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LUTHERAN BROTHERHOOD OPPORTUNITY GROWTH FUND
LUTHERAN BROTHERHOOD MID CAP GROWTH FUND
LUTHERAN BROTHERHOOD WORLD GROWTH FUND
LUTHERAN BROTHERHOOD GROWTH FUND
LUTHERAN BROTHERHOOD FUND
LUTHERAN BROTHERHOOD VALUE FUND
LUTHERAN BROTHERHOOD HIGH YIELD FUND
LUTHERAN BROTHERHOOD INCOME FUND
LUTHERAN BROTHERHOOD MUNICIPAL BOND FUND
LUTHERAN BROTHERHOOD LIMITED MATURITY BOND FUND
LUTHERAN BROTHERHOOD MONEY MARKET FUND
SERIES OF
THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
STATEMENT OF ADDITIONAL INFORMATION
March 1, 2000
The Lutheran Brotherhood Family of Funds offers eleven 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 20, 1999 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
Growth Fund ("LB Growth Fund"), Lutheran Brotherhood Fund ("LB Fund"),
Lutheran Brotherhood Value Fund ("LB Value 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"), Lutheran Brotherhood Limited Maturity Bond Fund ("LB Limited
Maturity Bond Fund") and Lutheran Brotherhood Money Market Fund ("LB Money
Market Fund"), each a series of The Lutheran Brotherhood Family of Funds
(the "Trust"). This Statement of Additional Information is not a prospectus
itself. The Report of Independent Accountants and financial statements in
the Annual Report to Shareholders for the fiscal year ended October 31, 1999
of the Funds are a separate report furnished with this Statement of
Additional Information and are incorporated herein by reference. To receive
a copy of either prospectus or the Annual Report, write to Lutheran
Brotherhood Securities Corp., 625 Fourth Avenue South, Minneapolis,
Minnesota 55415 or call toll-free 1-800-328-4552 for the Automated Service
Line or 1-800-990-6290 to speak with a customer service associate.
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TABLE OF CONTENTS
Page
History of the Lutheran Brotherhood Family of Funds......................
Investment Policies and Restrictions.....................................
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..........................................
Description of Debt Ratings..............................................
Report of Independent Public Accountants and Financial Statements........
HISTORY OF THE LUTHERAN BROTHERHOOD FAMILY OF FUNDS
Each Fund in The Lutheran Brotherhood Family of Funds is a diversified
series of The Lutheran Brotherhood Family of Funds (the "Trust"), an open-
end management investment company. All the Funds, except 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. 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. LB Growth Fund, LB Value
Fund, and LB Limited Maturity Bond Fund began operating as a series of the
LB Family of Funds on October 29, 1999. 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.
INVESTMENT POLICIES AND RESTRICTIONS
ADDITIONAL INVESTMENT PRACTICES
In addition to those practices stated in the Prospectus, various of the
Funds may purchase the following securities or may engage in the following
transactions.
OTHER SECURITIES
LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World Growth
Fund, LB Growth Fund, LB Fund, and LB Value Fund may each invest in other
types of securities, including bonds, preferred stocks, convertible bonds,
convertible preferred stocks, warrants, American Depository Receipts
(ADR's), and other debt or equity securities. In addition, each of these
Funds may invest in U.S. Government securities or cash, and LB World Growth
Fund may also invest in European Depository Receipts (EDR's) and the
securities of foreign investment trusts and or trusts.
LB Opportunity Growth Fund, LB Mid Cap Growth Fund, LB World Growth
Fund, LB Growth Fund, LB Fund, and LB Value Fund will not use any minimum
level of credit quality. 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.
LB High Yield Fund, LB Income Fund, and LB Limited Maturity Bond Fund
may also invest in common stocks, warrants to purchase stocks, bonds or
preferred stocks convertible into common stock, and other equity securities.
LB Municipal Bond Fund does not generally intend to purchase any
securities which would cause 25% or more of the value of its total assets to
be invested in the securities of governmental subdivisions located in any
one state, territory or possession of the United States. The Fund may invest
25% or more of the value of its total assets in industrial development
bonds. The Fund also 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.
BANK INSTRUMENTS
LB Money Market Fund may invest in bank instruments including, but not
limited to, certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or
savings and loan associations against funds deposited in the issuing
institution. A banker's acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction (to finance the import, export, transfer or storage of goods).
A banker's acceptance may be obtained from a domestic or foreign bank
including a U.S. branch or agency of a foreign bank. The borrower is liable
for payment as well as the bank, which unconditionally guarantees to pay the
draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior
to maturity. Time deposits are non-negotiable deposits for a fixed period
of time at a stated interest rate.
U.S. branches of foreign banks are offices of foreign banks and are not
separately incorporated entities. They are chartered and regulated either
federally or under state law. U.S. federal branches of foreign banks are
chartered and regulated by the Comptroller of the Currency, while state
branches and agencies are chartered and regulated by authorities of the
respective state or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however,
not all such branches elect FDIC insurance. U.S. branches of foreign banks
can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Investing in foreign branches of U.S. banks and U.S. branches of
foreign banks may involve risks. These risks may include future unfavorable
political and economic developments, possible withholding or confiscatory
taxes, seizure of foreign deposits, currency controls, interest limitations
and other governmental restrictions that might affect payment of principal
or interest, and possible difficulties pursuing or enforcing claims against
banks located outside the U.S. Additionally, foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or other regulatory requirements and practices comparable to U.S.
issuers, and there may be less public information available about foreign
banks and their branches and agencies.
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 an investment for later
delivery at an agreed upon price and rate of interest. 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-adviser) to be creditworthy.
RESTRICTED SECURITIES
The Funds may buy or sell restricted securities, including 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. Restricted securities that are not
resalable under Rule 144A may be subject to risks of illiquidity and
subjective valuations to a greater degree than Rule 144A securities.
