LB SERIES FUND, INC.
PROSPECTUS MAY 1, 1999
The Securities and Exchange Commission has not approved or disapproved
these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
Page
The Portfolios
Investment Objectives, Principal Strategies and Risks,
Volatility and Performance
Opportunity Growth Portfolio 2
Mid Cap Growth Portfolio 3
World Growth Portfolio 4
Growth Portfolio 5
High Yield Portfolio 6
Income Portfolio 7
Money Market Portfolio 8
Management 9
The Separate Accounts and the Contracts 10
Net Asset Value 10
Distributions and Taxes 10
Other Securities and Investment Practices 11
Financial Highlights 12
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OPPORTUNITY GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Opportunity
Growth Portfolio is to achieve long-term growth of capital by investing
primarily in a professionally managed diversified portfolio of smaller
capitalization common stocks.
PRINCIPAL STRATEGIES. The Opportunity Growth Portfolio seeks to
achieve its objective by investing at least 65% of its assets in common
stocks of small-cap growth companies under normal market conditions. T.
Rowe Price Associates, Inc. ("T. Rowe Price"), the Portfolio's sub-adviser,
defines small-cap growth companies as companies whose market capitalization
at the time of purchase is smaller than 80% of those in the Standard &
Poor's 500 Index, which was approximately $2.8 billion as of December 31,
1998. The upper size limit will vary with market fluctuations. The
Opportunity Growth Portfolio may, on occasion, purchase a stock whose market
cap exceeds the range, and it will not automatically sell a stock just
because the company's market cap has grown beyond the upper end of the
range. (Market capitalization of stocks gives you a snapshot view of a
company's size. A stock's "market cap" is calculated by multiplying the
number of the company's shares outstanding by the stock's per-share price.
Companies are categorized into small, medium and large based on their
capitalization, e.g., "small-cap," "mid-cap," or "large-cap.")
T. Rowe Price designed and uses a number of quantitative models to
identify key characteristics of small-cap growth stocks. Based on these
models, T. Rowe Price selects stocks in a "top down" manner so that the
Portfolio reflects characteristics T. Rowe Price considers important, such
as valuations (price/earnings or price/book value ratios, for example) and
projected earnings growth. These often will be companies with shorter
histories and less seasoned operations. The Portfolio will focus primarily
on companies that possess superior earnings prospects. The Portfolio will
be more broadly diversified than the typical small-cap growth fund, and the
top 25 holdings will not compose a large portion of assets. This broad
diversification should minimize the effects of individual security selection
on Portfolio performance.
PRINCIPAL RISKS. The Opportunity Growth Portfolio's principal risks
are the risks generally of stock investing. They include the risk of sudden
and unpredictable drops in the value of the market as a whole and periods of
lackluster performance.
In addition, smaller, less seasoned companies often have greater price
volatility, lower trading volume, and less liquidity than larger, more
established companies. These companies tend to be more dependent on the
success of limited product lines and have less experienced management and
financial resources.
For these and other reasons, the Opportunity Growth Portfolio may
underperform other stock Portfolios (such as large company stock Portfolios)
when stocks of small companies are out of favor.
The success of the Opportunity Growth Portfolio's investment strategy
depends significantly on T. Rowe Price's skill in assessing the potential of
the securities in which the Portfolio invests. Shares of the Opportunity
Growth Portfolio will rise and fall in value and there is a risk that you
could lose money by investing in the Portfolio. The Opportunity Growth
Portfolio cannot be certain that it will achieve its objective.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the Opportunity Growth Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual returns for a one-year period and since inception compared to
a broad-based securities market index. The bar chart and table include the
effects of Portfolio expenses, but not charges or deductions against your
variable contract, and assume that you sold your investment at the end of
the period. Because shares of the Portfolio may be purchased only through
variable life insurance and variable annuity contracts, you should carefully
review the variable contract prospectus for information on applicable
charges and expenses. If the charges and deductions against your variable
contract were included, returns would be lower than those shown. How a
Portfolio has performed in the past is not necessarily an indication of how
it will perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1997 +0.93%
1998 -2.99%
Best Quarter: Q4 '98 +25.57%
Worst Quarter: Q3 '98 -22.05%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
Since
Inception
1-Year (1/18/96)
Opportunity Growth Portfolio -2.99% 5.36%
Russell 2000 -2.55% 18.81%
The Russell 2000 is an unmanaged index which measures the performance
of the 2,000 smallest companies in the Russell 3000 Index (an index of the
3,000 largest companies based on market capitalization).
MID CAP GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Mid Cap Growth
Portfolio is 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.
PRINCIPAL STRATEGIES. The Mid Cap Growth Portfolio tries to increase
the long-term value of your investment by investing in common stocks of
companies with medium market capitalizations. Under normal market
conditions, the Mid Cap Growth Portfolio invests at least 65% of its assets
in companies that fall within the range of companies included in the
Standard & Poor's MidCap 400 Index at the time of the Portfolio's
investment. As of February 15, 1999, the S&P MidCap 400 included companies
with capitalizations between approximately $220 million and $13 billion.
Lutheran Brotherhood, the Portfolio's investment adviser, uses both
fundamental and technical investment research techniques to determine what
stocks to buy and sell. (Fundamental investment analysis generally involves
assessing a company's or security's value based on factors such as sales,
assets, markets, management, products and services, earnings, and financial
structure. Technical analysis generally involves studying trends and
movements in a security's price, trading volume, and other market-related
factors in an attempt to discern patterns.) Lutheran Brotherhood focuses on
companies that have a strong record of earnings growth or show good
prospects for growth in sales and earnings and also considers the trends in
the market as a whole.
PRINCIPAL RISKS. The Mid Cap Growth Portfolio's principal risks are
the risks generally of stock investing. They include the risk of sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster performance.
In addition, medium-sized companies often have greater price
volatility, lower trading volume, and less liquidity than larger, more-
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. For these and other reasons,
the Mid Cap Growth Portfolio may underperform other stock Portfolios (such
as large company stock Portfolios) when stocks of medium-sized companies are
out of favor.
The success of the Portfolio's investment strategy depends
significantly on Lutheran Brotherhood's skill in assessing the potential of
the securities in which the Portfolio invests. Shares of the Mid Cap Growth
Portfolio will rise and fall in value and there is a risk that you could
lose money by investing in the Portfolio. The Mid Cap Growth Portfolio
cannot be certain that it will achieve its objective.
No bar chart or performance table has been included for the Mid Cap
Growth Portfolio. The Mid Cap Growth Portfolio commenced operations on
January 30, 1998.
WORLD GROWTH PORTFOLIO
INVESTMENT OJBECTIVE. The investment objective of the World Growth
Portfolio is 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.
PRINCIPAL STRATEGIES. The World Growth Portfolio seeks to achieve its
objective by investing primarily in common stocks of established non-U.S.
companies. The Portfolio may invest in companies located anywhere in the
world (including the United States).
While stocks may be purchased without regard to a company's market
capitalization, the focus typically will be on large and, to a lesser
extent, medium-sized, companies. In determining the appropriate distribution
of investments among various countries and geographic regions, Rowe Price-
Fleming International, Inc. ("Price-Fleming"), the Portfolio's sub-adviser,
will consider prospects for relative economic growth, 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. Price-Fleming selects
stocks by blending a bottom-up approach, based on its fundamental research
techniques, with an awareness of a country's economic status and outlook.
Price-Fleming weighs a company's prospects for achieving and sustaining
above-average, long-term earnings growth and also considers valuation
factors, such as price/earnings and price/cash flows ratios. Valuation
factors often influence allocations among large-cap, mid-cap, or small-cap
companies.
PRINCIPAL RISKS. The World Growth Portfolio's principal risks are the
risks generally of stock investing. They include the risk of sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster performance.
Stocks of non-U.S. companies present additional risks for U.S.
investors. One of the most important is currency risk. Fluctuations in
currency exchange rates may reduce or eliminate gains or create losses.
Stocks of non-U.S. companies also tend to be less liquid and more volatile
than their U.S. counterparts, in part because foreign markets are generally
smaller, more sensitive to trading activity and more likely to experience
delayed or less frequent settlement of transactions. In many foreign
countries, accounting and regulatory standards are less rigorous, and
economic and political climates are less stable. These risks usually are
greater in emerging markets, such as most countries in Africa, Asia, Latin
America and the Middle East. For these and other reasons, the World Growth
Portfolio may underperform other stock Portfolios (such as U.S. stock
Portfolios) when international stocks are out of favor.
The success of the Portfolio's investment strategy depends
significantly on Price-Fleming's skill in assessing the potential of the
securities in which the Portfolio invests. Shares of the World Growth
Portfolio will rise and fall in value and there is a risk that you could
lose money by investing in the Portfolio. The World Growth Portfolio
cannot be certain that it will achieve its objective.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the World Growth Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual returns for a one-year period and since inception compared to
a broad-based securities market index. The bar chart and table include the
effects of Portfolio expenses, but not charges or deductions against your
variable contract, and assume that you sold your investment at the end of
the period. Because shares of the Portfolio may be purchased only through
variable life insurance and variable annuity contracts, you should carefully
review the variable contract prospectus for information on applicable
charges and expenses. If the charges and deductions against your variable
contract were included, returns would be lower than those shown. How a
Portfolio has performed in the past is not necessarily an indication of how
it will perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1997 2.81%
1998 16.75%
Best Quarter: Q4 '98 +17.87%
Worst Quarter: Q3 '98 -13.14%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
Since
Inception
1-Year (1/18/96)
World Growth Portfolio 16.75% 9.99%
Morgan Stanley EAFE Index 20.33% 14.68%
The Morgan Stanley EAFE (Europe and Australia, Far East Equity) is an
unmanaged index which measures the performance of international companies
screened for liquidity, cross-ownership, and industry representation.
GROWTH PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Growth 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.
PRINCIPAL STRATEGIES. The Growth Portfolio's principal strategy for
achieving its objective is to invest in leading U.S. domestic and multi-
national companies. Lutheran Brotherhood, the Portfolio's investment
adviser, uses fundamental and technical investment research techniques to
identify stocks of companies that it believes have a leading position and
successful business strategy within their industry. The Portfolio invests
primarily in stocks of large and, to a lesser extent, medium-sized,
companies, which Lutheran Brotherhood believes have balance sheet strength
and profitability. Lutheran Brotherhood defines large- and medium-sized
companies according to the market capitalization classifications published
by Lipper, Inc. Based on Lipper's guidelines as of March 31, 1999, large-
sized companies are those with market capitalizations of at least $8.2
billion and medium-sized companies are those with market capitalizations
less than $8.2 billion. Lutheran Brotherhood seeks to invest in companies
with a strong management team that will develop business strategies which
lead to sales and earnings growth and improving relative stock value.
PRINCIPAL RISKS. The Growth Portfolio's principal risks are the risks
generally of stock investing. They include the risk of sudden and
unpredictable drops in the value of the market as a whole and periods of
lackluster performance.
