As Filed with the Securities and Exchange
Commission on March 16, 1998
1933 Act File No. 2-25984
1940 Act File No. 811-1467
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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. 62 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 41 [X]
(Check appropriate box or boxes.)
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
----------------------------------------
(Exact Name of Registrant)
625 Fourth Avenue South, Minneapolis, Minnesota 55415
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(Address of Principal Executive Offices)
(612) 340-7215
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(Registrant's Telephone Number)
Otis F. Hilbert, Secretary
The Lutheran Brotherhood Family of Funds
625 Fourth Avenue South
Minneapolis, Minnesota 55415
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(Name and Address of Agent for Service of Process)
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)
[ ] On [DATE] pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (c)(1)
[x] On April 30, 1998 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>
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A)
UNDER THE SECURITIES ACT OF 1933
Form N-1A Item No. Caption or Location
Part A in Prospectuses
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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
Offered Brotherhood Family of Funds; Net
Asset Value Multiple Class
System; Receiving Your Order;
Certificates and Statements
8. Redemption or Repurchase Redeeming Shares
9. Legal Proceedings Not Applicable
Caption or Location
Form N-1A Item No. Statement of
Part B Additional Information
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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
Policies Restrictions; 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
<PAGE>
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 April 30, 1998
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 .
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 .
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 .
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 .
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 .
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 .
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 .
LUTHERAN BROTHERHOOD MONEY MARKET FUND ("LB Money Market Fund") seeks to
provide current income consistent with stability of principal. See page .
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 27 years, and have extensive skill in managing over $20.5 billion in
assets as of September 30, 1997, including $9.4 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") as
investment sub-advisor for LB World Growth Fund. LB Research currently
engages T. Rowe Price Associates, Inc. ("T. Rowe Price") as investment sub-
advisor for LB Opportunity 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 April 30, 1998 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.
<PAGE>
TABLE OF CONTENTS
PAGE
Summary of Fund Expenses.......................................
Financial Highlights..........................................
Investment Objectives and Policies............................
Investment Limitations........................................
Investment Risks..............................................
Buying Shares of The Lutheran Brotherhood Family of Funds .....
Net Asset Value of Your Shares................................
Multiple Class System.........................................
Distribution and Shareholder Servicing Plans..................
Receiving Your Order..........................................
Certificates and Statements...................................
Redeeming Shares..............................................
Dividends and Capital Gains...................................
Taxes.........................................................
Optimum Account...............................................
IRAs and Other Tax-Deferred Plans.............................
Fund Performance..............................................
The Funds and Their Shares.......... .........................
Fund Management...............................................
Fund Administration...........................................
Description of Debt Ratings...................................
How to Invest.................................................
Addresses.....................................................
<PAGE>
SUMMARY OF FUND EXPENSES
(To be filed by subsequent amendment.)
FINANCIAL HIGHLIGHTS
(To be filed by subsequent amendment.)
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 T. Rowe Price have a
potential for above average sales and earnings growth that is expected to
lead to capital appreciation. T. Rowe Price 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), foreign stocks 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 (excluding cash and U.S.
Government Securities). 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.
T. Rowe Price will use a number of proprietary quantitative models to
seek out those companies that have a competitively superior product or
service in an unsaturated market with large potential for growth and measure
the major characteristics of stocks in the small capitalization growth
sector. These will often be companies with shorter histories and less
seasoned operations. Based on these models, stocks are selected in a "top
down" manner so that the portfolio as a whole reflects the specific
characteristics that the sub-adviser considers important, such as valuation
and projected earnings growth. Many of such companies will have market
capitalizations that are less than $1.5 billion, with lower daily trading
volume in their stocks and less overall liquidity than larger, more well
established companies. T. Rowe Price 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. 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 T. Rowe
Price believes such disposition to be advisable. 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 rates of the Fund for the fiscal years
ended October 31, 1997 and October 31, 1996 were 136% and 176%, 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 those with market
capitalizations that fall within the capitalization range of companies
included in the Standard & Poor's MidCap 400 Index at the time of the
Portfolio'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 for the period ended October 31, 1997 was 94%.
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, Price-Fleming 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, Price-Fleming 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.
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 Price-Fleming 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. Price-Fleming 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, 1997 and October 31,
1996 were 17% and 11%, 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 costs of such transactions. The annual portfolio
turnover rates of the Fund for the fiscal years ended October 31, 1997 and
October 31, 1996 were 54% and 91%, 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, 1997 and October 31, 1996 were 113%
and 104%, 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 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, 1997 and October 31, 1996
were 97% and 142%, 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 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, 1997 and October 31, 1996 were 18% and 33%, 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.
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 a sub-advisor) to be creditworthy.
RESTRICTED SECURITIES
Subject to the limitations on illiquid securities noted above, the
Funds may buy or sell securities that meet the requirements of Rule 144A
under the Securities Act of 1933 ("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.
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 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 lend securities to broker-dealers affiliated with LB
Research or a 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).
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 Ssub-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
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 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 a 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 a Fund's 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 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 a Fund's 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.
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 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 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, LB INCOME
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:
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.
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, 1997, the LB High
Yield Fund held securities of 178 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........................................ 2.6%
Government obligations..................................... --
Corporate obligations
AAA/Aaa............................................... --
AA/Aa................................................. --
A/A................................................... --
BBB/Baa............................................... 2.3%
BB/Ba................................................. 10.6%
B/B................................................... 50.6%
CCC/Caa............................................... 9.3%
CC/Ca................................................. --
D/D................................................... --
Not rated............................................. 7.7%
Other Net Assets...................................... 16.9%
-----
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
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.
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. Shares of one class may not be exchanged for shares of another
class.
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 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.
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
investment(b) following their purchase. There is 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)
- - ------------------------------------------------------------------------------------------------------------------
- - --------------
(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.
</TABLE>
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.
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 .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 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:
<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.
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;
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 third 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.
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 of $250 or more. 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) VISA 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.
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.
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 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 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.
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 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.
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.
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.
Paul Ocenasek, Assistant Vice President of LB Research, serves as the
portfolio manager of LB High Yield Fund. Mr. Ocenasek joined LB Research in
1987, previously serving as a fixed-income analyst and bond portfolio manager
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 T. Rowe Price Associates, Inc. ("T. Rowe Price")
as investment sub-advisor for Lutheran Brotherhood Opportunity Growth Fund.
T. Rowe Price was founded in 1937 and has its principal offices in Baltimore,
Maryland. As of December 31, 1997, T. Rowe Price and its affiliates managed
over $124 billion. Richard T. Whitney, Managing Director of T. Rowe Price,
is primarily responsible for day-to-day management of the Opportunity Growth
Portfolio and developing and executing the Portfolio's investment program.
T. Rowe Price has an Investment Advisory Committee for the Opportunity
Growth Fund composed of the following members: Richard T. Whitney, Chairman,
Marc L. Baylin, Kristin F. Culp, John H. Laporte, and Donald J. Peters. The
committee chairman has day-to-day responsibility for managing the portfolio
and works with the committee in developing and executing the portfolio's
investment program. Mr. Whitney is chairman of the portfolio's committee.
