1933 Act File No. 33-3677
1940 Act File No. 811-4603
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No. ____ X
Post-Effective Amendment No. __21__ X
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. __23__ X
LB SERIES FUND, INC.
(Exact Name of Registrant as Specified in Charter)
625 Fourth Avenue South, Minneapolis, Minnesota 55415
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (612) 340-7215
Otis F. Hilbert, Secretary
LB Series Fund, Inc.
625 Fourth Avenue South
Minneapolis, Minnesota 55415
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate
box)
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on January 30, 1998 (date) pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
__X__ on April 30, 1998 (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
_____ this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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Registrant has filed with the Securities and Exchange Commission a
declaration pursuant to Rule 24f-2 under the Investment Company Act of 1940,
and:
_____ filed the Notice required by that Rule on (date); or
__X__ intends to file the Notice required by that Rule on or about March 20,
1998 (date);
or
_____ during the most recent fiscal year did not sell any securities
pursuant to Rule 24f-2 under the Investment Company Act of 1940, and,
pursuant to Rule 24f-2(b)(2), need not file the Notice.
<PAGE>
LB SERIES FUND, INC.
Cross Reference Sheet
Pursuant to Rule 485(a)
Under the Securities Act of 1933
Part A
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Item Number and Caption Location
1. Cover Page Cover Page
2. Synopsis Summary
3. Condensed Financial Information Summary
4. General Description of Registrant Summary; Investment Objectives and
Policies of the Portfolios
5. Management of the Fund Management of the Fund
5A. Management's Discussion of Fund Management's Discussion of
Performance Portfolio Performance; Annual
Report to Shareholders.
6. Capital Stock and Other Securities Other Information Concerning the
Fund -- Incorporation and
Authorized Stock; Dividends,
Distributions and Taxes
7. Purchase of Securities Being Purchase and Redemption of Shares;
Offered Determination of Net Asset Value
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Legal Proceedings Not Applicable
PART B
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History The Fund
13. Investment Objectives and Policies Investment Objectives and Policies
14. Management of the Fund Management of the Fund --
Directors and Officers of the Fund
15. Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other Investment Advisory and Other
Services Services
17. Brokerage Allocation Portfolio Brokerage and Related
Practices
18. Capital Stock and Other Securities Capital Stock
19. Purchase, Redemption and Pricing Control Persons and Principal
of Securities Being Offered Holders of Securities; Capital
Stock; Determination of Net Asset
Value
20. Tax Status Tax Status
21. Underwriters Not Applicable
22. Calculations of Performance Data Calculation of Performance
23. Financial Statements To be filed by subsequent
amendment.
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
LB SERIES FUND, INC.
625 Fourth Avenue South * Minneapolis, Minnesota 55415
(800) 423-7056 * (612) 340-7210
LB Series Fund, Inc. (the "Fund") is a diversified, open-end management
investment company (commonly known as a "mutual fund") that is intended to
provide a range of investment alternatives through its seven separate
Portfolios, each of which is in effect a separate fund. A separate class of
capital stock will be issued for each Portfolio.
Shares of the Fund are currently sold only to separate accounts (the
"Accounts") of Lutheran Brotherhood and Lutheran Brotherhood Variable
Insurance Products Company ("LBVIP") to fund benefits under variable life
insurance and variable annuity contracts issued by Lutheran Brotherhood and
LBVIP (the "Contracts"). The Accounts invest in shares of the Fund through
subaccounts that correspond to the Portfolios. The Accounts will redeem
shares of the Fund to the extent necessary to provide benefits under the
Contracts or for such other purposes as may be consistent with the
Contracts.
The investment objectives of the Portfolios are:
Growth Portfolio. To achieve long-term growth of capital through
investment primarily in common stocks of established corporations that
appear to offer attractive prospects of a high total return from dividends
and capital appreciation.
Opportunity Growth Portfolio. To achieve long term growth of capital by
investing primarily in a professionally managed diversified portfolio of
smaller capitalization common stocks.
Mid Cap Growth Portfolio. To achieve long term growth of capital by
investing primarily in a professionally managed diversified portfolio of
common stocks of companies with medium market capitalizations.
World Growth Portfolio. To achieve long-term growth of capital by
investing primarily in a professionally managed diversified portfolio of
common stocks of established, non-U.S. companies.
High Yield Portfolio. To achieve a higher level of income through
investment in a diversified portfolio of high yield securities ("junk
bonds") which involve greater risks than higher quality investments. See the
description of such risks in the section of this Prospectus entitled, "High
Yield Portfolio". The Portfolio will also consider growth of capital as a
secondary objective.
Income Portfolio. To achieve a high level of income over the longer
term while providing reasonable safety of capital through investment
primarily in readily marketable intermediate and long-term fixed income
securities.
Money Market Portfolio. To achieve the maximum current income that is
consistent with stability of capital and maintenance of liquidity through
investment in high-quality, short-term debt obligations.
Investments in the Money Market Portfolio are neither insured nor
guaranteed by the U.S. Government. There can be no assurance that the
Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
There can be no assurance that the objectives of any Portfolio will be
realized.
This Prospectus sets forth concisely the information about the Fund
that a prospective investor ought to know before investing. This Prospectus
should be read and kept for future reference. Additional information about
the Fund, contained in a Statement of Additional Information dated April 30,
1998 has been filed with the Securities and Exchange Commission and is
available upon request without charge by writing to LB Series Fund, Inc.,
625 Fourth Avenue South, Minneapolis, Minnesota 55415. The Statement of
Additional Information relating to the Fund having the same date as this
Prospectus is incorporated by reference into this Prospectus. The Statement
of Additional Information is not a Prospectus.
The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference, and other information regarding the
Fund.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is April 30, 1998.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY
The Fund
Financial Highlights
Management's Discussion of Portfolio Performance
The Accounts and the Contracts
Investment Objectives
Investment Adviser
Purchase and Redemption of Shares
Transfer Agent and Dividend Disbursing Agent
Certain Factors to Consider
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Money Market Portfolio
Income Portfolio
High Yield Portfolio
Growth Portfolio
Opportunity Growth Portfolio
Mid Cap Growth Portfolio
World Growth Portfolio
Put and Call Options
Financial Futures and Options on Futures
Hybrid Investments
Risks of Transactions in Options and Futures
Investment Restrictions Applicable to the
Portfolios
PURCHASE AND REDEMPTION OF SHARES
DETERMINATION OF NET ASSET VALUE
DIVIDENDS, DISTRIBUTIONS AND TAXES
MANAGEMENT OF THE FUND
Directors of the Fund
Investment Adviser
OTHER INFORMATION CONCERNING THE FUND
Incorporation and Authorized Stock
Voting Rights
Calculation of Performance
Comparative Performance
Portfolio Reports
Transfer Agent and Dividend Disbursing Agent
Shareholder Inquiries
DESCRIPTION OF DEBT RATINGS
ADDITIONAL INFORMATION
<PAGE>
No person is authorized to give any information or to make any
representations other than those contained in this Prospectus or the
accompanying prospectus relating to the Contracts and, if given or made,
such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the registered
securities to which it relates. This Prospectus does not constitute an offer
or solicitation in any circumstances in which such offer or solicitation
would be unlawful.
SUMMARY
The Fund
LB Series Fund, Inc. (the "Fund"), a diversified open-end management
investment company, is a Minnesota corporation organized on February 24,
1986. Prior to January 31, 1994, the Fund was known as LBVIP Series Fund,
Inc. The Fund is made up of seven separate Portfolios: the Money Market
Portfolio, the Income Portfolio, the High Yield Portfolio, the Growth
Portfolio, the Opportunity Growth Portfolio, the Mid Cap Growth Portfolio,
and the World Growth Portfolio. Each Portfolio is in effect a separate
investment fund, and a separate class of capital stock will be issued with
respect to each Portfolio.
Financial Highlights
(To be filed by subsequent amendment.)
Management's Discussion of Portfolio Performance
The discussion by management of the performance of each of the Fund's
Portfolios is contained in the Fund's Annual Report to Shareholders, which
may be obtained without charge by writing to LB Series Fund, Inc., 625
Fourth Avenue South, Minneapolis, Minnesota 55415.
The Accounts and the Contracts
Shares in the Fund are currently sold only to separate accounts of
Lutheran Brotherhood and Lutheran Brotherhood Variable Insurance Products
Company ("LBVIP") (the "Accounts"), to fund benefits under variable life
insurance and variable annuity contracts issued by Lutheran Brotherhood and
LBVIP (the "Contracts"). Each Contract owner allocates the premiums and the
assets relating to his or her Contract, within the limitations described in
the Contract, among the seven subaccounts of that Contract's Account, which
in turn invests in the corresponding Portfolios of the Fund. A prospectus
for one type of Contract accompanies this Prospectus and describes that type
of Contract and the relationship between changes in the value of shares of
each Portfolio and changes in the benefits payable under that type of
Contract. The rights of the Accounts as shareholders should be distinguished
from the rights of Contract owners which are described in the Contracts. The
terms "shareholder" or "shareholders" as used in this Prospectus refer to
the Accounts.
The Fund is designed to provide an investment vehicle for variable life
insurance and variable annuity contracts. Therefore, shares of the Fund will
be sold to more than one insurance company separate accounts of Lutheran
Brotherhood and LBVIP or any of their affiliates. It is conceivable that in
the future it may be disadvantageous for both variable life insurance
separate accounts and variable annuity separate accounts to invest
simultaneously in the Fund, although Lutheran Brotherhood and LBVIP do not
foresee any such disadvantage to either variable life insurance or variable
annuity contract owners. The management of the Fund intends to monitor
events in order to identify any material conflicts between such Contract
owners and to determine what action, if any, should be taken in response. In
addition, if Lutheran Brotherhood and LBVIP believe the Fund's response to
any such events or conflicts insufficiently protects Contract owners, they
will take appropriate action of their own.
Investment Objectives
The investment objective of each of the seven Portfolios is set forth
on the cover page of this Prospectus. See also "Investment Objectives and
Policies of the Portfolios".
Investment Adviser
Lutheran Brotherhood (the "Adviser") is the investment adviser of the
Fund. The Adviser was founded in 1917 as a fraternal benefit society, owned
by and operated for its members, under the laws of Minnesota The Adviser
has been engaged in the investment advisory business since 1970, either
directly or through the indirect ownership of Lutheran Brotherhood Research
Corp. ("LBRC"), the Fund's investment adviser prior to January 31, 1994.
LBVIP is an indirect subsidiary of Lutheran Brotherhood.
For its services, the Adviser receives from the Fund a daily investment
advisory fee equal to an annual rate of .40% of the aggregate average daily
net assets of the Money Market, Income, High Yield, Growth, Mid Cap Growth,
and Opportunity Growth Portfolios. Lutheran Brotherhood also receives an
annual investment advisory fee from the Fund equal to .85% of the aggregate
average daily net assets of the World Growth Portfolio.
Lutheran Brotherhood has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price") as investment sub-advisor for the Opportunity Growth Portfolio.
T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1997, T. Rowe Price and its
affiliates managed over $124 billion. Richard T. Whitney, Managing Director
of T. Rowe Price, is primarily responsible for day-to-day management of the
Opportunity Growth Portfolio and developing and executing the Portfolio's
investment program.
Lutheran Brotherhood pays the Sub-advisor for the Opportunity Growth
Portfolio an annual sub-advisory fee for the performance of sub-advisory
services. The fee payable is equal to .3% of that Portfolio's average daily
net assets.
Lutheran Brotherhood has engaged Rowe Price-Fleming International,
Inc., ("Price-Fleming") as investment sub-advisor for the World Growth
Portfolio. Price-Fleming was founded in 1979 as a joint venture between T.
Rowe Price Associates, Inc. and Robert Fleming Holdings Limited. Price-
Fleming is one of the world's largest international mutual fund asset
managers with approximately $29.2 billion under management as of December
31, 1996 in its offices in Baltimore, London, Tokyo and Hong Kong. Price-
Fleming has an investment advisory group that has day-to-day responsibility
for managing the World Growth Portfolio and developing and executing the
Portfolio's investment program.
Lutheran Brotherhood pays Price-Fleming an annual sub-advisory fee for
the performance of sub-advisory services for the World Growth Portfolio. The
fee payable is equal to a percentage of the that Portfolio's average daily
net assets. The percentage varies with the size of Portfolio's net assets,
decreasing as the Portfolio's assets increase. The formula for determining
the sub-advisory fee is described fully in the section of the Prospectus
entitled, "Management of the Fund--Investment Adviser".
The Portfolio managers of the Money Market, Income, High Yield, Growth,
and Mid Cap Growth Portfolios, as well as the Portfolio manager from T. Rowe
Price for the Opportunity Growth Portfolio and the members of the Price-
Fleming advisory group for the World Growth Portfolio are listed in the
"Management of the Fund--Investment Adviser" section of the Prospectus.
Purchase and Redemption of Shares
Shares are currently offered, without sales charge, at prices equal to
the respective per share net asset values of the Portfolios. The Fund is
required to redeem all full and fractional shares of the Fund at the net
asset value per share next determined after the initial receipt of proper
notice of redemption. See "Purchase and Redemption of Shares".
Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company is the Fund's transfer agent and
dividend disbursing agent, and is also custodian of the assets of the Fund.
See "Other Information Concerning the Fund--"Transfer Agent and Dividend
Disbursing Agent".
Certain Factors to Consider
Certain investment practices that may, to a limited extent, be employed
by the Fund in support of its basic investment objectives may involve
certain special risks. See, for example, the discussion of repurchase
agreements, reverse repurchase agreements and when-issued and delayed
delivery securities under "Investment Objectives and Policies of the
Portfolios--Money Market Portfolio"; certain other risks that may be
associated with investments by the Fund are described in the Statement of
Additional Information.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
Each of the seven Portfolios seeks to achieve a different investment
objective. Accordingly, each Portfolio can be expected to have different
investment results and to be subject to different financial and market
risks. Financial risk refers to the ability of an issuer of a debt security
to pay principal and interest, and to the earnings stability and overall
financial soundness of an issuer of an equity security. Market risk refers
to the degree to which the price of a security will react to changes in
conditions in securities markets in general, and, with particular reference
to debt securities, to changes in the overall level of interest rates.
The investment objectives of each Portfolio are fundamental and may not
be changed without the approval of the holders of a majority of the
outstanding shares of the Portfolio affected (which for this purpose and
under the Investment Company Act of 1940 means the lesser of (a) 67% of the
shares represented at a meeting at which more than 50% of the outstanding
shares are represented or (b) more than 50% of the outstanding shares). The
policies by which a Portfolio seeks to achieve its investment objectives,
however, are not fundamental. They may be changed by the Board of Directors
of the Fund without the approval of the shareholders. The investment
objectives of the Portfolios are discussed below.
Money Market Portfolio
The objective of this Portfolio is to achieve, through investment in
high-quality, short-term debt obligations, the maximum current income that
is consistent with stability of capital and maintenance of liquidity.
The Money Market Portfolio seeks to achieve this objective by following
the policy of investing primarily in money market instruments denominated in
U.S. dollars that mature in one year or less from the date the Portfolio
acquires them. Money market instruments include short-term obligations of
the U.S. Government, its agencies or instrumentalities, foreign governments,
their agencies and instrumentalities, and of banks and corporations. They
include certificates of deposit, commercial paper and other obligations,
including variable amount demand master notes. This Portfolio may also enter
into repurchase and reverse repurchase agreements and may purchase and sell
securities on a when-issued and delayed delivery basis; these securities are
described in detail below. A detailed description of the money market
instruments in which this Portfolio may invest and of the risks associated
with those instruments may be found in the Statement of Additional
Information. The dollar-weighted average life to maturity of the securities
held by the Portfolio will not exceed 90 days.
Variable amount demand master notes purchased by the Money Market
Portfolio are issued by domestic or foreign governments, their agencies and
instrumentalities, and corporations which, at the date of investment, either
(a) have an outstanding senior long-term debt issue rated "Aa" or better by
Moody's Investors Service, Inc. ("Moody's") or "AA" or better by Standard &
Poor's Corporation ("S&P"), or (b) do not have rated long-term debt
outstanding but have commercial paper rated at least Prime-2 by Moody's or
A-2 by S&P. The Money Market Portfolio may also invest in variable amount
demand master notes if (a) such securities have a high quality short-term
debt rating from an unaffiliated, nationally recognized statistical rating
organization or, if not rated, such securities are of comparable quality as
determined by management of the Fund, and (b) the demand feature of such
securities described below is unconditional, that is, exercisable even in
the event of a default in the payment of principal or interest on the
underlying securities. Variable amount demand master notes are unsecured
obligations with no stated maturity date that permit the investment by the
Portfolio of amounts that may fluctuate daily, at varying rates of interest
pursuant to direct arrangements between the Portfolio and the issuer. The
Portfolio may, on demand, require the issuer to redeem the notes; however,
these obligations are not readily marketable to third parties. They will not
be purchased unless the Adviser has determined that the issuer's liquidity
is such as to enable it to pay the principal and interest immediately upon
demand. These notes generally will not be backed by bank letters of credit,
and will be valued by the Adviser on an amortized cost basis (see
"Determination of Net Asset Value"). The liquidity of the issuers of such
notes held by the Portfolio will be continually assessed by the Adviser for
purposes of determining whether the Portfolio should continue to hold such
notes.
When the Money Market Portfolio purchases money market securities of
the types described above, it may on occasion enter into a repurchase
agreement with the seller wherein the seller and the buyer agree at the time
of sale to a repurchase of the security at a mutually agreed upon time and
price. The period of maturity is usually quite short, possibly overnight or
a few days, although it may extend over a number of months. The resale price
is in excess of the purchase price, reflecting an agreed-upon market rate of
interest effective for the period of time the Portfolio's money is invested
in the security, and is not related to the coupon rate of the purchased
security. Repurchase agreements may be considered loans of money to the
seller of the underlying security, which are collateralized by the
securities underlying the repurchase agreements. The Fund will not enter
into a repurchase agreement unless the agreement is "fully collateralized",
i.e., the value of the securities is, and during the entire term of the
agreement remains, at least equal to the amount of the "loan" including
accrued interest. The Portfolio will take possession of the securities
underlying the agreement and will value them periodically to assure that
this condition is met. Possession may include entries made in favor of the
Portfolio in a book-entry system. The Fund has adopted standards for the
parties with whom it will enter into repurchase agreements which it believes
are reasonably designed to assure that such a party presents no serious risk
of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase agreement. In the event that a seller
defaults on a repurchase agreement, the Fund may incur a loss on disposition
of the collateral; and, if a party with whom the Fund had entered into a
repurchase agreement becomes involved in bankruptcy proceedings, the Fund's
ability to realize on the collateral may be limited or delayed. The Fund
will not enter into repurchase agreements with the Adviser or its
affiliates. This will not affect the Fund's ability to maximize its
opportunities to engage in repurchase agreements.
The Portfolio may enter into reverse repurchase agreements, which
agreements have the characteristics of borrowing and involve the sale of
securities held by the Portfolio with an agreement to repurchase the
securities at an agreed-upon price and date, which reflect a rate of
interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that the Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to keep some of
the interest income associated with those securities. Such transactions are
only advantageous if the Portfolio has an opportunity to earn a greater rate
of interest on the cash derived from the transaction than the interest cost
of obtaining that cash. The Portfolio may be unable to realize a return from
the use of the proceeds equal to or greater than the interest required to be
paid. Opportunities to achieve this advantage may not always be available,
and the Portfolio intends only to use the reverse repurchase technique when
it appears to be to its advantage to do so. The use of reverse repurchase
agreements may magnify any increase or decrease in the value of the
Portfolio's securities. When effecting reverse repurchase agreements and
delayed delivery transactions (see the following paragraph), assets of the
Fund in a dollar amount sufficient to make payment for the obligations to be
purchased are segregated on the Fund's records at the trade date and
maintained until the transaction is settled. The value of the securities
subject to reverse repurchase agreements will not exceed 10% of the value of
the Portfolio's net assets.
From time to time, in the ordinary course of business, the Money Market
Portfolio may purchase securities on a when-issued or delayed delivery
basis, i.e., delivery and payment can take place as much as a month or more
after the date of transaction. The purchase price and the interest rate
payable on the securities are fixed on the transaction date. The securities
so purchased are subject to market fluctuation, and no interest accrues to
the Portfolio until delivery and payment take place. At the time the
Portfolio makes the commitment to purchase securities on a when-issued or
delayed delivery basis, it will record the transaction and thereafter
reflect the value, each day, of such securities in determining its net asset
value. The Portfolio will make commitments for when-issued transactions with
the intention of actually acquiring the securities or for the purpose of
generating incremental income. In some instances, the third party seller of
the when-issued or delayed-delivery securities may determine prior to the
settlement date that it will be unable or unwilling to meet its existing
transaction commitments without borrowing securities. If advantageous from a
yield perspective, the Portfolio may, in that event, agree to resell its
purchase commitment to a third-party seller at the current market price on
the date of sale and concurrently enter into another purchase commitment for
such securities at a later date. As an inducement for the Portfolio to "roll
over" its purchase commitment, the Portfolio may receive a negotiated fee.
If the Portfolio chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of any
other obligation, incur a gain or loss due to market fluctuation. No when-
issued commitments will be made if, as a result, more than 15% of the
Portfolio's net assets would be so committed.
The Portfolio may as a hedge engage in certain options and financial
futures transactions (see "Put and Call Options" and "Financial Futures and
Options on Futures").
Because of the high-quality, short-term nature of the Money Market
Portfolio's holdings, increases in the value of an investment in this
Portfolio will be derived almost entirely from interest on the securities
held by it.
Income Portfolio
The objective of this Portfolio is to achieve a high level of income
over the longer term while providing reasonable safety of capital through
investment primarily in readily marketable intermediate and long-term fixed
income securities.
The Income Portfolio seeks to achieve this objective by purchasing
primarily investment grade debt securities or, if not rated, securities of
comparable quality in the opinion of the Adviser. Investment grade debt
securities are bonds, notes, debentures, mortgage-backed securities, and
other debt obligations rated "Baa" or higher by Moody's, "BBB" or higher by
S&P, or a similar rating by a nationally-recognized statistical rating
organization. A description of the ratings that are given to debt securities
by Moody's and S&P and the standards applied by them in assigning these
ratings may be found at the end of this Prospectus.
The Income Portfolio may also invest, without limitation, in obligations
of the U.S. Government and its agencies and instrumentalities.
The Portfolio may from time to time invest in debt securities that are
not rated as investment grade. For a description of the risks of investing
in such securities, see the section of this Prospectus entitled "High Yield
Securities Investment Risks." It may also invest in convertible debt
securities, preferred stock, or convertible preferred stock. Occasionally,
debt securities are offered in units together with common stock or warrants
for the purchase of common stock. These securities may be purchased for this
Portfolio, but only when the debt security meets the Portfolio's investment
criteria and the value of the warrants is relatively small. If a warrant
becomes valuable, it will ordinarily be sold rather than exercised. The
Portfolio may, however, occasionally acquire some common stock through the
conversion of convertible securities, the exercise of warrants, or as part
of an offering of units which include both debt securities and common
stocks. No more than 10% of the value of the total assets of this Portfolio
will be held in common stocks, and those will usually be sold as soon as
favorable opportunity is available. Furthermore, no more than 25% of the
value of the total assets of this Portfolio will be held in securities
described in this paragraph.