In addition, the prices of larger company stocks may not rise as
quickly or as significantly as prices of stocks of well-managed smaller
companies. For these and other reasons, the Growth Portfolio may
underperform other stock Portfolios (such as small company or medium company
stock Portfolios) when larger company stocks are out of favor.
The success of the Growth Portfolio's investment strategy depends
significantly on Lutheran Brotherhood's skill in assessing the potential of
the securities in which the Portfolio invests. Shares of the Growth
Portfolio will rise and fall in value and there is a risk that you could
lose money by investing in the Portfolio. The Growth Portfolio cannot be
certain that it will achieve its objective.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the Growth Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average
annual returns for one, five, and ten years compared to a broad-based
securities market index. The bar chart and table include the effects of
Portfolio expenses, but not charges or deductions against your variable
contract, and assume that you sold your investment at the end of the period.
Because shares of the Portfolio may be purchased only through variable life
insurance and variable annuity contracts, you should carefully review the
variable contract prospectus for information on applicable charges and
expenses. If the charges and deductions against your variable contract were
included, returns would be lower than those shown. How a Portfolio has
performed in the past is not necessarily an indication of how it will
perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1989 26.57%
1990 -1.97%
1991 41.35%
1992 8.13%
1993 10.10%
1994 -4.66%
1995 37.25%
1996 22.44%
1997 30.18%
1998 28.38%
Best Quarter: Q4 '98 +24.41%
Worst Quarter: Q3 '90 -15.81%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
1-Year 5-Years 10-Years
Growth Portfolio 28.38% 21.76% 18.77%
S&P 500 28.59% 24.03% 19.19%
The S&P 500 is an unmanaged index which measures the performance of 500
widely held common stocks of large-cap companies.
HIGH YIELD PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the High Yield
Portfolio is 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. The Portfolio will also
consider growth of capital as a secondary objective.
PRINCIPAL STRATEGIES. Under normal market conditions, the High Yield
Portfolio invests at least 65% of its total assets in high-yield, high risk
bonds, notes, debentures and other debt obligations or preferred stocks.
These securities are commonly known as "junk bonds." At the time of
purchase these securities are rated within or below the BB major rating
category by Standard & Poor's Corporation or the Ba major rating category by
Moody's Investor Services, Inc. or are unrated but considered to be of
comparable quality by Lutheran Brotherhood, the Portfolio's investment
adviser. Lutheran Brotherhood uses fundamental investment research
techniques to determine what securities to buy and sell. Lutheran
Brotherhood focuses on companies which it believes have or are expected to
achieve adequate cash flows or access to capital markets for the payment of
principal and interest obligations. Lutheran Brotherhood generally
purchases bonds with a 10-year maturity, although it may purchase bonds with
a shorter or longer maturity.
PRINCIPAL RISKS. The principal risks of the High Yield Portfolio
include the tendency of high-yield bond prices to fall when the economy is
sluggish or overall corporate earnings are weak. During those times, it may
become difficult for issuers of high-yield bonds to generate sufficient cash
flow or to obtain adequate access to capital markets to pay principal or
interest. For all bonds, there is a risk that an issuer will default.
High-yield bonds, however, are more susceptible to the risk of default and
their prices usually fall if a number of issuers, or a high profile issuer,
default or go bankrupt or if the market anticipates either of those events.
The price of the High Yield Portfolio shares also may be affected by
weak equity markets, when issuers of high-yield bonds generally find it
difficult to improve their financial condition by replacing debt with
equity. In addition, many high yield securities are traded only among
institutional investors, and it may be difficult for Lutheran Brotherhood
to sell the Portfolio's investments at fair prices when high-yield bonds
fall out of favor with those investors.
Generally, when interest rates rise, bond prices fall, which may cause
the price of shares of the High Yield Portfolio to fall as well. Bonds with
longer durations and maturities tend to be more sensitive to changes in
interest rates than bonds with shorter durations or maturities. (Duration
is a measure of the effective, as opposed to the actual, maturity of a
fixed-income security. Duration considers the bond's cash flows and the
time value of money.) In general, the prices at which lower quality bonds
are traded before they mature may be more affected by the financial health
of the issuer and the economy and less by changes in interest rates.
The success of the High Yield Portfolio's investment strategy depends
significantly on Lutheran Brotherhood's skill in assessing the potential of
the securities in which the Portfolio invests. Shares of the High Yield
Portfolio will rise and fall in value and there is a risk that you could
lose money by investing in the Portfolio. The High Yield Portfolio cannot
be certain that it will achieve its objective.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the High Yield Portfolio by showing changes in the
Portfolio's performance from year to year and by showing how the Portfolio's
average annual returns for one, five, and ten years compared to a broad-
based securities market index. The bar chart and table include the effects
of Portfolio expenses, but not charges or deductions against your variable
contract, and assume that you sold your investment at the end of the period.
Because shares of the Portfolio may be purchased only through variable life
insurance and variable annuity contracts, you should carefully review the
variable contract prospectus for information on applicable charges and
expenses. If the charges and deductions against your variable contract were
included, returns would be lower than those shown. How a Portfolio has
performed in the past is not necessarily an indication of how it will
perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1989 3.13%
1990 -3.72%
1991 35.32%
1992 20.08%
1993 22.91%
1994 -4.38%
1995 19.62%
1996 11.55%
1997 14.10%
1998 -1.50%
Best Quarter: Q1 '91 +12.39%
Worst Quarter: Q3 '98 - 8.86%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
1-Year 5-Years 10-Years
High Yield Portfolio -1.50% 7.47% 11.01%
Lehman High Yield Index 1.87% 8.57% 10.54%
The Lehman High Yield Index is an unmanaged index which measures the
performance of fixed-rate non-investment grade bonds.
INCOME PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Income 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.
PRINCIPAL STRATEGIES. The Income Portfolio invests primarily in
investment-grade corporate bonds, government bonds, and mortgage-backed
securities. Under normal conditions, at least 65% of the Portfolio's assets
will be invested in debt securities or preferred stock at least in the "Baa"
major rating category by Moody's or at least in the "BBB" major rating
category by S&P or unrated securities considered to be of comparable quality
by Lutheran Brotherhood, the Portfolio's investment adviser. The Portfolio
may also invest in high-yield, high risk bonds, notes, debentures and other
debt obligations or preferred stock commonly known as "junk bonds."
Lutheran Brotherhood uses fundamental investment research techniques to
determine what debt obligations to buy and sell. Lutheran Brotherhood
focuses on companies which it believes are financially sound and have strong
cash flow, asset values, and interest or dividend earnings.
PRINCIPAL RISKS. The Income Portfolio's principal risks are those of
debt investing, including increases in interest rates and loss of principal.
Generally, when interest rates rise, bond prices fall, which may cause the
price of shares of the Income Portfolio to fall as well. Bond prices fall
because bonds issued after rates rise will offer higher yields, making older
bonds with lower rates less attractive. To raise the effective yield on
older bonds, holders of the older bonds must discount their prices.
(Effective yield on a bond is determined by the purchase price, the stated
rate of interest on the bond, the time between interest payments, and the
time until maturity.) Bonds with longer durations and maturities tend to be
more sensitive to changes in interest rates than bonds with shorter
durations or maturities.
For all bonds there is a risk that an issuer will default. High-yield
bonds generally are more susceptible to risk of default than higher rated
bonds, and to the Income Portfolio, this risk increases as Lutheran
Brotherhood increases the percentage of the Portfolio's investments in high-
yield bonds.
The success of the Income Portfolio's investment strategy depends
significantly on Lutheran Brotherhood's skill in assessing the potential of
the securities in which the Portfolio invests. Shares of the Income
Portfolio will rise and fall in value and there is a risk that you could
lose money by investing in the Portfolio. The Income Portfolio cannot be
certain that it will achieve its goal.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the Income Portfolio by showing changes in the Portfolio's
performance from year to year and by showing how the Portfolio's average
annual returns for one, five, and ten years compared to a broad-based
securities market index. The bar chart and table include the effects of
Portfolio expenses, but not charges or deductions against your variable
contract, and assume that you sold your investment at the end of the period.
Because shares of the Portfolio may be purchased only through variable life
insurance and variable annuity contracts, you should carefully review the
variable contract prospectus for information on applicable charges and
expenses. If the charges and deductions against your variable contract were
included, returns would be lower than those shown. How a Portfolio has
performed in the past is not necessarily an indication of how it will
perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1989 12.22%
1990 6.91%
1991 19.76%
1992 9.23%
1993 11.66%
1994 -4.68%
1995 19.36%
1996 3.21%
1997 8.75%
1998 9.37%
Best Quarter: Q2 '89 +7.44%
Worst Quarter: Q1 '94 -3.99%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
1-Year 5-Years 10-Years
Income Portfolio 9.37% 6.92% 9.36%
Lehman Aggregate Bond Index 8.69% 7.27% 9.26%
The Lehman Aggregate Bond Index is an unmanaged index which measures
the performance of U.S. investment grade bonds.
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE. The investment objective of the Money Market
Portfolio is 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.
PRINCIPAL STRATEGIES. The Money Market Portfolio seeks to achieve its
objective by investing in high quality, short-term money market instruments
that mature in 397 days or less, including U.S. dollar-denominated
commercial paper, bank instruments such as certificates of deposit, U.S.
government discount notes, and U.S. Treasury Bills. Lutheran Brotherhood,
the Portfolio's investment adviser, uses fundamental investment research
techniques to determine what money market instruments to buy and sell.
Under normal market conditions, the Portfolio invests primarily in prime
commercial paper. Lutheran Brotherhood looks for prime commercial paper
issued by corporations which it believes are financially sound, have strong
cash flows, and solid capital levels, are leaders in their industry and have
experienced management.
Lutheran Brotherhood manages the Money Market Portfolio subject to
strict rules established by the Securities and Exchange Commission that are
designed so that the Money Market Portfolio may maintain a stable $1.00
share price. Those guidelines generally require the Money Market Portfolio
to, among other things, invest only in high quality securities that
generally are diversified with respect to issuers, are denominated in U.S.
dollars and have short remaining maturities. In addition, the guidelines
require the Money Market Portfolio to maintain a dollar-weighted average
portfolio maturity of not more than 90 days.
Under the guidelines, at least 95% of the Money Market Portfolio's
total assets must be invested in "first tier" securities. First-tier
securities must be rated by at least two rating agencies in their highest
short-term major rating categories (or one, if only one rating agency has
rated the security, or if they have not received a short-term rating,
determined by Lutheran Brotherhood to be of comparable quality). First-tier
securities generally include U.S. Government securities, such as U.S.
Treasury bills and securities issued or sponsored by U.S. government
agencies. They also may include corporate debt securities, finance company
commercial paper and certain obligations of U.S. and foreign banks.
The remainder of the Money Market Portfolio's assets will be invested
in securities rated within the two highest rating categories by any two
rating agencies (or one, if only one rating agency has rated the security
or, if unrated, determined by Lutheran Brotherhood to be of comparable
quality), or kept in cash.