Mr Whitney joined T. Rowe Price in 1985 and has been managing investments
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 and Robert Fleming Holdings Limited. The common stock of Price-Fleming
is 50% owned by a wholly-owned subsidiary of T. Rowe Price, 25% by a
subsidiary of Flemings and 25% by Jardine Fleming Group Limited ("Jardine
Fleming"). (Half of Jardine Fleming is owned by Flemings and half by Jardine
Matheson Holdings Limited.) T. Rowe Price has the right to elect a majority
of the board of directors of Price-Fleming, and Flemings has the right to
elect the remaining directors, one of whom will be nominated by Jardine
Fleming.
Price-Fleming is one of the world's largest international mutual fund
asset managers with the U.S. equivalent of approximately $31 billion under
management as of October 31, 1997 in its offices in Baltimore, London, Tokyo,
Singapore, Hong Kong, and Buenos Aires. 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, Mark J.T. Edwards, John R. Ford, James B.M. Seddon,
Mark Bickford-Smith, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 29 years of experience
with the Fleming Group in research, client service and investment management,
including assignments in the Far East and the United States. (Fleming Group
includes Flemings and/or Jardine Fleming.)
Mark Edwards joined Price-Fleming in 1987 and has 16 years of
experience in financial analysis, including three years in Fleming European
research. John Ford joined Price-Fleming in 1982 and has 18 years of
experience with Fleming Group in research and portfolio management, including
assignments in the Far East and the United States. James Seddon joined Price-
Fleming in 1987 and has 11 years of experience in investment management. Mark
Bickford-Smith joined Price-Fleming in 1995 and has 13 years of experience
with the Fleming Group in research and financial analysis. David Warren
joined Price-Fleming in 1983 and has 17 years experience in equity research,
fixed income research and portfolio management.
LB Research, T. Rowe Price, 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.
The Trust and its Adviser have conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue.
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Trust's and its Adviser's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Trust and its
Adviser presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for its computer systems as so modified and converted.
However, if such modifications and conversions are not completed timely, the
Year 2000 problem may have a material impact on the operations of the Trust
and its Adviser.
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
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 0.68%
LB Mid Cap Growth Fund* 0.46%
LB World Growth Fund 1.00%
LB Fund** 0.59%
LB High Yield Fund** 0.59%
LB Income Fund** 0.55%
LB Municipal Bond Fund** 0.53%
LB Money Market Fund*** 0.40%
</TABLE>
- - ------------
* After giving effect to a fee waiver of 0.24%.
** After giving effect to a fee waiver of 0.04%.
*** After giving effect to a fee waiver of 0.10%.
LB Research pays T. Rowe Price an annual sub-advisory fee for the
performance of sub-advisory services for the LB Opportunity Growth Fund.
The fee payable is equal to .3% of that Fund's average daily net assets up to
$500 million, .25% of that Fund's average daily net assets over $500 million
but not over $1 billion, and .2% of that Fund's average daily net assets over
$1 billion.
LB Research pays Price-Fleming an annual sub-advisory fee for the
performance of sub-advisory services for the LB World Growth Fund. 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 Price-Fleming also
provides sub-advisory services. The sub-advisory fee LB Research pays Price-
Fleming 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 October 31, 1997 the combined assets of LB World Growth Fund and
World Growth Portfolio totaled $351.0 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 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, 1997, the Funds paid the
following amounts to LB Securities for administrative services:
<TABLE>
<S> <C>
LB Opportunity Growth Fund $55,875
LB Mid Cap Growth Fund $617
LB World Growth Fund $13,826
LB Fund $184,583
LB High Yield Fund $158,365
LB Income Fund $166,209
LB Municipal Bond Fund $122,078
LB Money Market Fund $90,172
</TABLE>
CUSTODIAN
State Street Bank ("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:
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.
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.
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 and3 to denote relative strength within this
classification.
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
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
<PAGE>
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 April 30, 1998
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
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 .
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 .
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 .
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 .
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 .
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 .
LUTHERAN BROTHERHOOD MONEY MARKET FUND ("LB Money Market Fund") seeks to
provide current income consistent with stability of principal. See page .
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 27 years, and have extensive skill in managing over $20.5 billion in
assets as of December 31, 1997, including $9.4 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") as investment sub-
advisor for LB World Growth Fund. LB Research currently engages T. Rowe Price
Associates, Inc. ("T. Rowe Price") as investment sub-advisor for LB
Opportunity 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 April 30, 1998 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary of Fund Expenses..............................................
Financial Highlights..................................................
Investment Objectives and Policies...................................
Investment Limitations...............................................
Investment Risks.....................................................
Buying Shares of The Lutheran Brotherhood Family of Fund.............
Net Asset Value of Your Shares.......................................
Multiple Class System................................................
Receiving Your Order.................................................
Certificates and Statements..........................................
Redeeming Shares.....................................................
Dividends and Capital Gains..........................................
Taxes................................................................
Fund Performance....................................... .............
The Funds and Their Shares...........................................
Fund Management................ .....................................
Fund Administration................... ..............................
Description of Debt Ratings........................ .................
How to Invest........................... ............................
Addresses............................................................
</TABLE>
<PAGE>
SUMMARY OF FUND EXPENSES
(To be filed by subsequent amendment.)
FINANCIAL HIGHLIGHTS
(To be filed by subsequent amendment.)
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 T. Rowe Price have a potential for
above average sales and earnings growth that is expected to lead to capital
appreciation. T. Rowe Price 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), foreign stocks 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 (excluding cash and U.S.
Government Securities). 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.
T. Rowe Price will use a number of proprietary quantitative models to
seek out those companies that have a competitively superior product or
service in an unsaturated market with large potential for growth and measure
the major characteristics of stocks in the small capitalization growth
sector. These will often be companies with shorter histories and less
seasoned operations. Based on these models, stocks are selected in a "top
down" manner so that the portfolio as a whole reflects the specific
characteristics that the sub-adviser considers important, such as valuation
and projected earnings growth. Many of such companies will have market
capitalizations that are less than $1.5 billion, with lower daily trading
volume in their stocks and less overall liquidity than larger, more well
established companies. T. Rowe Price 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. 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 T. Rowe
Price believes such disposition to be advisable. 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 rates of the Fund for the fiscal years
ended October 31, 1997 and October 31, 1996 were 136% and 176%, respectively.
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 those with market
capitalizations that fall within the capitalization range of companies
included in the Standard & Poor's MidCap 400 Index at the time of the
Portfolio'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 for the period ended October 31, 1997 was 94%.
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, Price-Fleming 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, Price-Fleming 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.
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 the Fund's 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. The Fund's 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, 1997 and October 31,
1996 were 17% and 11%, 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 costs of such transactions. The annual portfolio
turnover rates of the Fund for the fiscal years ended October 31, 1997 and
October 31, 1996 were 54% and 91%, 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, 1997 and October 31, 1996 were 113% and 104%,
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 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, 1997 and October 31, 1996 were 97% and 142%,
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 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, 1997 and October 31, 1996 were 18% and 33%, 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.
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 a sub-advisor) to be creditworthy.