The Portfolio may engage in repurchase agreements, reverse repurchase
agreements, and when-issued and delayed delivery transactions in pursuit of
its investment objectives. (See the section above on the investment
objectives and policies of the Money Market Portfolio for a description of
such transactions.)
The Portfolio may also invest in common stocks, warrants to purchase
stocks, bonds or preferred stock convertible into common stock, and other
equity securities. Investments in such securities will be made in pursuit of
the income and preservation of capital objectives of the Portfolio, but at
no time will the Portfolio invest more than 20% of its total assets in
equity securities.
The Portfolio may as a hedge engage in certain options and financial
futures transactions (see "Put and Call Options" and "Financial Futures and
Options on Futures").
From time to time the Portfolio may invest in short-term debt
obligations of the kind held in the Money Market Portfolio in order to make
effective use of cash reserves pending investment in other securities or as
a defensive investment strategy to protect the value of portfolio assets
during periods of rising interest rates.
The annual portfolio turnover rates for the Portfolio for the fiscal
years ended December 31, 1996 and December 31, 1995 were 150% and 132%,
respectively.
In order to help minimize credit risk, the Portfolio diversifies its
holdings among many issuers. As of December 31, 1996, the Portfolio held
securities of 97 corporate and government issuers, and the Portfolio's
holdings had the following credit quality characteristics:
Percent of
Investment Net Assets
Short-term securities--
Aaa equivalent................................ 9.2%
Government obligations............................... 26.2
Corporate obligations
AAA/Aaa....................................... 18.5
AA/Aa......................................... 8.6
A/A........................................... 18.2
BBB/Baa....................................... 13.1
BB/Ba......................................... 7.8
B/B........................................... 4.2
CCC/Caa....................................... --
CC/Ca......................................... --
D/D........................................... --
Not rated..................................... --
Other Net Assets/Liabilities.................. -5.8
Total 100.0%
High Yield Portfolio
The primary objective of this Portfolio is to achieve a higher level of
income by investing primarily in a diversified portfolio of high yield
securities, many of which involve greater risks than higher quality
investments. The Portfolio will also consider growth of capital as a
secondary objective.
The High Yield Portfolio seeks to achieve its objectives by investing
primarily in high yield bonds, notes, debentures, and other income producing
debt obligations and dividend paying preferred stock. The Portfolio will
ordinarily invest in securities that are rated "Ba" or lower by Moody's,
"BB" or lower by S&P, a similar rating by any other nationally-recognized
statistical rating organization, or, if not rated, securities having
comparable quality in the opinion of the Advisor. The Portfolio will use no
minimum quality rating. Securities having a quality rating of BB or Ba and
lower are considered to be speculative and have a greater degree of risk
than investment grade securities. See "High Yield Portfolio Investment
Risks" below. A description of the ratings that are given to debt securities
by Moody's and S&P and the standards applied by them in assigning these
ratings may be found at the end of this Prospectus.
The Portfolio may also invest in common stocks, warrants to purchase
stocks, bonds or preferred stock convertible into common stock, and other
equity securities. Investments in such securities will be made in pursuit of
the income and capital growth objectives of the Portfolio, but at no time
will the Portfolio invest more than 20% of its total assets in equity
securities.
When, in the opinion of the investment adviser, economic or market
conditions are such that high yield investments do not offer the most
attractive means of achieving the Portfolio's objectives of producing income
or growth of capital, the Portfolio may, without limitation, make temporary
defensive investments in cash, obligations of the U.S. Government, debt
obligations that may be rated higher than "Ba" or "BB", or short-term money
market obligations.
The Portfolio may invest in cash and short-term money market
obligations on a temporary basis, when awaiting the availability of suitable
high yield securities.
The Portfolio may also invest without limit in short-term money market
instruments when, in the opinion of the investment adviser, such investments
provide a better opportunity for achieving the Portfolio's objectives than
do longer term investments.
When making short-term money market investments for the defensive
purpose of avoiding the high yield investment market, the Portfolio will use
instruments rated A-1 or A-2 by Standard & Poor's Corporation, Prime-1 or
Prime-2 by Moody's Investors Service, Inc., or F-1 or F-2 by Fitch Investors
Service, or unrated instruments that are determined by the Board of
Directors or its designee to be of a comparable level of quality. When
making short-term money market investments for other purposes described
above, the Portfolio will not be limited to a minimum quality level and may
use unrated instruments.
Types of short-term money market instruments may include repurchase
agreements, certificates of deposit, Eurodollar certificates of deposit,
commercial paper and bankers' acceptances. The Fund's Board of Directors or
their designee will evaluate the creditworthiness of the parties before
entering into repurchase agreements.
The Portfolio may as a hedge engage in certain options and financial
futures transactions (see "Put and Call Options" and "Financial Futures and
Options on Futures").
The Portfolio may also engage in repurchase agreements, reverse
repurchase agreements, and when-issued and delayed delivery transactions in
pursuit of its investment objectives. (See the section above on the
investment objectives and policies of the Money Market Portfolio for a
description of such transactions.)
The Portfolio may make investments in a particular industry that would
result in up to 25% of its total assets being invested in such industry.
The Portfolio does not intend to engage in short-term trading but may
dispose of securities held for a short period if the Fund's investment
adviser believes such disposition to be advisable.
The Portfolio may purchase securities having maturities that are short
term (one year or less), intermediate term (one year to ten years), or long
term (more than ten years). The Portfolio will not be limited in the amount
of assets it may hold at any level of maturity. As market interest rates
rise, the market value of fixed rate debt obligations drops; as market
interest rates drop, the market value of such obligations rise. Debt
obligations with longer maturities will be subject to greater changes in
market value if market interest rates change, than will debt obligations
with relatively shorter maturities.
Changes in the market value of securities owned by the Portfolio will
not affect cash income but will affect the net asset value of the
Portfolio's shares.
The annual portfolio turnover rates for the Portfolio for the fiscal
years ended December 31, 1996 and December 31, 1995 were 107% and 67%,
respectively.
In order to help minimize credit risk, the Portfolio diversifies its
holdings among many issuers. As of December 31, 1996, the Portfolio held
securities of 172 corporate issuers, and the Portfolio's holdings had the
following credit quality characteristics:
Percent of
Investment Net Assets
Short-term securities--
Aaa equivalent.............................. 2.3%
Government obligations............................ --
Corporate obligations
AAA/Aaa..................................... --
AA/Aa....................................... --
A/A......................................... --
BBB/Baa..................................... 0.2
BB/Ba....................................... 5.9
B/B......................................... 50.6
CCC/Caa..................................... 8.0
CC/Ca....................................... --
D/D......................................... 0.1
Not rated................................... 16.0
Other Net Assets............................ 16.9
Total 100.0%
High Yield Portfolio Investment Risks
Investment in high yield securities (sometimes referred to as "junk
bonds") involves a greater degree of risk than investment in high quality
securities. Investment in high yield securities involves increased financial
risk due to the higher risk of default by the issuers of bonds and other
debt securities having quality ratings of "Ba" or lower by Moody's or "BB"
or lower by Standard & Poor's. The higher risk of default may be due to
higher debt leverage ratios, a history of low profitability or losses, or
other fundamental factors that weaken the ability of the issuer to service
its debt obligations.
In addition to the factors of issuer creditworthiness described above,
high yield securities generally involve a number of additional market risks.
These risks include:
Youth and Growth of High Yield Market. The high yield bond market is
relatively new and many of the high yield issues currently outstanding have
not endured a major business recession. In terms of total return on
investment, high yields from lower-rated bonds in diversified portfolios
have usually more than compensated for the higher default rates of such
securities. However, there can be no assurance that this will be true in the
event of increased interest rates or widespread defaults brought about by a
sustained economic downturn.
Sensitivity to Interest Rate and Economic Changes. The market value of
high yield securities has been found to be less sensitive to interest rate
changes on a short-term basis than higher-rated investments, but more
sensitive to adverse economic developments or individual corporate
developments. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may be more likely to experience
financial stress which would impair their ability to service their principal
and interest payment obligations or obtain additional financing. In the
event the issuer of a bond defaults on payments, the Portfolio may incur
additional expenses in seeking recovery. In periods of economic change and
uncertainty, market values of high yield securities and the Portfolio's
asset value may become more volatile. Furthermore, in the case of zero
coupon or payment-in-kind high yield securities, market values tend to be
more greatly affected by interest rate changes than securities which pay
interest periodically and in cash.
Payment Expectations. High yield securities may contain redemption or
call provisions, which allow the issuer to redeem a security in the event
interest rates drop. In this event, the Fund would have to replace the issue
with a lower yielding security, resulting in a decreased yield for
investors.
Liquidity and Valuation. High Yield securities tend to be more thinly
traded and are less likely to have an estimated retail secondary market than
investment grade securities. This may adversely impact the Portfolio's
ability to dispose of particular issues and to accurately value securities
in the Portfolio. Also, adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease market values and
liquidity, especially on thinly traded issues.
Taxation. High yield securities structured as zero coupon or payment-
in-kind issues may require the Portfolio to report interest on such
securities as income even though the Portfolio receives no cash interest on
such securities until the maturity or payment date. An investor (in this
case a separate account investing in the Portfolio) would be taxed on this
interest even though the Portfolio may not have received a cash payment or
made a cash distribution.
Reducing Risks of Lower-Rated Securities: The Portfolio's investment
adviser believes that the risks of investing in high yield securities can be
reduced by the use of professional portfolio management techniques
including:
Credit Research. The Portfolio's investment adviser will perform its
own credit analysis in addition to using recognized rating agencies and
other sources, including discussions with the issuer's management, the
judgment of other investment analysts and its own judgment. The adviser's
credit analysis will consider such factors as the issuer's financial
soundness, its responsiveness to changes in interest rates and business
conditions, its anticipated cash flow, asset values, interest or dividend
coverage and earnings.
Diversification. The Portfolio invests in a widely diversified portfolio
of securities to minimize the impact of a loss in any single investment and
to reduce portfolio risk.
Economic and Market Analysis. The Portfolio's investment adviser will
analyze current developments and trends in the economy and in the financial
markets. The Portfolio may invest in higher quality securities in the event
that investment in high yield securities is deemed to present unacceptable
market or financial risk.
Growth Portfolio
The objective of this Portfolio is to achieve long-term growth of
capital through investment primarily in common stocks of established
corporations that appear to offer attractive prospects of a high total
return from dividends and capital appreciation.
The Growth Portfolio seeks to achieve this objective by following the
policy of investing primarily in common stocks listed on the New York Stock
Exchange and on other national securities exchanges and, to a lesser extent,
in stocks that are traded over the counter. These stocks will be selected
principally for their potential appreciation over the longer term. The
effort to achieve a higher return necessarily involves accepting a greater
risk of declining values than does participation in certain of the other
Portfolios. During periods when stock prices decline generally, it can be
expected that the value of this Portfolio will also decline.
A portion of the Growth Portfolio may be invested in short-term debt
obligations of the kind held in the Money Market Portfolio as described in
the Statement of Additional Information in order to make effective use of
cash reserves pending investment in common stocks.
The Portfolio may as a hedge engage in certain options and financial
futures transactions (see "Put and Call Options" and "Financial Futures and
Options on Futures").
The annual portfolio turnover rates for the Portfolio for the fiscal
years ended December 31, 1996 and December 31, 1995 were 223% and 184%,
respectively.
Opportunity Growth Portfolio
The investment objective of this Portfolio is to achieve long-term
growth of capital.
The Opportunity Growth Portfolio seeks to achieve this objective
principally by seeking capital gains through the active management of a
portfolio consisting primarily of common stocks issued by smaller
capitalization companies. Such active management may involve a high level of
portfolio turnover. The Portfolio will invest primarily in common stocks of
domestic and foreign companies that in the opinion of T. Rowe Price have a
potential for above average sales and earnings growth that is expected to
lead to capital appreciation. T. Rowe Price believes that over a long period
of time, smaller companies that have a competitive advantage will be able to
grow faster than larger companies, leading to a higher rate of growth in
capital. A description of the risks associated with investments in such
companies is set forth below.
The Portfolio may also invest in bonds and preferred stocks,
convertible bonds, convertible preferred stocks, warrants, American
Depository Receipts (ADR's), foreign stocks and other debt or equity
securities. In addition, the Portfolio may invest in U.S. Government
securities or cash. The Portfolio will not use any minimum level of credit
quality. At no time will the Portfolio invest more than 5% of its net assets
in debt obligations (excluding cash and U.S. Government Securities). Debt
obligations may be rated less than investment grade, which is defined as
having a quality rating below "Baa", as rated by Moody's Investors Service,
Inc. ("Moody's"), or below "BBB", as rated by Standard & Poor's Corporation
("S&P"). For a description of Moody's and S&P's ratings, see "Description of
Debt Ratings". Securities rated below investment grade are considered to be
speculative and involve certain risks, including a higher risk of default
and greater sensitivity to interest rate and economic changes.
T. Rowe Price will use a number of proprietary quantitative models to
seek out those companies that have a competitively superior product or
service in an unsaturated market with large potential for growth and measure
the major characteristics of stocks in the small capitalization growth
sector. These will often be companies with shorter histories and less
seasoned operations. Based on these models, stocks are selected in a "top
down" manner so that the portfolio as a whole reflects the specific
characteristics that the sub-adviser considers important, such as valuation
and projected earnings growth. Many of such companies will have market
capitalizations that are less than $1.5 billion, with lower daily trading
volume in their stocks and less overall liquidity than larger, more well
established companies. T. Rowe Price anticipates that the common stocks of
such companies may increase in market value more rapidly than the stocks of
other companies.
The Portfolio will focus primarily on companies that possess superior
earnings prospects. The stocks that the Portfolio invests in may be traded on
national exchanges or in the over-the-counter market ("OTC"). There will be no
limit on the proportion of the Portfolio's investment portfolio that may
consist of OTC stocks.
The Portfolio may dispose of securities held for a short period if T.
Rowe Price believes such disposition to be advisable. The Portfolio will not
generally trade in securities for short-term profits, but when circumstances
warrant, securities may be purchased and sold without regard to the length
of time held.
The Portfolio may also engage in repurchase agreements, reverse
repurchase agreements, and when-issued and delayed delivery transactions in
pursuit of its investment objectives. (See the section above on the
investment objectives and policies of the Money Market Portfolio for a
description of such transactions.)
The portfolio turnover rate for the Opportunity Growth Portfolio for
the period January 18, 1996 through December 31, 1996 was 155%.
Opportunity Growth Portfolio Investment Risks
The Opportunity Growth Portfolio is aggressively managed and invests
primarily in the stocks of smaller, less seasoned companies many of which
are traded on an over-the-counter basis, rather than on a national exchange.
These companies represent a relatively higher degree of risk than do the
stocks of larger, more established companies. The companies the Opportunity
Growth Portfolio invests in also tend to be more dependent on the success of
a single product line and have less experienced management. They tend to
have smaller market shares, smaller capitalization, and less access to
sources of additional capital. As a result, these companies tend to have
less ability to cope with problems and market downturns and their shares of
stock tend to be less liquid and more volatile in price.
Mid Cap Growth Portfolio
The investment objective of this Portfolio is to achieve long term
growth of capital.
The Mid Cap Growth Portfolio seeks to achieve this objective by
investing primarily in a professionally managed diversified portfolio of
common stocks of companies with medium market capitalizations. Lutheran
Brotherhood defines companies with medium market capitalizations ("mid cap
companies") as those with market capitalizations that fall within the
capitalization range of companies included in the Standard & Poor's MidCap
400 Index at the time of the Portfolio's investment. The Portfolio will seek
to invest in companies that have a track record of earnings growth or the
potential for continued above average growth. The Portfolio will normally
invest at least 65% of its total assets in common stocks of mid cap
companies. The Portfolio will invest its remaining assets in other
securities, including common stocks of companies that fall outside the
medium capitalization range and debt obligations, subject to the limitations
discussed below. Lutheran Brotherhood will use both fundamental and
technical investment research techniques to seek out these companies.
The stocks that the Portfolio invests in may be traded on national
exchanges or in the over-the-counter market ("OTC"). There will be no limit
on the proportion of the Portfolio's investment portfolio that may consist
of OTC stocks.
Many mid cap companies have lower daily trading volume in their stocks
and less overall liquidity than larger, more well established companies. The
common stocks of such companies may have greater price volatility than the
stocks of other larger companies. A description of these and other risks
associated with investments in such companies is set forth below. .
The Portfolio may also invest in other types of securities, including
bonds, preferred stocks, convertible bonds, convertible preferred stocks,
warrants, American Depository Receipts (ADR's), common stocks of companies
falling outside the medium market capitalization range, and other debt or
equity securities. In addition, the Portfolio may invest in U.S. Government
securities or cash. The Portfolio will not use any minimum level of credit
quality. At no time will the Portfolio invest more than 5% of its net assets
in debt obligations. Debt obligations may be rated less than investment
grade, which is defined as having a quality rating below "Baa", as rated by
Moody's Investors Service, Inc. ("Moody's"), or below "BBB", as rated by
Standard & Poor's Corporation ("S&P"). For a description of Moody's and
S&P's ratings, see "Description of Debt Ratings". Securities rated below
investment grade (sometimes referred to as "high yield" or "junk bonds") are
considered to be speculative and involve certain risks, including a higher
risk of default and greater sensitivity to interest rate and economic
changes.
The Portfolio may dispose of securities held for a short period if the
Portfolio's investment adviser believes such disposition to be advisable.
While Lutheran Brotherhood does not intend to select portfolio securities
for the specific purpose of trading them within a short period of time, it
does intend to use an active method of management which will result in the
sale of some securities after a relatively brief holding period. This method
of management necessarily results in higher cost to the Portfolio due to the
fees associated with portfolio securities transactions. A higher portfolio
turnover rate may also result in taxes on realized capital gains to be borne
by shareholders. However, it is Lutheran Brotherhood's belief that this
method of management can produce added value to the Portfolio and its
shareholders that exceeds the additional costs of such transactions.
The Portfolio may as a hedge engage in certain options and financial
futures transactions (see "Put and Call Options" and "Financial Futures and
Options on Futures").
The Portfolio may also engage in repurchase agreements, reverse
repurchase agreements, and when-issued and delayed delivery transactions in
pursuit of its investment objectives. (See the section above on the
investment objectives and policies of the Money Market Portfolio for a
description of such transactions.)
The portfolio turnover rate for the Mid Cap Growth Portfolio is
expected to be no higher than 100% in its first year of operation.
Mid Cap Growth Portfolio Investment Risks
Stocks in mid cap companies entail greater risk than the stocks of
larger, well-established companies. These companies tend to have smaller
revenues, narrower product lines, less management depth and experience,
smaller shares of their product or service markets, fewer financial
resources, and less competitive strength than larger companies. Also, mid
cap companies usually reinvest a high portion of their earnings in their own
businesses and therefore lack a predictable dividend yield. Since investors
frequently buy these stocks because of their expected above average earnings
growth, earnings levels that fail to meet expectations often result in sharp
price declines of such stocks.
In addition, in many instances, the frequency and volume of trading of
mid cap companies is substantially less than is typical of larger companies.
Therefore, the securities of such companies may be subject to wider price
fluctuations. The spreads between the bid and asked prices of the securities
of these companies in the over-the-counter market typically are larger than
the spreads for more actively-traded companies. As a result, the Portfolio
could incur a loss if it determined to sell such a security shortly after
its acquisition. When making large sales, the Portfolio may have to sell
portfolio holdings at discounts from quoted prices or may have to make a
series of small sales over an extended period of time due to the trading
volume of such securities. Investors should be aware that, based on the
foregoing factors, an investment in the Portfolio may be subject to greater
price fluctuations than an investment in a fund that invests primarily in
larger more established companies.
World Growth Portfolio
The investment objective of this Portfolio is to achieve long-term
growth of capital.
The World Growth Portfolio seeks to achieve this objective principally
through investments in common stocks of established, non-U.S. companies.
Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses. The Portfolio intends to diversify
investments broadly among countries and to normally have at least three
different countries represented in the Portfolio. The Portfolio may invest
in countries of the Far East and Western Europe as well as South Africa,
Australia, Canada and other areas (including developing countries). As a
temporary defensive measure, the Portfolio may invest substantially all of
its assets in one or two countries.
In seeking its objective, the Portfolio will invest primarily in common
stocks of established foreign companies which have the potential for growth
of capital. In order to increase total return, the Portfolio may also invest
in bonds and preferred stocks, convertible bonds, convertible preferred
stocks, warrants, American Depository Receipts (ADR's) and other debt or
equity securities. In addition, the Portfolio may invest in U.S. Government
securities or cash. The Portfolio will not use any minimum level of credit
quality. At no time will the Portfolio invest more than 5% of its net assets
in debt obligations or other securities that may be converted to debt
obligations. Debt obligations may be rated less than investment grade, which
is defined as having a quality rating below "Baa", as rated by Moody's
Investors Service, Inc. ("Moody's"), or below "BBB", as rated by Standard &
Poor's Corporation ("S&P"). Debt obligations rated "Baa" or "BBB" are
considered to have speculative characteristics. For a description of Moody's
and S&P's ratings, see "Description of Debt Ratings". Securities rated below
investment grade are considered to be speculative and involve certain risks,
including a higher risk of default and greater sensitivity to interest rate
and economic changes.
In determining the appropriate distribution of investments among
various countries and geographic regions, Price-Fleming considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range
of individual investment opportunities available to international investors.
In analyzing companies for investment, Price-Fleming looks for one or
more of the following characteristics: an above-average earnings growth per
share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management;
and general operating characteristics which will enable the companies to
compete successfully in their market place. While current dividend income is
not a prerequisite in the selection of portfolio companies, the companies in
which the Portfolio invests normally will have a record of paying dividends,
and will generally be expected to increase the amounts of such dividends in
future years as earnings increase.
The Portfolio's investments also may include, but are not limited to,
European Depository Receipts ("EDRs"), other debt and equity securities of
foreign issuers, and the securities of foreign investment funds or trusts
(including passive foreign investment companies). A discussion of the risks
involved in foreign investing is located below.
The Portfolio may hold up to 100% of its assets in cash or short-term
debt securities for temporary defensive position when, in the opinion of the
Investment Adviser or Price-Fleming such a position is more likely to
provide protection against unfavorable market conditions than adherence to
the Portfolio's other investment policies. The types of short-term
instruments in which the Portfolio 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, the Portfolio 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 the Investment Adviser or Price-Fleming
to be of a comparable level of quality. When the Portfolio adopts a
temporary defensive position its investment objective may not be achieved.
The Portfolio may engage in certain forms of options and futures
transactions that are commonly known as derivative securities transactions.
These derivative securities transactions are identified and described in the
sections of this Prospectus entitled "Put and Call Options" and "Financial
Futures and Options on Futures."
The Portfolio may use foreign currency exchange-related securities
including foreign currency warrants, principal exchange rate linked
securities, and performance indexed paper. The Portfolio does not expect to
hold more than 5% of its total assets in foreign currency exchange-related
securities.
The Portfolio will normally conduct its foreign currency exchange
transactions either on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market, or through entering into forward
contracts to purchase or sell foreign currencies. The Portfolio will
generally not enter into a forward contract with a term of greater than one
year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in
a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when Price-Fleming believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell or
buy the former foreign currency (or another currency which acts as a proxy
for that currency) approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. Under certain
circumstances, the Portfolio may commit a substantial portion of the entire
value of its portfolio to the consummation of these contracts. Price-Fleming
will consider the effect such a commitment of its portfolio to forward
contracts would have on the investment program of the Portfolio and the
flexibility of the Portfolio to purchase additional securities. Although
forward contracts will be used primarily to protect the Portfolio from
adverse currency movements, they also involve the risk that anticipated
currency movements will not be accurately predicted and the Portfolio's
total return could be adversely affected as a result. A discussion of
foreign currency contracts and the risks involved therein is set forth
below.