PRINCIPAL RISKS. The Money Market Portfolio's principal risks are
those that could affect the yield of its shares. They include those factors
that could cause short-term interest rates to decline, such as a weak
economy, strong equity markets and changes by the Federal Reserve in its
monetary policies. The success of the Portfolio's investment strategy
depends significantly on Lutheran Brotherhood's skill in assessing the
potential of the securities in which the Portfolio invests.
An investment in the Money Market Portfolio is not a bank deposit and
is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency. Although the Portfolio seeks to preserve the
value of your investment at $1.00 per share, it is possible to lose money by
investing in the Portfolio.
VOLATILITY AND PERFORMANCE
The bar chart and table shown below provide an indication of the risks
of investing in the Money Market Portfolio by showing changes in the
Portfolio's performance from year to year and by showing the Portfolio's
average annual returns for one, five, and ten years. The bar chart and table
include the effects of Portfolio expenses, but not charges or deductions
against your variable contract, and assume that you sold your investment at
the end of the period. Because shares of the Portfolio may be purchased only
through variable life insurance and variable annuity contracts, you should
carefully review the variable contract prospectus for information on
applicable charges and expenses. If the charges and deductions against your
variable contract were included, returns would be lower than those shown.
How a Portfolio has performed in the past is not necessarily an indication
of how it will perform in the future.
[GRAPHIC BAR CHART OMITTED: YEAR-BY-YEAR TOTAL RETURN]
Annual
Year Return
1989 9.07%
1990 8.00%
1991 5.89%
1992 3.53%
1993 2.87%
1994 4.00%
1995 5.71%
1996 5.20%
1997 5.43%
1998 5.32%
Best Quarter: Q2 '89 +2.34%
Worst Quarter: Q2 '93 +0.69%
Average Annual Total Returns
(periods ending
December 31, 1998)
-----------------------------
1-Year 5-Years 10-Years
Money Market Portfolio 5.32% 5.13% 5.48%
MANAGEMENT
Lutheran Brotherhood, 625 Fourth Avenue South, Minneapolis, Minnesota
55415, serves as investment adviser for each of the Portfolios. Lutheran
Brotherhood and its wholly-owned subsidiary, Lutheran Brotherhood Research
Corp., have been in the investment advisory business since 1970 and managed
over $23.4 billion in assets as of December 31, 1998, including $11.4
billion in mutual fund assets. Lutheran Brotherhood provides investment
research and supervision of the Portfolios' investments. The following
individuals are responsible for the day-to-day management of the Portfolios.
MID CAP GROWTH PORTFOLIO
Brian L. Thorkelson, Portfolio Manager of Lutheran Brotherhood, has
been the portfolio manager of the Mid Cap Growth Portfolio since its
inception in 1998. Mr. Thorkelson has been with Lutheran Brotherhood since
1987, and previously served as a securities analyst.
GROWTH PORTFOLIO
Scott A. Vergin, Portfolio Manager of Lutheran Brotherhood, has been
the portfolio manager of the Growth Portfolio since 1994. Mr. Vergin has
been with Lutheran Brotherhood since 1984.
HIGH YIELD PORTFOLIO
Thomas N. Haag, Assistant Vice President of Lutheran Brotherhood, has
been the portfolio manager of the High Yield Portfolio since 1992. Mr. Haag
has been with Lutheran Brotherhood since 1986.
INCOME PORTFOLIO
Charles E. Heeren, Vice President of Lutheran Brotherhood, has been the
portfolio manager of the Income Portfolio since 1987. Mr. Heeren has been
with Lutheran Brotherhood since 1976.
MONEY MARKET PORTFOLIO
Gail R. Onan, Portfolio Manager of Lutheran Brotherhood, has been the
portfolio manager of the Money Market Portfolio since 1994. Ms. Onan
has been with Lutheran Brotherhood since 1986.
OPPORTUNITY GROWTH PORTFOLIO
Lutheran Brotherhood engaged T. Rowe Price as investment sub-adviser
for the Opportunity Growth Portfolio effective May 1, 1998. T. Rowe Price
was founded in 1937 and has its principal office at 100 East Pratt Street,
Baltimore, Maryland 21202. As of December 31, 1998, T. Rowe Price and its
affiliates managed approximately $148 billion. Richard T. Whitney, Managing
Director of T. Rowe Price, is primarily responsible for day-to-day
management of the Opportunity Growth Portfolio and for developing and
executing the Portfolio's investment program.
WORLD GROWTH PORTFOLIO
Lutheran Brotherhood has engaged Price-Fleming, 100 East Pratt Street,
Baltimore, Maryland 21202, as investment sub-adviser for the World Growth
Portfolio. Price-Fleming is one of the world's largest international mutual
fund asset managers with the U.S. equivalent of over $32 billion under
management as of December 31, 1998 in its offices in Baltimore, London,
Tokyo, Singapore, Paris, Hong Kong, and Buenos Aires. Price-Fleming has an
investment advisory group that has day-to-day responsibility for managing
the Portfolio and developing and executing the Portfolio's investment
program.
Lutheran Brotherhood, T. Rowe Price, and Price-Fleming personnel may
invest in securities for their own account pursuant to a code of ethics that
establishes procedures for personal investing and restricts certain
transactions.
During the fiscal year ended December 31, 1998, Lutheran Brotherhood
received the following advisory fees, expressed as a percentage of the
Portfolio's net assets:
Opportunity Growth Portfolio 0.40%
Mid Cap Growth Portfolio 0.40%
World Growth Portfolio 0.85%
Growth Portfolio 0.40%
High Yield Portfolio 0.40%
Income Portfolio 0.40%
Money Market Portfolio 0.40%
THE SEPARATE ACCOUNTS AND THE CONTRACTS
Shares in the LB Series Fund, Inc. ("the Fund") are currently sold,
without sales charges, only to separate accounts of Lutheran Brotherhood and
Lutheran Brotherhood Variable Insurance Products Company ("LBVIP"). These
separate accounts fund benefits of variable life insurance and variable
annuity contracts. A Prospectus for your variable contract accompanies this
Prospectus and describes how you may allocate the premiums and the assets
relating to your variable contract among one or more of the seven
subaccounts which correspond to the Portfolios of the Fund.
The separate accounts of Lutheran Brotherhood and LBVIP place a single
order to buy or sell shares of each Portfolio each business day. The
separate accounts calculate the amount of the order based on the aggregate
instructions from owners of the variable annuity contracts and variable life
insurance contracts. Instructions received from contract owners before the
close of the New York Stock Exchange ("NYSE")on a given day result in share
purchases and redemptions at the net asset value ("NAV") calculated as of
the close of the NYSE that day.
NET ASSET VALUE
Each Portfolio determines its NAV by adding the value of Portfolio
assets, subtracting the Portfolio's liabilities, and dividing the result by
the number of outstanding shares. The Money Market Portfolio seeks to
maintain a stable $1.00 NAV pursuant to procedures established by the Board
of Directors for the Fund in connection with the amortized cost method of
portfolio valuation. The NAV for the other Portfolios varies with the value
of their investments. The other Portfolios value their securities using
market quotations, other than short-term debt securities maturing in less
than 60 days, which are valued using amortized costs, and securities for
which market quotations are not readily available, which are valued at fair
value.
The Portfolios determine their NAV on each day the NYSE is open for
business, or any other day as required under the rules of the Securities and
Exchange Commission. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The
calculation is made as of the close of regular trading of the NYSE
(currently 4:00 p.m. Eastern time) after the Portfolio has declared any
applicable dividends. Because foreign securities markets are open on
different days from U.S. markets, there may be instances when the value of a
Portfolio's investment in foreign securities changes on days when you are
not able to change the allocation in your variable contract.
DISTRIBUTIONS AND TAXES
Dividends and capital gains distributions of each Portfolio will be
reinvested in additional full and fractional shares of that Portfolio.
Dividends. Dividends are declared and paid as follows:
- declared daily and paid monthly Money Market Portfolio
High Yield Portfolio
Income Portfolio
- declared and paid quarterly Growth Portfolio
- declared and paid annually Opportunity Growth Portfolio
Mid Cap Growth Portfolio
World Growth Portfolio
Income dividends are derived from investment income, including
dividends, interest, and certain foreign currency gains received by a
Portfolio.
Capital Gains. Capital gains distributions, if any, will usually be
declared in February.
Contract owners should review the documents pertaining to their
variable annuity and variable life insurance contracts for information
regarding the personal tax consequences purchasing such a contract.
Under existing tax law, dividends or capital gains distributions from a
Portfolio are not currently taxable to holders of variable annuity and
variable life insurance contracts when left to accumulate within a variable
contract. Depending on the variable contract, withdrawals from the contract
may be subject to ordinary income tax and, in addition, to a 10% penalty tax
on withdrawals before age 59.
OTHER SECURITIES AND INVESTMENT PRACTICES
The principal investment strategies and risk factors of each Portfolio
are outlined beginning on page 2. The Portfolios may also invest in other
securities and engage in other practices. Below are brief discussions of
some of these securities, other practices in which certain of the Portfolios
may engage, and their associated risks.
REPURCHASE AGREEMENTS. Each of the Portfolios may buy securities with
the understanding that the seller will buy them back with interest at a
later date. If the seller is unable to honor its commitment to repurchase
the securities, the Portfolio could lose money.
WHEN-ISSUED SECURITIES. Each Portfolio may invest in securities prior
to their date of issue. These securities could fall in value by the time
they are actually issued, which may be any time from a few days to over a
year.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The High Yield Portfolio,
Income Portfolio, and Money Market Portfolio may invest in mortgage-backed
and asset-backed securities. Mortgage-backed securities are securities that
are backed by pools of mortgages and which pay income based on the payments
of principal and income they receive from the underlying mortgages. Asset-
backed securities are similar but are backed by other assets, such as pools
of consumer loans. Both are sensitive to interest rate changes as well as
to changes in the redemption patterns of the underlying securities. If the
principal payment on the underlying asset is repaid faster or slower than
the holder of the mortgage-backed or asset-backed security anticipates, the
price of the security may fall, especially if the holder must reinvest the
repaid principal at lower rates or must continue to hold the securities when
interest rates rise.
ZERO COUPONS. Each of the Portfolios may invest in zero coupon
securities. A zero coupon security is a debt security that is purchased and
traded at discount to its face value because it pays no interest for some or
all of its life. Interest, however, is reported as income to the Portfolio
that has purchased the security and the Portfolio is required to distribute
to shareholders an amount equal to the amount reported.
FOREIGN SECURITIES. Each of the Portfolios may invest in foreign
securities. Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic
risks, lack of reliable information and fluctuations in currency exchange
rates. These risks are usually higher in less developed countries. Each of
these Portfolios except the Money Market Portfolio may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell than
comparable U.S. securities because the markets for foreign securities are
less efficient. Even where a foreign security increases in price in its
local currency, the appreciation may be diluted by the negative effect of
exchange rates when the security's value is converted to U.S. dollars.