RESTRICTED SECURITIES
Subject to the limitations on illiquid securities noted above, the
Funds may buy or sell securities that meet the requirements of Rule 144A
under the Securities Act of 1933 ("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.
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 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 lend securities to broker-dealers affiliated with LB
Research or a 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).
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; 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.
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 a 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 a Fund's 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 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 a Fund's 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.
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 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 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, LB INCOME
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:
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.
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, 1997, the LB High
Yield Fund held securities of 178 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........................................ 2.6%
Government obligations..................................... --
Corporate obligations
AAA/Aaa............................................... --
AA/Aa................................................. --
A/A................................................... --
BBB/Baa............................................... 2.3%
BB/Ba................................................. 10.6%
B/B................................................... 50.6%
CCC/Caa............................................... 9.3%
CC/Ca................................................. --
D/D................................................... --
Not rated............................................. 7.7%
Other Net Assets...................................... 16.9%
-----
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;
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.
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. Shares of one class may not be exchanged for shares of another class.
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.
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.
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.
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 third 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.
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 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 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.
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.
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.
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.
Paul Ocenasek, Assistant Vice President of LB Research, serves as the
portfolio manager of LB High Yield Fund. Mr. Ocenasek joined LB Research in
1987, previously serving as a fixed-income analyst and bond portfolio manager
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 T. Rowe Price Associates, Inc. ("T. Rowe
Price") as investment sub-advisor for Lutheran Brotherhood Opportunity Growth
Fund. T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1997, T. Rowe Price and its
affiliates managed over $124 billion. Richard T. Whitney, Managing Director
of T. Rowe Price, is primarily responsible for day-to-day management of the
Opportunity Growth Portfolio and developing and executing the Portfolio's
investment program.
T. Rowe Price has an Investment Advisory Committee for the Opportunity
Growth Fund composed of the following members: Richard T. Whitney, Chairman,
Marc L. Baylin, Kristin F. Culp, John H. Laporte, and Donald J. Peters. The
committee chairman has day-to-day responsibility for managing the portfolio
and works with the committee in developing and executing the portfolio's
investment program. Mr. Whitney is chairman of the portfolio's committee.
Mr Whitney joined T. Rowe Price in 1985 and has been managing investments
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 and Robert Fleming Holdings Limited. The common stock of Price-Fleming
is 50% owned by a wholly-owned subsidiary of T. Rowe Price, 25% by a
subsidiary of Flemings and 25% by Jardine Fleming Group Limited ("Jardine
Fleming"). (Half of Jardine Fleming is owned by Flemings and half by Jardine
Matheson Holdings Limited.) T. Rowe Price has the right to elect a majority
of the board of directors of Price-Fleming, and Flemings has the right to
elect the remaining directors, one of whom will be nominated by Jardine
Fleming.
Price-Fleming is one of the world's largest international mutual fund
asset managers with the U.S. equivalent of approximately $31 billion under
management as of October 31, 1997 in its offices in Baltimore, London, Tokyo,
Singapore, Hong Kong, and Buenos Aires. 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, Mark J.T. Edwards, John R. Ford, James B.M. Seddon,
Mark Bickford-Smith, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 29 years of experience
with the Fleming Group in research, client service and investment management,
including assignments in the Far East and the United States. (Fleming Group
includes Flemings and/or Jardine Fleming.)
Mark Edwards joined Price-Fleming in 1987 and has 16 years of
experience in financial analysis, including three years in Fleming European
research. John Ford joined Price-Fleming in 1982 and has 18 years of
experience with Fleming Group in research and portfolio management, including
assignments in the Far East and the United States. James Seddon joined Price-
Fleming in 1987 and has 11 years of experience in investment management. Mark
Bickford-Smith joined Price-Fleming in 1995 and has 13 years of experience
with the Fleming Group in research and financial analysis. David Warren
joined Price-Fleming in 1983 and has 17 years experience in equity research,
fixed income research and portfolio management.
LB Research, T. Rowe Price, 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.
The Trust and its Adviser have conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue.
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Trust's and its Adviser's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Trust and its
Adviser presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for its computer systems as so modified and converted.
However, if such modifications and conversions are not completed timely, the
Year 2000 problem may have a material impact on the operations of the Trust
and its Adviser.
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
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 0.68%
LB Mid Cap Growth Fund* 0.46%
LB World Growth Fund 1.00%
LB Fund** 0.59%
LB High Yield Fund** 0.59%
LB Income Fund** 0.55%
LB Municipal Bond Fund** 0.53%
LB Money Market Fund*** 0.40%
</TABLE>
- - ------------
* After giving effect to a fee waiver of 0.24%.
** After giving effect to a fee waiver of 0.04%.
*** After giving effect to a fee waiver of 0.10%.
LB Research pays T. Rowe Price an annual sub-advisory fee for the
performance of sub-advisory services for the LB Opportunity Growth Fund.
The fee payable is equal to .3% of that Fund's average daily net assets up to
$500 million, .25% of that Fund's average daily net assets over $500 million
but not over $1 billion, and .2% of that Fund's average daily net assets over
$1 billion.
LB Research pays Price-Fleming an annual sub-advisory fee for the
performance of sub-advisory services for the LB World Growth Fund. 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 Price-Fleming also
provides sub-advisory services. The sub-advisory fee LB Research pays Price-
Fleming 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 October 31, 1997 the combined assets of LB World Growth Fund and
World Growth Portfolio totaled $351.0 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 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 percent of each Fund's daily net assets.
During the fiscal year ended October 31, 1997, the Funds paid the
following amounts to LB Securities for administrative services:
<TABLE>
<S> <C>
LB Opportunity Growth Fund $55,875
LB Mid Cap Growth Fund $617
LB World Growth Fund $13,826
LB Fund $184,583
LB High Yield Fund $158,365
LB Income Fund $166,209
LB Municipal Bond Fund $122,078
LB Money Market Fund $90,172
</TABLE>
CUSTODIAN
State Street Bank ("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:
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.
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.
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.
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
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
<PAGE>
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
APRIL 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Policies and Restrictions.....................................
Additional Information Concerning Certain Investment Techniques..........
Fund Management..........................................................
Investment Advisory Services.............................................
Administrative Services..................................................
Distribution and Shareholder Services....................................
Brokerage Transactions...................................................
Code of Ethics...........................................................
Purchasing Shares........................................................
Sales Charges............................................................
Net Asset Value..........................................................
Redeeming Shares.........................................................
Tax Status...............................................................
General Information......................................................
Calculation of Performance Data..........................................
Report of Independent Public Accountants and Financial Statements........
</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 December 30, 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
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:
(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. This restriction does not
apply to the LB Opportunity Growth Fund.
(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, or in the case of the LB
World Growth Fund, warrants not listed on major foreign
exchanges, (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.
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 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.
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 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 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 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.
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.
