, the amount and purpose of payments to be
made hereunder.
(c) Continuation. This Plan and the Agreement shall continue in effect
with respect to each Series subsequent to the initial term specified in Section
4(a) and (b) for so long as such continuance is specifically approved at least
annually by votes of a majority of both (i) the Board of Trustees of the Trust
and (ii) the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on this Plan, subject to any shareholder approval requirements
existing under applicable law.
(d) Termination.
(i) This Plan may be terminated at any time with respect to the
Trust or any Series thereof, as the case may be, by vote of a majority of the
Qualified Trustees, or by vote of a majority of the outstanding voting Shares of
that Series. For purposes of this Agreement, the term "vote of a majority of the
outstanding voting Shares" of any Series shall mean the vote of the lesser of
(A) 67 percent or more of the outstanding voting Shares present at such meeting,
if the holders of more than 50 percent of the outstanding voting Shares are
present and represented by proxy; or (B) 50 percent or more of the Shares. The
Plan may remain in effect with respect to a Series even if it has been
terminated in accordance with this Section 4(d) with respect to one or more
other Series of the Trust.
(ii) The Agreement may be terminated at any time, without penalty,
with respect to the Shares of any Series by vote of a majority of the Qualified
Trustees or by
3
<PAGE> 4
vote of a majority of the outstanding voting Shares of that Series
on sixty days' written notice to the Agent.
5. AMENDMENTS. This Plan may be amended with respect to the Shares of a
Series by vote of a majority of the Qualified Trustees or by vote of a majority
of the outstanding voting Shares of that Series.
6. INDEPENDENT TRUSTEES. While this Plan is in effect with respect to any
Series, the selection and nomination of Trustees who are not interested persons
(as defined in the Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons.
7. QUARTERLY REPORTS. The Treasurer of the Trust and the Treasurer of the
Distributor shall provide to the Trustees of the Trust and the Trustees shall
review, at least quarterly, a written report of the amounts expended pursuant to
this Plan and the purposes for which such expenditures were made.
8. RECORDKEEPING. The Trust shall preserve copies of this Plan, the
Agreement and any related agreements and all reports made pursuant to Section 7
hereof, for a period of not less than six years from the date of this Plan and
the Agreement, the agreements or such reports, as the case may be, the first two
years in an easily accessible place.
Dated: September 9, 1997
4
<PAGE> 1
EXHIBIT (15)(c)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
SHAREHOLDER SERVICING PLAN
(CLASS B)
WHEREAS, The Lutheran Brotherhood Family of Funds, an unincorporated
association organized as a business trust under the laws of the State of
Delaware (the "Trust"), engages in business as an open-end management investment
company and is registered as such under the Investment Company Act of 1940, as
amended (the "Act"); and
WHEREAS, the Trust is authorized (i) to issue shares of beneficial interest
in separate series, with the shares of each such series representing the
interests in a separate portfolio of securities and other assets, and (ii) to
divide the shares within each such series into two or more classes;
WHEREAS, the Trust has established the following series: Lutheran
Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund,
Lutheran Brotherhood World Growth Fund, Lutheran Brotherhood Fund, Lutheran
Brotherhood High Yield Fund, Lutheran Brotherhood Income Fund, Lutheran
Brotherhood Municipal Bond Fund, and Lutheran Brotherhood Money Market Fund
(each such portfolio being referred to herein individually as an "Initial
Series" and collectively as the "Initial Series" and such series, together with
all other series subsequently established by the Trust and made subject to this
Plan, being referred to herein individually as a "Series" and collectively as
the "Series"); and
WHEREAS, the Trust has established three classes of shares, such classes
being referred to as "Class A", "Class B" and "Institutional Class"; and
WHEREAS, the Trust desires to adopt a Shareholder Servicing Plan (the
"Plan") with respect to the Class B shares (the "Shares") of the Initial Series;
and
WHEREAS, the Trust may enter into one or more agreements related to the
Plan (each, an "Agreement") for the provision of shareholder servicing functions
with one or more organizations, including, without limitation Lutheran
Brotherhood Securities Corp. (each, an "Agent"); and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) and who have no direct
or indirect financial interest in the operation of the Plan or the Agreement and
any agreements relating to it (the "Qualified Trustees"), having determined, in
the exercise of their reasonable business judgment and in light of their
fiduciary duties under state law and under Section 36(a) and (b) of the Act,
that there is a reasonable likelihood that this Plan and the Agreement will
benefit the Class B of the Initial Series and its shareholders, have accordingly
approved the Plan and the Agreement by votes cast in person at a meeting called
for the purpose of voting on the Plan and the Agreement and any agreements
related thereto.