Foreign withholding taxes also may apply and errors and delays may occur in
the settlement process for foreign securities.
RESTRICTED AND ILLIQUID SECURITIES. Each of the Portfolios may invest
in restricted or illiquid securities. Any securities that are thinly traded
or whose resale is restricted can be difficult to sell at a desired time and
price. Some of these securities are new and complex, and trade only among
institutions. The markets for these securities are still developing and may
not function as efficiently as established markets. Owning a large
percentage of restricted or illiquid securities could hamper a Portfolio's
ability to raise cash to meet redemptions. Also, because there may not be
an established market price for these securities, the Portfolio may have to
estimate their value, which means that their valuation (and, to a much
smaller extent, the valuation of the Portfolio) may have a subjective
element.
SECURIITES LENDING. Each of the Portfolios except the Money Market
Portfolio may seek additional income by lending securities to qualified
institutions. By reinvesting any cash collateral it receives in these
transactions, a Portfolio could realize additional gains or losses. If the
borrower fails to return the securities and the invested collateral has
declined in value, the Portfolio could lose money.
DERIVATIVES. Each of the Portfolios except the Money Market Portfolio
may invest in derivatives. Derivatives, a category that includes options
and futures, are financial instruments whose value derives from another
security, an index or a currency. Each Portfolio may use derivatives for
hedging (attempting to offset a potential loss in one position by
establishing an interest in an opposite position). This includes the use of
currency-based derivatives for hedging its positions in foreign securities.
Each Portfolio may also use derivatives for speculation (investing for
potential income or capital gain).
While hedging can guard against potential risks, it adds to the
Portfolio's expenses and can eliminate some opportunities for gains. There
is also a risk that a derivative intended as a hedge may not perform as
expected.
The main risk with derivatives is that some types can amplify a gain or
loss, potentially earning or losing substantially more money than the actual
cost of the derivative.
With some derivatives, whether used for hedging or speculation, there
is also the risk that the counterpart may fail to honor its contract terms,
causing a loss for the Portfolio. In addition, suitable derivative
investments for hedging or speculative purposes may not be available.
HIGH-YIELD BONDS. The Opportunity Growth Portfolio, Mid Cap Growth
Portfolio, World Growth Portfolio, Growth Portfolio, High Yield Portfolio
and Income Portfolio may invest in high-yield bonds. High-yield bonds are
debt securities rated below BBB by S&P or Baa by Moody's. To the extent
that a Portfolio invests in high-yield bonds, it takes on certain risks:
o The risk of a bond's issuer defaulting on principal or interest
payments is greater than on higher quality bonds.
o Issuers of high-yield bonds are less secure financially and are more
likely to be hurt by interest rate increases and declines in the
health of the issuer or the economy.
SHORT-TERM TRADING. The investment strategy for the Opportunity Growth
Portfolio, Mid Cap Growth Portfolio, World Growth Portfolio, Growth
Portfolio, High Yield Portfolio, and Income Portfolio at times may include
short-term trading. While a Portfolio ordinarily does not trade securities
for short-term profits, it will sell any security at any time it believes
best, which may result in short-term trading. Short-term trading can
increase a Portfolio's transaction costs.
INTERNATIONAL EXPOSURE. Many U.S. companies in which the Opportunity
Growth Portfolio, Mid Cap Growth Portfolio, World Growth Portfolio, Growth
Portfolio, High Yield Portfolio, and Income Portfolio may invest generate
significant revenues and earnings from abroad. As a result, these companies
and the prices of their securities may be affected by weaknesses in global
and regional economies and the relative value of foreign currencies to the
U.S. dollar. These factors, taken as a whole, could adversely affect the
price of Portfolio shares.
BONDS. The value of any bonds held by a Portfolio is likely to decline
when interest rates rise; this risk is greater for bonds with longer
maturities. A less significant risk is that a bond issuer could default on
principal or interest payments, possibly causing a loss for the Portfolio.
COMPUTER RISKS. Lutheran Brotherhood does not currently anticipate
that computer problems related to the year 2000 or to the conversion of
various European currencies into a single currency, the Euro, will have a
material effect on any Portfolio. However, there can be no assurances in
this area, including the possibility that year 2000 computer problems could
negatively affect communications systems, the investment markets or the
economy in general or that Euro conversion-related computer problems could
negatively affect the European investment markets or the global economy.
SECURITIES RATINGS. When fixed-income securities are rated by one or
more independent rating agencies, a Portfolio uses these ratings to
determine bond quality. Investment grade bonds are those that are rated
within or above the BBB major rating category by S&P or the Baa major rating
category by Moody's, or unrated but considered of equivalent quality by the
Portfolio's adviser. High-yield bonds are below investment grade bonds in
terms of quality.
In cases where a bond is rated in conflicting categories by different
rating agencies, a Portfolio (other than the Money Market Portfolio) may
choose to follow the higher rating. If a bond is unrated, the Portfolio may
assign it to a given category based on its own credit research. If a rating
agency downgrades a security, the Portfolio will determine whether to hold
or sell the security, depending on all of the facts and circumstances at
that time.
DEFENSIVE INVESTING. During unusual market conditions, each Portfolio
(other than the Money Market Portfolio) may place up to 100% of its total
assets in cash or quality short-term debt securities. To the extent that
the Portfolio does this, it is not pursuing its investment objective.
FINANCIAL HIGHLIGHTS
The financial highlights tables for each of the Portfolios are intended
to help you understand the Portfolios' financial performance for the past 5
years or, if shorter, the period of the Portfolios' operations. The total
returns in the tables represent the rate that an investor would have earned
or lost on an investment in a Portfolio (assuming reinvestment of all
dividends and distributions). The returns do not reflect any charges that
would normally occur at the separate account level. This information has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Portfolios' financial statements, are included in the
Annual Report for Variable Products for the fiscal year ended December 31,
1998, which is available upon request.
<PAGE>
<TABLE>
<CAPTION>
Opportunity Growth Portfolio
- ---------------------------------------------------------------------------------------------------------
For the period from
Year Ended Year Ended 1/18/96 (effective
12/31/98 12/31/97 date) to 12/31/96
-----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $11.55 $11.50 $10.00
------ ------ ------
Investment Operations -
Net investment income 0.03 0.06 0.02
Net realized and unrealized gain
on investments (a) (0.37) 0.05 1.90
------ ------ ------
Total from investment operations (0.34) 0.11 1.92
------ ------ ------
Less Distributions from:
Net investment income (0.03) (0.06) (0.02)
Net realized gain on investments (0.12) -- (0.40)
------ ------ ------
Total Distributions (0.15) (0.06) (0.42)
------ ------ ------
Net asset value, end of period 11.06 $11.55 $11.50
====== ====== ======
Total investment return at
net asset value (%) (2.99%) 0.93% 19.17%
Net assets, end of period (in millions) $372.2 $391.5 $246.6
Ratio of expenses to average
net assets (%) 0.40% 0.40% 0.40%(b)
Ratio of net investment income to
average net assets (%) 0.30% 0.65% 0.27%(b)
Portfolio turnover rate (%) 134% 147% 155%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
(b) Computed on an annualized basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Mid Cap Growth Portfolio
- -----------------------------------------------------------------------
For the period from
January 30, 1998
(effective date) to
December 31, 1998
------------------
<S> <C>
Net asset value, beginning of period $10.00
------
Investment Operations -
Net investment income 0.04
Net realized and unrealized gain
on investments (a) 1.13
------
Total from investment operations 1.17
------
Less Distribution from:
Dividends from net investment income (0.04)
------
Net asset value, end of period $11.13
======
Total investment return at
net asset value 11.62%
Net assets, end of period (in millions) $95.7
Ratio of expenses to average
net assets 0.40%(b)
Ratio of net investment income to
average net assets 0.64%(b)
Portfolio turnover rate 125%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
(b) Computed on an annualized basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
World Growth Portfolio
- ---------------------------------------------------------------------------------------------------------
For the period from
Year Ended Year Ended 1/18/96 (effective
12/31/98 12/31/97 date) to 12/31/96
-----------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $11.12 $10.95 $10.00
------ ------ ------
Investment Operations -
Net investment income 0.12 0.10 0.08
Net realized and unrealized gain
on investments (a) 1.74 0.21 0.96
------ ------ ------
Total from investment operations 1.86 0.31 1.04
------ ------ ------
Less Distributions from:
Net investment income (0.21) (0.13) (0.09)
Net realized gain on investments (0.10) (0.01) --
------ ------ ------
Total Distributions (0.31) (0.14) (0.09)
------ ------ ------
Net asset value, end of period 12.67 $11.12 $10.95
====== ====== ======
Total investment return at
net asset value (%) 16.75% 2.81% 10.41%
Net assets, end of period (in millions) $369.7 $287.2 $174.1
Ratio of expenses to average
net assets (%) 0.85% 0.85% 0.85%(b)
Ratio of net investment income to
average net assets (%) 1.04$ 1.08% 1.34%(b)
Portfolio turnover rate (%) 19% 19% 9%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
(b) Computed on an annualized basis.