Noel K. Estenson Trustee 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 Operating 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
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 9.39% of the outstanding Institutional Class shares of LB
World Growth Fund and 8.33% of the outstanding Institutional Class shares of
LB Money Market Fund as of November 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 $23,500 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, 1997, 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:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL TOTAL COMPENSATION
NAME AND POSITION COMPENSATION AS PART OF FUND BENEFITS UPON PAID BY FUND
OF PERSON FROM TRUST EXPENSES RETIREMENT AND FUND COMPLEX (1)
<S> <C> <C> <C> <C>
Rolf F. Bjelland(2) $0 $0 $0 $0
Chairman and Trustee
Charles W. Arnason $17,170 $0 $0 $31,000
Trustee
Herbert F. Eggerding, Jr. $17,170 $0 $0 $31,000
Trustee
Connie M. Levi $17,170 $0 $0 $31,000
Trustee
Bruce J. Nicholson(2) $0 $0 $0 $0
Trustee
Ruth E. Randall $17,170 $0 $0 $31,000
Trustee
Noel K. Estenson $8,125 $0 $0 $4,536
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 Opportunity
Growth Fund and 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 Opportunity Growth Fund's and the LB World
Growth Fund's investments, with investment decisions for that Fund being made
by investment sub-advisors. Except for the LB Opportunity Growth Fund and 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 Opportunity Growth Fund are made by T.
Rowe Price Associates, Inc. ("T. Rowe Price"), which LB Research has engaged
as the sub-advisor for that Fund. T. Rowe Price manages the LB Opportunity
Growth Fund on a daily basis, subject to the overall direction of LB Research
and the Funds' Board of Trustees.
T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1997, T. Rowe Price and its
affiliates managed over $124 billion.
Investment decisions for the LB World Growth Fund are made by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), which LB Research has
engaged as the sub-advisor for that Fund. Price-Fleming manages that Fund on
a daily basis, subject to the overall direction of LB Research and the Funds'
Board of Trustees.
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 the U.S. equivalent of approximately $31 billion under
management as of October 31, 1997 in its offices in Baltimore, London, Tokyo,
Singapore, Hong Kong, and Buenos Aires.
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 between the Trust and T. Rowe Price provides
that it shall continue in effect with respect to the LB Opportunity 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.
The Sub-advisory Contract between the Trust and Price-Fleming
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 an 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 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 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 Mid Cap Growth Fund, which is in its first year of operations) are as
follows:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund $1,868,475 $ 1,563,341 $ 938,166
LB Mid Cap Growth Fund 21,586 -- --
LB World Growth Fund 682,203 392,419 17,787
LB Fund 5,686,741 4,529,474 3,726,938
LB High Yield Fund 4,911,490 4,150,072 3,509,710
LB Income Fund 4,799,245 5,330,930 5,431,506
LB Municipal Bond Fund 3,424,258 3,551,045 3,504,880
LB Money Market Fund 2,210,254 1,922,505 1,538,307
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 the LB Fund totaling $385,904 for the fiscal year ended
October 31, 1997. LB Research waived fees with respect to LB High Yield Fund
totaling $328,810. LB Research waived fees with respect to LB Income Fund
totaling $333,931. LB Research waived fees with respect to LB Municipal Bond
Fund totaling $247,844. LB Research waived fees with respect to the Mid Cap
Growth Fund totaling $7,357. LB Research waived fees with respect to the
Money Market Fund totaling $435,799 for the fiscal year ended October 31,
1997, $246,901 for the fiscal year ended October 31, 1996 and $253,844 for
the fiscal year ended October 31, 1995.
LB Research pays the T. Rowe Price an annual sub-advisory fee for the
performance of sub-advisory services for the LB Opportunity Growth Fund. The
fee payable is equal to .3% of that Fund's average daily net assets up to
$500 million, .25% of that Fund's average daily net assets over $500 million
but not over $1 billion, and .2% of that Fund's average daily net assets over
$1 billion.
LB Research pays Price-Fleming an annual sub-advisory fee for the
performance of sub-advisory services for the LB World Growth Fund. 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 Price-Fleming also
provides sub-advisory services. The sub-advisory fee LB Research pays Price-
Fleming 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 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 October 31, 1997, the combined assets of LB World Growth
Fund and World Growth Portfolio totaled $351.0 million.
The total dollar amount paid by LB Research Price-Fleming under the
investment sub-advisory contract for LB World Growth Fund for the fiscal
period ended October 31, 1997 is $342,403.
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 0.02 percent of the Funds' average daily net
assets. Prior to January 1, 1997, the fee equaled 0.0225 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:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund $ 55,875 $ 51,379 $ 33,788
LB Mid Cap Growth Fund 617 -- --
LB World Growth Fund 13,826 8,217 56
LB Fund 184,583 163,270 144,572
LB High Yield Fund 158,365 148,767 136,969
LB Income Fund 166,209 207,659 215,922
LB Municipal Bond Fund 122,078 142,190 151,391
LB Money Market Fund 90,172 87,973 85,688
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:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund $ 1,147,649 $ 865,339 $ 582,903
LB Mid Cap Growth Fund 21,145 -- --
LB World Growth Fund 311,027 169,451 4,983
LB Fund 1,791,020 1,610,381 1,478,056
LB High Yield Fund 1,205,817 1,061,296 944,128
LB Income Fund 1,275,325 1,382,275 1,398,946
LB Municipal Bond Fund 492,743 516,423 517,010
LB Money Market Fund 1,383,639 1,239,592 1,211,889
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
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:
[CAPTION]
10/31/97 10/31/96
---------------------- -----------------------
Gross Amount Gross Amount
Commissions Retained Commissions Retained
[S] [C] [C] [C] [C]
LB Opportunity Growth Fund $1,724,236 $375,950 $2,272,864 $499,118
LB Mid Cap Growth Fund 278,924 59,480 -- --
LB World Growth Fund 637,128 138,984 857,697 187,621
LB Fund 2,613,029 566,543 2,306,035 504,687
LB High Yield Fund 3,716,291 812,906 3,372,402 742,668
LB Income Fund 905,599 194,851 1,486,518 324,229
LB Municipal Bond Fund 689,914 152,127 988,150 215,239
[CAPTION]
10/31/95
------------------------
Gross Amount
Commissions Retained
[S] [C] [C]
LB Opportunity Growth Fund $1,423,809 $315,636
LB Mid Cap Growth Fund -- --
LB World Growth Fund 153,713 33,490
LB Fund 1,609,270 352,617
LB High Yield Fund 2,422,070 530,028
LB Income Fund 1,325,519 288,981
LB Municipal Bond Fund 989,735 212,445
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 T. Rowe Price and Price-Fleming, (each a "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-advisors 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-advisors 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-advisors 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-advisors or an affiliate of LB Research or the sub-advisors
exercises investment discretion. LB Research and the sub-advisors 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-advisors
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-advisors might otherwise
have paid, it would, of course, tend to reduce the expenses of LB Research or
the sub-advisors.
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, a 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.
AFFILIATED TRANSACTIONS OF THE SUB-ADVISORS
Subject to applicable SEC rules, as well as other regulatory
requirements, the sub-advisors of the LB Opportunity Growth Fund and the LB
World Growth Fund may allocate orders to brokers or dealers affiliated with
such sub-advisors. 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.