<PAGE> 2
NOW, THEREFORE, the Trust hereby adopts this Plan on the following terms
and conditions:
1. SHAREHOLDER SERVICING ACTIVITIES. Subject to the supervision of the
Board of Trustees, the Trust may engage, directly or indirectly, in financing
any activities relating to shareholder servicing functions, including without
limitation making payments to the Agent or affiliates of the Agent for one or
more of the following activities: (a) answering inquiries regarding account
status and history, the manner in which purchases and redemptions of the Shares
may be effected, and certain other matters pertaining to the Shares; (b)
assisting in designating and changing dividend options, account designations and
addresses; (c) assisting the field force and other financial intermediaries in
responding to and dealing with shareholders and prospective shareholders and all
matters related thereto; (d) recruiting, training and assisting in licensing and
qualifying the field force; (e) providing the field force with educational
material, technology equipment, including laptop computers and software,
designed to assist the field force to better serve and assist shareholders with
respect to their investments and financial planning; (f) providing the field
force with various benefits including retirement benefits, medical, hospital,
dental and life insurance; (g) making available facilities that enable or assist
shareholders to obtain current information concerning their investment in the
Trust and other financial information; and (h) developing and maintaining a
web-site for usage by shareholders of the Trust.
The Trust is authorized to engage in the activities listed above either
directly or through other persons with which the Trust has entered into
Agreements pursuant to the Plan.
2. MAXIMUM EXPENDITURES. The expenditures to be made by the Initial
Series pursuant to this Plan and the basis upon which payment of such
expenditures will be made shall be determined from time to time by the Trustees,
but in no event may such expenditures exceed the following: (i) with respect to
Shares of the Initial Series, an annual rate of .25% of the average daily value
of net assets represented by such Shares, and (ii) with respect to Shares of any
Series subsequently established by the Trust and made subject to this Agreement,
the annual rate as agreed upon and specified in an addendum hereto. The
expenditures to be made pursuant to this Plan shall commence with respect to
Shares of a Series as of the date on which this Plan becomes effective with
respect to each such Series.
3. PAYMENTS. Pursuant to this Plan, the Trust shall make periodic payments
to the Agent at the annual rate provided for in the Agreement with respect to
the Shares of each Series. The servicing expenses of a particular class will be
borne solely by that class and no Series will use fees charged to one class
within a Series to support the marketing or servicing relating to any other
class within that Series or any other Series.
4. TERM AND TERMINATION.
(a) Initial Series. This Plan shall become effective with respect to
the Shares of the Initial Series as of the later of (i) the date on which an
amendment to the Registration
2
<PAGE> 3
Statement on Form N-1A with respect to the Shares becomes effective under the
Securities Act of 1933, as amended, or (ii) the date on which the Initial Series
commences offering the Shares to the public and shall continue in effect with
respect to the Shares (subject to Section 4(d) hereof) until one year from the
date of such effectiveness, unless the continuation of this Plan shall have been
approved with respect to the Shares in accordance with the provisions of Section
4(d) hereof.
(b) Additional Series. This Plan shall become effective with respect to
the Shares of each additional Series established by the Trust after the date
hereof and made subject to this Plan upon commencement of the initial public
offering thereof (provided that the Plan has previously been approved with
respect to the Series by votes of a majority of both (i) the Board of Trustees
of the Trust and (ii) the Qualified Trustees, cast in person at a meeting held
before the initial public offering of such additional Series thereof and called
for the purpose of voting on such approval), and shall continue in effect with
respect to each such additional Series (subject to Section 4(d) hereof) for one
year thereafter, unless the continuation of this Plan shall have been approved
with respect to such additional Series in accordance with the provisions of
Section 4(c) hereof. The Agent and the Trust on behalf of each such additional
Series shall each sign an addendum hereto agreeing to be bound hereby and
setting forth such specific and different terms as the parties may agree upon,
including, without implied limitation, the amount and purpose of payments to be
made hereunder.
(c) Continuation. This Plan and the Agreement shall continue in effect
with respect to each Series subsequent to the initial term specified in Section
4(a) and (b) for so long as such continuance is specifically approved at least
annually by votes of a majority of both (i) the Board of Trustees of the Trust
and (ii) the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on this Plan, subject to any shareholder approval requirements
existing under applicable law.
(d) Termination.