REVERSE REPURCHASE AGREEMENTS
Each of the Funds 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
effecting reverse repurchase agreements, assets of the Fund in a dollar
amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
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, a Fund will
maintain liquid securities, cash, or cash equivalents of a dollar amount
sufficient to make payment for the obligations to be purchased until the
transaction has been settled.
LENDING SECURITIES (ALL FUNDS EXCEPT LB MONEY MARKET FUND)
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. In electing to engage in
securities lending for a Fund, the Adviser will take into account the
investment objective and principal strategies of the Fund. 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-adviser. 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 LB MONEY MARKET FUND)
Selling ("Writing") Covered Call Options: The Funds may from time to
time sell ("write") covered call options on any portion of their portfolios
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. This obligation is held by the Fund until either the option expires
or a closing transaction is made.
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: 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 (but not the obligation) 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.
Selling Put Options: The Funds may from time to time sell ("write")
covered put options if the put option is part of a combined position (see
"Combined Position Option" below). As the writer of a put option, the Fund
assumes the obligation to pay a predetermined ("strike") price for the
option's underlying security if the holder of the option chooses to exercise
it. Until the option expires or a closing transaction is made, the Fund
must continue to be prepared to pay the strike price, regardless of price
movements in the underlying security.
If the price of the underlying security remains the same or rises above
the strike price, the Fund generally will not be called upon to purchase the
security. The Fund will, however, retain the premium received for the
option as additional income. If the price of the underlying security falls
below the strike price, the Fund may be called upon to purchase the security
at the strike price.
Buying Put Options: The Funds may from time to time purchase put
options on any portion of their portfolios. A put option gives the buyer of
the option, upon payment of a premium, the right (but not the obligation) 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 Funds 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.
Index Options: As part of its options transactions, the Funds may also
purchase and sell call options and 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.
Combined Position Options. The Funds may purchase and sell options in
combination with each other or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Funds may engage in "straddle" and "spread"
transactions. 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-adviser's perception of anticipated market movements.
Negotiated Transactions: 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-adviser'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 Statement of Additional Information 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-adviser 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.
Closing Transactions: 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.
FINANCIAL FUTURES AND OPTIONS ON FUTURES (ALL FUNDS EXCEPT LB MONEY MARKET
FUND)
Selling Futures Contracts: 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: The Funds may purchase financial futures
contracts as a hedge against adverse movements in the prices of securities
which they intend to purchase. The Funds may buy and sell futures contracts
for a number of reasons, including to manage their exposure to changes in
securities prices and foreign currencies as an efficient means of adjusting
their overall exposure to certain markets in an effort to enhance income;
and to protect the value of portfolio securities. 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: The Funds may also sell ("write") and
purchase covered call and put options on futures contracts in connection
with the above strategies. 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 Funds 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: 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 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. In addition, in instances involving the purchase of
futures contracts or call options thereon, a Fund will maintain liquid
securities, cash, or cash equivalents in an amount equal to the market value
of such contracts.
HYBRID INVESTMENTS (ALL FUNDS EXCEPT LB MONEY MARKET FUND)
As part of their investment program and to maintain greater
flexibility, the Funds 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. 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 a Fund and the seller of the hybrid
instrument, the creditworthiness of the counterparty to the transaction
would be a risk factor which a 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. None of the Funds expect to hold more than 5% of its
total assets in hybrid instruments.
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-adviser 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-adviser'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 the
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.
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.
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 an order is placed and the time it is
liquidated, offset or exercised.
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 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.
TEMPORARY DEFENSIVE INVESTMENTS (ALL FUNDS EXCEPT LB MONEY MARKET FUND)
The Funds 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-adviser 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-adviser to be of a comparable level of quality. When
a Fund adopts a temporary defensive position its investment objective may
not be achieved.
COMPUTER RELATED RISKS
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may
be adversely affected by computer systems (whether their own systems or
systems of their service providers) that do not properly process dates
beginning with January 1, 2000 and information related to those dates.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Funds, as well as the
computer systems of those service providers upon which the Funds rely, in
order to obtain reasonable assurances that the Funds will not experience a
material adverse impact related to this problem. The Funds do not currently
anticipate that this problem will have a material adverse impact on their
portfolio investments, taken as a whole. There can be no assurances in this
area, however, including the possibility that this problem could negatively
affect the investment markets or the economy generally.
INVESTMENT LIMITATIONS
The fundamental investment restrictions for the Funds 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. With respect to Lutheran
Brotherhood Money Market Fund, this restriction does not apply
to Government Securities (as such term is defined in the
Investment Company Act of 1940) or instruments issued by
domestic banks. This restriction does not apply to LB
Municipal Bond Fund.
The following nonfundamental investment restriction may be changed
without shareholder approval. Under this restriction with respect to each
Fund:
(1) 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.
Section 18(g) of the 1940 Act defines a "senior security" as any bond,
debenture, note, or similar obligation constituting a security and
evidencing indebtedness. Section 18(F)(1) of the 1940 Act prohibits an
open-end investment company from issuing senior securities but permits
borrowings from a bank if immediately after the borrowing there is asset
coverage of at least 300%. The SEC staff has taken the position that a fund
may engage in certain leveraged transactions, such as short sales and
financial futures contracts, without violating Section 18(F)(1) if it
segregates fund assets.
FUND MANAGEMENT
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.
The officers and Trustees of the Trust and their addresses, positions
with the Trust, and principal occupations are set forth below. As of
November 30, 1999 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, Lutheran
625 Fourth Avenue South President Brotherhood; Director, Lutheran
Minneapolis, MN Brotherhood Research Corp.; Director
Age 61 and Executive Vice President, Lutheran
Brotherhood Financial Corporation;
Director, Lutheran Brotherhood Securities
Corp.; Director and Vice President,
Lutheran Brotherhood Variable Insurance
Products Company; Director, Lutheran
Brotherhood Real Estate Products Company;
Director, Chairman and President of LB
Series Fund, Inc.