The Portfolio may also engage in repurchase agreements, reverse
repurchase agreements, and when-issued and delayed delivery transactions in
pursuit of its investment objectives. (See the section above on the
investment objectives and policies of the Money Market Portfolio for a
description of such transactions.)
The Portfolio will not generally trade in securities for short-term
profits, but, when circumstances warrant, securities may be purchased and
sold without regard to the length of time held. The portfolio turnover rate
for the World Growth Portfolio for the period January 18, 1996 through
December 31, 1996 was 9%.
World Growth Portfolio Investment Risks
Special risks are associated with investments in the World Growth
Portfolio, beyond the standard level of risks. These risks are described
below. An investor should take into account his or her investment objectives
and ability to absorb a loss or decline in his or her investment when
considering an investment in the Portfolio. Investors in the Portfolio
assume an above average risk of loss, and should not consider an investment
the Portfolio to be a complete investment program.
The Portfolio, may invest in stocks of foreign issuers and in "ADRs"
"EDRs" of foreign stocks. When investing in foreign stocks, ADRs and EDRs,
the Portfolio assumes certain additional risks that are not present with
investments in stocks of domestic companies. These risks include political
and economic developments such as possible expropriation or confiscatory
taxation that might adversely affect the market value of such stocks, ADRs
and EDRs. In addition, there may be less publicly available information
about such foreign issuers than about domestic issuers, and such foreign
issuers may not be subject to the same accounting, auditing and financial
standards and requirements as domestic issuers.
Foreign Securities: Investments in securities of foreign issuers may
involve risks that are not present with domestic investments. While
investments in foreign securities are intended to reduce risk by providing
further diversification, such investments involve sovereign risk in addition
to credit and market risks. Sovereign risk includes local political or
economic developments, potential nationalization, withholding taxes on
dividend or interest payments, and currency blockage (which would prevent
cash from being brought back to the United States). Compared to United
States issuers, there is generally less publicly available information about
foreign issuers and there may be less governmental regulation and
supervision of foreign stock exchanges, brokers and listed companies. Fixed
brokerage commissions on foreign securities exchanges are generally higher
than in the United States. Foreign issuers are not generally subject to
uniform accounting and auditing and financial reporting standards, practices
and requirements comparable to those applicable to domestic issuers.
Securities of some foreign issuers are less liquid and their prices are more
volatile than securities of comparable domestic issuers. In some countries,
there may also be the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, difficulty in enforcing
contractual and other obligations, political or social instability or
revolution, or diplomatic developments which could affect investments in
those countries. Settlement of transactions in some foreign markets may be
delayed or less frequent than in the United States, which could affect the
liquidity of investments. For example, securities which are listed on
foreign exchanges or traded in foreign markets may trade on days (such as
Saturday) when the Portfolio does not compute its price or accept orders for
the purchase, redemption or exchange of its shares. As a result, the net
asset value of the Portfolio may be significantly affected by trading on
days when shareholders cannot make transactions. Further, it may be more
difficult for the Fund's agents to keep currently informed about corporate
actions which may affect the price of portfolio securities. Communications
between the U.S. and foreign countries may be less reliable than within the
U.S., increasing the risk of delayed settlements or loss of certificates for
portfolio securities.
Investments by the Portfolio in foreign companies may require the
Portfolio to hold securities and funds denominated in a foreign currency.
Foreign investments may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations. Thus, the Portfolio's net
asset value per share will be affected by changes in currency exchange
rates. Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders of the Portfolio. They generally are determined by the forces
of supply and demand in foreign exchange markets and the relative merits of
investment in different countries, actual or perceived changes in interest
rates or other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by intervention
by U.S. or foreign governments or central banks or the failure to intervene,
or by currency controls or political developments in the U.S. or abroad. In
addition, the Portfolio may incur costs in connection with conversions
between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are
often heightened for investments in emerging or developing countries.
Developing Countries: Investing in developing countries involves
certain risks not typically associated with investing in U.S. securities,
and imposes risks greater than, or in addition to, risks of investing in
foreign, developed countries. These risks include: the risk of
nationalization or expropriation of assets or confiscatory taxation;
currency devaluations and other currency exchange rate fluctuations; social,
economic and political uncertainty and instability (including the risk of
war); more substantial government involvement in the economy; higher rates
of inflation; less government supervision and regulation of the securities
markets and participants in those markets; controls on foreign investment
and limitations on repatriation of invested capital and on the Portfolio's
ability to exchange local currencies for U.S. dollars; unavailability of
currency hedging techniques in certain developing countries; the fact that
companies in developing countries may be smaller, less seasoned and newly
organized companies; the difference in, or lack of, auditing and financial
reporting standards, which may result in unavailability of material
information about issuers; the risk that it may be more difficult to obtain
and/or enforce a judgment in a court outside the United States; and greater
price volatility, substantially less liquidity and significantly smaller
market capitalization of securities markets.
American Depository Receipts (ADRs) and European Depository Receipts
(EDRs): ADRs are dollar-denominated receipts generally issued by a domestic
bank that represents the deposit of a security of a foreign issuer. ADRs may
be publicly traded on exchanges or over-the-counter in the United States.
EDRs are receipts similar to ADRs and are issued and traded in Europe. ADRs
and EDRs may be issued as sponsored or unsponsored programs. In sponsored
programs, the issuer makes arrangements to have its securities traded in the
form of ADRs or EDRs. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are
generally similar, the issuers of unsponsored ADRs or EDRs are not obligated
to disclose material information in the United States and, therefore, the
import of such information may not be reflected in the market value of such
securities.
Currency Fluctuations: Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such
currency against the U.S. dollar will result in a corresponding change in
the U.S. dollar value of a Portfolio's assets denominated in that currency.
Such changes will also affect a Portfolio's income. Generally, when a given
currency appreciates against the dollar (the dollar weakens) the value of a
Portfolio's securities denominated in that currency will rise. When a given
currency depreciates against the dollar (the dollar strengthens) the value
of a Portfolio's securities denominated in that currency would be expected
to decline.
Put and Call Options
Selling ("Writing") Covered Call Options: The Portfolios 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 the prices of securities in such Portfolio 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, the Portfolio assumes the
obligation to deliver the underlying security to the holder of the option on
demand at the strike price.
If the price of a security hedged by a call option falls below or
remains below the strike price of the option, the Portfolio will generally
not be called upon to deliver the security. The Portfolio 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 Portfolio will generally be called upon to deliver the security. In this
event the Portfolio 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 Portfolios may also from time to time purchase
call options on securities in which such Portfolio may invest. As the holder
of a call option, the Fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
Portfolio generally will purchase such options as a hedge to provide
protection against adverse movements in the prices of securities which the
Portfolio intends to purchase. In purchasing a call option, the Portfolio
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.
The Portfolio 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. In instances involving
the purchase of call options, the Portfolio will hold cash or cash
equivalents in its portfolio in an amount equal to the exercise value of the
options. "Cash or cash equivalents" may include cash, government securities,
or liquid high quality debt obligations.
Buying Put Options: The Portfolios 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 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. The Portfolio generally will purchase
such options as a hedge to provide protection against adverse movements in
the prices of securities in the Portfolio. In purchasing a put option, the
Portfolio would realize a gain if, during the option period, the price of
the security declined by an amount in excess of the premium paid. The
Portfolio 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 Fund may also write covered call
options and purchase put and call options on foreign currencies as a hedge
against changes in prevailing levels of currency exchange rates.
Selling Put Options: The Portfolios may not sell put options, except in
the case of a closing purchase transaction (see "Closing Transactions").
Index Options: As part of their options transactions, The Portfolios
may also purchase and sell call options and purchase put options on stock
and bond indices. Options on securities indices are similar to options on a
security except that, upon the exercise of an option on a securities index,
settlement is made in cash rather than in specific securities.
Closing Transactions: The Portfolios may dispose of an option which it
has written by entering into a "closing purchase transaction". A Portfolio
may dispose of an option which it has purchased by entering into a "closing
sale transaction". 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.
The Portfolio realizes a profit from a closing purchase transaction if
the premium paid to close the option is less than the premium received by
the Portfolio from writing the option. The Portfolio realizes a loss if the
premium paid is more than the premium received. The Portfolio 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.
The Portfolio 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. The Portfolio realizes a loss if the premium received is less
than the premium paid.
Spreads and Straddles: Certain of the Portfolios may also engage in
"straddle" and "spread" transactions in order to enhance return which is a
speculative, non-hedging purpose. A straddle is established by buying both a
call and a put option on the same underlying security, each with the same
exercise price and expiration date. A spread is a combination of two or more
call options or put options on the same security with differing exercise prices
or times to maturity. The particular strategies employed by a Portfolio will
depend on Lutheran Brotherhood's or the Sub-advisor's perception of anticipated
market movements.
Negotiated Transactions: The Growth Portfolio, the Opportunity Growth
Portfolio, the Mid Cap Growth Portfolio, and the World Growth Portfolio will
generally purchase and sell options traded on a national securities or
options exchange. Those Portfolios may also purchase and sell options in
negotiated transactions. The High Yield Portfolio, the Income Portfolio and
the Money Market Portfolio will generally purchase and sell options in
negotiated transactions. The High Yield Portfolio, the Income Portfolio and
the Money Market Portfolio may also purchase and sell options traded on a
national securities or options exchange. A Portfolio will effect negotiated
transactions only with investment dealers and other financial institutions
deemed creditworthy by its Investment Adviser or Sub-advisor. Despite the
investment adviser's or sub-advisor's best efforts to enter into negotiated
options transactions with only creditworthy parties, there is always a risk
that the opposite party to the transaction may default in its obligation to
either purchase or sell the underlying security at the agreed upon time and
price, resulting in a possible loss by the Fund. This risk is described more
completely in the section of this Prospectus entitled, "Risks of
Transactions in Options and Futures". Options written or purchased by the
Portfolios in negotiated transactions are illiquid and there is no assurance
that the Portfolios will be able to effect a closing purchase or closing
sale transaction at a time when the Fund's Investment Adviser believes it
would be advantageous to do so. In the event the Portfolios are unable to
effect a closing purchase transaction with the holder of a call option
written by the Portfolios, the Portfolios may not sell the security
underlying the option until the call written by the Portfolios expires or is
exercised. Negotiated options transactions are subject to a 10% illiquid
securities limitation.
Limitations: A Portfolio will not purchase any option if, immediately
thereafter, the aggregate cost of all outstanding options purchased and held
by such Portfolio would exceed 5% of the market value of the Portfolio's
total assets. A Portfolio will not write any option if, immediately
thereafter, the aggregate value of the Portfolio's securities subject to
outstanding options would exceed 30% of the market value of the Portfolio's
total assets.
Financial Futures and Options on Futures
Selling Futures Contracts: The Portfolios may sell the financial
futures contracts ("futures contracts") as a hedge against adverse movements
in the prices of securities in such Portfolio. 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
Portfolio, as seller, to deliver the specific type of instrument called for
in the contract at a specified future time for a specific price. In selling
a futures contract, the Portfolio 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
Portfolio. The Portfolio 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 Portfolio.
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 the Portfolio 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 the Portfolio and its broker, but rather is a "good
faith deposit" by the Portfolio to secure its obligations under a futures
contract or an option. Each day during the term of certain futures
transactions, the Portfolio will receive or pay "variation margin" equal to
the daily change in the value of the position held by the Portfolio.
Buying Futures Contracts: The Portfolios may also purchase financial
futures contracts as a hedge against adverse movements in the prices of
securities which such Portfolio intends to purchase. A futures contract
purchase creates an obligation by the Portfolio, 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, the
Portfolio 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 the Portfolio intends to purchase. The Portfolio 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 the Portfolio intends to purchase.
Options on Futures Contracts: The Portfolios may also sell ("write")
covered call options on futures contracts and purchase put and call options
on futures contracts in connection with hedging strategies. The Portfolios
may not sell put options on futures contracts. An option on a futures
contract gives the buyer of the option, in return for the premium paid for
the option, the right to assume a position in the underlying futures
contract (a long position if the option is a call and a short position if
the option is a put). The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of securities
underlying the futures contract to the extent of the premium received for
the option. The purchase of a put option on a futures contract constitutes a
hedge against price declines below the exercise price of the option and net
of the premium paid for the option. The purchase of a call option
constitutes a hedge, net of the premium, against an increase in cost of
securities which the Portfolio intends to purchase.
Currency Futures Contracts and Options: The Fund may also sell and
purchase currency futures contracts (or options thereon) as a hedge against
changes in prevailing levels of currency exchange rates. Such contracts may
be traded on U.S. or foreign exchanges. The Fund will not use such contracts
or options for leveraging purposes.
Limitations: The Portfolios may engage in futures transactions, and
transactions involving options on futures, only on regulated commodity
exchanges or boards of trade. A Portfolio will not enter into a futures
contract or purchase or sell related options if immediately thereafter (a)
the sum of the amount of initial margin deposits on the Portfolio'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 Portfolio's total assets or (b) the sum of the
then aggregate value of open futures contracts sales, the aggregate purchase
prices under open futures contract purchases, and the aggregate value of
futures contracts subject to outstanding options would exceed 30% of the
market value of the Portfolio's total assets. In addition, in instances
involving the purchase of futures contracts or call options thereon, the
Portfolio will maintain cash or cash equivalents, less any related margin
deposits, in an amount equal to the market value of such contracts. "Cash
and cash equivalents" may include cash, government securities, or liquid
high quality debt obligations and will be held in a segregated account
maintained solely for such purpose.
Hybrid Investments
As part of its investment program and to maintain greater flexibility,
the Fund may invest in hybrid instruments (a potentially high risk
derivative) which have the characteristics of futures, options and
securities. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to
the value of a currency, security index or commodity at a future point in
time. The risks of such investments would reflect both the risks of
investing in futures, options, currencies and securities, including
volatility and illiquidity. Under certain conditions, the redemption value
of a hybrid instrument could be zero. The Fund does not expect to hold more
than 5% of its total assets in hybrid instruments. For a discussion of
hybrid investments and the risks involved therein, see the Trust's Statement
of Additional Information under "Additional Information Concerning Certain
Investment Techniques".
Risks of Transactions in Options and Futures
There are certain risks involved in the use of futures contracts,
options on securities and securities index options, and options on futures
contracts as hedging devices. There is a risk that the movement in the
prices of the index or instrument underlying an option or futures contract
may not correlate perfectly with the movement in the prices of the assets
being hedged. The lack of correlation could render the 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 the Fund's Investment Adviser or Sub-advisor could
be incorrect in its expectations about the direction or extent of market
factors such as interest rate movements. In such a case the 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 the 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 the Fund's Investment Adviser's or Sub-advisor's
accuracy in predicting the future changes in interest rate levels and
securities price movements.
The Fund will generally purchase and sell options traded on a national
securities or options exchange. Where options are not readily available on
such exchanges the Fund may purchase and sell options in negotiated
transactions. When the 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, the 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, the Fund could lose all or part of
benefit it would otherwise have realized from the transaction, including the
ability to sell securities it holds at a price above the current market
price or to purchase a security from another party at a price below the
current market price.
Finally, if a broker or clearing member of an options or futures
clearing corporation were to become insolvent, the 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, the 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.
Investment Restrictions Applicable to the Portfolios
None of the Portfolios will:
1. Purchase securities on margin or otherwise borrow money or issue
senior securities except that a Portfolio, in accordance with its investment
objectives and policies, may enter into reverse repurchase agreements and
purchase securities on a when-issued and delayed delivery basis, within the
limitations set forth under "Money Market Portfolio". The Fund may also
obtain such short-term credit as it needs for the clearance of securities
transactions, and may borrow from a bank, for the account of any Portfolio,
as a temporary measure to facilitate redemptions (but not for leveraging or
investment) an amount that does not exceed 5% of the value of the
Portfolio's total assets (including the amount borrowed) less liabilities
(not including the amount owed as a result of borrowing) at the time the
borrowing is made. Investment securities will not be purchased while
borrowings are outstanding. Interest paid on borrowings will not be
available for investment. The deposit or payment by a Portfolio of initial
or variation margin in connection with financial futures contracts or
related options transactions is not considered the purchase of a security on
margin.
2. Enter into reverse repurchase agreements if, as a result, the
Portfolio's obligations with respect to reverse repurchase agreements would
exceed 10% of the Portfolio's net assets (defined to mean total assets at
market value less liabilities other than reverse repurchase agreements).
Reverse repurchase agreements are further discussed under "Money Market
Portfolio."
3. Pledge or mortgage assets, except that not more than 10% of the
value of any Portfolio may be pledged (taken at the time the pledge is made)
to secure borrowings made in accordance with paragraph 1 above, and the
Portfolio may enter into reverse repurchase agreements in accordance with
paragraph 2 above. Margin deposits for the purchase and sale of financial
futures contracts and related options are not deemed to be a pledge.
4. Lend money, except that loans of up to 10% of the value of each
Portfolio may be made through the purchase of privately placed bonds,
debentures, notes and other evidences of indebtedness of a character
customarily acquired by institutional investors that may or may not be
convertible into stock or accompanied by warrants or rights to acquire
stock. Repurchase agreements and the purchase of publicly traded debt
obligations are not considered to be "loans" for this purpose and may be
entered into or purchased by a Portfolio in accordance with its investment
objectives and policies.
5. Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of cash,
cash items, obligations of the U.S. Government, its agencies or
instrumentalities, and other securities. For purposes of this restriction,
"other securities" are limited for each issuer to not more than 5% of the
value of a Portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Fund as a whole.
6. Invest in securities (including repurchase agreements maturing in
more than seven days) that are subject to legal or contractual restrictions
on resale or for which no readily available market exists, or in the
securities of issuers (other than U.S. Government agencies or
instrumentalities) having a record, together with predecessors, of less than
three years' continuous operation, if, regarding all such securities, more
than 10% of the Portfolio's total assets would be invested in them.
All of the investment restrictions set forth above are fundamental to
the operations of the Fund and may not be changed except with the approval
of a majority vote (as defined above in the second paragraph under
"Investment Objectives and Risks of the Portfolios") of the persons
participating in the affected Portfolio.
PURCHASE AND REDEMPTION OF SHARES
Shares in the Fund are currently offered continuously, without sales
charge, at prices equal to the respective per share net asset values of the
Portfolios (based on the next calculation of net asset value after the order
is placed), only to the Accounts to fund benefits payable under the
Contracts. The Fund may at some later date also offer its shares to other
separate accounts of LBVIP, Lutheran Brotherhood (the parent of LBVIP) or
other subsidiaries of Lutheran Brotherhood.
The Fund is required to redeem all full and fractional shares of the
Fund for cash within seven days of receipt of proper notice of redemption.
The redemption price is the net asset value per share next determined after
the initial receipt of proper notice of redemption.
The right to redeem shares or to receive payment with respect to any
redemption may be suspended only for any period during which trading on the
New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission or when such exchange is closed (other than customary
weekend and holiday closings), for any period during which an emergency
exists as defined by the Securities and Exchange Commission as a result of
which disposal of a Portfolio's securities or determination of the net asset
value of each Portfolio is not reasonably practicable, and for such other
periods as the Securities and Exchange Commission may by order permit for
the protection of shareholders of each Portfolio.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio is determined once
daily by the Adviser, immediately after the declaration of dividends, if
any, at 4:00 P.M., Eastern time, on each day during which the New York Stock
Exchange is open for business, and on any other day in which there is a
sufficient degree of trading in the Portfolio's securities such that the
current net asset value of its shares might be materially affected. The net
asset value per share of each Portfolio except the Money Market Portfolio is
computed by adding the sum of the value of the securities held by that
Portfolio plus any cash or other assets it holds, subtracting all its
liabilities, and dividing the result by the total number of shares
outstanding of that Portfolio at such time. Expenses, including the
investment advisory fee payable to the Adviser, are accrued daily. The
assets belonging to any Portfolio will be charged with the liabilities in
respect to such Portfolio, and will also be charged with their shares of the
general liabilities of the Fund in proportion to the asset values of the
respective Portfolios.
In determining the net asset value of the Income, High Yield, Growth,
Opportunity Growth, Mid Cap Growth, and World Growth Portfolios, securities
are generally valued based on market quotations. Securities or assets for
which market quotations are not readily available will be valued at fair
value as determined by the Adviser under the direction of the Board of
Directors of the Fund. The amortized cost accounting method of valuation
will be used for short-term investments maturing in 60 days or less that are
held by the Income, High Yield, Growth, Opportunity Growth, Mid Cap Growth,
or World Growth Portfolios.
The net asset value of shares of the Money Market Portfolio will
normally remain at $1.00 per share, because the net investment income of
this Portfolio (including realized gains and losses on Portfolio holdings)
will be declared as a dividend each time the Portfolio's net income is
determined (see "Dividends, Distributions and Taxes"). If, in the view of
the Board of Directors of the Fund, it is inadvisable to continue to
maintain the net asset value of the Money Market Portfolio at $1.00 per
share, the Board reserves the right to alter the procedure. The Fund will
notify shareholders of any such alteration.
The Fund values all short-term debt obligations in the Money Market
Portfolio on an amortized cost basis.
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund intends to qualify as a Regulated Investment Company under
certain provisions of the Internal Revenue Code of 1986, as amended (the
"Code"). Under such provisions, the Fund will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains that it distributes to the Account. Generally, each Portfolio will be
treated as a separate corporation for Federal income tax purposes. This
means that the investment results of each Portfolio will determine whether
the Portfolio qualifies as a Regulated Investment Company and will determine
the net ordinary income (or loss) and net realized capital gains (or losses)
of the Portfolio.
The Fund intends to distribute as dividends substantially all the net
investment income, if any, of each Portfolio. For dividend purposes, net
investment income of each Portfolio, other than the Money Market Portfolio,
will consist of all payments of dividends (other than stock dividends) or
interest received by such Portfolio less the estimated expense of such
Portfolio (including fees payable to the Adviser). Net investment income of
the Money Market Portfolio consists of (i) interest accrued and/or discount
earned (including both original issue and market discount), (ii) plus or
minus all realized gains and losses, (iii) less the expenses of the
Portfolio (including the fees payable to the Adviser).
Dividends on each of the Portfolios will be declared and reinvested in
additional full and fractional shares of that Portfolio. Shares will begin
accruing dividends on the day following the date on which they are issued.
Dividends will be declared and reinvested daily on the Income Portfolio, on
the High Yield Portfolio and on the Money Market Portfolio, quarterly on the
Growth Portfolio, and annually on the Opportunity Growth Portfolio, Mid Cap
Growth Portfolio, and the World Growth Portfolio, although the Fund may make
distribution of dividends on any Portfolio more frequently.
The Fund will also declare and distribute annually all net realized
capital gains of the Fund, other than short-term gains of the Money Market
Portfolio, which are declared as dividends daily. A capital gain
distribution will usually be made in February.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and these
Regulations are subject to change by legislative or administrative actions.
MANAGEMENT OF THE FUND
Directors of the Fund
The business and affairs of the Fund are managed under the direction of
its Board of Directors.