(i) This Plan may be terminated at any time with respect to the
Trust or any Series thereof, as the case may be, by vote of a majority of the
Qualified Trustees, or by vote of a majority of the outstanding voting Shares of
that Series. For purposes of this Agreement, the term "vote of a majority of the
outstanding voting Shares" of any Series shall mean the vote of the lesser of
(A) 67 percent or more of the outstanding voting Shares present at such meeting,
if the holders of more than 50 percent of the outstanding voting Shares are
present and represented by proxy; or (B) 50 percent or more of the Shares. The
Plan may remain in effect with respect to a Series even if it has been
terminated in accordance with this Section 4(d) with respect to one or more
other Series of the Trust.
(ii) The Agreement may be terminated at any time, without penalty,
with respect to the Shares of any Series by vote of a majority of the Qualified
Trustees or by
3
<PAGE> 4
vote of a majority of the outstanding voting Shares of that Series on sixty
days' written notice to the Agent.
5. AMENDMENTS. This Plan may be amended with respect to the Shares of a
Series by vote of a majority of the Qualified Trustees or by vote of a majority
of the outstanding voting Shares of that Series.
6. INDEPENDENT TRUSTEES. While this Plan is in effect with respect to any
Series, the selection and nomination of Trustees who are not interested persons
(as defined in the Act) of the Trust shall be committed to the discretion of the
Trustees who are not interested persons.
7. QUARTERLY REPORTS. The Treasurer of the Trust and the Treasurer of the
Distributor shall provide to the Trustees of the Trust and the Trustees shall
review, at least quarterly, a written report of the amounts expended pursuant to
this Plan and the purposes for which such expenditures were made.
8. RECORDKEEPING. The Trust shall preserve copies of this Plan, the
Agreement and any related agreements and all reports made pursuant to Section 7
hereof, for a period of not less than six years from the date of this Plan and
the Agreement, the agreements or such reports, as the case may be, the first two
years in an easily accessible place.
Dated: September 9, 1997
4
<PAGE> 1
EXHIBIT 18
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
MULTIPLE CLASS EXPENSE ALLOCATION PLAN
ADOPTED PURSUANT TO RULE 18F-3
WHEREAS, The Lutheran Brotherhood Family of Funds, an unincorporated
association of the type commonly known as a business trust organized under the
laws of the state of Delaware (the "Trust"), engages in business as an open-end
management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust is authorized to (i) issue shares of beneficial interest
(the "Shares") in separate series, with the Shares of each such series
representing the interests in a separate portfolio of securities and other
assets, and (ii) divide the Shares within each such series into two or more
classes;
WHEREAS, the Trust has established the following portfolio series: Lutheran
Brotherhood Opportunity Growth Fund, Lutheran Brotherhood Mid Cap Growth Fund,
Lutheran Brotherhood World Growth Fund, Lutheran Brotherhood Fund, Lutheran
Brotherhood High Yield Fund, Lutheran Brotherhood Income Fund, Lutheran
Brotherhood Municipal Bond Fund and Lutheran Brotherhood Money Market Fund (each
series being referred to herein individually and collectively as the "Initial
Series" and each such series, together with all other series subsequently
established by the Trust and made subject to this Plan, being referred to herein
individually and collectively as a "Series"), and each Initial Series has
established (and future Series may establish) three classes of Shares thereof
designated as the "Class A" Shares, the "Class B" Shares and the "Institutional
Class" Shares; and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) (the "Qualified
Trustees"), having determined in the exercise of their reasonable business
judgment that this Plan is in the best interest of each class of each Initial
Series and of each Initial Series and the Trust as a whole, have accordingly
approved this Plan.
NOW, THEREFORE, the Trust hereby adopts this Plan in accordance with Rule
18f-3 under the Act, on the following terms and conditions:
1. CLASS DIFFERENCES. Each class of Shares of each Initial Series shall
represent interests in the same portfolio of investments of such Initial Series
and shall be identical in all respects, except that each class shall differ with
respect to: (i) distribution, shareholder and other charges and expenses, as
provided for in Sections 2 and 3 of this Plan; (ii) the exclusive right of the
Class B Shares to vote on certain matters relating to the Plan of Distribution
pursuant to Rule 12b-1 (the "Rule 12b-1 Plan") adopted by the Trust with respect
to the Class
<PAGE> 2
B Shares; (iii) the conversion features of the Class A and Class B
Shares provided for in Section 4 of this Plan; (iv) such other differences
relating to eligible investors as may be set forth in the prospectus and
statement of additional information of the Initial Series, as the same may be
amended or supplemented from time to time (respectively, the "Prospectus" and
"SAI"); and (v) the designation of each class of Shares.