Herbert F. Eggerding, Jr. Trustee Management consultant to several privately
12587 Glencroft Drive owned companies; formerly Executive Vice
St. Louis, MO President and Chief Financial Officer,
Age 62 Petrolite Corporation; Director, Lutheran
Charities Foundation of St. Louis, MO;
Director of LB Series Fund, Inc.
Noel K. Estenson Trustee President and Chief Executive Officer,
CENEX, Inc. CENEX, Inc.; Vice Chairman, CF
P.O. Box 64089 Industries; Board member, National
St. Paul, MN Cooperative Refinery Association;
Age 61 Board member, Farm Credit Leasing;
Board member, National Council of
Farmer Cooperatives; Director, LB Series
Fund, Inc.
Jodi L. Harpstead Trustee Vice President, U.S. Cardiac Rhythm
Medtronic Management for Medtronic, Inc.; Previously,
7000 Central Avenue NE Manager and Vice President, U.S. Pacing
Minneapolis, MN Marketing, Medtronic, Inc.; Board member
Age 43 of Delta Dental Plan of Minnesota;
Director, LB Series Fund, Inc.
Richard A. Hauser Trustee Partner, Baker & Hostetler, LLP; Previously,
1050 Connecticut Avenue NW Chairman of the Pennsylvania Avenue
Suite 1100 Development Corporation, Washington, DC;
Washington, DC Director, The Luther Institute; Director,
Age 57 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 served in the Minnesota House of
Age 60 Representatives from 1978 to 1986,
including in the capacity as majority
leader; former Director or member of
numerous governmental, public service
and non-profit boards and organizations;
Director, Norstan, Inc.; Director of
LB Series Fund, Inc.
Bruce J. Nicholson* Trustee President and Chief Operating Officer,
625 Fourth Avenue South Lutheran Brotherhood; Chairman,
Minneapolis, MN President and Chief Executive Officer,
Age 53 Lutheran Brotherhood Financial
Corporation; Chairman, President and Chief
Executive Officer, Lutheran Brotherhood
Variable Insurance Products Company;
Chairman, Lutheran Brotherhood Research
Corp; Chairman, Lutheran Brotherhood
Securities Corp.; Chairman, Lutheran
Brotherhood Real Estate Products Company;
Director, LB Series Fund, Inc.
Randall L. Boushek Senior Vice President Senior Vice President and Chief Investment
625 Fourth Avenue South Officer, Lutheran Brotherhood; Director
Minneapolis, MN and President, Lutheran Brotherhood
Age 42 Research Corp; Director, Vice President
and Chief Investment Officer, Lutheran
Brotherhood Variable Insurance Products
Company; Director, Lutheran Brotherhood
Securities Corp.; Director, Lutheran
Brotherhood Real Estate Products Company;
Vice President of LB Series Fund, Inc.
Otis F. Hilbert Secretary and Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President and Secretary,
Minneapolis, MN Lutheran Brotherhood Securities Corp.;
Age 62 Secretary, 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; Vice President
and Secretary of LB Series Fund, Inc.
Frederick P. Johnson Vice President Assistant Vice President, Lutheran
625 Fourth Avenue South Brotherhood; Assistant Vice President,
Minneapolis, MN Lutheran Brotherhood Variable Insurance
Age 37 Products Company; Assistant Vice President,
Lutheran Brotherhood Securities Corp.;
Vice President of LB Series Fund, Inc.
James R. Olson Vice President Senior Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Director and Vice President, Lutheran
Minneapolis, MN Brotherhood Variable Insurance Products
Age 57 Company; Director and Vice President,
Lutheran Brotherhood Research Corp.;
Director and Vice President, Lutheran
Brotherhood Securities Corp.; Director and
Vice President, Lutheran Brotherhood Real
Estate Products Company; Vice President of
LB Series Fund, Inc.
Brenda J. Pederson Vice President Assistant Vice President, Lutheran
625 Fourth Avenue South Brotherhood; Assistant Vice President,
Minneapolis, MN Lutheran Brotherhood Securities Corp.;
Age 38 Vice President of LB Series Fund, Inc.
Richard B. Ruckdashel Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President, Lutheran Brotherhood
Minneapolis, MN Variable Insurance Products Company; Vice
Age 44 President, Lutheran Brotherhood
Securities Corp.; 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 43
- -----------------------
(*) "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.
Executive Committee
The present members of the Executive Committee of the Fund are Trustees Bjelland (Chairman), Eggerding, and
Nicholson. The Executive Committee assists the Board of Trustees in fulfilling its duties with respect to the
scheduling of Board meetings and their agendas. The Executive Committee serves as a direct line of communication
between the Board of Trustees and management of the Fund and the investment adviser. The Executive Committee meets as
necessary, and generally meets at least once prior to each meeting of the Board of Trustees.