BROKERAGE COMMISSIONS
During the last three fiscal years, the Funds paid the following
brokerage fees:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund $ 520,660 $ 472,846 $ 197,461
LB Mid Cap Growth Fund 29,180 -- --
LB World Growth Fund* 102,408 108,394 24,302
LB Fund 941,481 1,349,473 1,787,109
LB High Yield Fund 15,071 36,567 47,583
LB Income 162,275 92,838 61,164
LB Municipal Bond Fund 7,399 7,399 9,518
LB Money Market Fund -- -- --
- - --------------------
* Amount paid to affiliated broker-dealer is $2,608 for the fiscal
year ended October 31, 1997, $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:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund 6.68% 0.60% 0.22%
LB Mid Cap Growth Fund 68.99 -- --
LB World Growth Fund 0.48 0.08
LB Fund 1.30 7.17 8.10
LB High Yield Fund 0.00 0.24 0.70
LB Income Fund 5.12 6.41 0.62
LB Municipal Bond Fund 0.00 0.00 0.00
LB Money Market Fund 0.00 0.00 0.00
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 Mid Cap Growth Fund, LB World Growth Fund, LB
Fund, LB High Yield Fund, LB Income Fund, and LB Municipal Bond Fund were as
follows:
[CAPTION]
10/31/97 10/31/96 10/31/95
[S] [C] [C] [C]
LB Opportunity Growth Fund 136% 176% 213%
LB Mid Cap Growth Fund 94% -- --
LB World Growth Fund 17% 11% 0%
LB Fund 54% 91% 127%
LB High Yield Fund 113% 104% 71%
LB Income Fund 97% 142% 131%
LB Municipal Bond Fund 18% 33% 36%
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;
- 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.
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
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' 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:
- 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 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:
[CAPTION]
[S] [C] [C] [C]
Class Rule 12b-1 Shareholder Sales Charge
Servicing Fee
---------- ------------- -------------
A None .25% of average Maximum 4.0% initial
daily net assets sales charge
reflected(1)
B .75% of .25% of average 1- and 5- year periods
average daily daily net assets reflect a 5% and 1%
net assets(1) CDSC, respectively(1)
Institutional None None None
- - -----------------
(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 October 31, 1997:
AVERAGE ANNUAL TOTAL RETURNS FOR CLASS A SHARES FOR THE INDICATED PERIODS
ENDED
OCTOBER 31, 1997*
[CAPTION]
LB OPPORTUNITY
GROWTH FUND LB FUND LB HIGH YIELD FUND
- - -------------------- ----------------- ------------------
[S] [C] [C] [C] [C] [C]
1 year 3.20% 1 year 21.92% 1 year 9.90%
Since Fund 16.13% 5 years 14.87% 5 years 11.18%
Inception
1/8/93
10 years 13.80% 10 Years 10.98%
<TABLE>
<CAPTION>
LB INCOME FUND LB MUNICIPAL BOND FUND LB MONEY MARKET FUND
- - --------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
1 year 3.77% 1 year 3.93% 1 year 4.74%
5 years 5.90% 5 years 6.57% 5 years 3.88%
10 years 8.52% 10 years 8.22% 10 years 5.11%
</TABLE>
[CAPTION]
LB WORLD GROWTH FUND LB MID CAP GROWTH FUND
- - ------------------ ----------------------
[S] [C] [C] [C]
1 Year 3.04% Since Fund 7.16%
Inception
Since Fund 6.80% (5/30/97)
Inception
(9/5/95)
* 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
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 October 31, 1997,
including the maximum sales charge of 4% for the LB High Yield Fund, LB
Income Fund and LB Municipal Bond Fund were 8.90%, 5.65%, and 4.16%,
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 October 31, 1997, including the maximum sales charge of 4%
assuming a tax rate of 15%, 28%, 31% and 39.6%, were 4.89%, 5.78%, 6.03% and
6.89%, respectively.
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 10/31/97...................... 4.74%
Effective Yield For 7-day Period Ended 10/31/97............ 4.85%
</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.
<PAGE>
PART C
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements
(1) Financial Statements included in PART A (Prospectus) of this
Registration Statement:
(A) Financial Highlights for Lutheran Brotherhood Opportunity
Growth Fund for the fiscal year ended October 31, 1997
(B) Financial Highlights for Lutheran Brotherhood Mid Cap
Growth Fund for the fiscal year ended October 31, 1997
(C) Financial Highlights for Lutheran Brotherhood World
Growth Fund for the fiscal year ended October 31, 1997
(D) Financial Highlights for Lutheran Brotherhood Fund for
the fiscal year ended October 31, 1997
(E) Financial Highlights for Lutheran Brotherhood High Yield
Fund for the fiscal year ended October 31, 1997
(F) Financial Highlights for Lutheran Brotherhood Income Fund
for the fiscal year ended October 31, 1997
(G) Financial Highlights for Lutheran Brotherhood Municipal
Bond Fund for the fiscal year ended October 31, 1997
(H) Financial Highlights for Lutheran Brotherhood Money
Market Fund for the fiscal year ended October 31, 1997
(2) Financial Statements included in the Annual Report to Shareholders
for the period ended October 31, 1997 as incorporated by reference
into PART B (Statement of Additional Information) of this
Registration Statement for 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:
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statements (including Financial
Highlights referenced to the Prospectus)
Report of Independent Accountants
(b) Exhibits
(1) First Amended and Restated Master Trust Agreement of the
Registrant (1)
(1)(b) Form of Amendment No. 1 to First Amended and Restated Master
Trust Agreement (2)
(1)(c) Form of Amendment No. 2 to First Amended and Restated Master
Trust Agreement (3)
(1)(d) Form of Amendment No. 3 to First Amended and Restated Master
Trust Agreement (4)
(2) By-Laws of the Registrant (1)
(3) Not applicable
(4) Not applicable
(5)(a) Form of Master Advisory Contract between the Registrant and
Lutheran Brotherhood Research Corp. (1)
(5)(b) Form of Amendment to Master Advisory Contract (2)
(5)(c) Form of Sub-Advisory Agreement between Lutheran Brotherhood
Research Corp. and Rowe Price-Fleming International, Inc. (2)
(5)(d) Form of Sub-Advisory Agreement between Lutheran Brotherhood
Research Corp., the Registrant and T. Rowe Price Associates,
Inc. (5)
(6) Form of Amended and Restated Distribution Contract (4)
(7) Not applicable
(8)(a) Form of Custodian Contract between the Registrant and State
Street Bank and Trust Company (1)
(8)(b) Form of Amended and Restated Transfer Agency Agreement between
the Registrant and Lutheran Brotherhood Securities Corp. (4)
(8)(c) Form of Administrative Services Agreement between the Registrant
and Lutheran Brotherhood Securities Corp. (1)
(8)(d) Form of Amendment to Custodian Contract (2)
(8)(f) Administration Contract Between The Lutheran Brotherhood Family
of Funds and Lutheran Brotherhood Securities Corp. (2)
(8)(g) Form of Amendment to Administrative Services Agreement (2)
(8)(h) Form of Amendment to Custodian Contract (3)
(8)(j) Form of Amendment to Administration Contract (3)
(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 (1)
(13)(b) Form of Subscription and Investment Letter with respect to
Lutheran Brotherhood World Growth Fund (2)
(13)(c) Form of Subscription and Investment Letter with respect to
Lutheran Brotherhood Mid Cap Growth Fund (3)
(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 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 (1)