2. DIFFERENCES IN SALES LOAD, DISTRIBUTION AND SHAREHOLDER SERVICES.
Class A Shares, Class B Shares and Institutional Class Shares of each Initial
Series shall differ in the manner in which such Shares are distributed and in
the services provided to shareholders of each such class as follows:
(a) Sales Load and Distribution Fee.
(i) CLASS A SHARES. The Class A Shares (other than Class A Shares
of the Lutheran Brotherhood Money Market Fund) shall be subject to a
front-end sales charge as set forth in the Prospectus and SAI. The Class A
Shares shall not be subject to any distribution fees under Rule 12b-1.
(ii) CLASS B SHARES. The Class B Shares shall be sold subject to
a contingent deferred sales charge ("CDSC") as set forth in the Prospectus
and SAI. Class B Shares (other than Class B Shares of the Lutheran
Brotherhood Money Market Fund) shall also be subject to an annual fee
pursuant to Rule 12b-1 under the Act of up to .75 of 1% of the average
daily value of the net assets of the Series allocable to the Class B
Shares. Such fee may be used to finance distribution activities in
accordance with Rule 12b-1 under the Act and the Rule 12b-1 Plan.
(iii) INSTITUTIONAL CLASS SHARES. The Institutional Class Shares
shall be sold without a sales charge and shall not be subject to any
distribution fees under Rule 12b-1.
(b) Shareholder Services. The Class A Shares shall be subject to an
annual fee pursuant to a Shareholder Servicing Plan with respect to the Class A
Shares of up to 0.25 of 1% of the average daily value of the net assets of the
Initial Series allocable to the Class A Shares. The Class B Shares shall be
subject to an annual fee pursuant to a Shareholder Servicing Plan with respect
to the Class B Shares of up to 0.25 of 1% of the average daily value of the net
assets of the Initial Series allocable to the Class B Shares. Such fees may be
used to finance shareholder servicing activities for the applicable class of
Shares in accordance with the Shareholder Servicing Plan with respect to such
class of Shares adopted by the Trust. The Institutional Class Shares shall not
be subject to any shareholder servicing fee unless authorized and implemented
hereafter by the Trustees pursuant to an amendment to this Plan and the adoption
of a shareholder servicing plan with respect to the Institutional Class Shares.
2
<PAGE> 3
3. ALLOCATION OF EXPENSES.
(a) Class Expenses. Expenses of the Series, other than the fees set
forth in Section 2 of this Plan, shall be allocated to each class on the basis
of the net asset value of that class in relation to the net asset value of the
Series. Notwithstanding the foregoing, (i) advisory fees, custodial fees and
other expenses relating to the management of the Fund's assets ("Management-
Related Expenses") shall be allocated to each class on the basis of the net
asset value of that class in relation to the net asset value of the Series, (ii)
expenses of the Institutional Class shares of each Series (other than Management
Related Expenses) and, fees set forth in Section 2 of this Plan with respect to
Institutional Class shares, if any, shall be specially allocated to such class
and (iii) the expenses of the Class A and Class B shares of each series, other
than Management-Related Expenses and the fees set forth in Section 2 of this
Plan with respect to Class A and Class B shares, shall be allocated to each such
class based on the net asset value of such class in relation to the aggregate
net asset value of the Class A and Class B shares, such expense allocation to
take effect on such date as the Trust obtains a private letter ruling from the
Internal Revenue Service approving such allocation or such allocation on advice
of Trust Counsel, is otherwise permissible under applicable law. The
underwriter, adviser, or other provider of services to a Series may waive or
reimburse the expenses of a specific class or classes to the extent permitted
under Rule 18f-3 under the Act.
(b) Certain Prohibited Allocations. Notwithstanding the foregoing, no
expense shall be allocated to any particular class of a Series and no waiver or
reimbursement of the expenses of a specific class or classes shall be permitted
if such allocation, waiver or reimbursement would cause such Series to fail to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended, or adversely affect its right to claim a dividend paid
deduction thereunder.