</TABLE>
PRINCIPAL HOLDERS
The following shareholders were record owners of 5% or more of a Class
of a Fund's outstanding securities as of December 1, 1999:
Owner % Ownership
Lutheran Brotherhood (including its
wholly-owned subsidiary companies)
625 Fourth Avenue South
Minneapolis, Minnesota 55415-1624 9.04% Class B LB Money Market Fund
7.17% Institutional Class LB Fund
7.23% Institutional Class LB
Opportunity Growth Fund
62.53% Institutional Class LB World
Growth Fund
71.44% Institutional Class LB Money
Market Fund
5.12% Institutional Class LB High
Yield Fund
57.14% Class A LB Growth Fund
65.44% Class A LB Value Fund
85.42% Class A LB Limited Maturity
Bond Fund
83.25% Class B LB Growth Fund
86.70% Class B LB Value Fund
99.80% Class B LB Limited Maturity
Bond Fund
100% Institutional Class LB Growth
Fund
100% Institutional Class LB Value
Fund
57.65% Institutional Class LB Mid
Cap Growth Fund
100% Institutional Class LB
Limited Maturity Bond Fund
Roger W. Allen 7.37% Class B LB Money Market Fund
139 W. Hickory Street
E. Rochester, NY 14445-1811
Berkey Land Company 8.35% Institutional Class LB
524 Berkey Road Municipal Bond Fund
Boswell, PA 15531-2315
Calahan Family Partnership 12.93% Institutional Class LB
6314 Hillview Way Municipal Bond Fund
Missoula, MT 59803-3373
California Lutheran University 6.70% Institutional Class LB Fund
60 West Olsen Road
Thousand Oaks, CA 91360-2700
Christ the King Lutheran Church 5.05% Institutional Class LB Money
5918 Spalding Drive Market Fund
Norcross, GA 30092-1906
FFB Financial Partnership 5.51% Institutional Class LB
Fred Bashore - G.P. Municipal Bond Fund
12435 E. Doubletree Road
Scottsdale, AZ 85259
Alfred H. Gaucker 14.51% Class B LB Money Market Fund
2110 Old Route 100
Bechtelsville, PA 19505-9003
Koppy's Propane, Inc. 14.52% Institutional Class LB
Rural Route 209, Box 36 Municipal Bond Fund
Williamstown, PA 17098
K V Management 17.15% Institutional Class LB
25 Gateway Drive Municipal Bond Fund
Reedsville, PA 17084-9641
Peter G. Lee 5.50% Class B LB Money Market Fund
1110 Fiske Street
Pacific Palisades, CA 90272-3845
Lichtenberg Brothers, Inc. 19.93% Institutional Class LB Mid
W1918 McArthur Road Cap Growth Fund
Mayville, WI 53050-2333
Lutheran Charities Foundation 11.07% Institutional Class LB High
Church Street Station Yield Fund
PO Box 9014
New York, NY 10087-9014
Lutheran Church Missouri 52.78% Institutional Class LB High
Synod Foundation Yield Fund
1333 S. Kirkwood Road
St. Louis, MO 63122-7295
Lutheran Community Foundation 42.72% Institutional Class LB Fund
625 Fourth Avenue South 36.22% Institutional Class LB Income
Suite 1415 Fund
Minneapolis, MN 55415-1624 83.11% Institutional Class LB
Opportunity Growth Fund
33.45% Institutional Class LB World
Growth Fund
Donald Frank Mann 5.86% Class B LB Money Market Fund
23 Barberry Hill Road
Woodstock, VT 05091-1268
Jon A. Olson 5.74% Class B LB Money Market Fund
Jean C. Olson
2919 Vernon Avenue South
St. Louis Park, MN 55416-1841
Roxie D. Overcash 12.37% Class B LB Money Market Fund
1885 Daugherty Road
China Grove, NC 28023-7680
St. Andrews By the Sea ELCA 19.87% Institutional Class LB Mid
PO Box 1567 Cap Growth Fund
Atlantic City, NJ 08404-1567
Norris Dean Thorson 7.14% Class B LB Money Market Fund
RR 3, Box 26
Luverne, MN 56156-9415
Joyce S. Winiarski 15.86% Class B LB Money Market Fund
103 Eden Glen Court
Black Mountain, NC 28711-8802
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, 1999, 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
Herbert F. Eggerding, Jr. 19,875 0 0 36,750
Trustee
Noel K. Estenson 19,208 0 0 35,500
Trustee
Jodi L. Harpstead 19,208 0 0 35,500
Trustee
Richard K. Hauser 19,208 0 0 35,500
Trustee
Connie M. Levi 19,542 0 0 36,125
Trustee
Bruce J. Nicholson(2) 0 0 0 0
Trustee
- ---------------------------------------------------------------------------------------------------
(1) The "Fund Complex" includes the eleven series of The Lutheran Brotherhood Family of
Funds and the seven portfolios of LB Series Fund, Inc.
(2) "Interested person" of the Fund as defined in the Investment Company Act of 1940.
</TABLE>
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 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 LB World
Growth Fund's investments, with investment decisions for LB World Growth
Fund being made by an investment sub-adviser. Except for 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. 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 LB World Growth Fund are made by Rowe Price-
Fleming International, Inc. ("Price-Fleming"), which LB Research has engaged
as the sub-adviser 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 over $33 billion under management as of June 30, 1999
in its offices in Baltimore, London, Tokyo, Singapore, Paris, Hong Kong, and
Buenos Aires.