(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 (1)
(14)(b) Lutheran Brotherhood Individual Retirement Account, Disclosure
Statement and Custodial Agreement (1)
(14)(c) Lutheran Brotherhood Self-Directed Individual Retirement Account,
Supplemental Disclosure Statement, Disclosure Statement and
Custodial Agreement (1)
(14)(d) Lutheran Brotherhood Tax Sheltered Custodial Account (1)
(14)(e) Lutheran Brotherhood Prototype Simplified Employee Pension Plan
(1)
(15)(a) Plan of Distribution Pursuant to Rule 12b-1 with respect to the
Class B Shares (4)
(15)(b) Shareholder Servicing Plan with respect to the Class A Shares (4)
(15)(c) Shareholder Servicing Plan with respect to the Class B Shares (4)
(16) Schedule of computation of performance data provided in response
to Item 22 of this Registration Statement (1)
(17) Financial Data Schedule (1)
(18) Multiple Class Expense Allocation Plan Adopted Pursuant to Rule
18f-3 (4)
(19)(a) Powers of Attorney for:
(i) Rolf F. Bjelland, Wade M. Voigt, Charles W. Arnason,
Herbert F. Eggerding, Jr., and Ruth E. Randall (1)
(ii) Connie M. Levi (1)
(19)(b) Power of Attorney for Bruce J. Nicholson (2)
(19)(c) Power of Attorney for Noel K. Estenson (4)
- --------------------
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote
Reference Securities Act of 1933 Amendment Date Filed
--------- -------------------------------- ----------
(1) Filed herein
(2) Post-Effective Amendment No. 55 June 16, 1995
(3) Post-Effective Amendment No. 58 March 10, 1997
(4) Post-Effective Amendment No. 60 October 28, 1997
(5) Enclosed
Item 25. Persons Controlled by or under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of December 1, 1997 the numbers of record holders of shares of the
Registrant was as follows:
(1) (2)
Number of
Title of Class Record Holders
Shares of Beneficial Interest
Lutheran Brotherhood Opportunity Growth Fund 57,970
Lutheran Brotherhood Mid Cap Growth Fund 4,885
Lutheran Brotherhood World Growth Fund 17,583
Lutheran Brotherhood Fund 90,955
Lutheran Brotherhood High Yield Fund 58,459
Lutheran Brotherhood Income Fund 55,084
Lutheran Brotherhood Municipal Bond Fund 21,730
Lutheran Brotherhood Money Market Fund 53,340
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 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
David K. Stewart, 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)
Fred P. Johnson, 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 L. 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
(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:
(1) (2) (3)
Positions
Name and Principal and Offices Positions and Offices
Business Address with Underwriter with Registrant
------------------ ---------------- --------------------
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 and Vice President and
625 Fourth Avenue South Secretary Secretary
Minneapolis, MN 55415
David K. Stewart Treasurer --
625 Fourth Avenue South
Minneapolis, MN 55415
(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:
Name Address
---- -------
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
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.
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.
The Registrant hereby undertakes to file a post-effective amendment to
its registration for the purposes of filing updated financial statements
(which need not be audited) within the time limit specified by Item 32(b) of
Form N-1A.
Notice
A copy of the Master Trust Agreement of the Registrant is on file with
the Secretary of State of the State of Delaware and notice is hereby given
that the obligations of the Registrant hereunder, and the authorization,
execution and delivery of this amendment to the Registrant's Registration
Statement, shall not be binding upon any of the Trustees, shareholders,
nominees, officers, agents or employees of the Registrant as individuals or
personally, but shall bind only the property of the Funds of the Registrant,
as provided in the Master Trust Agreement. Each Fund of the Registrant shall
be solely and exclusively responsible for the payment of any of its direct or
indirect debts, liabilities and obligations, and no other Fund shall be
responsible for the same.
<PAGE>
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 16th day of March, 1998.
THE LUTHERAN BROTHERHOOD
FAMILY OF FUNDS
/s/ Randall L. Wetherille
By: --------------------------
Randall L. Wetherille,
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
amendment to this registration statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
* Trustee and President March 16, 1998
- ------------------------ (Principal Executive Officer)
Rolf F. Bjelland
* Treasurer March 16, 1998
- ------------------------ (Principal Financial and
Wade M. Voigt Accounting Officer)
* Trustee March 16, 1998
- ------------------------
Charles W. Arnason
* Trustee March 16, 1998
- -------------------------
Herbert F. Eggerding, Jr.
* Trustee March 16, 1998
- -------------------------
Noel K. Estenson
* Trustee March 16, 1998
- ------------------------
Connie M. Levi
* Trustee March 16, 1998
- ------------------------
Bruce J. Nicholson
* Trustee March 16, 1998
- ------------------------
Ruth E. Randall
/s/ Randall L. Wetherille
By: --------------------------------
Randall L. Wetherille,
Attorney-in-Fact Under Powers
of Attorney filed herewith and
incorporated by reference from
Post-Effective Amendment Nos. 51,
52 and 55 and 60.
INVESTMENT SUB-ADVISORY AGREEMENT
By and Among
Lutheran Brotherhood Research Corp.,
and
The Lutheran Brotherhood Family of Funds,
and
T. ROWE PRICE ASSOCIATES, INC.
INVESTMENT SUB-ADVISORY AGREEMENT, made as of the _____ day of May,
1998, between Lutheran Brotherhood Research Corp. ("Adviser"), a corporation
organized and existing under the laws of the State of Minnesota, the
Lutheran Brotherhood Family of Funds, a business trust organized and
existing under the laws of the State of Delaware ("Company"), and T. Rowe
Price Associates, Inc. ("Sub-Adviser"), a corporation organized and existing
under the laws of the State of Maryland.
WHEREAS, the Adviser has entered into a Master Advisory Contract dated
as of the 1st day of November, 1993 ("Advisory Agreement") with the Company,
which is engaged in business as an open-end investment company registered
under the Investment Company Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Company is authorized to issue shares of the Lutheran
Brotherhood Opportunity Growth Fund ("Fund"), a separate series of the
Company;
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment supervisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended ("Advisers
Act"); and
WHEREAS, the Company and Adviser desires to retain the Sub-Adviser as
sub-adviser to furnish certain investment advisory services to the Adviser
and the Fund and the Sub-Adviser is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual promises
herein set forth, the parties hereto agree as follows:
1. Appointment. Adviser hereby appoints the Sub-Adviser as its
investment sub-adviser with respect to the Fund for the period and on the
terms set forth in this Agreement. The Sub-Adviser accepts such appointment
and agrees to render the services herein set forth, for the compensation
herein provided.