Investment Adviser
Lutheran Brotherhood (the "Adviser") has served as the investment
adviser of the Fund since January, 1994. The Adviser, founded in 1917 as a
fraternal benefit society, is owned by and operated for its members, under
the laws of Minnesota. The Adviser has been engaged in the investment
advisory business since 1970, either directly or through the indirect
ownership of Lutheran Brotherhood Research Corp. ("LBRC"), the Fund's
investment adviser prior to January 31, 1994. Lutheran Brotherhood has
managed its own portfolio of investment assets since its inception in 1917.
Lutheran Brotherhood's assets as of December 31, 1996 were $11.8 billion.
Additionally, through an indirect subsidiary, Lutheran Brotherhood Research
Corp., Lutheran Brotherhood also manages $4.09 billion of assets of eight
other mutual funds. LBVIP is also an indirect subsidiary of Lutheran
Brotherhood. Lutheran Brotherhood's principal business address is 625 Fourth
Avenue South, Minneapolis, Minnesota 55415.
Prior to the time Lutheran Brotherhood was named investment adviser to
the Fund, Lutheran Brotherhood Research Corp. (LBRC), an indirect subsidiary
of Lutheran Brotherhood, served as investment adviser to the Fund. All of
the personnel employed by Lutheran Brotherhood to perform investment
advisory services for the Fund are substantially the same as the personnel
that performed such services on behalf of LBRC. The Fund's Portfolio
Managers and their experience and qualifications are described as follows:
Brian L. Thorkelson, Portfolio Manager of Lutheran Brotherhood, serves
as the Portfolio Manager of Mid Cap Growth Portfolio. Mr. Thorkelson has
been with Lutheran Brotherhood since 1987.
Scott A. Vergin, Portfolio Manager of Lutheran Brotherhood, has been
the Portfolio Manager of the Growth Portfolio of the Fund since October 31,
1994. Mr. Vergin has been with Lutheran Brotherhood since 1984.
Thomas N. Haag, Assistant Vice President of Lutheran Brotherhood, has
been the Portfolio Manager of the Fund's High Yield Portfolio Fund since
1992. Mr. Haag has been with Lutheran Brotherhood since 1986.
Charles E. Heeren, Vice President and Manager of the Lutheran
Brotherhood Bond Department, has been the Portfolio Manager of the Fund's
Income Portfolio since 1987. Mr. Heeren has been with Lutheran Brotherhood
since 1976.
Gail R. Onan, Portfolio Manager of Lutheran Brotherhood, has been the
portfolio manager of the Fund's Money Market Portfolio since January, 1994. Ms.
Onan has been with Lutheran Brotherhood since 1986.
Lutheran Brotherhood has engaged T. Rowe Price Associates, Inc. ("T.
Rowe Price") as investment sub-advisor for the Opportunity Growth Portfolio.
T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1997, T. Rowe Price and its
affiliates managed over $124 billion. Richard T. Whitney, Managing Director
of T. Rowe Price, is primarily responsible for day-to-day management of the
Opportunity Growth Portfolio and developing and executing the Portfolio's
investment program.
T. Rowe Price has an Investment Advisory Committee for the Opportunity
Growth Portfolio composed of the following members: Richard T. Whitney,
Chairman, Marc L. Baylin, Kristen F. Culp, John H. Laporte, and Donald J.
Peters. The committee chairman has day-to-day responsibility for managing
the portfolio and works with the committee in developing and executing the
portfolio's investment program. Mr. Whitney is chairman of the portfolio's
committee. Mr. Whitney joined T. Rowe Price in 1985 and has been managing
investments since 1986.
Lutheran Brotherhood has engaged Rowe Price-Fleming International, Inc.
("Price-Fleming") as investment sub-advisor for the World Growth Portfolio.
Price-Fleming was founded in 1979 as a joint venture between T. Rowe Price
Associates, Inc. ("T. Rowe Price") and Robert Fleming Holdings Limited
("Price-Fleming"). The common stock of Price-Fleming is 50% owned by a
wholly-owned subsidiary of T. Rowe Price, 25% by a subsidiary of Flemings
and 25% by Jardine Fleming Group Limited ("Jardine Fleming"). (Half of
Jardine Fleming is owned by Flemings and half by Jardine Matheson Holdings
Limited.) T. Rowe Price has the right to elect a majority of the board of
directors of Price-Fleming, and Flemings has the right to elect the
remaining directors, one of whom will be nominated by Jardine Fleming.
Price-Fleming is one of the world's largest international mutual fund
asset managers with the U.S. equivalent of approximately $30 billion under
management as of December 31, 1997 in its offices in Baltimore, London,
Tokyo, Singapore, Hong Kong, and Buenos Aires. Price-Fleming has an
investment advisory group that has day-to-day responsibility for managing
the World Growth Portfolio and developing and executing the Portfolio's
investment program. The members of the advisory group are listed below.
Martin G. Wade, Mark J.T. Edwards, John R. Ford, James B.M. Seddon,
Mark Bickford-Smith and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 29 26 years of
experience with the Fleming Group in research, client service and investment
management, including assignments in the Far East and the United States.
(Fleming Group includes Flemings and/or Jardine Fleming.)
Mark Edwards joined Price-Fleming in 1987 and has 16 years of
experience in financial analysis, including three years in Fleming European
research. John Ford joined Price-Fleming in 1982 and has 18 years of
experience with the Fleming Group in research and portfolio management,
including assignments in the Far East and the United States. James Seddon
joined Price-Fleming in 1987 and has 11 years of experience in investment
management. Mark Bickford-Smith joined Price-Fleming in 1995 and has 13
years of experience with the Fleming Group in research and financial
analysis. David Warren joined Price-Fleming in 1983 and has 17 years
experience in equity research, fixed income research and portfolio
management.
The Fund has entered into an Investment Advisory Agreement with the
Adviser under which the Adviser will, subject to the direction of the Board
of Directors of the Fund, carry on the day-to-day management of the Fund,
and provide advice and recommendations with respect to investments and the
purchase and sale of securities in accordance with the Fund's investment
objectives, policies and restrictions. The Adviser also furnishes at its own
expense all necessary administrative services, office space, equipment and
clerical personnel for servicing the investments of the Fund and maintaining
its organization, and investment advisory facilities and executive and
supervisory personnel for managing the investments and effecting the
portfolio transactions of the Fund. The Investment Advisory Agreement
provides that the Fund will pay, or provide for the payment of, all of its
own expenses including, without limitation, the compensation of the
directors who are not affiliated with Lutheran Brotherhood or LBVIP,
governmental fees, interest charges, taxes, membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of the
independent auditors, of legal counsel and of any transfer agent, registrar
and dividend disbursing agent of the Fund, expenses of preparing, printing
and mailing prospectuses, shareholders' reports, notices, proxy statements
and reports to governmental officers and commissions, expenses connected
with the execution, recording and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the Fund's custodian
for all services to the Fund, including safekeeping of funds and securities
and keeping of books and calculating the net asset value of the shares of
the Portfolios of the Fund, expenses of shareholders' meetings and expenses
relating to the issuance, registration and qualification of shares of the
Fund. Lutheran Brotherhood and LBVIP have agreed with the Fund to pay, or to
reimburse the Fund for the payment of, all of the foregoing expenses.
The Fund and its Adviser have conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue.
The Year 2000 problem is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Any of the
Fund's and its Adviser's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a major system failure or miscalculations. The Fund
and its Adviser presently believes that, with modifications to existing
software and converting to new software, the Year 2000 problem will not pose
significant operational problems for its computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material impact on the operations
of the Fund and its Adviser.
The Adviser receives an investment advisory fee as compensation for its
services to the Fund. The fee is a daily charge equal to an annual rate of
.40% of the aggregate average daily net assets of the Money Market, Income,
High Yield, Growth, Mid Cap Growth, and Opportunity Growth Portfolios and
.85% of the aggregate average daily net assets of the World Growth
Portfolio.
Lutheran Brotherhood pays the Sub-advisor for the Opportunity Growth
Portfolio an annual sub-advisory fee for the performance of sub-advisory
services. The fee payable is equal to .3% of the average daily net assets
for that Portfolio.
Lutheran Brotherhood pays the Sub-advisor for the World Growth
Portfolio an annual sub-advisory fee for the performance of sub-advisory
services. The fee payable is equal to a percentage of the that Portfolio's
average daily net assets. The percentage decreases as the Portfolio's assets
increase. For purposes of determining the percentage level of the sub-
advisory fee for the Portfolio, the assets of the Portfolio are combined
with the assets of the Lutheran Brotherhood World Growth Fund, another fund
with investment objectives and policies that are similar to the World Growth
Portfolio and for which the Sub-advisor also provides sub-advisory services.
The sub-advisory fee Lutheran Brotherhood pays the Sub-advisor is equal to
the World Growth Portfolio's pro rata share of the combined assets of the
Portfolio and the Lutheran Brotherhood World Growth Fund and is equal to
.75% of combined average daily net assets up to $20 million, .60% of
combined average daily net assets over $20 million but not over $50 million,
and .50% of combined average daily net assets over $50 million. When the
combined assets of the World Growth Portfolio and the Lutheran Brotherhood
World Growth Fund exceed $200 million, the sub-advisory fee for the World
Growth Portfolio is equal to .50% of all of the Portfolio's average daily
net assets.
OTHER INFORMATION CONCERNING THE FUND
Incorporation and Authorized Stock
The Fund was incorporated under Minnesota law on February 24, 1986.
The shares of capital stock of the Fund are divided into seven classes:
Money Market Portfolio Capital Stock, Income Portfolio Capital Stock, High
Yield Portfolio Capital Stock, Growth Portfolio Capital Stock, Opportunity
Growth Portfolio Capital Stock, Mid Cap Growth Capital Stock, and World
Growth Portfolio Capital Stock. Unissued shares of any of the classes of
capital stock may be reallocated to any new or existing class or classes as
determined by the Fund's Board of Directors. The Fund may in the future
issue shares of additional classes through the creation of one or more new
portfolios.
Each share of stock will have a pro rata interest in the assets of the
Portfolio to which the stock of that class relates and will have no interest
in the assets of any other Portfolio. Holders of shares of any Portfolio are
entitled to redeem their shares as set forth under "Purchase and Redemption
of Shares".
Voting Rights
The voting rights of Contract owners, and limitations on those rights,
are explained in the accompanying prospectus relating to the Contracts.
Lutheran Brotherhood and LBVIP, as the owners of the assets in the Accounts,
are entitled to vote all of the shares of the Fund held to fund the benefits
under the Contracts, but it will generally do so in accordance with the
instructions of Contract owners. Any such shares of a Portfolio attributable
to a Contract for which no timely voting instructions are received, and any
shares of that Portfolio held by Lutheran Brotherhood, LBVIP or any of their
affiliates for their own account, will be voted by Lutheran Brotherhood or
LBVIP in proportion to the voting instructions that are received with
respect to all Contracts participating in that Portfolio. Under certain
circumstances described in the accompanying Contract prospectus, however,
Lutheran Brotherhood and LBVIP may disregard voting instructions received
from Contract owners.
Shareholders are entitled to one vote for each share held. Because the
per share purchase price of shares of different Portfolios will not,
generally, be the same (initial purchase price for shares of the Growth
Portfolio, the High Yield Portfolio and the Income Portfolio was $10 per
share, as compared to $1 per share for the Money Market Portfolio), the
number of votes obtained as a result of a particular amount invested will
generally vary depending on which Portfolio's shares are purchased (for
example, using the initial purchase prices set forth above, a $100
investment in the Money Market Portfolio would result in 100 votes, whereas
the same investment in any one of the other Portfolios would result in only
10 votes).
The Fund's Bylaws provide that regular meetings of the shareholders of
the Fund may be held on an annual or less frequent basis as determined by
the Board of Directors of the Fund; provided, however, that if a regular
meeting has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding 3% or more of the voting power of all
shares entitled to vote may demand a regular meeting of shareholders by
written demand given to the Chief Executive Officer or Chief Financial
Officer of the Fund.
Calculation of Performance
From time to time the Fund advertises the Money Market Portfolio's
"yield" and "effective yield". Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of
the Portfolio refers to the income generated by an investment in the
Portfolio over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized". That is, the, amount of
income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of
the investment. The "effective yield" is calculated similarly but, when
annualized, the income earned by an investment in the Portfolio is assumed
to be reinvested. The "effective yield" will be slightly higher than the
"yield" because of the compounding effect of this assumed reinvestment. The
annualized current yield and effective yield for the seven-day base period
ended December 31, 1996, was 5.12% and 5.25%, respectively. For more
information, see the Statement of Additional Information.
Also, the Fund may advertise for the Portfolios other than the Money
Market Portfolio a yield quotation based on a 30-day (or one month) period
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the
period. The current yield for the 30-day base period ended December 31, 1996
for the High Yield Portfolio was 10.22%. The current yield for the same 30-
day base period for the Income Portfolio was 6.68%. For more information,
see the Statement of Additional Information.
From time to time, the Fund advertises the average annual total return
quotations for the Portfolios for the 1, 3, 5 and 10-year periods (or such
shorter time period during which the Fund's shares have been offered),
computed by finding the average annual compounded rates of return over the
1, 3, 5 and 10-year periods (or such shorter time period during which the
Fund's shares have been offered) that would equate the initial amount
invested to the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 3, 5 or 10-year periods (or such shorter
time period during which the Fund's shares have been offered).
The average annual total returns for the 1-year, 3-year and 5-year
periods ended December 31, 1996, and for the period from the Fund's
effective date through December 31, 1996 for the Portfolios are as follows:
From
1 Year 3 Years 5 Years Inception
Opportunity Growth
Portfolio (1/18/96) N/A N/A N/A 19.17%
World Growth Portfolio 1/18/96) N/A N/A N/A 10.41%
Growth Portfolio (1/9/87) 22.44% 16.99% 13.77% 12.52%
High Yield Portfolio (11/2/87) 11.55% 8.45% 13.47% 12.76%
Income Portfolio (1/9/87) 3.21% 5.51% 7.44% 8.30%
Money Market Portfolio (1/9/87) 5.20% 4.96% 4.25% 5.77%
Average annual total return quotations assume a steady rate of growth.
Actual performance fluctuates and will vary from the quoted results for
periods of time within the quoted periods. For more information, see the
Statement of Additional Information.
Quotations of yield or total return for the Fund will not take into
account charges or deductions against any Account to which the Fund shares
are sold or charges and deductions against the Contracts issued by Lutheran
Brotherhood or LBVIP. The Portfolios' yield and total return should not be
compared with mutual funds that sell their shares directly to the public
since the figures provided do not reflect charges against the Account or the
Contract. Performance information for any Portfolio reflects only the
performance of a hypothetical investment in the Portfolio during the
particular time period on which the calculations are based. Performance
information should be considered in light of the Portfolios' investment
objectives and policies, characteristics and quality of the portfolios, and
the market conditions during the given time period, and should not be
considered as a representation of what may be achieved in the future. For a
description of the methods used to determine yield and total return for the
Portfolios, see the Statement of Additional Information.
Comparative Performance
The Portfolios' performance reported from time to time in
advertisements and sales literature may be compared to generally accepted
indices or analyses such as those provided by Lipper Analytical Service,
Inc., Standard & Poor's and Dow Jones. Performance ratings reported
periodically in financial publications such as MONEY MAGAZINE, FORBES,
BUSINESS WEEK, FORTUNE, FINANCIAL PLANNING and the WALL STREET JOURNAL will
be used.
Portfolio Reports
The Fund will send each shareholder, at least annually, reports showing
as of a specified date the number of shares in each Portfolio credited to
the shareholder. The Fund will also send Contract owners' reports
semiannually showing the financial condition of the Portfolios and the
investments held in each. The annual report may take the form of an updated
copy of this Prospectus.
Transfer Agent and Dividend Disbursing Agent
State Street Bank and Trust Company, Boston, Massachusetts, is the
transfer agent and dividend disbursing agent for the Fund. The Bank is also
custodian of the assets of the Fund.
Shareholder Inquiries
Shareholder inquiries with respect to the Fund should be addressed to
LB Series Fund, Inc., 625 Fourth Avenue South, Minneapolis, Minnesota 55415,
attention: Secretary.
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:
* Leading market positions in well-established industries.
* High rates of return of funds employed.
* Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
* Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
* 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 of the
obligation in this category than in higher rated categories.
BB,B,
CCC,
CC,C Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
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 BBB credits 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.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information included in the
Registration Statement filed with the Securities and Exchange Commission
under the Securities Act of 1933 with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. The Registration
Statement including the exhibits filed therewith may be examined at the
office of the Securities and Exchange Commission in Washington, D.C.
Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, each such statement being qualified in all respects
by such reference.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
LB SERIES FUND, INC.
This Statement of Additional Information is not a Prospectus, but should be
read in conjunction with the Prospectus for LB Series Fund, Inc. (the
"Fund") dated April 30, 1998. Much of the information contained in this
Statement of Additional Information expands upon subjects discussed in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Prospectus for the Fund. A copy of the Prospectus for the Fund
may be obtained from LB Series Fund, Inc., 625 Fourth Avenue South,
Minneapolis, Minnesota 55415.
TABLE OF CONTENTS
PAGE
THE FUND
INVESTMENT OBJECTIVES AND POLICIES
Securities in Which the Portfolios May
Currently Invest
Additional Investment Restrictions Applicable
to the Portfolios
Loans of Portfolio Securities
Portfolio Turnover Policy
FOREIGN FUTURES AND OPTIONS - WORLD GROWTH PORTFOLIO
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
HYBRID INSTRUMENTS
INVESTMENT RISKS - WORLD GROWTH PORTFOLIO
MANAGEMENT OF THE FUND
Directors and Officers of the Fund
COMPENSATION OF DIRECTORS AND OFFICERS
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
Custodian
Independent Accountants
PORTFOLIO BROKERAGE AND RELATED PRACTICES
BROKERAGE COMMISSIONS
AFFILIATED TRANSACTIONS OF THE SUB-ADVISORS
CAPITAL STOCK
DETERMINATION OF THE NET ASSET VALUE
CALCULATION OF PERFORMANCE
Money Market Portfolio
Other Portfolios
TAX STATUS
ADDITIONAL INFORMATION
REPORT OF INDEPENDENT ACCOUNTANTS AND
FINANCIAL STATEMENTS
The date of this Statement of Additional
Information is April 30, 1998.
<PAGE>
THE FUND
LB Series Fund, Inc. (the "Fund"), a diversified open-end management
investment company, is a Minnesota corporation organized on February 24,
1986. Prior to January 31, 1994, the Fund was known as LBVIP Series Fund,
Inc. The Fund is made up of seven separate Portfolios: the Money Market
Portfolio, the Income Portfolio, the High Yield Portfolio, the Growth
Portfolio, the Opportunity Growth Portfolio, the Mid Cap Growth Portfolio,
and the World Growth Portfolio. Each Portfolio is in effect a separate
investment fund, and a separate class of capital stock is issued with
respect to each Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
The following information supplements the discussion under "Investment
Objectives and Policies of the Portfolios" in the Fund's Prospectus.
Securities in Which the Portfolios May Currently Invest
The Money Market Portfolio, and the other Portfolios to the extent
their investment policies so provide, as discussed in the Prospectus, may
invest in the following liquid, short-term debt securities regularly bought
and sold by financial institutions:
1. U.S. Treasury Bills and other obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities. These are debt
securities (including bills, certificates of indebtedness, notes and bonds)
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality
of the U.S. Government that is established under the authority of an act of
Congress. Such agencies or instrumentalities include, but are not limited
to, the Federal National Mortgage Association, the Export--Import Bank, the
Federal Farm Credit Bank and the Federal Home Loan Bank. Although all
obligations of agencies and instrumentalities are not direct obligations of
the U.S. Treasury, payment of the interest and principal of them is
generally backed directly or indirectly by the U.S. Government. This support
can range from the backing of the full faith and credit of the United
States, to U.S. Treasury guarantees, or to the backing solely of the issuing
instrumentality itself.
2. U.S. dollar denominated obligations (including certificates of
deposit, bankers' acceptances, letters of credit and time deposits) of any
United States bank, savings and loan association or savings bank or foreign
branches thereof, or U.S. dollar denominated obligations of banks organized
under the laws of Australia, Canada, France, Germany, Japan, the
Netherlands, Switzerland or the United Kingdom, provided that such bank or
savings and loan association has, at the time of the Portfolio's investment,
total assets of at least $1 billion or the equivalent. The term
"certificates of deposit" includes both Eurodollar certificates of deposit,
which are traded in the over--the--counter market, and Eurodollar time
deposits, for which there is generally not a market. "Eurodollars" are
dollars deposited in banks outside the United States. Also included within
the term "certificates of deposit" are U.S. dollar denominated certificates
of deposit issued by U.S. branches of foreign banks held in the United
States (Yankee-Dollar Certificates of Deposit).
"Certificates of deposit" are certificates evidencing the indebtedness
of a commercial bank to repay funds deposited with it for a definite period
of time (usually from 14 days to one year). "Bankers' acceptances" are
credit instruments evidencing the obligation of a bank to pay a draft which
has been drawn on it by a customer. These instruments reflect the obligation
both of the bank and of the drawer to pay the face amount of the instrument
upon maturity. "Time deposits" are non-negotiable deposits in a bank for a
fixed period of time.
3. Commercial paper issued by domestic corporations which at the date
of investment have been found by the Portfolio's Adviser to have minimal
credit risk and, except as noted below, are rated "high quality" by Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P"), or any other similar nationally recognized statistical rating
organization ("NRSRO"), provided that in no event will the Portfolio invest
in commercial paper rated lower than Prime-2 by Moody's or A-2 by S&P or any
comparable rating by any other NRSRO or, if not rated, issued by domestic
corporations which have an outstanding senior long-term debt issue rated A
or lower by Moody's or A or lower by S&P. In the case where commercial paper
has received different ratings from different services, such commercial
paper is an acceptable investment so long as at least one rating is a top
quality rating and provided the commercial paper presents minimal credit
risk. When a security has received ratings by two or more different NRSROs
and at least two of the ratings are the highest rating given by such NRSROs,
the security will be considered "high quality". When a security has
received ratings by two or more different NRSROs and only one of the ratings
is the highest rating given by such NRSROs, the security will not be
considered "high quality". The Portfolio will not invest more than 5% of
its assets in securities that have received ratings from two or more
different NRSROs and less than two of the ratings are the highest rating
given by such NRSROs, and will invest no more than 1% of its assets in the
securities of any one issuer, when the issuer's securities have received
ratings from two or more different NRSROs and less than two of the ratings
are the highest rating given by such NRSROs. Long term corporate debt
issues having less than 397 days to maturity are deemed to be commercial
paper and to have a credit risk equal to the issuer's commercial paper
rating. See "Description of Debt Ratings" for an explanation of the ratings
issued by Moody's and S&P. "Commercial paper" consists of short-term
(usually from one to 270 days) unsecured promissory notes issued by
corporations in order to finance their current operations.
4. Other corporate obligations issued by domestic corporations which
at the date of investment are rated Baa or better by Moody's or BBB or
better by S&P, except that the High Yield Portfolio may invest in corporate
obligations that are rated Ba or lower by Moody's, BB or lower by S&P, rated
similarly by any other nationally-recognized statistical rating
organization, or, if not rated, such securities may be of comparable quality
in the opinion of the Fund's investment adviser. See "Description of Debt
Ratings" for rating information. "Corporate obligations" are bonds and notes
issued by corporations and other business organizations, including business
trusts, in order to finance their long-term credit needs.