4. CONVERSION PRIVILEGES.
(a) Class B Shares of each Series shall automatically convert to Class
A Shares of the same Series at the end of five years following the issuance
of such Class B Shares except that the holding period of Class B Shares of the
Lutheran Brotherhood Money Market Fund shall not be counted in calculating such
five-year period. All Class B Shares of such Series held by the shareholder at
the end of such period that represent the reinvestment of dividends or capital
gains distributions shall also be automatically converted to Class A shares at
such time. Class B shares of each Series shall convert into Class A shares of
the same Series on the basis of the relative net asset value of the two classes,
without the imposition of any sales load, fee or other charge. In the event the
holders of the Class A shares approve any increase in expenses allocated to the
Class A shares under paragraph (a)(i) or (ii) of Rule 18f-3 without the approval
of the holders of the Class B Shares, the Trust shall establish a new class of
shares into which the Class B Shares will convert in accordance with the
provisions of Rule 18f-3 under the Act.
(b) Class A shares of each Series, including any shares received as
dividends or distributions with respect to such shares, shall automatically
convert to Institutional Class shares of the same Series if the Class A
shareholder is no longer eligible to hold Class A shares. Eligibility
requirements for Class A shares are as set forth in the
3
<PAGE> 4
Prospectus and SAI. Such automatic conversion shall take place on the basis of
the relative net asset value of the two classes, without the imposition of any
sales load fee, or other charge following notice to the Class A shareholder of
such conversion.
5. EXCHANGE PRIVILEGE. Shares of a class of a Series may be exchanged for
shares of the same class of another Series in the manner described in the
Prospectus and SAI.
6. LIMITATION OF LIABILITY OF THE SHAREHOLDERS AND TRUSTEES. It is
expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but shall bind only the trust property of the
Trust. The adoption of this Plan by the Trustees shall not be deemed to have
been made by any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Trust as provided in
the Trust's Master Trust Agreement.
7. TERM AND TERMINATION.
(a) Initial Series. This Plan shall become effective with respect to
each Initial Series as of October 31, 1997, and shall continue in effect with
respect to each class of Shares of such Initial Series (subject to Section 7(c)
hereof) until terminated in accordance with the provisions of Section 7(c)
hereof.
(b) Additional Series or Classes. This Plan shall become effective
with respect to any class of each Initial Series other than the Class A Shares,
Class B Shares and Institutional Class shares and with respect to each
additional Series or class thereof established by the Trust after the effective
date hereof and made subject to this Plan upon commencement of the initial
public offering thereof (provided that the Plan has previously been approved
with respect to such additional series or class by votes of a majority of both
(i) the Board of Trustees of the Trust and (ii) the Qualified Trustees, cast at
a meeting held before the initial public offering of such additional Series or
classes thereof), and shall continue in effect with respect to each such
additional Series or class (subject to Section 7(c) hereof) until terminated in
accordance with the provisions of Section 7(c) hereof. An addendum hereto
setting forth such specific and different terms of such additional series of
classes shall be attached to this Plan.
(c) Termination. This Plan may be terminated at any time with respect
to the Trust or any Series or class thereof, as the case may be, by vote of a
majority of both the Trustees of the Trust and the Qualified Trustees. The Plan
may remain in effect with respect to a Series or class thereof even if this Plan
has been terminated in accordance with this Section 7(c) with respect to another
class of such Series or one or more other Series of the Trust.
4
<PAGE> 5
8. AMENDMENTS. Any material amendment to this Plan shall require the
affirmative vote of a majority of both the Trustees of the Trust and the
Qualified Trustees.
Dated as of: September 9, 1997
5
<PAGE> 1
EXHIBIT (19)(d)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
POWER OF ATTORNEY OF TRUSTEE AND OFFICER
KNOW ALL MEN BY THESE PRESENTS, that the undersigned trustee and/or officer of
The Lutheran Brotherhood Family of Funds, a Delaware business trust, does hereby
make, constitute and appoint Otis F. Hilbert, Randall L. Wetherille and
James M. Odland, and each or any of them, the undersigned's true and lawful
attorneys-in-fact, with power of substitution, for the undersigned and in the
undersigned's name, place and stead, to sign and affix the undersigned's name as
such director and/or officer of such Company to a Registration Statement or
Registration Statements, on Form N-1A or other applicable form, and all
amendments, including post-effective amendments, thereto, to be filed by such
Company with the Securities and Exchange Commission, Washington, D.C., in
connection with the registration under the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, of shares of such Company,
and to file the same, with all exhibits thereto and other supporting documents,
with such Commission, granting unto such attorneys-in-fact, and each of them,
full power and authority to do and perform any and all acts necessary or
incidental to the performance and execution of the powers herein expressly
granted.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 10th day of
September, 1997.
/s/ Noel K. Estenson
--------------------
Noel K. Estenson
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