</TABLE>
<PAGE>
<TABLE>
<CAPTION
Growth Portfolio
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $21.58 $19.32 $18.27 $13.51 $14.76
------ ------ ------ ------ ------
Investment Operations -
Net investment income 0.19 0.21 0.24 0.24 0.20
Net realized and unrealized gain
on investments (a) 5.28 4.97 3.43 4.76 (0.87)
------ ------ ------ ----- -----
Total from investment operations 5.47 5.18 3.67 5.00 (0.67)
------ ------ ------ ----- -----
Less Distributions from:
Net investment income (0.19) (0.21) (0.24) (0.24) (0.20)
Net realized gain on investments (3.35) (2.71) (2.38) -- (0.38)
------ ------ ------ ----- -----
Total Distributions (3.54) (2.92) (2.62) (0.24) (0.58)
------ ------ ------ ----- -----
Net asset value, end of period $23.51 $21.58 $19.32 $18.27 $13.51
====== ====== ====== ====== ======
Total investment return at
net asset value (%) 28.38% 30.18% 22.44% 37.25% (4.66%)
Net assets, end of period (in millions) $3,320.0 $2,426.1 $1,658.6 $1,173.1 $721.8
Ratio of expenses to average
net assets (%) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets (%) 0.94% 1.11% 1.41% 1.53% 1.52%
Portfolio turnover rate (%) 152% 193% 223% 184% 135%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
High Yield Portfolio
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.44 $10.06 $ 9.94 $ 9.18 $10.76
------ ------ ------ ------ ------
Investment Operations -
Net investment income 0.99 0.98 0.98 0.96 0.97
Net realized and unrealized gain
on investments (a) (1.12) 0.37 0.12 0.76 (1.40)
------ ------ ------ ----- -----
Total from investment operations (0.13) 1.35 1.10 1.72 (0.43)
------ ------ ------ ----- -----
Less Distributions from:
Net investment income (1.00) (0.97) (0.98) (0.96) (0.97)
Net realized gain on investments (0.15) -- -- -- (0.18)
------ ------ ------ ----- -----
Total Distributions (1.15) (0.97) (0.98) (0.96) (1.15)
------ ------ ------ ----- -----
Net asset value, end of period $9.16 $10.44 $10.06 $ 9.94 $ 9.18
====== ====== ====== ====== ======
Total investment return at
net asset value (%) (1.50%) 14.10% 11.55% 19.62% (4.38%)
Net assets, end of period (in millions) $1,427.3 $1,344.6 $1,026.7 $792.5 $595.6
Ratio of expenses to average
net assets (%) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets (%) 10.04% 9.58% 9.83% 9.94% 9.75%
Portfolio turnover rate (%) 71% 105% 107% 67% 44%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Income Portfolio
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.92 $ 9.75 $10.08 $ 9.04 $10.36
------ ------ ------ ------ ------
Investment Operations -
Net investment income 0.61 0.65 0.63 0.65 0.64
Net realized and unrealized gain
on investments (a) 0.29 0.17 (0.33) 1.04 (1.11)
------ ------ ------ ----- -----
Total from investment operations 0.90 0.82 0.30 1.69 (0.47)
------ ------ ------ ----- -----
Less Distributions from:
Net investment income (0.61) (0.65) (0.63) (0.65) (0.64)
Net realized gain on investments -- -- -- -- (0.21)
------ ------ ------ ----- -----
Total Distributions (0.61) (0.65) (0.63) (0.65) (0.85)
------ ------ ------ ----- -----
Net asset value, end of period $10.21 $ 9.92 $ 9.75 $10.08 $ 9.04
====== ====== ====== ====== ======
Total investment return at
net asset value (%) 9.37% 8.75% 3.21% 19.36% (4.68%)
Net assets, end of period (in millions) $1,074.3 $880.4 $801.2 $762.1 $608.2
Ratio of expenses to average
net assets (%) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets (%) 6.06% 6.68% 6.54% 6.81% 6.78%
Portfolio turnover rate (%) 86% 117% 150% 132% 139%
- ----------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Money Market Portfolio
- ----------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended Year Ended
12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
Investment Operations -
Net investment income 0.05 0.05 0.05 0.06 0.04
------ ------ ------ ----- -----
Less Distributions from:
Net investment income (0.05) (0.05) (0.05) (0.06) (0.04)
------ ------ ------ ----- -----
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total investment return at
net asset value (%) 5.32% 5.43% 5.20% 5.71% 4.00%
Net assets, end of period (in millions) $193.8 $121.2 $103.9 $66.1 $41.9
Ratio of expenses to average
net assets (%) 0.40% 0.40% 0.40% 0.40% 0.40%
Ratio of net investment income to
average net assets (%) 5.16% 5.27% 5.07% 5.55% 4.03%
- ----------------------------------------
(a) The amount shown is a balancing figure and may not agree with the change in aggregate gains and losses of
portfolio securities as a result of the timing of sales and redemption of fund shares.
</TABLE>
<PAGE>
[Back cover page]
The Statement of Additional Information which is incorporated by
reference into this Prospectus contains additional information about the
Fund and its Portfolios. Additional information about the Portfolios'
investments is available in the Fund's annual and semi-annual reports for
variable products. In the Fund's annual report, you will find a discussion
of the market conditions and investment strategies that significantly
affected the performance of each of the Portfolios during their last fiscal
year. You may request a free copy of the Statement of Additional
Information, the annual report, or the semi-annual report, or you may make
additional requests or inquiries by calling 1-800-990-6290. You may also
review and copy information about the Portfolios (including the Statement of
Additional Information) at the Public Reference Room of the Securities and
Exchange Commission in Washington, DC. You may get more information about
the Public Reference Room by calling 1-800-SEC-0330. You may also get
information about the Portfolios at the SEC web site (www.sec.gov) or by
mail, upon payment of a duplicating fee, by writing the Public Reference
Section of the SEC, Washington, DC 20549-6009.
1940 Act File No. 811-4603
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
LB SERIES FUND, INC.
May 1, 1999
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 May 1, 1999. Much of the information contained in this
Statement of Additional Information expands upon subjects discussed in the
Prospectus. To receive a copy of the Prospectus for the Fund, write to LB
Series Fund, Inc., 625 Fourth Avenue South, Minneapolis, Minnesota 55415 or
call toll-free (800) 328-4552 for Automated Investor Access Line or (800)
990-6290 to speak with an Investor Representative.
TABLE OF CONTENTS
PAGE
History of the Fund................................................... 2
Investment Policies and Restrictions.................................. 2
Fund Management....................................................... 16
Investment Advisory Services.......................................... 23
Brokerage Transactions................................................ 26
Code of Ethics........................................................ 28
Capital Stock......................................................... 29
Net Asset Value....................................................... 30
Tax Status............................................................ 33
Calculation of Performance Data....................................... 34
Description of Debt Ratings........................................... 39
Report of Independent Public Accountants and Financial Statements..... 42
<PAGE>
HISTORY OF THE FUND
The Fund is a diversified open-end management investment company, 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 Opportunity Growth Portfolio, the Mid Cap
Growth Portfolio, the World Growth Portfolio, the Growth Portfolio, the High
Yield Portfolio, the Income Portfolio, and the Money Market 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 POLICIES AND RESTRICTIONS
ADDITIONAL INVESTMENT PRACTICES
In addition to those practices stated in the Prospectus, various of the
Portfolios may purchase the following securities or may engage in the
following transactions.
OTHER SECURITIES
The Opportunity Growth Portfolio, the Mid Cap Growth Portfolio, the
World Growth Portfolio, and the Growth Portfolio may each invest in other
types of securities, including bonds, preferred stocks, convertible bonds,
convertible preferred stocks, warrants, American Depository Receipts
(ADR's), and other debt or equity securities. In addition, each of these
Portfolios may invest in U.S. Government securities or cash, and the World
Growth Portfolio may also invest in European Depository Receipts (EDR's) and
the securities of foreign investment trusts and or trusts. At no time will
the Opportunity Growth Portfolio, Mid Cap Growth Portfolio, or World Growth
Portfolio invest more than 5% of its net assets in debt obligations. In
calculating this per cent limitation, cash and U.S. Government securities
are excluded.
The Opportunity Growth Portfolio, the Mid Cap Growth Portfolio, the
World Growth Portfolio, and the Growth Portfolio will not use any minimum
level of credit quality. Debt obligations may be rated less than investment
grade, which is defined as having a quality rating below "Baa", as rated by
Moody's Investors Service, Inc. ("Moody's"), or below "BBB", as rated by
Standard & Poor's Corporation ("S&P"). For a description of Moody's and
S&P's ratings, see "Description of Debt Ratings". Securities rated below
investment grade (sometimes referred to as "high yield" or "junk bonds") are
considered to be speculative and involve certain risks, including a higher
risk of default and greater sensitivity to interest rate and economic
changes.
The High Yield Portfolio and the Income Portfolio may also invest in
common stocks, warrants to purchase stocks, bonds or preferred stocks
convertible into common stock, and other equity securities. No more than 20%
of the High Yield Portfolio's assets will be invested in equity securities.
No more than 10% of the Income Portfolio's assets will be invested in common
stocks and no more than 25% of its assets will be invested in high yield
securities, common stocks, and bonds and preferred stocks that are
convertible into common stock.
BANK INSTRUMENTS
The Money Market Portfolio may invest in bank instruments including,
but not limited to, certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are generally short-term (i.e., less than
one year), interest-bearing negotiable certificates issued by commercial
banks or savings and loan associations against funds deposited in the
issuing institution. A banker's acceptance is a time draft drawn on a
commercial bank by a borrower, usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage
of goods). A banker's acceptance may be obtained from a domestic or foreign
bank including a U.S. branch or agency of a foreign bank. The borrower is
liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances
have maturities of six months or less and are traded in secondary markets
prior to maturity. Time deposits are non-negotiable deposits for a fixed
period of time at a stated interest rate.
U.S. branches of foreign banks are offices of foreign banks and are not
separately incorporated entities. They are chartered and regulated either
federally or under state law. U.S. federal branches of foreign banks are
chartered and regulated by the Comptroller of the Currency, while state
branches and agencies are chartered and regulated by authorities of the
respective state or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however,
not all such branches elect FDIC insurance. U.S. branches of foreign banks
can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Investing in foreign branches of U.S. banks and U.S. branches of
foreign banks may involve risks. These risks may include future unfavorable
political and economic developments, possible withholding or confiscatory
taxes, seizure of foreign deposits, currency controls, interest limitations
and other governmental restrictions that might affect payment of principal
or interest, and possible difficulties pursuing or enforcing claims against
banks located outside the U.S. Additionally, foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or other regulatory requirements and practices comparable to U.S.
issuers, and there may be less public information available about foreign
banks and their branches and agencies.
REPURCHASE AGREEMENTS
Each of the Portfolios may engage in repurchase agreement transactions
in pursuit of its investment objective. A repurchase agreement consists of a
purchase and a simultaneous agreement to resell for later delivery at an
agreed upon price and rate of interest U.S. Government obligations. The
Portfolio or its custodian will take possession of the obligations subject
to a repurchase agreement. If the original seller of a security subject to a
repurchase agreement fails to repurchase the security at the agreed upon
time, the Portfolio could incur a loss due to a drop in the market value of
the security during the time it takes the Portfolio to either sell the
security or take action to enforce the original seller's agreement to
repurchase the security. Also, if a defaulting original seller filed for
bankruptcy or became insolvent, disposition of such security might be
delayed by pending court action. The Portfolio may only enter into
repurchase agreements with banks and other recognized financial institutions
such as broker/dealers which are found by Lutheran Brotherhood (or a sub-
adviser) to be creditworthy.
RESTRICTED SECURITIES
The Portfolios may buy or sell restricted securities, including
securities that meet the requirements of Rule 144A under the Securities Act
of 1933 ("Rule 144A Securities"). Securities may be resold pursuant to Rule
144A under certain circumstances only to qualified institutional buyers as
defined in the rule, and the markets and trading practices for such
securities are relatively new and still developing; depending on the
development of such markets, such Rule 144A Securities may be deemed to be
liquid as determined by or in accordance with methods adopted by the
Directors. Under such methods the following factors are considered, among
others: the frequency of trades and quotes for the security, the number of
dealers and potential purchasers in the market, market making activity, and
the nature of the security and marketplace trades. Investments in Rule 144A
Securities could have the effect of increasing the level of a Portfolio's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, a Portfolio may be
adversely impacted by the subjective valuation of such securities in the
absence of an active market for them. Restricted securities that are not
resalable under Rule 144A may be subject to risks of illiquidity and
subjective valuations to a greater degree than Rule 144A securities.