5. Variable amount demand master notes issued by domestic corporations
which, at the date of investment, either (a) have an outstanding senior
long-term debt issue rated Baa or better by Moody's (Aa or better if
purchased by the Money Market Portfolio) or BBB or better by S&P (AA or
better if purchased by the Money Market Portfolio), or (b) do not have rated
long-term debt outstanding but have commercial paper rated at least Prime-2
by Moody's or A-2 by S&P. Additionally, ratings on such variable amount
demand master notes held by the High Yield Portfolio may carry a long term
rating of Ba or lower by Moody's or BB or lower by S&P. The Money Market
Portfolio may also invest in variable amount demand master notes if (a) such
securities have a high quality short-term debt rating from an unaffiliated,
nationally-recognized statistical rating organization or, if not rated, such
securities are of comparable quality as determined by management of the
Fund, and (b) the demand feature of such securities described below is
unconditional, that is, exercisable even in the event of a default in the
payment of principal or interest on the underlying securities. Variable
amount demand master notes are unsecured obligations that permit the
investment by the Portfolio of amount that may fluctuate daily, at varying
rates of interest pursuant to direct arrangements between the Portfolio and
the issuing corporation. Although callable on demand by the Portfolio, these
obligations are not marketable to third parties. They will not be purchased
unless the Fund's investment adviser (the "Adviser") has determined that the
issuer's liquidity is such as to enable it to pay the principal and interest
immediately upon demand.
The Money Market Portfolio, in accordance with the requirements of the
Securities and Exchange Commission rule that permits the use of the
amortized cost accounting method of valuation (see "Determination of Net
Asset Value"), will limit its investments to those U.S. dollar-denominated
instruments which management of the Fund determines present minimal credit
risks and which are of "high quality" as determined by any major rating
service (Aa or better by Moody's, AA or better by S&P for corporate debt
securities; Prime-2 or better by Moody's, A-2 or better by S&P for
commercial paper; see the preceding paragraph with regard to variable amount
demand master notes) or, in the case of any instrument that is not rated, of
comparable quality as determined by management of the Fund.
A description of repurchase agreements, reverse repurchase agreements
and when-issued and delayed delivery securities appears in the Fund's
Prospectus under "Investment Objectives and Policies of the Prospectus--
Money Market Portfolio".
The Fund may invest in the securities of foreign issuers including, as
noted above, certain obligations of foreign banks and foreign branches of
U.S. banks. Investments in such securities involve risks that are different
in some respects from an investment in obligations of domestic issuers,
including future political and economic developments such as possible
expropriation or confiscatory taxation that might adversely affect the
payment of principal and interest on such securities. In addition, there
might be less publicly available information about such foreign issuers than
about domestic issuers, and such foreign issuers may not be subject to the
same accounting, auditing and financial standards and requirements as
domestic issuers. Finally, in the event of default, judgments against a
foreign issuer might be difficult to obtain or enforce. Additional
information concerning the risks of foreign investing that applies to the
World Growth Portfolio is stated below.
Additional Investment Restrictions Applicable to the Portfolios
In addition to the investment restrictions applicable to the Portfolios
described in the Prospectus, none of the Portfolios will:
1. Buy or sell real estate, mortgages, commodities or commodity
contracts, although the Portfolios may buy and sell securities which are
secured by real estate and securities of real estate investment trusts and
of other issuers that engage in real estate operations, and except that the
Portfolios may enter into financial futures contracts, may purchase put
options on financial futures contracts and may purchase and sell call
options on financial futures contract, if such transactions are for purposes
of hedging the Fund's portfolio.
2. Acquire securities for the purpose of exercising control or
management of any company except in connection with a merger, consolidation,
acquisition or reorganization.
3. Make short sales.
4. Purchase securities on margin or otherwise borrow money or issue
senior securities except that a Portfolio, in accordance with its investment
objectives and policies, may enter into reverse repurchase agreements and
purchase securities on a when-issued and delayed delivery basis, within the
limitations set forth in the Prospectus under "Investment Objectives and
Policies of the Portfolios--Money Market Portfolio".
5. 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. Underwrite the securities of other issuers, except where the Fund
may be deemed to be an underwriter for purposes of certain federal
securities laws in connection with the disposition of portfolio securities
and with loans that a Portfolio may make pursuant to paragraph 5 above.
7. Purchase securities of a company in any industry if as a result of
the purchase a Portfolio's holdings of securities issued by companies in
that industry would exceed 25% of the value of the Portfolio, except that
this restriction does not apply to purchases of obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or
issued by domestic banks. For purposes of this restriction, neither finance
companies as a group nor utility companies as a group are considered to be a
single industry and will be grouped instead according to their services; for
example, gas, electric, and telephone utilities will each be considered a
separate industry.
8. Buy or sell the securities of other investment companies, except by
purchases in the open market involving only customary brokerage commissions,
or except as part of a merger, consolidation or other acquisition.
Certain additional investment restrictions are applicable only to the
Money Market Portfolio. That Portfolio will not:
1. Invest in oil and gas interests, common stock, preferred stock,
warrants or other equity securities.
2. Invest in any security with a remaining maturity in excess of one
year, except that securities held pursuant to repurchase agreements may have
a remaining maturity of more than one year.
All of the investment restrictions set forth above are fundamental to
the operations of the Fund and may not be changed except with the approval
of the holders of a majority of the outstanding shares of the Portfolio
affected (which for this purpose and under the Investment Company Act of
1940 means the lesser of (a) 67% of the shares represented at a meeting at
which more than 50% of the outstanding shares are represented, or (b) more
than 50% of the outstanding shares). The policies by which a Portfolio seeks
to achieve its investment objectives, however, are not fundamental. They may
be changed by the Board of Directors of the Fund without the approval of the
shareholders.
Investment limitations may also arise under the insurance laws and
regulations of certain states which may impose additional restrictions on
the Portfolios.
Loans of Portfolio Securities
The Income, High Yield, Growth, Opportunity Growth, Mid Cap Growth, and
World Growth Portfolios may from time to time lend the securities they hold
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, or irrevocable standby letters of credit in an
amount at all times equal to at least the market value of the loaned
securities plus the accrued interest and dividends. During the time
securities are on loan, the lending Portfolio will continue to receive the
interest and dividends, or amounts equivalent thereto, on the loaned
securities while receiving a fee from the borrower or earning 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 lender securities identical to the
loaned securities. The lending Portfolio will not have the right to vote
securities on loan, but would likely terminate the loan and retain the right
to vote if that were considered important with respect to the investment.
The primary risk in lending securities is that the borrower may become
insolvent on a day on which the loaned security is rapidly advancing in
price. In such event, if the borrower fails to return the loaned securities,
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 Portfolio 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 Portfolio will lend securities to broker-dealers affiliated with the
Adviser. This will not affect a Portfolio's ability to maximize its
securities lending opportunities.
Portfolio Turnover Policy
The portfolio turnover rate is, generally, the percentage computed by
dividing the lesser of portfolio purchases or sales by the average value of
the portfolio, in each case excluding securities with maturities of one year
or less. A higher portfolio turnover rate generally indicates a greater
number of purchases or sales by a portfolio, resulting in greater expense to
the portfolio in the form of brokerage commissions and underwriters'
concessions. For a description of how each of the portfolios conducts sale
and purchase transactions see the section below entitled, "Portfolio
Brokerage and Related Practices."
The annual portfolio turnover rates for the Income Portfolio, High
Yield Portfolio, and Growth Portfolio for the fiscal years ended December
31, 1995 and 1996 are as follows:
Fiscal Years Ended December 31, 1995 1996
Income Portfolio 132% 150%
High Yield Portfolio 67% 107%
Growth Portfolio 184% 223%
The portfolio turnover rate for the Opportunity Growth Portfolio and the
World Growth Portfolio for the period January 18, 1996 through December 31,
1996 is 155% and 9%, respectively.
The portfolio turnover rate for the Mid Cap Growth Portfolio is expected to
be no higher than 100% in its first year of operation.
FOREIGN FUTURES AND OPTIONS - WORLD GROWTH PORTFOLIO
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of
a foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be
liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, customers
who trade foreign futures or foreign options contracts may not be afforded
certain of the protective measures provided by the Commodity Exchange Act,
the CFTC's regulations and the rules of the National Futures Association and
any domestic exchange, including the right to use reparations proceedings
before the Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, funds
received from customers for foreign futures or foreign options transactions
may not be provided the same protections as funds received in respect of
transactions on United States futures exchanges. In addition, the price of
any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the
foreign exchange rate between the time your order is placed and the time it
is liquidated, offset or exercised.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
FOREIGN CURRENCY WARRANTS. Foreign currency warrants are warrants which
entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which
is calculated pursuant to a predetermined formula and based on the exchange
rate between a specified foreign currency and the U.S. dollar as of the
exercise date of the warrant. Foreign currency warrants generally are
exercisable upon their issuance and expire as of a specified date and time.
Foreign currency warrants have been issued in connection with U.S. dollar-
denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk which, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may attempt to reduce
the foreign exchange risk assumed by purchasers of a security by, for
example, providing for a supplemental payment in the event that the U.S.
dollar depreciates against the value of a major foreign currency such as the
Japanese Yen or German Deutschmark. The formula used to determine the amount
payable upon exercise of a foreign currency warrant may make the warrant
worthless unless the applicable foreign currency exchange rate moves in a
particular direction (e.g., unless the U.S. dollar appreciates or
depreciates against the particular foreign currency to which the warrant is
linked or indexed). Foreign currency warrants are severable from the debt
obligations with which they may be offered, and may be listed on exchanges.
Foreign currency warrants may be exercisable only in certain minimum
amounts, and an investor wishing to exercise warrants who possesses less
than the minimum number required for exercise may be required either to sell
the warrants or to purchase additional warrants, thereby incurring
additional transaction costs. In the case of any exercise of warrants, there
may be a time delay between the time a holder of warrants gives instructions
to exercise and the time the exchange rate relating to exercise is
determined, during which time the exchange rate could change significantly,
thereby affecting both the market and cash settlement values of the warrants
being exercised. The expiration date of the warrants may be accelerated if
the warrants should be delisted from an exchange or if their trading should
be suspended permanently, which would result in the loss of any remaining
"time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of
the warrants. Warrants are generally unsecured obligations of their issuers
and are not standardized foreign currency options issued by the Options
Clearing Corporation ("OCC"). Unlike foreign currency options issued by OCC,
the terms of foreign exchange warrants generally will not be amended in the
event of governmental or regulatory actions affecting exchange rates or in
the event of the imposition of other regulatory controls affecting the
international currency markets. The initial public offering price of foreign
currency warrants is generally considerably in excess of the price that a
commercial user of foreign currencies might pay in the interbank market for
a comparable option involving significantly larger amounts of foreign
currencies. Foreign currency warrants are subject to significant foreign
exchange risk, including risks arising from complex political or economic
factors.
PRINCIPAL EXCHANGE RATE LINKED SECURITIES. Principal exchange rate linked
securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the
U.S. dollar and a particular foreign currency at or about that time. The
return on "standard" principal exchange rate linked securities is enhanced
if the foreign currency to which the security is linked appreciates against
the U.S. dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted
by increases in the value of foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the
degree of foreign currency risk assumed or given up by the purchaser of the
notes (i.e., at relatively higher interest rates if the purchaser has
assumed some of the foreign exchange risk, or relatively lower interest
rates if the issuer has assumed some of the foreign exchange risk, based on
the expectations of the current market). Principal exchange rate linked
securities may in limited cases be subject to acceleration of maturity
(generally, not without the consent of the holders of the securities), which
may have an adverse impact on the value of the principal payment to be made
at maturity.
PERFORMANCE INDEXED PAPER. Performance indexed paper is U.S. dollar-
denominated commercial paper the yield of which is linked to certain foreign
exchange rate movements. The yield to the investor on performance indexed
paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is
below, and a potential maximum rate of return that is above, market yields
on U.S. dollar-denominated commercial paper, with both the minimum and
maximum rates of return on the investment corresponding to the minimum and
maximum values of the spot exchange rate two business days prior to
maturity.
HYBRID INSTRUMENTS
Hybrid Instruments (a type of potentially high risk derivative) have
recently been developed and combine the elements of futures contracts or
options with those of debt, preferred equity or a depository instrument
(hereinafter "Hybrid Instruments"). Often these Hybrid Instruments are
indexed to the price of a commodity, particular currency, or a domestic
foreign debt or equity securities index. Hybrid Instruments may take a
variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference
to the value of a currency or commodity or securities index at a future
point in time, preferred stock with dividend rates determined by reference
to the value of a currency, or convertible securities with the conversion
terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of
the risks from investing in securities, options, futures and currencies,
including volatility and lack of liquidity. Reference is made to the
discussion of futures, options, and forward contracts herein for a
discussion of these risks. Further, the prices of the Hybrid Instrument and
the related commodity or currency may not move in the same direction or at
the same time. Hybrid Instruments may bear interest or pay preferred
dividends at below market (or even relatively nominal) rates. Alternatively,
Hybrid Instruments may bear interest at above market rates but bear an
increased risk of principal loss (or gain). In addition, because the
purchase and sale of Hybrid Instruments could take place in an over-the-
counter market or in a private transaction between the Fund and the seller
of the Hybrid Instrument, the creditworthiness of the contra party to the
transaction would be a risk factor which the Fund would have to consider.
Hybrid Instruments also may not be subject to regulation of the Commodities
Futures Trading Commission ("CFTC"), which generally regulates the trading
of commodity futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
INVESTMENT RISKS - WORLD GROWTH PORTFOLIO
There are special risks in investing in the World Growth Portfolio, as
discussed in the Prospectus. Certain of these risks are inherent in any
international mutual fund while others relate more to the countries in which
the Portfolio will invest ("Portfolio Companies"). Many of the risks are
more pronounced for investments in developing or emerging countries.
Although there is no universally accepted definition, a developing country
is generally considered to be a country which is in the initial stages of
its industrialization cycle with a per capita gross national product of less
than $5,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be
attained. The Portfolio is designed for individual and institutional
investors seeking to diversify beyond the United States in an actively
researched and managed portfolio, and is intended for long-term investors
who can accept the risks entailed in investment in foreign securities. In
addition to the general risks of foreign investing described in the Fund's
Prospectus, other risks include:
INVESTMENT AND REPATRIATION RESTRICTIONS. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions may at times limit or preclude
investment in certain of such countries and may increase the cost and
expenses of a Fund. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These restrictions may
take the form of prior governmental approval, limits on the amount or type
of securities held by foreigners, and limits on the types of companies in
which foreigners may invest. Additional or different restrictions may be
imposed at any time by these or other countries in which a Fund invests. In
addition, the repatriation of both investment income and capital from
several foreign countries is restricted and controlled under certain
regulations, including in some cases the need for certain government
consents. Although these restrictions may in the future make it undesirable
to invest in these countries, the Advisor and Sub-advisor do not believe
that any current repatriation restrictions would affect its decision to
invest in these countries.
MARKET CHARACTERISTICS. Foreign securities may be purchased in over-the-
counter markets or on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and a Fund's portfolio
securities may be less liquid and more volatile than securities of
comparable U.S. companies. Equity securities may trade at price/earnings
multiples higher than comparable United States securities and such levels
may not be sustainable. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on United States exchanges,
although a Fund will endeavor to achieve the most favorable net results on
its portfolio transactions. There is generally less government supervision
and regulation of foreign stock exchanges, brokers and listed companies than
in the United States. Moreover, settlement practices for transactions in
foreign markets may differ from those in United States markets, and may
include delays beyond periods customary in the United States.
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, the Philippines'
National Assembly was dissolved in 1986 following a period of intense
political unrest and the removal of President Marcos. During the 1960's, the
high level of communist insurgency in Malaysia paralyzed economic activity,
but by the 1970's these communist forces were suppressed and normal economic
activity resumed. In 1991, the existing government in Thailand was
overthrown in a military coup. In addition, significant external political
risks currently affect some foreign countries. Both Taiwan and China still
claim sovereignty of one another and there is a demilitarized border between
North and South Korea.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economics. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The
economies of many foreign countries are heavily dependent upon international
trade and are accordingly affected by protective trade barriers and economic
conditions of their trading partners. The enactment by these trading
partners of protectionist trade legislation could have a significant adverse
effect upon the securities markets of such countries.
INFORMATION AND SUPERVISION. There is generally less publicly available
information about foreign companies comparable to reports and ratings that
are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those
applicable to United States companies.
TAXES. The dividends and interest payable on certain of a Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders. A shareholder otherwise subject to United States federal
income taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his or her
proportionate share of such foreign taxes paid by the Fund.
COSTS. Investors should understand that the expense ratio of the World
Growth Portfolio can be expected to be higher than investment companies
investing in domestic securities since the cost of maintaining the custody
of foreign securities and the rate of advisory fees paid by the Portfolio
are higher.
OTHER. With respect to certain foreign countries, especially developing and
emerging ones, there is the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the Portfolio,
political or social instability, or diplomatic developments which could
affect investments by U.S. persons in those countries.
EASTERN EUROPE. Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in
the countries of Eastern Europe and Russia is highly speculative at this
time. Political and economic reforms are too recent to establish a definite
trend away from centrally-planned economies and state owned industries. In
many of the countries of Eastern Europe and Russia, there is no stock
exchange or formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable market value
relative to the established currencies of western market economies, little
or no experience in trading in securities, no financial reporting standards,
a lack of a banking and securities infrastructure to handle such trading,
and a legal tradition which does not recognize rights in private property.
In addition, these countries may have national policies which restrict
investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require
governmental or quasi-governmental authorities to act as custodian of the
Fund's assets invested in such countries and these authorities may not
qualify as a foreign custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these considerations
are among the factors which could cause significant risks and uncertainties
to investment in Eastern Europe and Russia. The Fund will only invest in a
company located in, or a government of, Eastern Europe or Russia, if the
Sub-advisor believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia are
considered illiquid, the Portfolio will be required to include such
securities within its 15% restriction on investing in illiquid securities.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in
which the respective principal offices of the issuers of the various
securities are located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
portfolios is subject to the provisions of the 1940 Act discussed below. If
the Portfolio invests in such investment portfolios, the Portfolio's
shareholders will bear not only their proportionate share of the expenses of
the Portfolio (including operating expenses and the fees of the Investment
Manager), but also will bear indirectly similar expenses of the underlying
investment portfolios. In addition, the securities of these investment
portfolios may trade at a premium over their net asset value.
Apart from the matters described herein, the Fund is not aware at this
time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Fund as described in
the Fund's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
FOREIGN CURRENCY TRANSACTIONS. The World Growth Portfolio will generally
enter into forward foreign currency exchange contracts under two
circumstances. First, when the Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the
value of some or all of the Portfolio's portfolio securities denominated in
such foreign currency. Alternatively, where appropriate, the Portfolio may
hedge all or part of its foreign currency exposure through the use of a
basket of currencies or a proxy currency where such currency or currencies
act as an effective proxy for other currencies. In such a case, the
Portfolio may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities denominated in such
currency. The use of this basket hedging technique may be more efficient and
economical than entering into separate forward contracts for each currency
held in the Portfolio. The precise matching of the forward contract amounts
and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change
as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and the date it
matures. The projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Other than as set forth above, and immediately below, the
Portfolio will also not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of
the value of the Portfolio's portfolio securities or other assets
denominated in that currency. The Portfolio, however, in order to avoid
excess transactions and transaction costs, may maintain a net exposure to
forward contracts in excess of the value of the Portfolio's portfolio
securities or other assets to which the forward contracts relate (including
accrued interest to the maturity of the forward on such securities) provided
the excess amount is "covered" by liquid, high-grade debt securities,
denominated in any currency, at least equal at all times to the amount of
such excess. For these purposes "the securities or other assets to which the
forward contracts relate may be securities or assets denominated in a single
currency, or where proxy forwards are used, securities denominated in more
than one currency. Under normal circumstances, consideration of the prospect
for currency parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies. However,
the Sub-advisor believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests
of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign
currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to
purchase additional foreign currency on the spot market (and bear the
expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Portfolio is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of
the foreign currency received upon the sale of the portfolio security if its
market value exceeds the amount of foreign currency the Portfolio is
obligated to deliver. However, as noted, in order to avoid excessive
transactions and transaction costs, the Portfolio may use liquid, high-grade
debt securities denominated in any currency, to cover the amount by which
the value of a forward contract exceeds the value of the securities to which
it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as
described below) to the extent that there has been movement in forward
contract prices. If the Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between the
Portfolio's entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase
of the foreign currency, the Portfolio will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent of the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to
sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency
contracts for different purposes and under different circumstances. Of
course, the Portfolio is not required to enter into forward contracts with
regard to its foreign currency-denominated securities and will not do so
unless deemed appropriate by the Sub-advisor. It also should be realized
that this method of hedging against a decline in the value of a currency
does not eliminate fluctuations in the underlying prices of the securities.
It simply establishes a rate of exchange at a future date. Additionally,
although such contracts tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time, they tend to limit
any potential gain which might result from an increase in the value of that
currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies
into U.S. dollars on a daily basis. It will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize
a profit based on the difference (the "spread") between the prices at which
they are buying and selling various currencies. Thus, a dealer may offer to
sell a foreign currency to the Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency
to the dealer.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment
in such securities. For tax purposes these portfolios may be known as
Passive Foreign Investment Companies. The Portfolio is subject to certain
percentage limitations under the 1940 Act and certain states relating to the
purchase of securities of investment companies, and may be subject to the
limitation that no more than 10% of the value of the Portfolio's total
assets may be invested in such securities.
For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Fund's Prospectus under "World Growth
Portfolio Investment Risks".
MANAGEMENT OF THE FUND
Directors and Officers of The Fund
The names of all directors and officers of the Fund, the position each
holds with the Fund and the principal occupation of each are shown below.
Name and Address, Position with the Fund, Age, Principal Occupation During
Past 5 Years
Rolf F. Bjelland*, President, Director and Chairman, 625 Fourth Ave. S.,
Minneapolis, MN, Age 59
Investment Officer, Lutheran Brotherhood; President and Director, Lutheran
Brotherhood Research Corp.; Director and Vice President--Investments,
Lutheran Brotherhood Variable Insurance Products Company; Director and
Executive Vice President, Lutheran Brotherhood Financial Corporation;
Director, Lutheran Brotherhood Securities Corp.; Director, Lutheran
Brotherhood Real Estate Products Company; President, Trustee and Chairman of
The Lutheran Brotherhood Family of Funds Funds**.
Charles W. Arnason, Director, 101 Judd Street, Suite 1, Marine-On-St. Croix,
MN, Age 69
Attorney-At-Law; formerly Partner, Head, Hempel, Seifert & Vander Weide;
formerly Executive Director of Minnesota Technology Corridor; formerly
Senior Vice President, Secretary and General Counsel of Cowles Media
Company; Trustee of The Lutheran Brotherhood Family of Funds**.
Herbert F. Eggerding, Jr., Director, 12587 Glencroft Dr., St. Louis, MO, Age
60
Retired Executive Vice President and Chief Financial Officer, Petrolite
Corporation; Director, Wheat Ridge Foundation; Director, Lutheran Charities
Association; Trustee of the Lutheran Brotherhood Family of Funds**.
Noel K. Estenson, Director, CENEX, Inc., P.O. Box 64089, St. Paul, MN, Age
58
Chairman, CENEX, Inc. Trustee of the Lutheran Brotherhood Family of Funds**
Connie M. Levi, Director, PO Box 675325, Rancho Santa Fe, CA, Age 58
Retired President of the Greater Minneapolis Chamber of Commerce; Directors
or member of numerous governmental, public service and non-profit boards and
organizations; Trustee of The Lutheran Brotherhood Family of Funds**.