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 Price-Fleming provides
that it shall continue in effect with respect to 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 between LB Research and the Trust provides for the
following advisory fees: LB Opportunity Growth Fund pays an advisory fee
equal to .50% of average daily net assets up to $100 million, .40% of
average daily net assets over $100 million but not over $250 million, .35%
of average daily net assets over $250 million but not over $500 million,
.30% of average daily net assets over $500 million but not over $1 billion,
and .25% of average daily net assets over $1 billion. LB Mid Cap Growth Fund
pays an advisory fee equal to .45% of average daily net assets up to $100
million, .40% of average daily net assets over $100 million but not over
$250 million, .35 % of average daily net assets over $250 million but not
over $500 million, .30% of average daily net assets over $500 million but
not over $1 billion and .25% of average daily net assets over $1 billion. LB
World Growth Fund pays an advisory fee equal to 1.00% of average daily net
assets up to $20 million, .85% of average daily net assets over $20 million
but not over $50 million, and .75% of average daily net assets over $50
million. LB Growth Fund pays an advisory fee equal to .425% of average daily
net assets up to $500 million, .375% of average daily net assets over $500
million but not over $1 billion and .325% of average daily net assets over
$1 billion. LB Fund pay an advisory fee equal to .40% of average daily net
assets of $500 million or less, .35% of average daily net assets over $500
million but not over $1 billion, and .30% of average daily net assets over
$1 billion. LB Value Fund pays an advisory fee equal to .40% of average
daily net assets up to $500 million, .35% of average daily net assets over
$500 million but not over $1 billion and .30% of average daily net assets
over $1 billion. LB High Yield Fund pay an advisory fee equal to .40% of
average daily net assets of $500 million or less, .35% of average daily net
assets over $500 million but not over $1 billion, and .30% of average daily
assets over $1 billion. LB Income Fund pays an advisory fee equal to .35% of
average daily net assets of $500 million or less, .325% of average daily net
assets over $500 million but not over $1 billion, and .30% of average daily
net assets over $1 billion. LB Municipal Bond Fund pays an advisory fee
equal to .325% of average daily net assets of $500 million or less, .3125%
of average daily net assets over $500 million but not over $1 billion, and
.30% of average daily net assets over $1 billion. LB Limited Maturity Bond
Fund pays an advisory fee equal to .30% of average daily net assets up to
$500 million, .275% of average daily net assets over $500 million but not
over $1 billion and .25% of average daily net assets over $1 billion. LB
Money Market Fund pay an advisory fee equal to .25% of average daily net
assets of $500 million or less, .225% of average daily net assets on the
next $500 million of average daily net assets, .20% of average daily net
assets on the next $500 million of average daily net assets, .175% of
average daily net assets on the next $500 million of average daily net
assets, and .15% of average daily net assets over $2 billion.
Effective January 1, 1997, LB Research voluntarily agreed to waive 5
basis points (0.05%) from the advisory fees payable by 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 voluntarily agreed to temporarily waive a portion of
the advisory fee for LB Mid Cap Growth Fund 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 voluntarily agreed to temporarily waive a portion of its
advisory fee for the LB Growth Fund 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 1.30%, 2.05%, and 1.05%,
respectively, of the average daily net assets of the relevant class. LB
Research has voluntarily agreed to temporarily waive a portion of its
advisory fee for the LB Value Fund 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 1.30%, 2.05%, and 1.05%,
respectively, of the average daily net assets of the relevant class. LB
Research has voluntarily agreed to temporarily waive a portion of its
advisory fee for the LB Limited Maturity Bond Fund 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 0.95%, 0.95%, and 0.70%,
respectively, of the average daily net assets of the relevant class. LB
Research has voluntarily agreed to temporarily waive a portion of the
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 are as
follows:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund $1,049,677 $1,819,274 $1,868,475
LB Mid Cap Growth Fund 267,092 203,949 21,586
LB World Growth Fund 753,081 834,624 682,203
LB Fund 5,257,761 6,971,792 5,686,741
LB High Yield Fund 3,660,910 5,720,730 4,911,490
LB Income Fund 2,754,808 4,538,239 4,799,245
LB Municipal Bond Fund 2,096,878 3,439,413 3,424,258
LB Money Market Fund 1,579,481 2,530,134 2,210,254
LB Research waived fees with respect to LB World Growth Fund totaling
$18,844, $208,656, and $66,807 for the fiscal years ended October 31, 1999,
1998, and 1997, respectively. LB Research waived fees with respect to LB
Fund totaling $967,463, $3,393,704, and $385,904 for the fiscal years ended
October 31, 1999, 1998 and 1997, respectively. LB Research waived fees with
respect to LB High Yield Fund totaling $647,959, $2,735,365, and $328,810
for the fiscal years ended October 31, 1999, 1998 and 1997, respectively. LB
Research waived fees with respect to LB Income Fund totaling $543,063,
$2,302,559, and $333,931 for the fiscal years ended October 31, 1999, 1998
and 1997, respectively. LB Research waived fees with respect to LB Municipal
Bond Fund totaling $434,545, $1,801,021, and $247,844 for the fiscal years
ended October 31, 1999, 1998 and 1997, respectively. LB Research waived fees
with respect to the Mid Cap Growth Fund totaling $77,128, $152,651, and
$7,357 for the fiscal years ended October 31, 1999, 1998 and 1997,
respectively. LB Research waived fees with respect to the Money Market Fund
totaling $404,526, $1,712,946, and $435,799 for the fiscal years ended
October 31, 1999, 1998 and 1997, respectively. LB Research waived fees with
respect to the Opportunity Growth Fund totaling $47,854 and $664,301 for the
fiscal years ended October 31, 1999 and 1998.
LB Research pays Price-Fleming an annual sub-advisory fee for the
performance of sub-advisory services for 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 World Growth
Portfolio of LB Series Fund, Inc., another fund with investment objectives
and policies that are similar to 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 LB World Growth Fund
and the World Growth Portfolio of LB Series Fund, Inc. exceed $200 million,
the sub-advisory fee for LB World Growth Fund is equal to .50% of all of the
Fund's average daily net assets. Price-Fleming has agreed to waive its fees
so that when the combined assets of LB World Growth Fund and LB Series Fund,
Inc. World Growth Portfolio exceed $500 million, the sub-advisory fee for LB
World Growth Fund is equal to .45% of all the Fund's average daily net
assets. At October 31, 1999, the combined assets of LB World Growth Fund and
World Growth Portfolio totaled $556.7 million.
The total dollar amount paid by LB Research to Price-Fleming under the
investment sub-advisory contract for LB World Growth Fund for the fiscal
year ended October 31, 1999 is $449,259.