2. Duties of the Sub-Adviser.
A. Investment Sub-Advisory Services. Subject to the supervision of
the Company's Board of Trustees ("Board") and the Adviser, the Sub-Adviser
shall act as the investment sub-adviser and shall supervise and direct the
investments of the Fund in accordance with the Fund's investment objectives,
policies, and restrictions as provided in the Fund's Prospectus and
Statement of Additional Information, as currently in effect and as amended
or supplemented from time to time (hereinafter referred to as the
"Prospectus"), and such other limitations as the Fund may impose by notice
in writing to the Sub-Adviser. The Sub-Adviser shall obtain and evaluate
such information relating to the economy, industries, businesses, securities
markets, and securities as it may deem necessary or useful in the discharge
of its obligations hereunder and shall formulate and implement a continuing
program for the management of the assets and resources of the Fund in a
manner consistent with the Fund's investment objective(s), policies, and
restrictions. In furtherance of this duty, the Sub-Adviser, on behalf of
the Fund, is authorized, in its discretion and without prior consultation
with the Fund or the Adviser, to:
(1) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and
(2) directly or through the trading desks of affiliates of Robert
Fleming Holdings Limited ("Robert Fleming") and Jardine Fleming Group
Limited ("JFG") place orders and negotiate the commissions (if any) for the
execution of transactions in securities or other assets with or through such
brokers, dealers, underwriters or issuers as the Sub-Adviser may select.
B. Further Duties of Sub-Adviser. In all matters relating to the
performance of this Agreement, the Sub-Adviser shall act in conformity with
the Company's Master Trust Agreement, By-Laws, and currently effective
Registration Statement (as defined below) and with the written instructions
and directions of the Board and the Adviser, and shall comply with the
requirements of the 1940 Act, the Advisers Act, the rules thereunder, and
all other applicable federal and state laws and regulations. Without
limiting the foregoing, the Sub-Adviser shall have primary responsibility
for compliance with Rules 10f-3 and 17e-1 under the 1940 Act in each case in
which affiliates of Robert Fleming or JFG are used for the execution of
portfolio securities transactions.
3. Compensation. For the services provided and the expenses assumed
by the Sub-Adviser pursuant to this Agreement, the Sub-Adviser shall receive
a monthly investment management fee as set forth in Schedule 1, attached
hereto and incorporated herein by reference. The management fee shall be
payable monthly to the Sub-Adviser on or before the 10th day of the next
succeeding calendar month. If this Agreement becomes effective or
terminates before the end of any month, the investment management fee for
the period from the effective date to the end of such month or from the
beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proration which such period bears to the
full month in which such effectiveness or termination occurs.
4. Duties of the Adviser.
A. The Adviser shall continue to have responsibility for all services
to be provided to the Fund pursuant to the Advisory Agreement except those
services to be performed by the sub-adviser hereunder and shall oversee and
review the Sub-Adviser's performance of its duties under this Agreement.
B. The Adviser has furnished the Sub-Adviser with copies of each of
the following documents and will furnish to the Sub-Adviser at its principal
office all future amendments and supplements to such documents, if any, as
soon as practicable after such documents become available:
(1) The Master Trust Agreement of the Company, as filed with
the State of Delaware, as in effect on the date hereof and as amended from
time to time ("Declaration of Trust");
(2) The By-Laws of the Company as in effect on the date
hereof and as amended from time to time ("By-Laws");
(3) Certified resolutions of the Board of the Company
authorizing the appointment of the Adviser and the Sub-Adviser and approving
the form of the Advisory Agreement and this Agreement;
(4) The Company's Registration Statement under the 1940 Act
and the Securities Act of 1933, as amended, on Form N-1A, as filed with the
Securities and Exchange Commission ("SEC") relating to the Fund and its
shares and all amendments thereto ("Registration Statement");
(5) The Notification of Registration of the Company under
the 1940 Act on Form N-8A as filed with the SEC and any amendments thereto;
(6) The Fund's Prospectus (as defined above); and
(7) A certified copy of any financial statement or report
prepared for the Fund by certified or independent public accountants, and
copies of any financial statements or reports made by the Fund to its
shareholders or to any governmental body or securities exchange.
The Adviser shall furnish the Sub-Adviser with any further documents,
materials or information that the Sub-Adviser may reasonably request to
enable it to perform its duties pursuant to this Agreement.
C. During the term of this Agreement, the Adviser shall furnish to the
Sub-Adviser at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature, or other material prepared for
distribution to shareholders of the Fund or the public, which refer to the
Sub-Adviser or its clients in any way, prior to the use thereof, and the
adviser shall not use any such materials if the Sub-Adviser reasonably
objects in writing fifteen business days (or such other time as may be
mutually agreed) after receipt thereof. The Adviser shall ensure that
materials prepared by employees or agents of the Adviser or its affiliates
that refer to the Sub-Adviser or its clients in any way are consistent with
those materials previously approved by the Sub-Adviser as referenced in the
preceding sentence.
5. Brokerage.
A. The Sub-Adviser agrees that, in placing orders with broker-dealers
for the purchase or sale of portfolio securities, it shall attempt to obtain
quality execution at favorable security prices; provided that, on behalf of
the Fund, the Sub-Adviser may, in its discretion, agree to pay a broker-
dealer that furnishes brokerage or research services as such services are
defined under Section 28(e) of the Securities Exchange Act of 1934, as
amended ("1934 Act"), a higher commission than that which might have been
charged by another broker-dealer for effecting the same transactions, if the
Sub-Adviser determines in good faith that such commission is reasonable in
relation to the brokerage and research services provided by the broker-
dealer, viewed in terms of either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to the accounts as to which
it exercises investment discretion (as such term is defined under Section
3(a)(35) of the 1934 Act). In no instance will portfolio securities be
purchased from or sold to the Sub-Adviser, or any affiliated person thereof,
except in accordance with the federal securities laws and the rules and
regulations thereunder;
B. On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients of
the Sub-Adviser, the Sub-Adviser, to the extent permitted by applicable laws
and regulations, may, but shall be under no obligation to, aggregate the
securities to be purchased or sold to attempt to obtain a more favorable
price or lower brokerage commissions and efficient execution. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Sub-Adviser in the
manner the Sub-Adviser considers to be the most equitable and consistent
with its fiduciary obligation's to the Fund and to its other clients.
6. Ownership of Records. The Sub-Adviser shall maintain all books and
records required to be maintained by the Sub-Adviser pursuant to the 1940
Act and the rules and regulations promulgated thereunder with respect to
transactions on behalf of the Fund. In compliance with the requirements of
Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees (i) that all
records that it maintains for the Fund are the property of the Company, (ii)
to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any
records that it maintains for the Company and that are required to be
maintained by Rule 31a-1 under the 1940 Act, and (iii) agrees to surrender
promptly to the Company any records that it maintains for the Company upon
request by the Company; provided, however, the Sub-Adviser may retain copies
of such records.
7. Reports. The Sub-Adviser shall furnish to the Board or the
Adviser, or both, as appropriate, such information, reports, evaluations,
analyses and opinions as the Sub-Adviser and the Board or the Adviser, as
appropriate, may mutually agree upon from time to time.