Bruce J. Nicholson*, Director, 625 Fourth Ave. S., Minneapolis, MN, Age 51
Executive Vice President and Chief Financial Officer, Lutheran Brotherhood;
Director, Executive Vice President and Chief Financial Officer, Lutheran
Brotherhood Financial Corporation; Director, Lutheran Brotherhood Research
Corp.; Director, Lutheran Brotherhood Securities Corp.; Director and Chief
Financial Officer, Lutheran Brotherhood Variable Insurance Products Company;
Director, Lutheran Brotherhood Real Estate Products Company; Trustee, The
Lutheran Brotherhood Family of Funds**.
Ruth E. Randall, Director, 25 Stanley, #A2, West Hartford, CT, Age 68
Retired Interim Dean, Division of Continuing Studies, University of
Nebraska-Lincoln; formerly Associate Dean and Professor, Department of
Educational Administration, Teachers College, University of Nebraska-
Lincoln; Commissioner of Education for the State of Minnesota; formerly
Superintendent of Schools, Independent School District #196, Rosemount,
Minnesota; Director or member of numerous governmental, public service and
non-profit boards and organizations; Trustee of The Lutheran Brotherhood
Family of Funds**.
James M. Walline, Vice President, 625 Fourth Ave. S., Minneapolis, MN, Age
52
Vice President, Lutheran Brotherhood; Vice President, Lutheran Brotherhood
Research Corp.; Vice President, Lutheran Brotherhood Variable Insurance
Products Company; Vice President of The Lutheran Brotherhood Family of
Funds**.
Richard B. Ruckdashel, Vice President, 625 Fourth Ave. S., Minneapolis, MN,
Age 42
Vice President, Lutheran Brotherhood; Assistant Vice President, Lutheran
Brotherhood Variable Insurance Products Company; Assistant Vice President,
Lutheran Brotherhood Securities Corp.; Vice President of The Lutheran
Brotherhood Family of Funds**.
Wade M. Voigt, Treasurer, 625 Fourth Ave. S., Minneapolis, MN, Age 41
Assistant Vice President, Mutual Fund Accounting, Lutheran Brotherhood;
Treasurer of The Lutheran Brotherhood Family of Funds**.
Otis F. Hilbert, Vice President and Secretary, 625 Fourth Ave. S.,
Minneapolis, MN, Age 60
Vice President, Lutheran Brotherhood; Counsel, Vice President and Secretary,
Lutheran Brotherhood Securities Corp.; Counsel and Secretary of Lutheran
Brotherhood Research Corp.; Vice President and Secretary, Lutheran
Brotherhood Real Estate Products Company; Vice President and Assistant
Secretary, Lutheran Brotherhood Variable Insurance Products Company; Vice
President and Secretary of The Lutheran Brotherhood Family of Funds**.
James R. Olson, Vice President, 625 Fourth Ave. S., Minneapolis, MN, Age 55
Vice President, Lutheran Brotherhood; Vice President, Lutheran Brotherhood
Securities Corp.; Vice President, Lutheran Brotherhood Research Corp.; Vice
President, Lutheran Brotherhood Variable Insurance Products Company; Vice
President of The Lutheran Brotherhood Family of Funds**.
*The Investment Company Act of 1940 provides that no registered
investment company shall have a board of directors more than 60% of the
members of which are persons who are interested persons of the Adviser or
the Fund. The membership of the Board complies with this requirement.
Certain actions of the Board, including the annual continuance of the
Investment Advisory Agreement between the Fund and the Adviser, must be
approved by a majority of the members of the Board who are not interested
persons of the Adviser or the Fund. Mr. Bjelland and Mr. Nicholson are the
only two of the six members of the Board who are interested persons of the
Adviser or the Fund as that term is defined in the Investment Company Act of
1940.
** The Lutheran Brotherhood Family of Funds is a series mutual fund
that includes the following separate funds: Lutheran Brotherhood
Opportunity Growth Fund, Lutheran Brotherhood World Growth Fund, Lutheran
Brotherhood Fund, Lutheran Brotherhood High Yield Fund, Lutheran Brotherhood
Income Fund, Lutheran Brotherhood Municipal Bond Fund, and Lutheran
Brotherhood Money Market Fund.
COMPENSATION OF DIRECTORS AND OFFICERS
The Fund make no payments to any of its officers for services performed
for the Fund. Directors of the Fund who are not interested persons of the
Fund are paid an annual retainer fee of $21,500 and an annual fee of $9,000
per year to attend meetings of Board of Directors of the Fund complex.
Directors who are not interested persons of the Fund are reimbursed by
the Fund 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 Directors of the Fund. The Directors receive no pension
or retirement benefits in connection with their service to the Fund.
For the fiscal year ended December 31, 1996, the Directors of the Fund
received the following amounts of compensation either directly or in the
form of payments into a deferred compensation plan:
Total
Aggregate Compensation
Name and Position Compensation Paid by Fund and
of Person From Fund Fund Complex(1)
- ----------------- ------------ -----------------
Rolf F. Bjelland(2) $0 $0
Chairman
and Director
Charles W. Arnason $10,904 $29,500
Director
Herbert F. Eggerding, Jr. $10,904 $29,500
Director
Connie M. Levi $10,904 $29,500
Director
Bruce J. Nicholson(2) $0 $0
Director
Ruth E. Randall $10,904 $29,500
Director
(1) The "Fund Complex" includes The Lutheran Brotherhood Family of Funds
and LB Series Fund, Inc.
(2) "Interested person" of the Fund as defined in the Investment Company
Act of 1940.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Shares in the Fund are sold only to separate accounts (the "Accounts")
of Lutheran Brotherhood and Lutheran Brotherhood Variable Insurance Products
Company ("LBVIP"), to fund benefits under various variable life insurance
and annuity contracts issued by Lutheran Brotherhood and LBVIP (the
"Contracts").
The voting rights of Contract owners, and limitations on those rights,
are explained in separate prospectuses relating to such Contracts. Lutheran
Brotherhood and LBVIP, as the owners of the assets in the Accounts, are
entitled to vote all of the shares of the Fund held to fund the benefits
under the Contracts, but they will generally do so in accordance with the
instructions of Contract owners. Any shares of a Portfolio attributable to a
Contract for which no timely voting instructions are received, and any
shares of that Portfolio held by Lutheran Brotherhood, LBVIP or any of their
affiliates for their own account, will be voted by Lutheran Brotherhood and
LBVIP in proportion to the voting instructions that are received with
respect to all Contracts participating in that Portfolio. Under certain
circumstances described in the separate prospectus relating to the
Contracts, however, Lutheran Brotherhood and LBVIP may disregard voting
instructions received from Contract owners.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
Lutheran Brotherhood (the "Adviser") is the investment adviser of the
Fund. The Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940. Lutheran Brotherhood, founded in 1917 under
the laws of Minnesota, is a fraternal benefit society owned by and operated
for its members. It is subject to regulation by the Insurance Division of
the State of Minnesota as well as by the insurance departments of all the
other states and jurisdictions in which it does business. LBVIP is an
indirect subsidiary of Lutheran Brotherhood.
Certain directors and officers of the Fund are also affiliates of
Lutheran Brotherhood and/or LBVIP. See "Management of the Fund--Directors
and Officers of the Fund".
Investment decisions for the Opportunity Growth Portfolio are made by
T. Rowe Price Associates, Inc. ("T. Rowe Price"), which Lutheran Brotherhood
and the Fund have engaged as the sub-advisor for the Opportunity Growth
Portfolio. T. Rowe Price manages the Opportunity Growth Portfolio in
accordance with the Fund's investment objectives, policies and restrictions,
subject to the supervision of Lutheran Brotherhood and the Fund's Board of
Directors.
T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1997, T. Rowe Price and its
affiliates managed over $124 billion.
Investment decisions for the World Growth Portfolio are made by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), which Lutheran
Brotherhood and the Fund have engaged as the sub-advisor for the World
Growth Portfolio. Price-Fleming manages the World Growth Portfolio of
Lutheran Brotherhood and the Fund's Board of Directors.
Price-Fleming was founded in 1979 as a joint venture between T. Rowe
Price Associates, Inc. and Robert Fleming Holdings Limited. Price-Fleming is
one of the world's largest international mutual fund asset managers with
approximately $29.2 billion under management as of December 31, 1996 in its
offices in Baltimore, London, Tokyo and Hong Kong.
The Advisory Contract provides that it shall continue in effect with
respect to each Portfolio 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 Portfolio (as defined in the 1940 Act) or by the
Directors of the Fund, and (ii) in either event by a vote of a majority of
the Directors 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 Investment Sub-advisory Contract between Lutheran Brotherhood, the
Fund and T. Rowe Price (the "T. Rowe Price Sub-advisory Contract") provides
that it shall continue in effect with respect to the Opportunity Growth
Portfolio 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
Portfolio (as defined in the 1940 Act) or by the Directors of the Fund, and
(ii) in either event by a vote of a majority of the Directors who are not
parties to the T. Rowe Price 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 T. Rowe Price Sub-advisory Contract may be
terminated on 60 days' written notice by each 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 Investment Sub-advisory Contract between Lutheran Brotherhood, the
Fund and Price-Fleming (the "Price-Fleming Sub-advisory Contract") provides
that it shall continue in effect with respect to the World Growth Portfolio
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 Portfolio
(as defined in the 1940 Act) or by the Directors of the Fund, and (ii) in
either event by a vote of a majority of the Directors who are not parties to
the Price-Fleming 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 Price-Fleming Sub-advisory Contract may be terminated on
60 days' written notice by either party and will terminate automatically in
the event of its assignment, as defined under the 1940 Act and regulations
thereunder. Such regulations provide that a transaction which does not
result in a change of actual control or management of an adviser is not
deemed an assignment.
The Adviser receives an investment advisory fee as compensation for its
services to the Fund. The fee is a daily charge equal to an annual rate of
.40% of the aggregate average daily net assets of the Money Market, Income,
High Yield, Growth, Opportunity Growth, and Mid Cap Growth Portfolios. The
fee is a daily charge equal to an annual rate of .85% of the aggregate
average daily net assets of the World Growth Portfolio. Each daily charge
for the fee is divided among the Portfolios in proportion to their net
assets on that day. During the fiscal periods ended December 31, 1996, 1995,
and 1994, the Adviser earned $13,945,681, $9,372,835, and $7,450,844,
respectively, as gross advisory fees.
Lutheran Brotherhood pays T. Rowe Price, the sub-advisor, for the
Opportunity Growth Portfolio, an annual sub-advisory fee for the performance
of sub-advisory services. The fee payable is equal to .3% of that
Portfolio's average daily net assets.
Lutheran Brotherhood pays the Sub-advisor for the World Growth
Portfolio an annual sub-advisory fee for the performance of sub-advisory
services. The fee payable is equal to a percentage of the that Portfolio's
average daily net assets. The percentage decreases as the Portfolio's assets
increase. For purposes of determining the percentage level of the sub-
advisory fee for the Portfolio, the assets of the Portfolio are combined
with the assets of the Lutheran Brotherhood World Growth Fund, another fund
with investment objectives and policies that are similar to the World Growth
Portfolio and for which the Sub-advisor also provides sub-advisory services.
The sub-advisory fee Lutheran Brotherhood pays the Sub-advisor is equal to
the World Growth Portfolio's pro rata share of the combined assets of the
Portfolio and the Lutheran Brotherhood World Growth Fund and is equal to
.75% of combined average daily net assets up to $20 million, .60% of
combined average daily net assets over $20 million but not over $50 million,
and .50% of combined average daily net assets over $50 million. When the
combined assets of the World Growth Portfolio and the Lutheran Brotherhood
World Growth Fund exceed $200 million, the sub-advisory fee for the World
Growth Portfolio is equal to .50% of all of the Portfolio's average daily
net assets.
The Investment Advisory Agreement provides that the Fund will pay, or
provide for the payment of, the compensation of the directors who are not
affiliated with the Adviser, Lutheran Brotherhood or LBVIP and all other
expenses of the Fund (other than those assumed by the Adviser), including
governmental fees, interest charges, taxes, membership dues in the
Investment Company Institute allocable to the Fund, fees and expenses of the
independent auditors, of legal counsel and of any transfer agent, registrar
and dividend disbursing agent of the Fund, expenses of preparing, printing
and mailing prospectuses, shareholders' reports, notices, proxy statements
and reports to governmental officers and commissions, expenses connected
with the execution, recording and settlement of portfolio security
transactions, insurance premiums, fees and expenses of the Fund's custodian
for all services to the Fund, expenses of calculating the net asset value of
the shares of the Portfolio of the Fund, expenses of shareholders' meetings
and expenses relating to the issuance, registration and qualification of
shares of the Fund. Lutheran Brotherhood and LBVIP have agreed with the Fund
to pay, or to reimburse the Fund for the payment of, all of the foregoing
expenses.
The Adviser also furnishes at its own expense all necessary
administrative services, office space, equipment and clerical personnel for
servicing the investments of the Fund and maintaining its organization, and
investment advisory facilities and executive and supervisory personnel for
managing the investments and effecting the portfolio transactions of the
Fund.
The Investment Advisory Agreement specifically provides that the
Adviser, including its directors, officers and employees, shall not be
liable for any error of judgment or mistake of law or for any loss arising
out of any investment or for any act or omission in the execution and
management of the Fund, except for willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of reckless
disregard of its obligations and duties under the Agreement.
The Adviser, through the indirect ownership of Lutheran Brotherhood
Research Corp., also serves as the investment adviser to several other
investment companies. When investment opportunities arise that may be
appropriate for one of the Portfolios and one or more of such other
companies, the Adviser will not favor one over another and may allocate
investments among them in an impartial manner believed to be equitable to
each entity involved. The allocations will be based on the investment
objectives and current cash and investment position of each. Because the
various entities for which the Adviser acts as investment adviser have
different investment objectives and positions, the Adviser may from time to
time buy a particular security for one or more such entities while at the
same time it sells such securities for another.
Custodian
State Street Bank and Trust Company, Boston, Massachusetts, is the
custodian of the securities held by the Portfolios and is authorized to use
various securities depository facilities, such as the Depository Trust
Company and the facilities of the book-entry system of the Federal Reserve
Bank. State Street Bank and Trust Company is also the transfer agent and
dividend disbursing agent for the Fund.
Independent Accountants
The independent accountant for the Fund is Price Waterhouse LLP.
PORTFOLIO BROKERAGE AND RELATED PRACTICES
Except for the Opportunity Growth Portfolio and the World Growth
Portfolio, the Adviser is responsible for decisions to buy and sell
securities for the Portfolios, the selection of brokers and dealers to
effect the transactions and the negotiation of brokerage commissions, if
any. T. Rowe Price and Price-Fleming (each, a "Sub-advisor") are responsible
for such functions for the Opportunity Growth Porfolio and the World Growth
Portfolio, respectively. Transactions on a stock exchange in equity
securities for the Growth Portfolio, the Mid Cap Growth Portfolio, the
Opportunity Growth Portfolio and the World Growth Portfolio will be executed
primarily through brokers that will receive a commission paid by the
Portfolio. The Money Market, High Yield and Income Portfolios, on the other
hand, will not normally incur any brokerage commissions. Fixed income
securities, as well as equity securities traded in the over-the-counter
market, are generally traded on a "net" basis with dealers acting as
principals for their own accounts without a stated commission, although the
price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that
includes an amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. Certain of these securities may
also be purchased directly from an issuer, in which case neither commissions
nor discounts are paid.
In placing orders for securities transactions, the Adviser and the Sub-
advisor give primary consideration to obtaining the most favorable price and
efficient execution. The Adviser and the Sub-advisor seek to effect each
transaction at a price and commission, if any, that provides the most
favorable total cost or proceeds reasonably attainable in the circumstances.
The Adviser and the Sub-advisor may, however, pay a higher commission than
would otherwise be necessary for a particular transaction when, in the
Adviser's or Sub-advisor's opinion, to do so will further the goal of
obtaining the best available execution.
In connection with any securities transaction that involves a
commission payment, the Adviser or the Sub-advisor negotiates the commission
with the broker on the basis of the quality and quantity of execution
services that the broker provides, in light of generally prevailing
commission rates. When selecting a broker or dealer in connection with a
transaction for any Portfolio, the Adviser or the Sub-advisor gives
consideration to whether the broker or dealer has furnished the Adviser or
the Sub-advisor with certain services, provided this does not jeopardize the
objective of obtaining the best price and execution. These services, which
include statistical and economic data and research reports on particular
companies and industries, are services that brokerage houses customarily
provide to institutional investors. The Adviser or the Sub-advisor uses
these services in connection with all of its investment activities, and some
of the data or services obtained in connection with the execution of
transactions for a Portfolio may be used in managing other investment
accounts. Conversely, brokers and dealers furnishing such services may be
selected for the execution of transactions of such other accounts, while the
data or service may be used by the Adviser or the Sub-advisor in providing
investment management for the Fund. Although the Adviser's and the Sub-
advisor's present policies are not to pay higher commissions on transactions
in order to secure research and statistical services from brokers or
dealers, the Adviser or the Sub-advisor might in the future pay higher
commissions, if the Adviser or the Sub-advisor determines that the higher
commissions are necessary in order to secure desired research and are
reasonable in relation to all of the services that the broker or dealer
provides.
T. Rowe Price and Price-Fleming receive a wide range of research
services from brokers and dealers. These services include information on the
economy, industries, groups of securities, individual companies, statistical
information, accounting and tax law interpretations, political developments,
legal developments affecting portfolio securities, technical market action,
pricing and appraisal services, credit analysis, risk measurement analysis,
performance analysis, and analysis of corporate responsibility issues.
These services provide both domestic and international perspective. Research
services are received primarily in the form of written reports, computer
generated services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form of meetings
arranged with corporate and industry spokespersons, economists, academicians
and government representatives. In some cases, research services are
generated by third parties but are provided to T. Rowe Price and Price-
Fleming by or through broker-dealers.
Research services received from brokers and dealers are supplemental to
T. Rowe Price's own research effort and, when utilized, are subject to
internal analysis before being incorporated by T. Rowe Price into its
investment process. As a practical matter, it would not be possible for T.
Rowe Price's Equity Research Division to generate all of the information
presently provided by brokers and dealers. T. Rowe Price pays cash for
certain research services received from external sources. T. Rowe Price also
allocates brokerage for research services which are available for cash.
While receipt of research services from brokerage firms has not reduced T.
Rowe Price's normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such additional
information through its own staff. To the extent that research services of
value are provided by brokers or dealers, T. Rowe Price may be relieved of
expenses which it might otherwise bear.
T. Rowe Price and Price-Fleming have a policy of not allocating
brokerage business in return for products or services other than brokerage
or research services. In accordance with the provisions of Section 28(e) of
the Securities Exchange Act of 1934, T. Rowe Price and Price-Fleming may
from time to time receive services and products which serve both research
and non-research functions. In such event, T. Rowe Price and Price-Fleming
make a good faith determination of the anticipated research and non-research
use of the product or services and allocate brokerage only with respect to
the research component.
Certain brokers and dealers who provide quality brokerage and execution
services also furnish research services to T. Rowe Price and Price-Fleming.
With regard to the payment of brokerage commissions, T. Rowe Price and
Price-Fleming have adopted a brokerage allocation policy embodying the
concepts of Section 28(e) of the Securities Act of 1934, which permits an
investment adviser to cause an account to pay commission rates in excess of
those another broker or dealer would have charged for effecting the same
transaction, if the adviser determines in good faith that the commission
paid is reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of either the
particular transaction involved or the overall responsibilities of the
adviser with respect to the accounts over which it exercises investment
discretion. Accordingly, T. Rowe Price and Price-Fleming may assess the
reasonableness of commissions in light of the total brokerage and research
services provided by each particular broker. T. Rowe Price may receive
research, as defined in Section 28(e), in connection with selling
concessions and designations in fixed price offerings in which the Funds
participate.
The Adviser or the Sub-advisor may employ an affiliated broker to
execute brokerage transactions on behalf of the Portfolios, as long as the
Adviser or the Sub-advisor obtains a price and execution as favorable as
that which would be available through the use of an unaffiliated broker, and
no less favorable than the affiliated broker's contemporaneous charges to
its other most favored, but unaffiliated, customers. The Fund may not engage
in any transactions in which the Adviser or the Sub-advisor or their
affiliates acts as principal, including over-the-counter purchases and
negotiated trades in which such a party acts as a principal.
The Adviser or the Sub-advisor may enter into business transactions
with brokers or dealers other than using them to execute Portfolio
securities transactions for accounts the Adviser or the Sub-advisor manages.
These other transactions will not affect the Adviser's or the Sub-advisor's
selection of brokers or dealers in connection with Portfolio transactions
for the Fund.
BROKERAGE COMMISSIONS
During the last three fiscal years, the Fund paid the following brokerage
fees:
12/31/97 12/31/96 12/31/95
Opportunity Growth
Portfolio $ 789,032 $ 353,407 $ --
World Growth Portfolio 492,771 441,571 --
Growth Portfolio 6,961,631 6,346,524 3,876,957
High Yield Portfolio 8,418 44,558 60,767
Income Portfolio 135,832 89,581 35,118
Money Market Portfolio -- -- --
Of the brokerage fee amounts stated above, the following percentages were
paid to firms which provided research, statistical, or other services to the
Fund's Adviser or Sub-advisor in connection with the management of the Fund:
12/31/97 12/31/96 12/31/95
Opportunity Growth
Portfolio 5.52% 0.30% --
World Growth Portfolio 1.90% 1.30% --
Growth Portfolio 18.19% 9.79% 10.21%
High Yield Portfolio -- -- 19.00%
Income Portfolio 3.29% 4.78% 8.37%
Money Market Portfolio -- -- --
ROWE PRICE-FLEMING AFFILIATED TRANSACTIONS
Subject to applicable SEC rules, as well as other regulatory
requirements, the sub-advisor of the World Growth Portfolio may allocate
orders to brokers or dealers affiliated with such sub-advisor. Such
allocation shall be in such amounts and proportions as the sub-advisor shall
determine and the sub-advisor will report such allocations either to
Lutheran Brotherhood, which will report such allocations to the Board of
Directors, or, if requested, directly to the Board of Directors. For the
fiscal period ended December 31, 1997, the Fund paid $11,272 to brokers or
dealers affiliated with the sub-advisor of the World Growth Portfolio.
CAPITAL STOCK
The total number of shares of capital stock which the Fund has
authority to issue is 2,000,000,000 shares of the par value of $.01 per
share. All shares are divided into the following classes of capital stock,
each class comprising the number of shares and having the designations
indicated, subject, however, to the authority to increase and decrease the
number of shares of any class granted to the Board of Directors:
Class Number of Shares
Money Market Portfolio Capital Stock 400,000,000
Income Portfolio Capital Stock 400,000,000
High Yield Portfolio Capital Stock 200,000,000
Growth Portfolio Capital Stock 400,000,000
Opportunity Growth Portfolio Capital Stock 200,000,000
Mid Cap Growth Portfolio Capital Stock 200,000,000
World Growth Portfolio Capital Stock 200,000,000
Subject to any then applicable statutory requirements, the balance of
any unassigned shares of the authorized capital stock may be issued in such
classes, or in any new class or classes having such designations, such
powers, preferences and rights as may be fixed and determined by the Board
of Directors. In addition, and subject to any applicable statutory
requirements, the Board of Directors has the authority to increase or
decrease the number of shares of any class, but the number of shares of any
class will not be decreased below the number of shares thereof then
outstanding.