REVERSE REPURCHASE AGREEMENTS
Each of the Portfolios also may enter into reverse repurchase
agreements, which are similar to borrowing cash. A reverse repurchase
agreement is a transaction in which the Portfolio transfers possession of a
portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument's market
value in cash, with an agreement that at a stipulated date in the future the
Portfolio will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Portfolio to avoid selling portfolio
instruments at a time when a sale may be deemed to be disadvantageous, but
the ability to enter into reverse repurchase agreements does not assure that
the Portfolio will be able to avoid selling portfolio instruments at a
disadvantageous time. The Portfolio will engage in reverse repurchase
agreements which are not in excess of 60 days to maturity and will do so to
avoid borrowing cash and not for the purpose of investment leverage or to
speculate on interest rate changes. When effecting reverse repurchase
agreements, assets of the Portfolio in a dollar amount sufficient to make
payment of the obligations to be purchased are segregated on the Portfolio's
records at the trade date and maintained until the transaction is settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each of the Portfolios may purchase securities on a when-issued and
delayed delivery basis. When-issued and delayed delivery transactions arise
when U.S. Government obligations and other types of securities are bought by
the Portfolio with payment and delivery taking place in the future. The
settlement dates of these transactions, which may be a month or more after
entering into the transaction, are determined by mutual agreement of the
parties. There are no fees or other expenses associated with these types of
transactions other than normal transaction costs. To the extent a Portfolio
engages in when-issued and delayed delivery transactions, it will do so for
the purpose of acquiring portfolio instruments consistent with its
investment objective and policies and not for the purpose of investment
leverage or to speculate on interest rate changes. On the settlement date,
the value of such instruments may be less than the cost thereof. When
effecting when-issued and delayed delivery transactions, cash, cash
equivalents or high grade debt obligations of a dollar amount sufficient to
make payment for the obligations to be purchased will be segregated at the
trade date and maintained until the transaction has been settled.
LENDING SECURITIES (ALL PORTFOLIOS EXCEPT THE MONEY MARKET PORTFOLIO)
Consistent with applicable regulatory requirements, each of the
Portfolios may from time to time lend the securities it holds to broker-
dealers, provided that such loans are made pursuant to written agreements
and are continuously secured by collateral in the form of cash, U.S.
Government securities, irrevocable standby letters of credit or other liquid
securities in an amount at all times equal to at least the market value of
the loaned securities plus the accrued interest and dividends. For the
period during which the securities are on loan, the lending Portfolio will
be entitled to receive the interest and dividends, or amounts equivalent
thereto, on the loaned securities and a fee from the borrower or interest on
the investment of the cash collateral. The right to terminate the loan will
be given to either party subject to appropriate notice. Upon termination of
the loan, the borrower will return to the Portfolio securities identical to
the loaned securities.
The primary risk in lending securities is that the borrower may become
insolvent on a day on which the loaned security is rapidly increasing in
value. In such event, if the borrower fails to return the loaned security,
the existing collateral might be insufficient to purchase back the full
amount of the security loaned, and the borrower would be unable to furnish
additional collateral. The borrower would be liable for any shortage, but
the lending 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
Lutheran Brotherhood or a sub-adviser. Lutheran Brotherhood believes that
this will not affect the Portfolio's ability to maximize its securities
lending opportunities. No Portfolio may lend any security or make any other
loan if, as a result, more than one-third of its total assets would be lent
to other parties.
PUT AND CALL OPTIONS (ALL PORTFOLIOS EXCEPT THE MONEY MARKET PORTFOLIO)
Selling ("Writing") Covered Call Options: Certain of the Portfolios may
from time to time sell ("write") covered call options on any portion of its
investments as a hedge to provide partial protection against adverse
movements in prices of securities in those Portfolios and, subject to the
limitations described below, for the non-hedging purpose of attempting to
create additional income. A call option gives the buyer of the option, upon
payment of a premium, the right to call upon the writer to deliver a
specified amount of a security on or before a fixed date at a predetermined
("strike") price. As the writer of a call option, a 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, a Portfolio will generally not
be called upon to deliver the security. A 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, a 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: Certain of the Portfolios may also from time to
time purchase call options on securities in which those Portfolios may
invest. As the holder of a call option, a Portfolio has the right to
purchase the underlying security or currency at the exercise price at any
time during the option period (American style) or at the expiration of the
option (European style). A 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, a 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. A 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.
Buying Put Options: Certain of the Portfolios may from time to time
purchase put options on any portion of its investments. A put option gives
the buyer of the option, upon payment of a premium, the right to deliver a
specified amount of a security to the writer of the option on or before a
fixed date at a predetermined ("strike") price. A 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, a 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. A
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 World Growth Portfolio 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 its options transactions, certain of 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: Certain of the Portfolios may dispose of options
which they have written by entering into "closing purchase transactions".
Those Portfolios may dispose of options which they have purchased by
entering into "closing sale transactions". A closing transaction terminates
the rights of a holder, or the obligation of a writer, of an option and does
not result in the ownership of an option.
A 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.
A 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. A 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-adviser's
perception of anticipated market movements.
Negotiated Transactions: Certain of the Portfolios will generally
purchase and sell options traded on a national securities or options
exchange. Where options are not readily available on such exchanges, a
Portfolio may purchase and sell options in negotiated transactions. A
Portfolio effects negotiated transactions only with investment dealers and
other financial institutions deemed creditworthy by its investment adviser.
Despite the investment adviser's or sub-adviser's best efforts to enter into
negotiated options transactions with only creditworthy parties, there is
always a risk that the opposite party to the transaction may default in its
obligation to either purchase or sell the underlying security at the agreed
upon time and price, resulting in a possible loss by the Portfolio. This
risk is described more completely in the section of this Statement of
Additional Information entitled, "Risks of Transactions in Options and
Futures". Options written or purchased by a Portfolio in negotiated
transactions are illiquid and there is no assurance that a Portfolio will be
able to effect a closing purchase or closing sale transaction at a time when
its investment adviser or sub-adviser believes it would be advantageous to
do so. In the event the Portfolio is unable to effect a closing transaction
with the holder of a call option written by the Portfolio, the Portfolio may
not sell the security underlying the option until the call written by the
Portfolio expires or is exercised.
Limitations: A Portfolio will not purchase any option if, immediately
thereafter, the aggregate cost of all outstanding options purchased and held
by the Portfolio would exceed 5% of the market value of the Portfolio's
total assets.
FINANCIAL FUTURES AND OPTIONS ON FUTURES (ALL PORTFOLIOS EXCEPT THE MONEY
MARKET PORTFOLIO)
Selling Futures Contracts: Certain of the Portfolios may sell financial
futures contracts ("futures contracts") as a hedge against adverse movements
in the prices of securities in those Portfolios. 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 specified 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 a 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 a Portfolio and its broker, but rather is a
"good faith deposit" by a Portfolio to secure its obligations under a
futures contract or an option. Each day during the term of certain futures
transactions, a 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: Certain of the Portfolios may purchase
financial futures contracts as a hedge against adverse movements in the
prices of securities which they intend to purchase. The Opportunity Growth
and World Growth Portfolios may buy and sell futures contracts for a number
of reasons, including to manage their exposure to changes in securities
prices and foreign currencies as an efficient means of adjusting their
overall exposure to certain markets in an effort to enhance income; and to
protect the value of portfolio securities. A futures contract purchase
creates an obligation by a 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, a 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 a Portfolio intends to purchase. A 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 a Portfolio intends to purchase.
Options on Futures Contracts: Certain of the Portfolios may also sell
("write") covered call options on futures contracts and purchase put and
call options on futures contracts in connection with the above strategies. A
Portfolio may not sell put options on futures contracts. An option on a
futures contract gives the buyer of the option, in return for the premium
paid for the option, the right to assume a position in the underlying
futures contract (a long position if the option is a call and a short
position if the option is a put). The writing of a call option on a futures
contract constitutes a partial hedge against declining prices of securities
underlying the futures contract to the extent of the premium received for
the option. The purchase of a put option on a futures contract constitutes a
hedge against price declines below the exercise price of the option and net
of the premium paid for the option. The purchase of a call option
constitutes a hedge, net of the premium, against an increase in cost of
securities which a Portfolio intends to purchase.
Currency Futures Contracts and Options: The World Growth Portfolio 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 Portfolio will not
use such contracts or options for leveraging purposes.
Limitations: Certain of 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, a 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.
HYBRID INVESTMENTS (ALL PORTFOLIOS EXCEPT THE MONEY MARKET PORTFOLIO)
As part of its investment program and to maintain greater flexibility,
the Portfolios may invest in hybrid instruments (a potentially high risk
derivative) which have the characteristics of futures, options and
securities. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to
the value of a currency, security index or commodity at a future point in
time. The risks of such investments would reflect both the risks of
investing in futures, options, currencies and securities, including
volatility and illiquidity. Under certain conditions, the redemption value
of a hybrid instrument could be zero. In addition, because the purchase and
sale of hybrid instruments could take place in an over-the-counter market or
in a private transaction between the Portfolio and the seller of the hybrid
instrument, the creditworthiness of the contra party to the transaction
would be a risk factor which the Portfolio would have to consider. Hybrid
Instruments also may not be subject to regulation of the Commodities Futures
Trading Commission ("CFTC"), which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and
sale of securities by and to U.S. persons, or any other governmental
regulatory authority. None of the Portfolios expect to hold more than 5% of
its total assets in hybrid instruments.
RISKS OF TRANSACTIONS IN OPTIONS AND FUTURES
There are certain risks involved in the use of futures contracts,
options on securities and securities index options, and options on futures
contracts, as hedging devices. There is a risk that the movement in the
prices of the index or instrument underlying an option or futures contract
may not correlate perfectly with the movement in the prices of the assets
being hedged. The lack of correlation could render a Portfolio's hedging
strategy unsuccessful and could result in losses. The loss from investing in
futures transactions is potentially unlimited.
There is a risk that Lutheran Brotherhood or a sub-adviser could be
incorrect in their expectations about the direction or extent of market
factors such as interest rate movements. In such a case a Portfolio would
have been better off without the hedge. In addition, while the principal
purpose of hedging is to limit the effects of adverse market movements, the
attendant expense may cause a Portfolio'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 Lutheran Brotherhood's or a Portfolio's sub-
adviser's accuracy in predicting the future changes in interest rate levels
and securities price movements.
A Portfolio will generally purchase and sell options traded on a
national securities or options exchange. Where options are not readily
available on such exchanges a Portfolio may purchase and sell options in
negotiated transactions. When a Portfolio uses negotiated options
transactions it will seek to enter into such transactions involving only
those options and futures contracts for which there appears to be an active
secondary market. There is nonetheless no assurance that a liquid secondary
market such as an exchange or board of trade will exist for any particular
option or futures contract at any particular time. If a futures market were
to become unavailable, in the event of an adverse movement, a Portfolio
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 Portfolio
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 Portfolio to continue to hold a
position until delivery or expiration regardless of changes in its value. As
a result, a Portfolio's access to other assets held to cover its options or
futures positions could also be impaired.