8. Services to Others Clients. Nothing contained in this Agreement
shall limit or restrict (i) the freedom of the Sub-Adviser, or any
affiliated person thereof, to render investment management and corporate
administrative services to other investment companies, to act as investment
manager or investment counselor to other persons, firms, or corporations, or
to engage in any other business activities, or (ii) the right of any
director, officer, or employee of the Sub-Adviser, who may also be a
trustee, officer, or employee of the Company, to engage in any other
business or to devote his or her time and attention in part to the
management or other aspects of any other business, whether of a similar
nature or a dissimilar nature.
9. Sub-Adviser's Use of the Services of Others. The Sub-Adviser may
(at its cost except as contemplated by Paragraph 5 of this Agreement)
employ, retain, or otherwise avail itself of the services or facilities of
other persons or organizations for the purpose of providing the Sub-Adviser
or the Company or Fund, as appropriate, with such statistical and other
factual information, such advice regarding economic factors and trends, such
advice as to occasional transactions in specific securities, or such other
information, advice, or assistance as the Sub-Adviser may deem necessary,
appropriate, or convenient for the discharge of its obligations hereunder or
otherwise helpful to the Company or the Fund, as appropriate, or in the
discharge of Sub-Advisers overall responsibilities with respect to the other
accounts that it serves as investment manager or counselor.
10. Limitation of Liability of the Sub-Adviser. Neither the Sub-
Adviser nor any of its officers, directors, or employees, nor any person
performing executive, administrative, trading, or other functions for the
Company, the Fund (at the direction or request of the Sub-Adviser) or the
Sub-Adviser in connection with the Sub-Adviser's discharge of its
obligations undertaken or reasonably assumed with respect to this Agreement,
shall be liable for (i) any error of judgment or mistake of law or for any
loss suffered by the Company or Fund or (ii) any error of fact or mistake of
law contained in any report or data provided by the Sub-Adviser, except for
any error, mistake or loss resulting from willful misfeasance, bad faith, or
gross negligence in the performance of its or his duties on behalf of the
Company or Fund or from reckless disregard by the Sub-Adviser or any such
person of the duties of the Sub-Adviser pursuant to this Agreement.
11. Representations of Sub-Adviser. The Sub-Adviser represents,
warrants, and agrees as follows:
A. The Sub-Adviser: (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement;
(iii) has met, and will continue to meet for so long as this Agreement
remains in effect, any other applicable federal or state requirements, or
the applicable requirements of any regulatory or industry self-regulatory
agency, necessary to be met in order to perform the services contemplated by
this Agreement (iv) has the authority to enter into and perform the services
contemplated by this Agreement; and (v) will immediately notify the Adviser
of the occurrence of any event that would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to
Section 9(a) of the 1940 Act or otherwise.
B. The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and, if it has not already
done so, will provide the Adviser and the Company with a copy of such code
of ethics, together with evidence of its adoption.
C. The Sub-Adviser has provided the Adviser and the Company with a
copy of its Form ADV as most recently filed with the SEC and will, promptly
after filing any amendment to its Form ADV with the SEC, furnish a copy of
such amendment to the Adviser.
12. Term of Agreement. This Agreement shall become effective upon the
date first above written, provided that this Agreement shall not take effect
unless it has first been approved (i) by a vote of a majority of those
trustees of the Company who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by vote of a majority of the
Fund's outstanding voting securities. This Agreement shall continue in
effect unless terminated pursuant to Section 13 hereof subject to all terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board, or by vote of a majority
of the outstanding voting securities of the Fund; (b) in either event, by
the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the trustees of the Company who are not
parties to this Agreement or interested persons of any such party; and (c)
the Sub-Adviser shall not have notified the Company, in writing, at least 60
days prior to such approval that it does not desire such continuation. The
Sub-Adviser shall furnish to the Company, promptly upon its request, such
information as may reasonably be necessary to evaluate the terms of this
Agreement or any extension, renewal, or amendment hereof.
13. Termination of Agreement. Notwithstanding the foregoing, this
Agreement may be terminated at any time, without the payment of any penalty,
by vote of the Board or by a vote of a majority of the outstanding voting
securities of the Fund on at least 60 days' prior written notice to the Sub-
Adviser. This Agreement may also be terminated by the Adviser: (i) on at
least 60 days' prior written notice to the Sub-Adviser, without the payment
of any penalty; (ii) upon material breach by the Sub-Adviser of any of the
representations and warranties set forth in Paragraph 11 of this Agreement,
if such breach shall not have been cured within a 20-day period after notice
of such breach; or (iii) if the Sub-Adviser becomes unable to discharge its
duties and obligations under this Agreement. The Sub-Adviser may terminate
this Agreement at any time, without the payment of any penalty, on at least
60 days' prior notice to the Adviser. This Agreement shall terminate
automatically in the event of its assignment or upon termination of the
Advisory Agreement.
14. Amendment of Agreement. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change,
waiver, discharge, or termination is sought, and no material amendment of
this Agreement shall be effective until approved by vote of a majority of
the Fund's outstanding voting securities.
15. Miscellaneous.
A. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Maryland without giving effect to the
conflicts of laws principles thereof and the 1940 Act. To the extent that
the applicable laws of the State of Maryland conflict with the applicable
provisions of the 1940 Act, the latter shall control.
B. Captions. The captions contained in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
C. Entire Agreement. This Agreement represents the entire agreement
and understanding of the parties hereto and shall supersede any prior
agreements between the parties relating to the subject matter hereof, and
all such prior agreements shall be deemed terminated upon the effectiveness
of this Agreement.
D. Interpretation. Nothing herein contained shall be deemed to
require the Company to take any action contrary to its Declaration of Trust
or By-Laws, or any applicable statutory or regulatory requirement to which
it is subject or by which it is bound, or to relieve or deprive the Board of
its responsibility for and control of the conduct of the affairs of the
Fund.
E. Definitions. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to
such term or provision of the 1940 Act and to interpretations thereof, if
any, by the United States courts or, in the absence of any controlling
decision of any such court, by rules, regulations, or orders of the SEC
validly issued pursuant to the Act. As used in this Agreement, the terms
"majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net
assets," "sale," "sell," and "security" shall have the same meaning as such
terms have in the 1940 Act, subject to such exemption as may be granted by
the SEC by any rule, regulation, or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of
this Agreement is made less restrictive by a rule, regulation, or order of
the SEC, whether of special or general application, such provision shall be
deemed to incorporate the effect of such rule, regulation, or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as of the date and year
first above written.
LUTHERAN BROTHERHOOD RESEARCH
CORP.
Attest:
_________________________________________ By: ___________________________
THE LUTHERAN BROTHERHOOD FAMILY
OF FUNDS
Attest:
_________________________________________ By: ___________________________
T. ROWE PRICE ASSOCIATES, INC.
Attest:
_________________________________________ By: ___________________________
SCHEDULE 1
Rate of Annual
Sub-Advisory Fee as
a Percentage of
Average Daily Net Assets Average Daily Net Assets
On the portion of the Fund which is:
$500,000,000 or less . . . . . . . . . . . . . . . . .30%
Over $500,000,000 but not over $1,000,000,000. . . . .25%
Over $1,000,000,000. . . . . . . . . . . . . . . . . .20%