The holder of each share of stock of the Fund shall be entitled to one
vote for each full share and a fractional vote for each fractional share of
stock, irrespective of the class, then standing in such holder's name on the
books of the Fund. On any matter submitted to a vote of shareholders, all
shares of the Fund will be voted in the aggregate and not by class except
that (a) when otherwise expressly required by statutes or the Investment
Company Act of 1940 shares will be voted by individual class, (b) only
shares of a particular Portfolio are entitled to vote on matters concerning
only that Portfolio, and (c) fundamental objectives and restrictions may be
changed, with respect to any Portfolio, if such change is approved by the
holders of a majority (as defined under the Investment Company Act of 1940)
of the outstanding shares of such Portfolio. No shareholder will have any
cumulative voting rights.
The shares of each class, when issued, will be fully paid and
nonassessable, have no preference, preemptive, conversion, exchange or
similar rights and will be freely transferable. The consideration received
by the Fund for the sale of shares shall become part of the assets of the
Portfolio to which the shares of the class relates. Each share will have a
pro rate interest in the assets of the Portfolio to which the share relates
and will have no interest in the assets of any other Portfolio.
The Board of Directors may from time to time declare and pay dividends
or distributions, in stock or in cash, on any or all classes of stock, the
amount of such dividends and distributions and the payment of them being
wholly in the discretion of the Board. Dividends or distributions on shares
of any class of stock shall be paid only out of undistributed earnings or
other lawfully available funds belonging to such class.
Inasmuch as one goal of the Fund is to qualify as a Regulated
Investment Company under the Internal Revenue Code of 1986, as amended, and
the regulations promulgated thereunder, and inasmuch as the computation of
net income and gains for Federal income tax purposes may vary from the
computation thereof on the books of the Fund, the Board of Directors has the
power in its discretion to distribute in any fiscal year as dividends,
including dividends designated in whole or in part as capital gains
distributions, amounts sufficient in the opinion of the Board to enable the
Fund and each portfolio to qualify as a Regulated Investment Company and to
avoid liability for Federal income tax in respect of that year.
The assets belonging to any class of stock will be charged with the
liabilities in respect to such class, and will also be charged with their
share of the general liabilities of the Fund in proportion to the asset
values of the respective classes.
DETERMINATION OF THE NET ASSET VALUE
The net asset value of the shares of each Portfolio is determined once
daily by the Adviser immediately after the declaration of dividends, if any,
at 4:00 P.M., Eastern time, on each day during which the New York Stock
Exchange is open for business and on any other day in which there is a
sufficient degree of trading in the Portfolio's portfolio securities such
that the current net asset value of its shares might be materially. The net
asset value per share of each Portfolio except the Money Market Portfolio is
computed by adding the sum of the value of the securities held by that
Portfolio plus any cash or other assets it holds, subtracting all its
liabilities, and dividing the result by the total number of shares
outstanding of that Portfolio at such time. Expenses, including the
investment advisory fee payable to the Adviser, are accrued daily.
In determining the net asset value of the Portfolios other than the
Money Market Portfolio, securities will be valued at prices provided by an
independent pricing service. Securities traded on national securities
exchanges are generally valued at the last quoted sales price at the close
of each business day. Securities traded on the over-the-counter market,
securities listed on a national exchange for which no price is readily
available or for which the available price is determined to not represent
fair value, and securities or assets for which adequate market quotations
are not readily available are valued at a price within the range of current
bid and asked prices considered to best represent value under the
circumstances as determined by the Adviser under the direction of the Board
of Directors of the Fund. In determining fair value the Advisor may consider
institutional trading in similar groups of securities, yield, quality,
coupon rate, maturities, etc.
The amortized cost accounting method of valuation will be used for
short-term investments maturing in 60 days or less that are held by any of
the Portfolios, other than the Money Market Portfolio.
The net asset value of shares of the Money Market Portfolio will
normally remain at $1.00 per share, because the net investment income of
this Portfolio (including realized gains and losses on Portfolio holdings)
will be declared as a dividend each time the Portfolio's net income is
determined. If, in the view of the Board of Directors of the Fund, it is
inadvisable to continue to maintain the net asset value of the Money Market
Portfolio at $1.00 per share, the Board reserves the right to alter the
procedure. The Fund will notify shareholders of any such alteration.
The Fund values all short-term debt obligations held in the Money
Market Portfolio on an amortized cost basis. This means that each obligation
will be valued initially at its purchase price and thereafter by amortizing
any discount or premium uniformly to maturity, regardless of the impact of
fluctuating interest rates on the market value of the obligation. This
highly practical method of valuation is in widespread use and almost always
results in a value that is extremely close to the actual market value. As a
result of the rule of the Securities and Exchange Commission that permits
the use of amortized cost valuation for the Money Market Portfolio, it is
the policy of the Fund that the Money Market Portfolio may not purchase any
security with a remaining maturity of more than one year and must maintain a
dollar-weighted average of portfolio maturity of 90 days or less. In the
event of sizeable changes in interest rates, however, the value determined
by this method may be higher or lower than the price that would be received
if the obligation were sold. The Board of Directors has established
procedures to determine whether, on these occasions, if any should occur,
the deviation might be enough to affect the value of shares in the Money
Market Portfolio by more than 1/2 of one percent, and, if it does, an
appropriate adjustment will be made in the value of the obligations.
CALCULATION OF PERFORMANCE
Money Market Portfolio
The Prospectus contains information with respect to the yield and
effective yield of a hypothetical pre-existing account having a balance of
one Money Market Portfolio share at the beginning of a specified seven-day
period. Such yield quotations have been calculated by determining the net
change, exclusive of capital changes, in the value of a hypothetical pre-
existing account having a balance of one share of the Portfolio at the
beginning of the period, dividing the net change by the value of the account
at the beginning of the period to obtain the period return, and multiplying
the period return by 365/7. The effective yield has been calculated by
compounding the yield quotation for such period by adding 1 and raising the
sum to a power equal to 365/7, and subtracting 1 from the result.
This example illustrates the yield quotation for the Money Market
Portfolio for the seven-day period ended December 31, 1996:
Value of hypothetical pre-existing account with
exactly one share at the beginning of the period $1.000000000
Value of same account (excluding capital changes)
at end of the seven-day period* $1.000981447
Net change in account value $0.000981447
Base Period Return
Net change in account value divided by beginning
account value = 0.000981447
Annualized Current Yield [0.000981447 x (365/7)] 5.12%
Effective Yield** [0.000981447 + 1)365/7 - 1 5.25%
* This value includes the value of any additional shares purchased with
dividends from the original share, and all dividends declared on both the
original share and any such additional shares.
** This value may change to include shares purchased with dividends
reinvested on a less frequent basis.
The annualization of a seven-day average yield is not a representation
of future actual yield.
Other Portfolios
The Prospectus contains information with respect to yield quotations by
Portfolios other than the Money Market Portfolio. These yield quotations are
based on a 30-day (or one month) period computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, by setting yield equal to two
times the difference between the sixth power of one plus the designated
ratio and one, where the designated ratio is the difference between the net
investment income earned during the period and the expenses accrued for the
period (net of reimbursement) divided by the product of the average daily
number of shares outstanding during the period and the maximum offering
price per share on the last day of the period.
The following example illustrates the annualized current yield
calculation for the High Yield Portfolio for the 30-day base period ended
December 31, 1996:
Dividends and interest earned by the High Yield
Portfolio during the base period $8,817,516
Expenses accrued for the base period $ (331,433)
$8,486,083 (A)
Product of the maximum public offering price on
the last day of the base period and the average
daily number of shares outstanding during the
base period that were entitled to receive
dividends ($10.055407 x 101,138,431 shares) = $1,016,988,087 (B)
Quotient of dividends and interest earned minus
expenses accrued divided by product of maximum
public offering price multiplied by average
shares outstanding (A divided by B) = 0.00834433 (C)
Adding one and raising total to the 6th power
(C + 1)6 = 1.051122 (D)
Annualized current yield [2(D - 1) x 100] = 10.22%
The following example illustrates the annualized current yield
calculation for the Income Portfolio for the 30-day base period ended
December 31, 1996:
Dividends and interest earned by the Income
Portfolio during the base period $4,647,674
Expenses accrued for the base period $ (263,278)
$4,384,396 (A)
Product of the maximum public offering price on
the last day of the base period and the average
daily number of shares outstanding during the
base period that were entitled to receive
dividends ($9.749323 x 81,944,795 shares) = $798,906,275 (B)
Quotient of dividends and interest earned minus
expenses accrued divided by product of maximum
public offering price multiplied by average
shares outstanding (A divided by B) = 0.00548800 (C)
Adding one and raising total to the 6th power
(C + 1)6 = 1.033383 (D)
Annualized current yield [2(D - 1) x 100] = 6.68%
Annualized current yield of any specific base period is not a
representation of future actual yield.
The Prospectus contains information with respect to performance data
for the Portfolios of the Fund. Such performance data includes average
annual total return quotations for the 1, 5 and 10-year periods (or such
shorter time period during which the Portfolios have been offered) ended on
the date of the most recent balance sheet of the Fund included in the
Prospectus or Statement of Additional Information, computed by finding the
average annual compounded rates of return over the 1, 5 and 10-year periods
(or such shorter time period during which the Portfolios have been offered)
that would equate the initial amount invested to the ending redeemable
value, by equating the ending redeemable value to the product of a
hypothetical initial payment of $1,000, and one plus the average annual
total return raised to a power equal to the applicable number of years.
Such performance data assumes that any applicable charges have been
deducted from the initial $1,000 payment and includes all recurring fees
that are charged to the Fund's shareholders.
Average annual total return for any specific period is not a
representation of future actual results. Average annual total return assumes
a steady rate of growth. Actual performance fluctuates and will vary from
the quoted results for periods of time within the quoted periods.
The following example illustrates the average annual total return for
the Opportunity Growth Portfolio from the date of inception through December
31, 1996:
Hypothetical $1,000 initial investment on
January 18, 1996 $1,000
Ending redeemable value of the investment on
December 31, 1996 1,192
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 19.17%
The following example illustrates the average annual total return for
the World Growth Portfolio from the date of inception through December 31,
1996:
Hypothetical $1,000 initial investment on
January 18, 1996 $1,000
Ending redeemable value of the investment on
December 31, 1996 1,104
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 10.41%
The following example illustrates the average annual total return for
the Growth Portfolio from the date of inception through December 31, 1996:
Hypothetical $1,000 initial investment on
January 9, 1987 $1,000
Ending redeemable value of the investment on
December 31, 1996 3,248
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 224.76%
Average annual total return from inception
through December 31, 1996 is the sum of the total
return calculated above plus one; such sum is
raised to the power of 1/n where n is expressed
as nine years and 356 days; the result is
reduced by one and is expressed in terms of a
percentage (For example, 0.2 equals 20%) 12.52%
The following example illustrates the average annual total return for
the High Yield Portfolio from the date of inception through December 31,
1996:
Hypothetical $1,000 initial investment on
November 2, 1987 $1,000
Ending redeemable value of the investment on
December 31, 1996 3,009
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 200.89%
Average annual total return from inception
through December 31, 1996 is the sum of the total
return calculated above plus one; such sum is
raised to the power of 1/n where n is expressed
as nine years and 59 days; the result is reduced
by one and is expressed in terms of a percentage
(For example, 0.2 equals 20%) 12.76%
The following example illustrates the average annual total return for
the Income Portfolio from the date of inception through December 31, 1996:
Hypothetical $1,000 initial investment on
January 9, 1987 $1,000
Ending redeemable value of the investment on
December 31, 1996 2,216
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 121.65%
Average annual total return from inception
through December 31, 1996 is the sum of the total
return calculated above plus one; such sum is
raised to the power of 1/n where n is expressed
as nine years and 356 days; the result is
reduced by one and is expressed in terms of a
percentage (For example, 0.2 equals 20%) 8.30%
The following example illustrates the average annual total return for
the Money Market Portfolio from the date of inception through December 31,
1996:
Hypothetical $1,000 initial investment on January
9, 1987 $1,000
Ending redeemable value of the investment on
December 31, 1996 1,750
Total return for the period is the difference
between the ending redeemable value and the
hypothetical $1,000 initial investment divided by
the hypothetical $1,000 initial investment; the
result is expressed in terms of a percentage (For
example, 2 equals 200%) 75.04%
Average annual total return from inception
through December 31, 1996 is the sum of the total
return calculated above plus one; such sum is
raised to the power of 1/n where n is expressed
as nine years and 356 days; the result is
reduced by one and is expressed in terms of a
percentage (For example, 0.2 equals 20%) 5.77%
TAX STATUS
The Fund intends to qualify as a Regulated Investment Company under
certain provisions of the Internal Revenue Code of 1986, as amended, (the
"Code"). Under such provisions, the Fund will not be subject to Federal
income tax on the part of its net ordinary income and net realized capital
gains that it distributes to the Account. Generally, each of the Portfolios
will be treated as a separate corporation for Federal income tax purposes.
This means that the investment results of each Portfolio will determine
whether the Portfolio qualifies as a Regulated Investment Company and will
determine the net ordinary income (or loss) and net realized capital gains
(or losses) of the Portfolio. To qualify for treatment as a Regulated
Investment Company, each Portfolio must, among other things, derive in each
taxable year at least 90% of its gross income from dividends, interest
(including tax-exempt interest) and gains from the sale or other disposition
of securities, and must derive less than 30% of its gross income in each
taxable year from the sale or disposition of securities held for less than
three months. At least 50% of its assets quarterly must be in cash items or
"other securities". "Other securities" cannot include securities of one
issuer greater in value than 5% of total Portfolio assets nor represent more
than 10% of the voting power of the issuer. Not more than 25% in value of
the Portfolio's assets quarterly can be invested in securities (excluding
governments) of any one issuer (including affiliates).
The Fund intends to distribute as dividends substantially all the net
investment income, if any, of each Portfolio. For dividend purposes, net
investment income of each Portfolio, other than the Money Market Portfolio,
will consist of all payments of dividends (other than stock dividends) or
interest received by such Portfolio less the estimated expenses of such
Portfolio (including fees payable to the Adviser). Net investment income of
the Money Market Portfolio consists of (i) interest accrued and/or discount
earned (including both original issue and market discount), (ii) plus or
minus all realized gains and losses, (iii) less the expenses of the
Portfolio (including the fees payable to the Adviser).
Dividends on the Income Portfolio, the High Yield Portfolio and Money
Market Portfolio will be declared and reinvested daily in additional full
and fractional shares of the Portfolio. Shares will begin accruing dividends
on the day following the date on which they are issued. Dividends from
investment income of the Growth Portfolio will be declared and reinvested in
additional full and fractional shares quarterly, although the Fund may make
distribution more frequently. Dividends from investment income of the
Opportunity Growth Portfolio, Mid Cap Growth Portfolio and the World Growth
Portfolio will be declared and reinvested in additional full and fractional
shares annually, although the Fund may make distribution more frequently.
The Fund will also declare and distribute annually all net realized
capital gains of each Portfolio, other than short-term gains of the Money
Market Portfolio which are declared as dividends daily.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections
and the Treasury Regulations promulgated thereunder. The Code and these
Regulations are subject to change by legislative or administrative actions.
ADDITIONAL INFORMATION
The Prospectus of the Fund and this Statement of Additional Information
do not contain all information included in the Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
with respect to the securities offered hereby, certain portions of which
have been omitted pursuant to the rules and regulations of the Securities
and Exchange Commission. The Registration Statement including the exhibits
filed therewith may be examined at the office of the Securities and Exchange
Commission in Washington, D.C.
Statements contained in the Prospectus and this Statement of Additional
Information as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement of which the Prospectus and this Statement of
Additional Information form a part, each such statement being qualified in
all respects by such reference.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
AND FINANCIAL STATEMENTS
(The Report of Independent Accountants and financial statement is to be
included in a subsequent amendment.)
<PAGE>
LB SERIES FUND, INC.
PART C
OTHER INFORMATION
-----------------
Item 24. Financial Statements and Exhibits
- -------------------------------------------
(a) Financial Statements
(1) Part A: Financial Highlights for Growth Portfolio, Income
Portfolio, High Yield Portfolio, Money Market
Portfolio, Opportunity Growth Portfolio, World Growth
Portfolio and Mid Cap Growth Portfolio (13)
(2) Part B: Financial Statements for Growth Portfolio, Income
Portfolio, High Yield Portfolio, Money Market
Portfolio, Opportunity Growth Portfolio, World Growth
Portfolio and Mid Cap Growth Portfolio (13)
(b) Exhibits
(1) Articles of Incorporation of the Registrant (1),(4),(7)
(2) By-Laws of the Registrant (1),(5), (11)
(3) Not applicable
(4) Not applicable
(5)(a) Investment Advisory Contract between the Registrant
and Lutheran Brotherhood Research Corp. (1),(2)
(5)(b) Investment Advisory Contract between the Registrant
and Lutheran Brotherhood. (7)
(5)(c) Form of Sub-Advisory Agreement between Lutheran Brotherhood,
the Registrant and Rowe Price-Fleming International, Inc. (9)
(5)(d) Form of Investment Advisory Contract between the Registrant
and Lutheran Brotherhood. (11)
(5)(e) Form of Sub-Advisory Agreement between Lutheran Brotherhood,
the Registrant and T. Rowe Price Associates, Inc. (14)
(6)(a) Distribution Agreement between the Registrant and
Lutheran Brotherhood Securities Corp. (2)
(7) Not applicable
(8)(a) Custodian Contract between the Registrant and State
Street Bank and Trust Company (2),(3)
(8)(b) Transfer Agency Agreement between the Registrant and
State Street Bank and Trust Company (2),(3)
(8)(c) Amendment to Custodian Contract dated February 1, 1989 (9)
(8)(d) Amendment to Custodian Contract dated January 11, 1990 (9)
(8)(e) Amendment to Custodian Contract (9)
(8)(f) Letter Agreement between the Registrant and State Street
Bank and Trust Company (10)
(8)(g) Form of Letter Agreement between the Registrant and State Street
Bank and Trust Company (11)
(9) Not applicable
(10)(a) Opinion and consent of counsel (9)
(10)(b) Opinion and consent of counsel (11)
(11) Consent of independent accountants (13)
(12) Not applicable
(13)(a) Letter from Lutheran Brotherhood Variable Insurance Products
Company ("LBVIP")with respect to providing initial capital. (1)
(13)(b) Letter from Lutheran Brotherhood with respect to
providing initial capital Letter with respect to the Opportunity
Growth Portfolio and the World Growth Portfolio. (9)
(13)(c) Letter from Lutheran Brotherhood with respect to
providing initial capital Letter with respect to the Opportunity
Growth Portfolio (10)
(13)(d) Letter from Lutheran Brotherhood with respect to providing
initial capital Letter with respect to the World Growth
Portfolio (10)
(13)(e) Letter from Lutheran Brotherhood Variable Insurance Products
Company with respect to providing initial capital Letter
with respect to the Opportunity Growth Portfolio (10)
(13)(f) Letter from Lutheran Brotherhood Variable Insurance Products
Company with respect to providing initial capital Letter
with respect to the World Growth Portfolio (10)
(13)(g) Letter from Lutheran Brotherhood with respect to providing
initial capital Letter with respect to the Mid Cap Growth
Portfolio (11)
(13)(h) Form of Letter from Lutheran Brotherhood Variable Insurance
Products Company with respect to providing initial capital Letter
with respect to the Mid Cap Growth Portfolio (11)
(14) Not applicable
(15) Not applicable
(16) Schedule of computation of performance data provided in response
to Item 22 of this Registration Statement (6)
(i) Total Return -- Growth Portfolio
(ii) Current Yield -- Income Portfolio
(iii) Current Yield -- Money Market Portfolio
(17) Financial Data Schedules(13)
(18)(a) Reimbursement Agreement between the Registrant and LBVIP. (3)
(18)(b) Powers of Attorney for Rolf F. Bjelland, Wade M. Voigt, Charles
W. Arnason, Herbert F. Eggerding, Jr. and Ruth E. Randall. (8)
(18)(c) Power of Attorney for Bruce J. Nicholson (9)
(18)(d) Power of Attorney for Noel K. Estenson (11)
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote
Reference Securities Act of 1933 Amendment Date Filed
--------- -------------------------------- ----------
(1) Initial Registration Statement March 3, 1986
(2) Pre-effective Amendment No. 1 July 26, 1986
(3) Pre-effective Amendment No. 2 December 23, 1986
(4) Post-effective Amendment No. 3 March 3, 1988
(5) Post-effective Amendment No. 6 March 2, 1990
(6) Post-effective Amendment No. 7 May 1, 1990
(7) Post-effective Amendment No. 11 March 1, 1994
(8) Post-effective Amendment No. 12 April 28, 1994
(9) Post-effective Amendment No. 14 November 1, 1995
(10) Post-effective Amendment No. 15 January 17, 1996
(11) Post-effective Amendment No. 18 November 12, 1997
(12) Post-effective Amendment No. 19 January 30, 1998
(13) To be filed by subsequent amendment
(14) Enclosed
Item 25. Persons Controlled by or under Common Control with Registrant
- ----------------------------------------------------------------------
None.
LBVIP, a Minnesota stock life insurance company, has purchased shares
of Common Stock of Registrant for the purpose of providing the initial
capital of Registrant.
LBVIP is an indirect subsidiary of Lutheran Brotherhood, a fraternal
benefit society founded under the laws of the State of Minnesota.
Lutheran Brotherhood's other direct and indirect subsidiaries are
Lutheran Brotherhood Financial Corporation, a Minnesota corporation,
and the Adviser and Lutheran Brotherhood Securities Corp., both of
which are Pennsylvania corporations.
Item 26. Number of Holders of Securities
- ----------------------------------------
As of February 27, 1998 the numbers of record holders of shares of the
Registrant was as follows:
(1) (2)
Title of Class Number of Record Holders
Money Market Portfolio Capital Stock Two
Income Portfolio Capital Stock Two
Growth Portfolio Capital Stock Two
High Yield Portfolio Capital Stock Two
Opportunity Growth Portfolio Capital Stock Two
World Growth Portfolio Capital Stock Two
Mid Cap Growth Portfolio Capital Stock Two
Item 27. Indemnification
- ------------------------
Filed as part of the initial Registration Statement filed on March 3, 1986,
and incorporated herein by reference.
Item 28. Business and Other Connections of Investment Adviser
- -------------------------------------------------------------
The Adviser has been engaged in the management of its own investment
portfolio since 1917, and has been a registered investment adviser since
1989. The Adviser's own assets were approximately $11.8 billion on December
31, 1997. The Adviser also has owned a subsidiary investment advisory
company since 1970 that acts as investment adviser to eight registered
investment companies with combined net assets of approximately $.3 billion
at February 27, 1998.
The directors and officers of the Adviser are listed below, together
with their principal occupations during the past two years. (Their titles
may have varied during that period.)
Directors:
Robert O. Blomquist, Chairman and Director of Lutheran Brotherhood;
Richard W. Duesenberg, Director;
Director of Liberty Fund, Indianapolis, IN; Formerly Senior Vice
President, General Counsel and Secretary of Monsanto Company, St. Louis, MO.
Robert P. Gandrud, President & Chief Executive Officer and Director of
Lutheran Brotherhood.
Bobby I. Griffin; Director
Executive Vice President of Medtronic, Inc.; President, Medtronic
Pacing Business, Fridley, MN.