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:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund $ 45,091 $ 53,144 $ 55,875
LB Mid Cap Growth Fund 11,478 5,827 617
LB World Growth Fund 19,579 16,693 13,826
LB Fund 283,224 226,247 184,583
LB High Yield Fund 184,197 182,358 158,365
LB Income Fund 151,763 153,504 166,209
LB Municipal Bond Fund 121,892 120,068 122,078
LB Money Market Fund 118,971 101,269 90,172
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:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund $ 1,262,313 $ 1,282,211 $ 1,147,649
LB Mid Cap Growth Fund 453,747 238,905 21,145
LB World Growth Fund 510,661 421,984 311,027
LB Fund 2,645,215 2,173,882 1,791,020
LB High Yield Fund 1,605,493 1,425,789 1,205,817
LB Income Fund 1,280,447 1,223,151 1,275,325
LB Municipal Bond Fund 483,542 480,276 492,743
LB Money Market Fund 1,718,928 1,549,977 1,383,639
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 650 Third Avenue South, Park Building,
Suite 1300, 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 LB Limited Maturity Bond Fund and LB Money Market Fund. 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 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, as supplemented by letter dated October 29, 1999, (the
"Distribution Contract"), LB Securities is granted the right to sell Class
A, Class 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 Limited Maturity Bond Fund and 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.
For the fiscal year ended October 31, 1999 each Fund paid LB Securities
fees under the Distribution Plan and the distributor used all of such
payments for compensation to sales personnel on behalf of the Class B shares
of the Funds as follows:
LB Opportunity Growth Fund 49,948
LB Mid Cap Growth Fund 83,511
LB World Growth Fund 43,727
LB Fund 346,361
LB High Yield Fund 215,750
LB Income Fund 87,611
LB Municipal Bond Fund 49,369
SHAREHOLDER SERVICING PLANS
The Trust has adopted shareholder servicing plans (each a "Shareholder
Servicing Plan") for each Fund (including LB Money Market Fund). The
Shareholder Servicing Plans for the Class A and Class B shares provide 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. The Shareholder Servicing Plan for the
Institutional Class shares provides that the Institutional Class may spend
annually, directly or indirectly, up to .15% 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 and .15% of the average daily
value of the net assets represented by Institutional Class 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 (i) initial sales charges reserved by LB
Securities for the last three fiscal years and (ii) contingent deferred
sales charge upon redemptions of Class B shares for the fiscal year ended
October 31, 1999 are as follows:
<TABLE>
<CAPTION>
10/31/99 10/31/98
10/31/99 10/31/98 10/31/97 Contingent Contingent
Initial Initial Initial Deferred Deferred
Sales Sales Sales Sales Sales
Charges Charges Charges Charges Charges
<S> <C> <C> <C> <C> <C>
LB Opportunity Growth Fund $ 460,081 $ 778,363 $1,724,236 $ 9,798 $ 1,307
LB Mid Cap Growth Fund 358,047 427,170 278,924 12,738 2,314
LB World Growth Fund 264,109 310,483 637,128 8,846 675
LB Fund 2,710,727 2,551,224 2,613,029 58,914 12,268
LB High Yield Fund 2,699,426 3,625,091 3,716,291 45,912 15,247
LB Income Fund 1,295,358 1,114,000 905,599 24,214 4,381
LB Municipal Bond Fund 961,589 843,903 689,914 7,587 5,242
</TABLE>
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 Price-Fleming (a "sub-adviser"), 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-adviser 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-
adviser 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-adviser 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-adviser or
an affiliate of LB Research or the sub-adviser exercises investment
discretion. LB Research and the sub-adviser 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-adviser 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-adviser might otherwise
have paid, it would, of course, tend to reduce the expenses of LB Research
or the sub-adviser.
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-adviser, 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-ADVISER
Subject to applicable SEC rules, as well as other regulatory
requirements, the sub-adviser of LB World Growth Fund may allocate orders to
brokers or dealers affiliated with the sub-adviser. Such allocation shall be
in such amounts and proportions as the sub-adviser shall determine and the
Fund's sub-adviser 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:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund $ 173,174 $ 748,871 $ 520,660
LB Mid Cap Growth Fund 152,039 362,449 29,180
LB World Growth Fund* 55,680 87,386 102,408
LB Growth Fund 3,538 -- --
LB Fund 1,552,905 1,282,269 941,481
LB Value Fund 5,043 -- --
LB High Yield Fund 0 11,048 15,071
LB Income 80,602 94,514 162,275
LB Municipal Bond Fund 0 0 7,399
LB Limited Maturity Bond Fund 0 -- --
LB Money Market Fund 0 0 0
- --------------------
* Amount paid to affiliated broker-dealer is $1,486 for the fiscal year
ended October 31, 1999, $4,586 for the fiscal year ended October 31, 1998,
$2,608 for the fiscal year ended October 31, 1997.
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-adviser in
connection with the management of the Funds:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund 0.06% 5.63% 6.68%
LB Mid Cap Growth Fund 16.83 25.69 68.99
LB World Growth Fund 2.87 3.55 1.30
LB Growth Fund 100.00 0.00 0.00
LB Fund 25.50 30.50 10.01
LB Value Fund 100.00 0.00 0.00
LB High Yield Fund 0.00 0.00 0.00
LB Income Fund 3.14 3.35 5.12
LB Municipal Bond Fund 0.00 0.00 0.00
LB Limited Maturity 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-adviser 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. LB Growth Fund, LB Value Fund,
and LB Limited Maturity Bond Fund do not expect their portfolio turnover
rate to exceed 100% during their first year of operation.