When conducting negotiated options transactions there is a risk that
the opposite party to the transaction may default in its obligation to
either purchase or sell the underlying security at the agreed upon time and
price. In the event of such a default, a Portfolio could lose all or part of
the benefit it would otherwise have realized from the transaction, including
the ability to sell securities it holds at a price above the current market
price or to purchase a security from another party at a price below the
current market price.
Finally, if a broker or clearing member of an options or futures
clearing corporation were to become insolvent, a Portfolio could experience
delays and might not be able to trade or exercise options or futures
purchased through that broker or clearing member. In addition, a Portfolio
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.
SHORT SALES AGAINST THE BOX
The Portfolios may effect short sales, but only if such transactions
are short sale transactions known as short sales "against the box". A short
sale is a transaction in which a Portfolio sells a security it does not own
by borrowing it from a broker, and consequently becomes obligated to replace
that security. A short sale against the box is a short sale where a
Portfolio owns the security sold short or has an immediate and unconditional
right to acquire that security without additional cash consideration upon
conversion, exercise or exchange of options with respect to securities held
in its portfolio. The effect of selling a security short against the box is
to insulate that security against any future gain or loss.
FOREIGN FUTURES AND OPTIONS
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of
a foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade,
including the execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of trade or any
applicable foreign law. This is true even if the exchange is formally linked
to a domestic market so that a position taken on the market may be
liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, customers
who trade foreign futures or foreign options contracts may not be afforded
certain of the protective measures provided by the Commodity Exchange Act,
the CFTC's regulations and the rules of the National Futures Association and
any domestic exchange, including the right to use reparations proceedings
before the Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In particular, funds
received from customers for foreign futures or foreign options transactions
may not be provided the same protections as funds received in respect of
transactions on United States futures exchanges. In addition, the price of
any foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance in the
foreign exchange rate between the time an 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.
TEMPORARY DEFENSIVE INVESTMENTS
The Opportunity Growth Portfolio, Mid Cap Growth Portfolio, World
Growth Portfolio, Growth Portfolio, High Yield Portfolio, and Income
Portfolio may hold up to 100% of their assets in cash or short-term debt
securities for temporary defensive position when, in the opinion of Lutheran
Brotherhood or a Portfolio's sub-adviser such a position is more likely to
provide protection against unfavorable market conditions than adherence to
the Portfolios' other investment policies. The types of short-term
instruments in which the Portfolios may invest for such purposes include
short-term money market securities such as repurchase agreements and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, Eurodollar certificates of
deposit, commercial paper and banker's acceptances issued by domestic and
foreign corporations and banks. When investing in short-term money market
obligations for temporary defensive purposes, a 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 Lutheran Brotherhood or the Sub-adviser
to be of a comparable level of quality. When a Portfolio adopts a temporary
defensive position its investment objective may not be achieved.
PORTFOLIO TURNOVER RATE
The rate of portfolio turnover in the Portfolios will not be a limiting
factor when Lutheran Brotherhood or the Sub-adviser deems changes in a
Portfolio's assets appropriate in view of its investment objectives. As a
result, while a Portfolio will not purchase or sell securities solely to
achieve short term trading profits, a Portfolio may sell securities without
regard to the length of time held if consistent with the Portfolio's
investment objective. A higher degree of equity trading activity will
increase brokerage costs to a Portfolio. The portfolio turnover rate is
computed by dividing the dollar amount of securities purchased or sold
(whichever is smaller) by the average value of securities owned during the
year. Short-term investments such as commercial paper and short-term U.S.
Government securities are not considered when computing the turnover rate.
For the last three fiscal years, the portfolio turnover rates of the
Opportunity Growth Portfolio, Mid Cap Growth Portfolio, World Growth
Portfolio, Growth Portfolio, High Yield Portfolio, and Income Portfolio were
as follows:
12/31/98 12/31/97 12/31/96
Opportunity Growth Portfolio 134% 147% 155%
Mid Cap Growth Portfolio 125% -- --
World Growth Portfolio 19% 19% 9%
Growth Portfolio 152% 193% 223%
High Yield Portfolio 71% 105% 107%
Income Portfolio 86% 117% 150%
COMPUTER RELATED RISKS
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may
be adversely affected by computer systems (whether their own systems or
systems of their service providers) that do not properly process dates
beginning with January 1, 2000 and information related to those dates. In
addition, many funds and other companies, especially those funds and
companies that do business in one or more national currencies of the
countries in the European Union (the "EU"), may be adversely affected by
computer systems that cannot accommodate concurrent references to two
currencies, the national currency and the euro (the proposed currency unit
of the EU). Beginning on January 1, 1999 and for the three years
thereafter, businesses and governments in most EU countries generally must
be prepared to conduct their businesses in their national currency and the
euro. After such three-year period, they must conduct their businesses only
in the euro.
The euro conversion presents additional risks for the World Growth
Portfolio and the Opportunity Growth Portfolio to the extent that they
invest in securities denominated in a national currency that eventually will
be replaced by the euro. For example, trading, accounting and other
administrative systems must be able to reflect exchange rates between a
national currency of an EU member and the euro and to redenominate
outstanding tradable debt securities into the euro in accordance with
specific technical requirements.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to each of these Portfolios, as
well as the computer systems of those service providers upon which the
Portfolios rely, in order to obtain reasonable assurances that the
Portfolios will not experience a material adverse impact related to either
problem. The Portfolios do not currently anticipate that either problem
will have a material adverse impact on their portfolio investments, taken as
a whole. There can be no assurances in either area, however, including the
possibility that either or both problems could negatively affect the
investment markets or the economy generally.
INVESTMENT LIMITATIONS
The fundamental investment restrictions for the Portfolios are set
forth below. These fundamental investment restrictions may not be changed by
a Portfolio except by the affirmative vote of a majority of the outstanding
voting securities of that Portfolio as defined in the Investment Company Act
of 1940. (Under the Investment Company Act of 1940, a "vote of the majority
of the outstanding voting securities" means the vote, at a meeting of
security holders duly called, (i) of 67% or more of the voting securities
present at a meeting if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy or (ii) of more than
50% of the outstanding voting securities, whichever is less (a "1940 Act
Majority Vote").) Under these restrictions:
1. None of the Portfolios may borrow money, except that a Portfolio may
borrow money (through the issuance of debt securities or otherwise) in
an amount not exceeding one-third of the Portfolio's total assets
immediately after the time of such borrowing.
2. None of the Portfolios may issue senior securities, except as permitted
under the Investment Company Act of 1940 or any exemptive order or rule
issued by the Securities and Exchange Commission.
3. None of the Portfolios will 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 securities 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 held by the Fund as
a whole.
4. None of the Portfolios will buy or sell real estate, commodities or
commodity contracts, although the Portfolios may buy and sell securities
or other instruments 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 contracts.
5. None of the Portfolios may 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 a
Portfolio's investment objective and policies will not be considered a
loan for purposes of this limitation.
6. None of the Portfolios will 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. None of the Portfolios will 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.
The following nonfundamental investment restriction may be changed
without shareholder approval. Under this restriction:
1. None of the Portfolios will purchase any security while borrowings,
including reverse repurchase agreements, representing more than 5% of
the Portfolio's total assets are outstanding.
FUND MANAGEMENT
The Board of Directors of the Fund is responsible for the management
and supervision of the Fund's business affairs and for exercising all powers
except those reserved to the shareholders.
The officers and Directors of the Fund and their addresses, positions
with the Fund, and principal occupations are set forth below.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH THE TRUST PRINCIPAL OCCUPATION DURING THE
PAST 5 YEARS
<S> <C> <C>
Rolf F. Bjelland* Chairman, Director and Executive Vice President and Chief
625 Fourth Avenue South President Investment Officer, Lutheran
Minneapolis, MN Brotherhood; Director and President,
Age 61 Lutheran Brotherhood Research Corp;
Director and Executive Vice President,
Lutheran Brotherhood Financial
Corporation; Director, Lutheran
Brotherhood Securities Corp.; Director,
Vice President and Chief Investment
Officer, Lutheran Brotherhood Variable
Insurance Products Company; Director,
Lutheran Brotherhood Real Estate Products
Company; Trustee, Chairman and President
of Lutheran Brotherhood Family of Funds
Herbert F. Eggerding, Jr. Director Management consultant to several privately
12587 Glencroft Drive owned companies; formerly Executive Vice
St. Louis, MO President and Chief Financial Officer,
Age 61 Petrolite Corporation; Director, Lutheran
Charities Foundation of St. Louis, MO;
Trustee, Lutheran Brotherhood Family of Funds
Noel K. Estenson Director President and Chief Executive Officer,
CENEX, Inc. CENEX, Inc.; Vice Chairman, CF
P.O. Box 64089 Industries; Board member, National
St. Paul, MN Cooperative Refinery Association;
Age 60 Board member, Farm Credit Leasing;
Board member, National Council of
Farmer Cooperatives; Trustee, Lutheran
Brotherhood Family of Funds
Jodi L. Harpstead Director Vice President, U.S. Cardiac Rhythm
Medtronic Management for Medtronic, Inc.; Previously,
7000 Central Avenue NE Manager and Vice President, U.S. Pacing
Minneapolis, MN Marketing, Medtronic, Inc.; Board member
Age 42 of Delta Dental Plan of Minnesota;
Trustee, Lutheran Brotherhood Family of
Funds
Richard A. Hauser Director Partner, Baker & Hostetler, LLP; Previously,
1050 Connecticut Avenue NW Chairman of the Pennsylvania Avenue
Suite 1100 Development Corporation, Washington, DC;
Washington, DC Director, The Luther Institute; Trustee,
Age 56 Lutheran Brotherhood Family of Funds
Connie M. Levi Director Retired President of the Greater
P.O. Box 675325 Minneapolis Chamber of Commerce;
Rancho Santa Fe, CA served in the Minnesota House of
Age 59 Representatives from 1978 to 1986,
including in the capacity as majority
leader; former Director or member of
numerous governmental, public service
and non-profit boards and organizations;
Director, Norstan, Inc.; Trustee, Lutheran
Brotherhood Family of Funds
Bruce J. Nicholson* Director Executive Vice President and Chief
625 Fourth Avenue South Operating Officer, Lutheran
Minneapolis, MN Brotherhood; Director, Executive Vice
Age 52 President and Chief Operating Officer,
Lutheran Brotherhood Financial
Corporation; Director and Chief
Operating Officer, Lutheran Brotherhood
Variable Insurance Products Company;
Director, Lutheran Brotherhood Research
Corp; Director, Lutheran Brotherhood
Securities Corp.; Director, Lutheran
Brotherhood Real Estate Products Company;
Trustee, Lutheran Brotherhood Family of
Funds
Randall L. Boushek Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President, Lutheran Brotherhood
Minneapolis, MN Research Corp.; Vice President, Lutheran
Age 42 Brotherhood Variable Insurance Products
Company; Portfolio Manager, Lutheran
Brotherhood Securities Corp.