William R. Halling, Director;
Director and President of The Economic Club of Detroit, Detroit, MI;
Director of SelectCare, Inc., Troy, MI; Director of Compuware Corporation,
Farmington Hills, MI; Director of Detroit Legal News, Detroit, MI; Director
of Standard Federal Bank, Troy, MI.
James M. Hushagen, Director
Attorney-at-Law, Tacoma, Washington.
Herbert D. Ihle, Director;
Formerly President of Diversified Financial Consultants, Marco Island,
FL and Eden Prarie, MN.
Richard C. Kessler, Director;
President of the Kessler Enterprise, Inc., 12205 Apopka Vineland Road,
Orlando, FL.
Judith K. Larson, Director;
Vice President of AC Nielsen, Schaumburg, IL; formerly Vice President
of Dataquest, San Jose, CA.
Luther S. Luedtke, Director
President, California Lutheran University, Thousand Oaks, California
John P. McDaniel, Director;
President and Chief Executive Officer of Medlantic Healthcare Group,
100 Irving Street N.W., Washington, DC.
Mary Ellen H. Schmider, Director;
Formerly Dean of Graduate Studies - Coordinator of Grants, Moorhead
State University, Moorhead, MN.
Officers:
Robert P. Gandrud, President and Chief Executive Officer
Bruce J. Nicholson, Executive Vice President and Chief Operating Officer
David W. Angstadt, Executive Vice President and Chief Marketing Officer
Rolf F. Bjelland, Executive Vice President
Paul R. Ramseth, Executive Vice President
William H. Reichwald, Executive Vice President
David J. Larson, Senior Vice President, Secretary and General Counsel
Jerald E. Sourdiff, Senior Vice President and Chief Financial Officer
David K. Stewart, Vice President and Treasurer
J. Keith Both, Senior Vice President
Edward A. Lindell, Senior Vice President
Michael E. Loken, Senior Vice President
James R. Olson, Senior Vice President
Jennifer H. Smith, Senior Vice President
Mary M. Abbey, Vice President
Galen R. Becklin, Vice President
Larry A. Borlaug, Vice President
Collen Both, Vice President
Randall L. Boushek, Vice President
Michael R. Braun, Vice President
David J. Christianson, Vice President
Craig R. Darrington, Vice President
Pamela H. Desnick, Vice President
Mitchell F. Felchle, Vice President
Charles E. Heeren, Vice President
Wayne A. Hellbusch, Vice President
Otis F. Hilbert, Vice President
Gary J. Kallsen, Vice President
Fred O. Konrath, Vice President
Douglas B. Miller, Vice President
C. Theodore Molen, Vice President
Susan Oberman Smith, Vice President
Kay J. Owen, Vice President
Dennis K. Peterson, Vice President
Bruce M. Piltingsrud, Vice President
Richard B. Ruckdashel, Vice President
Rolf H. Running, Vice President
Lynette J.C. Stertz, Vice President
John O. Swanson, Vice President
Louise K. Thoreson, Vice President
James M. Walline, Vice President
Daniel G. Walseth, Vice President
Anita J. T. Young, Vice President
Except where noted otherwise, the business address of each of the above
directors and officers employed by Lutheran Brotherhood is 625 Fourth Avenue
South, Minneapolis, Minnesota 55415.
The business and other connections of the officers and directors of T.
Rowe Price Associates, Inc. ("Sub-advisor for Opportunity Growth Portfolio")
are set forth in the Form ADV of Sub-advisor currently on file with the
Securities and Exchange Commission (File No. 801-856).
The business and other connections of the officers and directors of
Rowe
Price-Fleming International, Inc. ("Sub-advisor for World Growth Portfolio")
are set forth in the Form ADV of Sub-advisor currently on file with the
Securities and Exchange Commission (File No. 801-14713)
Item 29. Principal Underwriters
- -------------------------------
Not Applicable
Item 30. Location of Accounts and Records
- -----------------------------------------
The Registrant maintains the records required to be maintained by it
under Rules 31a-1(a), 31a-1(b), and 31a-2(a) under the Investment Company
Act of 1940 at its principal executive offices at 625 Fourth Avenue South,
Minneapolis, Minnesota 55415. Certain records, including records relating to
Registrant's shareholders and the physical possession of its securities, may
be maintained pursuant to Rule 31a-3 under the Investment Company Act of
1940 by the Registrant's transfer agent or custodian at the following
locations:
Name Address
---- -------
Lutheran Brotherhood Securities Corp. 625 Fourth Avenue South
Minneapolis, Minnesota 55415
Norwest Bank Minnesota, N.A. Sixth and Marquette Avenue
Minneapolis, Minnesota 55402
State Street Bank and Trust Company 225 Franklin Street
Boston, Massachusetts 02110
Item 31. Management Services
- ----------------------------
Not Applicable.
Item 32. Undertakings
- ---------------------
1. The Registrant includes in its Annual Report to Shareholder a
discussion of Portfolio performance as required by Item 5A of this Form and
incorporates such discussion in this Amended Registration Statement on Form
N-1A by reference. The Registrant hereby undertakes to make such Annual
Report to Shareholders available without charge to anyone so requesting it,
and further undertakes to make such fact know by including in its Prospectus
a statement to that effect.
2. The Registrant hereby undertakes to file a post-effective amendment to
its registration for the purposes of filing updated financial statements
with respect to the Opportunity Growth Portfolio and the World Growth
Portfolio (which need not be audited) within the time limit specified by
Item 32(b) of Form N-1A.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Registrant has duly caused this amendment to
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Minneapolis and State
of Minnesota, on the 13th day of March, 1998.
LB SERIES FUND, INC.
By: /s/ Randall L. Wetherille
-------------------------
Randall L. Wetherille,
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this amendment
to this registration statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Title Date
* Director and President March 13, 1998
- ------------------------ (Principal Executive Officer)
Rolf F. Bjelland
* Treasurer March 13, 1998
- ------------------------ (Principal Financial and
Wade M. Voigt Accounting Officer)
* Director March 13, 1998
- ------------------------
Charles W. Arnason
* Director March 13, 1998
- -------------------------
Herbert F. Eggerding, Jr.
* Director March 13, 1998
- ------------------------
Noel K. Estenson
* Director March 13, 1998
- ------------------------
Bruce J. Nicholson
* Director March 13, 1998
- ------------------------
Ruth E. Randall
By: /s/ Randall L. Wetherille
-------------------------
Randall L. Wetherille,
Attorney-in-Fact under Powers
of Attorney filed herewith and
incorporated by reference from
Post-Effective Amendment Nos.
21 and 23.
INVESTMENT SUB-ADVISORY AGREEMENT
By and Among
Lutheran Brotherhood
and
LB Series Fund, Inc.
and
T. ROWE PRICE ASSOCIATES, INC.
INVESTMENT SUB-ADVISORY AGREEMENT, made as of the _____ day of April
1998, between Lutheran Brotherhood ("Adviser"), a fraternal benefit society
organized and existing under the laws of the State of Minnesota, the LB
Series Fund, Inc., a corporation organized and existing under the laws of
the State of Minnesota ("Fund"), and T. Rowe Price Associates, Inc. ("Sub-
Adviser"), a corporation organized and existing under the laws of the State
of Maryland.
WHEREAS, the Adviser has entered into an Advisory Agreement dated as of
January 31, 1994 ("Advisory Agreement") with the Fund, which is engaged in
business as an open-end investment Fund registered under the Investment Fund
Act of 1940, as amended ("1940 Act"); and
WHEREAS, the Fund is authorized to issue shares of the Opportunity
Growth Portfolio ("Portfolio"), a separate portfolio of the Fund;
WHEREAS, the Sub-Adviser is engaged principally in the business of
rendering investment supervisory services and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended ("Advisers
Act"); and
WHEREAS, the Fund and Adviser desire to retain the Sub-Adviser as sub-
adviser to furnish certain investment advisory services to the Adviser and
the Portfolio and the Sub-Adviser is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual promises
herein set forth, the parties hereto agree as follows:
1. Appointment. Adviser hereby appoints the Sub-Adviser as its
investment sub-adviser with respect to the Portfolio for the period and on
the terms set forth in this Agreement. The Sub-Adviser accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. Duties of the Sub-Adviser.
A. Investment Sub-Advisory Services. Subject to the supervision of
the Fund's Board of Directors ("Board") and the Adviser, the Sub-Adviser
shall act as the investment sub-adviser and shall supervise and direct the
investments of the Portfolio in accordance with the Portfolio's investment
objectives, policies, and restrictions as provided in the Portfolio's
Prospectus and Statement of Additional Information, as currently in effect
and as amended or supplemented from time to time (hereinafter referred to as
the "Prospectus"), and such other limitations as the Portfolio may impose by
notice in writing to the Sub-Adviser. The Sub-Adviser shall obtain and
evaluate such information relating to the economy, industries, businesses,
securities markets, and securities as it may deem necessary or useful in the
discharge of its obligations hereunder and shall formulate and implement a
continuing program for the management of the assets and resources of the
Portfolio in a manner consistent with the Portfolio's investment
objective(s), policies, and restrictions. In furtherance of this duty, the
Sub-Adviser, on behalf of the Portfolio, is authorized, in its discretion
and without prior consultation with the Portfolio or the Adviser, to:
(1) buy, sell, exchange, convert, lend, and otherwise trade in any
stocks, bonds, and other securities or assets; and
(2) directly or through the trading desks of affiliates of Robert
Fleming Holdings Limited ("Robert Fleming") and Jardine Fleming Group
Limited ("JFG") place orders and negotiate the commissions (if any) for the
execution of transactions in securities or other assets with or through such
brokers, dealers, underwriters or issuers as the Sub-Adviser may select.
B. Further Duties of Sub-Adviser. In all matters relating to the
performance of this Agreement, the Sub-Adviser shall act in conformity with
the Fund's Articles of Incorporation, By-Laws, and currently effective
Registration Statement (as defined below) and with the written instructions
and directions of the Board and the Adviser, and shall comply with the
requirements of the 1940 Act, the Advisers Act, the rules thereunder, and
all other applicable federal and state laws and regulations. Without
limiting the foregoing, the Sub-Adviser shall have primary responsibility
for compliance with Rules 10f-3 and 17e-1 under the 1940 Act in each case in
which affiliates of Robert Fleming or JFG are used for the execution of
portfolio securities transactions.
3. Compensation. For the services provided and the expenses assumed
by the Sub-Adviser pursuant to this Agreement, the Sub-Adviser shall receive
a monthly investment management fee as set forth in Schedule 1, attached
hereto and incorporated herein by reference. The management fee shall be
payable monthly to the Sub-Adviser on or before the 10th day of the next
succeeding calendar month. If this Agreement becomes effective or
terminates before the end of any month, the investment management fee for
the period from the effective date to the end of such month or from the
beginning of such month to the date of termination, as the case may be,
shall be prorated according to the proration which such period bears to the
full month in which such effectiveness or termination occurs.
4. Duties of the Adviser.
A. The Adviser shall continue to have responsibility for all services
to be provided to the Portfolio pursuant to the Advisory Agreement except
those services to be performed by the sub-adviser hereunder and shall
oversee and review the Sub-Adviser's performance of its duties under this
Agreement.
B. The Adviser has furnished the Sub-Adviser with copies of each of
the following documents and will furnish to the Sub-Adviser at its principal
office all future amendments and supplements to such documents, if any, as
soon as practicable after such documents become available:
(1) The Articles of Incorporation of the Fund, as filed with
the State of Minnesota, as in effect on the date hereof and as amended from
time to time ("Articles of Incorporation");
(2) The By-Laws of the Fund as in effect on the date hereof
and as amended from time to time ("By-Laws");
(3) Certified resolutions of the Board of the Fund
authorizing the appointment of the Adviser and the Sub-Adviser and approving
the form of the Advisory Agreement and this Agreement;
(4) The Fund's Registration Statement under the 1940 Act and
the Securities Act of 1933, as amended, on Form N-1A, as filed with the
Securities and Exchange Commission ("SEC") relating to the Portfolio and its
shares and all amendments thereto ("Registration Statement");
(5) The Notification of Registration of the Fund under the
1940 Act on Form N-8A as filed with the SEC and any amendments thereto;
(6) The Portfolio's Prospectus (as defined above); and
(7) A certified copy of any financial statement or report
prepared for the Portfolio by certified or independent public accountants,
and copies of any financial statements or reports made by the Portfolio to
its shareholders or to any governmental body or securities exchange.
The Adviser shall furnish the Sub-Adviser with any further documents,
materials or information that the Sub-Adviser may reasonably request to
enable it to perform its duties pursuant to this Agreement.
C. During the term of this Agreement, the Adviser shall furnish to the
Sub-Adviser at its principal office all prospectuses, proxy statements,
reports to shareholders, sales literature, or other material prepared for
distribution to shareholders of the Portfolio or the public, which refer to
the Sub-Adviser or its clients in any way, prior to the use thereof, and the
adviser shall not use any such materials if the Sub-Adviser reasonably
objects in writing fifteen business days (or such other time as may be
mutually agreed) after receipt thereof. The Adviser shall ensure that
materials prepared by employees or agents of the Adviser or its affiliates
that refer to the Sub-Adviser or its clients in any way are consistent with
those materials previously approved by the Sub-Adviser as referenced in the
preceding sentence.
5. Brokerage.
A. The Sub-Adviser agrees that, in placing orders with broker-dealers
for the purchase or sale of portfolio securities, it shall attempt to obtain
quality execution at favorable security prices; provided that, on behalf of
the Portfolio, the Sub-Adviser may, in its discretion, agree to pay a
broker-dealer that furnishes brokerage or research services as such services
are defined under Section 28(e) of the Securities Exchange Act of 1934, as
amended ("1934 Act"), a higher commission than that which might have been
charged by another broker-dealer for effecting the same transactions, if the
Sub-Adviser determines in good faith that such commission is reasonable in
relation to the brokerage and research services provided by the broker-
dealer, viewed in terms of either that particular transaction or the overall
responsibilities of the Sub-Adviser with respect to the accounts as to which
it exercises investment discretion (as such term is defined under Section
3(a)(35) of the 1934 Act). In no instance will portfolio securities be
purchased from or sold to the Sub-Adviser, or any affiliated person thereof,
except in accordance with the federal securities laws and the rules and
regulations thereunder;
B. On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as other
clients of the Sub-Adviser, the Sub-Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities to be purchased or sold to attempt to obtain a more
favorable price or lower brokerage commissions and efficient execution. In
such event, allocation of the securities so purchased or sold, as well as
the expenses incurred in the transaction, will be made by the Sub-Adviser in
the manner the Sub-Adviser considers to be the most equitable and consistent
with its fiduciary obligation's to the Fund and to its other clients.
6. Ownership of Records. The Sub-Adviser shall maintain all books and
records required to be maintained by the Sub-Adviser pursuant to the 1940
Act and the rules and regulations promulgated thereunder with respect to
transactions on behalf of the Portfolio. In compliance with the
requirements of Rule 31a-3 under the 1940 Act, the Sub-Adviser hereby agrees
(i) that all records that it maintains for the Portfolio are the property of
the Fund, (ii) to preserve for the periods prescribed by Rule 31a-2 under
the 1940 Act any records that it maintains for the Fund and that are
required to be maintained by Rule 31a-1 under the 1940 Act, and (iii) agrees
to surrender promptly to the Fund any records that it maintains for the Fund
upon request by the Fund; provided, however, the Sub-Adviser may retain
copies of such records.
7. Reports. The Sub-Adviser shall furnish to the Board or the
Adviser, or both, as appropriate, such information, reports, evaluations,
analyses and opinions as the Sub-Adviser and the Board or the Adviser, as
appropriate, may mutually agree upon from time to time.
8. Services to Others Clients. Nothing contained in this Agreement
shall limit or restrict (i) the freedom of the Sub-Adviser, or any
affiliated person thereof, to render investment management and corporate
administrative services to other investment companies, to act as investment
manager or investment counselor to other persons, firms, or corporations, or
to engage in any other business activities, or (ii) the right of any
director, officer, or employee of the Sub-Adviser, who may also be a
trustee, officer, or employee of the Fund, to engage in any other business
or to devote his or her time and attention in part to the management or
other aspects of any other business, whether of a similar nature or a
dissimilar nature.
9. Sub-Adviser's Use of the Services of Others. The Sub-Adviser may
(at its cost except as contemplated by Paragraph 5 of this Agreement)
employ, retain, or otherwise avail itself of the services or facilities of
other persons or organizations for the purpose of providing the Sub-Adviser
or the Fund or Portfolio, as appropriate, with such statistical and other
factual information, such advice regarding economic factors and trends, such
advice as to occasional transactions in specific securities, or such other
information, advice, or assistance as the Sub-Adviser may deem necessary,
appropriate, or convenient for the discharge of its obligations hereunder or
otherwise helpful to the Fund or the Portfolio, as appropriate, or in the
discharge of Sub-Advisers overall responsibilities with respect to the other
accounts that it serves as investment manager or counselor.
10. Limitation of Liability of the Sub-Adviser. Neither the Sub-
Adviser nor any of its officers, directors, or employees, nor any person
performing executive, administrative, trading, or other functions for the
Fund, the Portfolio (at the direction or request of the Sub-Adviser) or the
Sub-Adviser in connection with the Sub-Adviser's discharge of its
obligations undertaken or reasonably assumed with respect to this Agreement,
shall be liable for (i) any error of judgment or mistake of law or for any
loss suffered by the Fund or Portfolio or (ii) any error of fact or mistake
of law contained in any report or data provided by the Sub-Adviser, except
for any error, mistake or loss resulting from willful misfeasance, bad
faith, or gross negligence in the performance of its or his duties on behalf
of the Fund or Portfolio or from reckless disregard by the Sub-Adviser or any
such person of the duties of the Sub-Adviser pursuant to this Agreement.
11. Representations of Sub-Adviser. The Sub-Adviser represents,
warrants, and agrees as follows:
A. The Sub-Adviser: (i) is registered as an investment adviser under
the Advisers Act and will continue to be so registered for so long as this
Agreement remains in effect; (ii) is not prohibited by the 1940 Act or the
Advisers Act from performing the services contemplated by this Agreement;
(iii) has met, and will continue to meet for so long as this Agreement
remains in effect, any other applicable federal or state requirements, or
the applicable requirements of any regulatory or industry self-regulatory
agency, necessary to be met in order to perform the services contemplated by
this Agreement (iv) has the authority to enter into and perform the services
contemplated by this Agreement; and (v) will immediately notify the Adviser
of the occurrence of any event that would disqualify the Sub-Adviser from
serving as an investment adviser of an investment company pursuant to
Section 9(a) of the 1940 Act or otherwise.
B. The Sub-Adviser has adopted a written code of ethics complying with
the requirements of Rule 17j-1 under the 1940 Act and, if it has not already
done so, will provide the Adviser and the Fund with a copy of such code of
ethics, together with evidence of its adoption.
C. The Sub-Adviser has provided the Adviser and the Fund with a copy
of its Form ADV as most recently filed with the SEC and will, promptly after
filing any amendment to its Form ADV with the SEC, furnish a copy of such
amendment to the Adviser.
12. Term of Agreement. This Agreement shall become effective upon the
date first above written, provided that this Agreement shall not take effect
unless it has first been approved (i) by a vote of a majority of those
directors of the Fund who are not parties to this Agreement or interested
persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval, and (ii) by vote of a majority of the
Portfolio's outstanding voting securities. This Agreement shall continue in
effect unless terminated pursuant to Section 13 hereof subject to all terms
and conditions hereof, so long as such continuation shall be specifically
approved at least annually (a) by either the Board, or by vote of a majority
of the outstanding voting securities of the Portfolio; (b) in either event,
by the vote, cast in person at a meeting called for the purpose of voting on
such approval, of a majority of the directors of the Fund who are not
parties to this Agreement or interested persons of any such party; and (c)
the Sub-Adviser shall not have notified the Fund, in writing, at least 60
days prior to such approval that it does not desire such continuation. The
Sub-Adviser shall furnish to the Fund, promptly upon its request, such
information as may reasonably be necessary to evaluate the terms of this
Agreement or any extension, renewal, or amendment hereof.
13. Termination of Agreement. Notwithstanding the foregoing, this
Agreement may be terminated at any time, without the payment of any penalty,
by vote of the Board or by a vote of a majority of the outstanding voting
securities of the Portfolio on at least 60 days' prior written notice to the
Sub-Adviser. This Agreement may also be terminated by the Adviser: (i) on
at least 60 days' prior written notice to the Sub-Adviser, without the
payment of any penalty; (ii) upon material breach by the Sub-Adviser of any
of the representations and warranties set forth in Paragraph 11 of this
Agreement, if such breach shall not have been cured within a 20-day period
after notice of such breach; or (iii) if the Sub-Adviser becomes unable to
discharge its duties and obligations under this Agreement. The Sub-Adviser
may terminate this Agreement at any time, without the payment of any
penalty, on at least 60 days' prior notice to the Adviser. This Agreement
shall terminate automatically in the event of its assignment or upon
termination of the Advisory Agreement.
14. Amendment of Agreement. No provision of this Agreement may be
changed, waived, discharged, or terminated orally, but only by an instrument
in writing signed by the party against which enforcement of the change,
waiver, discharge, or termination is sought, and no material amendment of
this Agreement shall be effective until approved by vote of a majority of
the Portfolio's outstanding voting securities.
15. Miscellaneous.
A. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Maryland without giving effect to the
conflicts of laws principles thereof and the 1940 Act. To the extent that
the applicable laws of the State of Maryland conflict with the applicable
provisions of the 1940 Act, the latter shall control.
B. Captions. The captions contained in this Agreement are included
for convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
C. Entire Agreement. This Agreement represents the entire agreement
and understanding of the parties hereto and shall supersede any prior
agreements between the parties relating to the subject matter hereof, and
all such prior agreements shall be deemed terminated upon the effectiveness
of this Agreement.
D. Interpretation. Nothing herein contained shall be deemed to
require the Fund to take any action contrary to its Articles of
Incorporation or By-Laws, or any applicable statutory or regulatory
requirement to which it is subject or by which it is bound, or to relieve or
deprive the Board of its responsibility for and control of the conduct of
the affairs of the Portfolio.
E. Definitions. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to
such term or provision of the 1940 Act and to interpretations thereof, if
any, by the United States courts or, in the absence of any controlling
decision of any such court, by rules, regulations, or orders of the SEC
validly issued pursuant to the Act. As used in this Agreement, the terms
"majority of the outstanding voting securities," "affiliated person,"
"interested person," "assignment," "broker," "investment adviser," "net
assets," "sale," "sell," and "security" shall have the same meaning as such
terms have in the 1940 Act, subject to such exemption as may be granted by
the SEC by any rule, regulation, or order. Where the effect of a
requirement of the federal securities laws reflected in any provision of
this Agreement is made less restrictive by a rule, regulation, or order of
the SEC, whether of special or general application, such provision shall be
deemed to incorporate the effect of such rule, regulation, or order.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized signatories as of the date and year
first above written.
LUTHERAN BROTHERHOOD
Attest:
_________________________________________ By: ___________________________
LB SERIES FUND, INC.
Attest:
_________________________________________ By: ___________________________
T. ROWE PRICE ASSOCIATES, INC.
Attest:
_________________________________________ By: ___________________________
SCHEDULE 1
Rate of Annual
Sub-Advisory Fee as
a Percentage of
Average Daily Net Assets
.30%