For the last three fiscal years, the portfolio turnover rates of 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:
10/31/99 10/31/98 10/31/97
LB Opportunity Growth Fund 49% 155% 136%
LB Mid Cap Growth Fund 145% 436% 94%
LB World Growth Fund 18% 20% 17%
LB Fund 57% 57% 54%
LB High Yield Fund 55% 73% 113%
LB Income Fund 72% 98% 97%
LB Municipal Bond Fund 20% 14% 18%
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 LB Limited Maturity Bond Fund and
LB Money Market Fund and 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, "Choosing Your Class of Shares", 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 GROWTH FUND LB FUND, LB VALUE FUND, LB HIGH YIELD FUND, LB INCOME FUND,
LB MUNICIPAL BOND FUND AND LB LIMITED MATURITY 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. 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
Securities held by LB Money Market Fund are valued on the basis of
amortized cost, which involves a constant amortization of premium or
accretion of discount to maturity regardless of the impact of fluctuating
interest rates on the market value of the security. While this method
provides certainty in valuation, it may result in periods in which the value
as determined by amortized cost is higher or lower than the price LB Money
Market Fund would receive if it sold the security.
LB Money Market Fund anticipates that under ordinary and usual
circumstances it will be able to maintain a constant net asset value of
$1.00 per share and LB Money Market Fund will use its best efforts to do so.
However, such maintenance at $1.00 might not be possible if (1) there are
changes in short-term interest rates or other factors such as unfavorable
changes in the credit of issuers affecting the values of the securities held
by LB Money Market Fund and LB Money Market Fund is compelled to sell such
securities at a time when the prices which it is able to realize vary
significantly from the values determined on the amortized cost basis or (2)
LB Money Market Fund should have negative net income. It is expected that LB
Money Market Fund will have positive net income at the time of each
determination thereof.
The utilization of the amortized cost method of valuation requires
compliance with the requirements of Rule 2a-7 under the 1940 Act. Such
compliance requires, among other things, the following:
(1) The Trustees must adopt procedures whereby the extent of
deviation, if any, of the current net asset value per share
calculated using available market quotations (or an appropriate
substitute which reflects current market conditions) from LB
Money Market Fund's net asset value per share under the amortized
cost valuation method will be determined at such intervals as the
Trustees deem appropriate and reasonable in light of current
market conditions, and the Trustees must review periodically the
amount of the deviation as well as the methods used to calculate
the deviation;
(2) In the event such deviation from LB Money Market Fund's net
asset value under the amortized cost valuation method exceeds
1/2 of 1%, the Trustees must promptly consider what action should
be initiated by them, and when the Trustees believe the extent of
any deviation from LB Money Market Fund's net asset value per
share under the amortized cost valuation method may result in
material dilution or any other unfair results to investors or
existing shareholders, they must take such action as they deem
appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results (shareholders will be
notified in the event any such corrective action is taken by the
Trustees);
(3) LB Money Market Fund may not purchase any instrument with a
remaining maturity greater than 397 calendar days or maintain a
dollar-weighted average portfolio maturity which exceeds 90 days;
(4) LB Money Market Fund must limit its portfolio investments,
including repurchase agreements, to those United States dollar-
denominated instruments which the Trustees determine present
minimal credit risks and which are "eligible securities" as
defined in Rule 2a-7; and
(5) LB Money Market Fund must record, maintain and preserve
certain records and observe certain reporting obligations in
accordance with Rule 2a-7.
Securities in which LB Money Market Fund invests must be U.S. dollar-
denominated Eligible Securities (as defined in Rule 2a-7 under the 1940 Act)
that are determined to present minimal credit risks. In general, the term
"Eligible Security" is limited to any security that:
(i) (a) either (1) has received a short-term rating from a nationally
recognized statistical rating organization (NRSRO") or has been
issued by an issuer that has received a short-term rating from an
NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security with the security or (2) is subject to a guarantee that
has received a short-term rating from an NRSRO, or a guarantee
issued by a guarantor that has received a short-term rating from
an NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security with the guarantee, (b) has a remaining maturity of 397
calendar days or less and (c) has received a rating from the
requisite number of NRSROs (i.e.. two, if two organizations have
issued ratings and one if only one has issued a rating) in one of
the two highest short-term major rating categories; or
(ii) is unrated but is of comparable quality to a rated security as
described in (i), above, and which at the time of issuance (a)
had a remaining maturity of more than 397 calendar days and now
has a remaining maturity of 397 calendar days or less, and (b)
has not received a long-term rating from an NRSRO in any NRSRO
major rating category outside of the NRSRO's three highest major
rating categories, unless the security has received a long-term
rating from the requisite number of NRSROs (i.e., two, if two
organizations have issued ratings and one if only one has issued
a rating) in one of the three highest long-term major rating
categories.
As indicated in the Prospectus, at least 95% of LB Money Market Fund's
total assets will consist of government securities and "first tier" eligible
securities as defined in Rule 2a-7 under the 1940 Act, with the balance of
LB Money Market Fund's assets invested in "second tier" eligible securities
as defined in Rule 2a-7. For this purpose, "second tier" eligible
securities generally are those which have been (i) rated by at least two
nationally recognized statistical rating organizations in one of the two
highest rating categories for short-term obligations (or so rated by one
such organization if it alone has rated the security), (ii) issued by an
issuer with comparable short-term obligations that are rated in one of the
two highest rating categories, or (iii) if unrated, determined to be
comparable to such securities. LB Money Market Fund may not invest more
than the greater of 1% of its total assets or $1 million in "second tier"
eligible securities of any single issuer.
CONVERSION TO FEDERAL FUNDS
It is 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 that 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,
among other requirements:
- derive at least 90% of its gross income from dividends,
interest, gains from the sale of securities, and certain
other investments;
- invest in securities within certain statutory limits; and
- distribute at least 90% of its ordinary income to
shareholders.
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, (i)
advisory fees, custodial fees and other expenses relating to the management
of the Fund's assets ("Management-Related Expenses") are allocated to each
class on the basis of the net asset value of that class in relation to the
net asset value of the Series, (ii) expenses of the Institutional Class
shares of each Series (other than Management-Related Expenses) and
shareholder servicing fees with respect to Institutional Class shares are
specially allocated to the Institutional Class and (iii) expenses of the
Class A and Class B shares of each series, other than Management-Related
Expenses and Rule 12b-1 and shareholder servicing fees with respect to Class
A and Class B shares, are allocated to each such class based on the net
asset value of such class in relation to the aggregate net asset value of
the Class A and Class B shares. Upon any liquidation of a Fund,
shareholders thereof are entitled to share pro rata in the net assets of
each class available for distribution.
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. The Shareholder Servicing Plans became effective on October
31, 1997, for Class A and Class B shares, and on October 31, 1999, for
Institutional Class shares. 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, which will adversely
affect performance after October 31, 1997, for the Class A and B shares and
after October 31, 1999, for the Institutional Class shares.
Performance data after October 31, 1997 reflects Rule 12b-1 fees,
shareholder servicing fees and sales charges, where applicable, as follows:
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
average daily daily net assets periods reflect a
net assets(1) 5% and 1% CDSD,
respectively(1)
Institutional(2) None .15% None
- -----------------
(1) Except for LB Limited Maturity Bond Fund and LB Money Market Fund,
which are not subject to initial sales charges, CDSC or Rule 12b-1
fees.
(2) The Institutional Class shareholder servicing fee became effective
October 31, 1999.
Calculations of performance data for all Funds 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.
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.
TAX EQUIVALENT YIELD
LB Municipal Bond Fund may quote its tax equivalent yield. 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 tables below present the average annual returns for all Funds
except LB Money Market Fund, the yields for LB High Yield Fund, LB Income
Fund, and LB Municipal Bond Fund, and the tax-equivalent yield for LB
Municipal Bond Fund of the Class A, Class B, and Institutional Class shares
for the indicated periods ended October 31, 1999. The tables reflect the
revised initial sales charge schedule for the Class A shares and the CDSC
for Class B shares effective October 31, 1997,and they do not reflect the
shareholder servicing fee applicable to the Class A and Class B shares for
periods prior to October 31, 1997 and applicable to the Institutional Class
shares for periods prior to October 31, 1999.
<TABLE>
<CAPTION>
CLASS A PERFORMANCE
Current
SEC Average Annual Total Returns as of 10/31/99 Date
Yield --------------------------------------------- of
Fund 10/31/99 1-Year 5-Years 10-Years Inception Inception
- -------------------------- -------- ------ ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
LB Opportunity Growth Fund n/a 14.82% 7.56% n/a 9.34% 01/08/93
LB Mid Cap Growth Fund n/a 35.11% n/a n/a 15.85% 05/30/97
LB World Growth Fund n/a 14.45% n/a n/a 9.66% 09/05/95
LB Fund n/a 20.59% 20.23% 14.64% n/a --
LB High Yield Fund 10.72% 3.35% 7.09% 9.38% n/a --
LB Income Fund 6.09% -4.71% 6.36% 6.60% n/a --
LB Municipal Bond Fund 4.47%(a) -6.52% 5.79% 6.41% n/a --
--------------------------------------------------
(a) Tax Equivalent Yields
--------------------------------------------------
Tax Bracket 39.6% 36% 31% 28% 15%
------ ------ ------ ------ ------
LB Municipal Bond Fund 7.40% 6.98% 6.48% 6.21% 5.26%
</TABLE>
<TABLE>
<CAPTION>
CLASS B PERFORMANCE
Current Total Returns as of 10/31/99
SEC ---------------------------- Date
Yield Inception Inception of
Fund 10/31/99 (If Held) (If Redeemed) Inception
- -------------------------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C>
LB Opportunity Growth Fund n/a 18.66% 13.66% 10/31/97
LB Mid Cap Growth Fund n/a 39.69% 34.69% 10/31/97
LB World Growth Fund n/a 18.28% 13.28% 10/31/97
LB Fund n/a 24.66% 19.66% 10/31/97
LB High Yield Fund 10.40% 6.92% 1.92% 10/31/97
LB Income Fund 5.59% -1.52% -6.45% 10/31/97
LB Municipal Bond Fund 3.91%(a) -3.44% -8.27% 10/31/97
--------------------------------------------------
(a) Tax Equivalent Yields
--------------------------------------------------
Tax Bracket 39.6% 36% 31% 28% 15%
------ ------ ------ ------ ------
LB Municipal Bond Fund 6.47% 6.11% 5.67% 5.43% 4.60%
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS PERFORMANCE
Current
SEC Total Returns as of 10/31/99 Date
Yield ---------------------------- of
Fund 10/31/99 Inception Inception
- -------------------------- -------- --------- ---------
<S> <C> <C> <C>
LB Opportunity Growth Fund n/a -5.19% 10/31/97
LB Mid Cap Growth Fund n/a 15.72% 10/31/97
LB World Growth Fund n/a 13.15% 10/31/97
LB Fund n/a 20.54% 10/31/97
LB High Yield Fund 11.45% 1.10% 10/31/97
LB Income Fund 6.59% 4.03% 10/31/97
LB Municipal Bond Fund 4.92%(a) 2.80% 10/31/97
--------------------------------------------------
(a) Tax Equivalent Yields
--------------------------------------------------
Tax Bracket 39.6% 36% 31% 28% 15%
------ ------ ------ ------ ------
LB Municipal Bond Fund 8.15% 7.69% 7.13% 6.83% 5.79%
</TABLE>
YIELD - MONEY MARKET FUND
When 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.
Class Institutional
A & B Class
----- -----
Yield For 7-day Period Ended 10/31/99 4.59% 4.84%
Effective Yield For 7-day Period Ended 10/31/99 4.69% 4.96%
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.
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.
REPORT OF INDEPENDENT ACCOUNTANTS AND FINANCIAL STATEMENTS
The Report of Independent Accountants and financial statements in the
Annual Report to Shareholders for the fiscal year ended October 31, 1999 of
the Funds are a separate report furnished with this Statement of Additional
Information and are incorporated herein by reference.