James R. Olson Vice President Senior Vice President, Lutheran
625 Fourth Avenue South Brotherhood; Vice President, Lutheran
Minneapolis, MN Brotherhood Variable Insurance Products
Age 56 Company; Vice President, Lutheran
Brotherhood Research Corp.; Vice
President, Lutheran Brotherhood Research
Corp.; Vice President, Lutheran
Brotherhood Securities Corp.; Vice
President, Lutheran Brotherhood Real
Estate Products Company; Vice President,
Lutheran Brotherhood Family of Funds
Brenda J. Pederson Vice President Assistant Vice President, Lutheran
625 Fourth Avenue South Brotherhood
Minneapolis, MN
Age 38
Richard B. Ruckdashel Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President, Lutheran Brotherhood
Minneapolis, MN Variable Insurance Products Company; Vice
Age 43 President, Lutheran Brotherhood
Securities Corp.; Vice President,
Lutheran Brotherhood Family of Funds
Wade M. Voigt Treasurer Assistant Vice President, Mutual Fund
625 Fourth Avenue South Accounting, Lutheran Brotherhood;
Minneapolis, MN Treasurer of LB Series Fund, Inc.
Age 43
Otis F. Hilbert Secretary and Vice President Vice President, Lutheran Brotherhood;
625 Fourth Avenue South Vice President and Secretary,
Minneapolis, MN Lutheran Brotherhood Securities Corp.;
Age 62 Secretary of Lutheran Brotherhood
Research Corp.; Vice President and
Secretary, Lutheran Brotherhood
Real Estate Products Company; Vice
President and Assistant Secretary,
Lutheran Brotherhood Variable
Insurance Products Company; Secretary and
Vice President of LB Series Fund, Inc.
Frederick P. Johnson Vice President Assistant Vice President, Lutheran
625 Fourth Avenue South Brotherhood; Assistant Vice President,
Minneapolis, MN Lutheran Brotherhood Variable Insurance
Age 36 Products Company; Assistant Vice
President, Lutheran Brotherhood
Securities Corp.; Assistant Vice
President, LB Research; Vice President,
LB Series Fund, Inc.
- -----------------------
(*) "Interested person" of the Fund as defined in the Investment Company
Act of 1940 by virtue of his positions with affiliated entities
referred to elsewhere herein.
Executive Committee
The present members of the Executive Committee of the Fund are Directors Bjelland (Chairman), Eggerding, and
Nicholson. The Executive Committee assists the Board of Directors in fulfilling its duties with respect to the
scheduling of Board meetings and their agendas. The Executive Committee serves as a direct line of communication
between the Board of Directors and management of the Fund and the investment adviser. The Executive Committee meets as
necessary, and generally meets at least once prior to each meeting of the Board of Directors.
</TABLE>
COMPENSATION OF DIRECTORS AND OFFICERS
The Fund makes 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 $25,000 and an annual fee of
$10,000 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, 1998, the Directors of the Fund
received the following amounts of compensation either directly or in the
form of payments into a deferred compensation plan:
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL TOTAL COMPENSATION
NAME AND POSITION COMPENSATION AS PART OF FUND BENEFITS UPON PAID BY FUND
OF PERSON FROM FUND EXPENSES RETIREMENT AND FUND COMPLEX (1)
<S> <C> <C> <C> <C>
Rolf F. Bjelland(2) $ 0 $ 0 $ 0 $ 0
Chairman and Director
Herbert F. Eggerding, Jr. 15,262 0 0 33,750
Director
Noel K. Estenson 15,262 0 0 33,750
Director
Jodi L. Harpstead 4,042 0 0 8,750
Director
Richard K. Hauser 8,083 0 0 17,500
Director
Connie M. Levi 15,262 0 0 33,750
Director
Bruce J. Nicholson(2) 0 0 0 0
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.
</TABLE>
CONTROL PERSONS AND PURCHASES 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 SERVICES
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 "Fund Management".
Investment decisions for each of the Portfolios, except the Opportunity
Growth Portfolio and the World Growth Portfolio, are made by Lutheran
Brotherhood, subject to the overall direction of the Board of Directors.
Lutheran Brotherhood provides overall investment supervision of the
Opportunity Growth Portfolio's and the World Growth Portfolio's
investments, with investment decisions for those Portfolios being made by
investment sub-advisers. Except for the Opportunity Growth Portfolio and
the World Growth Portfolio, Lutheran Brotherhood provides investment
research and supervision of each Portfolio's investments and conducts a
continuous program of investment evaluation and appropriate disposition and
reinvestment of each Portfolio's assets.
Investment decisions for the Opportunity Growth Portfolio are made by
T. Rowe Price Associates, Inc. ("T. Rowe Price"), which Lutheran
Brotherhood has engaged as the sub-adviser for that Portfolio. T. Rowe
Price manages the Opportunity Growth Portfolio on a daily basis, subject to
the overall direction of Lutheran Brotherhood and the Board of Directors.
T. Rowe Price was founded in 1937 and has its principal offices in
Baltimore, Maryland. As of December 31, 1998, T. Rowe Price and its
affiliates managed approximately $148 billion.
Investment decisions for the World Growth Portfolio are made by Rowe
Price-Fleming International, Inc. ("Price-Fleming"), which Lutheran
Brotherhood has engaged as the sub-adviser for that Portfolio. Price-Fleming
manages that Portfolio on a daily basis, subject to the overall direction of
Lutheran Brotherhood and the Board of Directors.
Price-Fleming was founded in 1979 as a joint venture between T. Rowe
Price and Robert Fleming Holdings Limited. Price-Fleming is one of the
world's largest international mutual fund asset managers with the U.S.
equivalent of over $32 billion under management as of December 31, 1998 in
its offices in Baltimore, London, Tokyo, Singapore, Paris, Hong Kong, and
Buenos Aires.
The Advisory Contract provides that it shall continue in effect with
respect to each 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, 1998, 1997,
and 1996, the Adviser earned $25,936,473, $20,167,422, and $13,945,681,
respectively, as gross advisory fees.
Lutheran Brotherhood pays T. Rowe Price an annual sub-advisory fee for
the performance of sub-advisory services. The fee payable is equal to .30%
of that Portfolio's average daily net assets.
Lutheran Brotherhood pays Price-Fleming an annual sub-advisory fee for
the performance of sub-advisory services. The fee payable is equal to a
percentage of 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-adviser also
provides sub-advisory services. The sub-advisory fee Lutheran Brotherhood
pays the Sub-adviser 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. Price-Fleming has agreed to waive its
fees so that when the combined assets of the World Growth Portfolio and
World Growth Fund exceed $500 million, the sub-advisory fee for the World
Growth Portfolio is equal to .45% of all the Portfolio's average daily net
assets. As of December 31, 1998, the combined assets of the World Growth
Portfolio and the World Growth Fund totaled $464.3 million.
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 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, 225 Franklin Street, Boston,
Massachusetts 02110, 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
PricewaterhouseCoopers LLP, 650 Third Avenue South, Park Building,
Suite 1300, Minneapolis, Minnesota 55402, serves as the Fund's independent
accountants, providing professional services including audits of the Fund's
annual financial statements, assistance and consultation in connection with
Securities and Exchange Commission filings, and review of the annual income
tax returns filed on behalf of the Fund.
BROKERAGE TRANSACTIONS
PORTFOLIO TRANSACTIONS
In connection with the management of the investment and reinvestment of
the assets of the Portfolios, the Advisory Contract authorizes Lutheran
Brotherhood, acting by its own officers, directors or employees or by a duly
authorized subcontractor, including T. Rowe Price and Price-Fleming (each a
"sub-adviser"), to select the brokers or dealers that will execute purchase
and sale transactions for the Portfolios. In executing portfolio
transactions and selecting brokers or dealers, if any, Lutheran Brotherhood
and the sub-advisers will use reasonable efforts to seek on behalf of the
Portfolios the best overall terms available. In assessing the best overall
terms available for any transaction, Lutheran Brotherhood and the sub-
advisers will consider all factors it deems relevant, including the breadth
of the market in and the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any (for the specific transaction and on a continuing basis).
In evaluating the best overall terms available, and in selecting the broker
or dealer, if any, to execute a particular transaction, Lutheran Brotherhood
and the sub-advisers may also consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act
of 1934) provided to any other accounts over which Lutheran Brotherhood or
the sub-advisers or an affiliate of Lutheran Brotherhood or the sub-advisers
exercises investment discretion. Lutheran Brotherhood and the sub-advisers
may pay to a broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction which is in
excess of the amount of commission another broker or dealer would have
charged for effecting that transaction if, but only if, Lutheran Brotherhood
or the sub-advisers determines in good faith that such commission was
reasonable in relation to the value of the brokerage and research services
provided.
To the extent that the receipt of the above-described services may
supplant services for which Lutheran Brotherhood or the sub-advisers might
otherwise have paid, it would, of course, tend to reduce the expenses of
Lutheran Brotherhood or the sub-advisers.
The investment decisions for a Portfolio are and will continue to be
made independently from those of other investment companies and accounts
managed by Lutheran Brotherhood, a sub-adviser, or their affiliates. Such
other investment companies and accounts may also invest in the same
securities as a Portfolio. When purchases and sales of the same security are
made at substantially the same time on behalf of such other investment
companies and accounts, transactions may be averaged as to the price and
available investments allocated as to the amount in a manner which Lutheran
Brotherhood and its affiliates believe to be equitable to each investment
company or account, including the Portfolio. In some instances, this
investment procedure may affect the price paid or received by a Portfolio or
the size of the position obtainable or sold by a Portfolio.
AFFILIATED TRANSACTIONS OF THE SUB-ADVISERS
Subject to applicable SEC rules, as well as other regulatory
requirements, the sub-advisers of the Opportunity Growth Portfolio and the
World Growth Portfolio may allocate orders to brokers or dealers affiliated
with such sub-advisers. Such allocation shall be in such amounts and
proportions as the sub-adviser shall determine and the Portfolio's sub-
adviser 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.
BROKERAGE COMMISSIONS
During the last three fiscal years, the Portfolios paid the following
brokerage fees:
12/31/98 12/31/97 12/31/96
Opportunity Growth
Portfolio $ 857,916 $ 789,032 $ 353,407
Mid Cap Growth Portfolio 203,262 -- --
World Growth Portfolio* 285,236 492,771 441,571
Growth Portfolio 8,234,385 6,961,631 6,346,524
High Yield Portfolio 9,706 8,418 44,558
Income Portfolio 82,478 135,832 89,581
Money Market Portfolio -- -- --
- -----------------------
* Amount paid to affiliated broker-dealer is $10,640 for the fiscal year
ended December 31, 1998, $11,272 for the fiscal year ended December 31,
1997, and $10,997 for the fiscal year ended December 31, 1996.
Of the brokerage fee amounts stated above and underwriting concessions
of dealers from whom the Portfolio purchased newly issued debt securities,
the following percentages were paid to firms which provided research,
statistical, or other services to Lutheran Brotherhood or the Sub-adviser in
connection with the management of the Portfolios:
12/31/98 12/31/97 12/31/96
Opportunity Growth
Portfolio 6.70% 5.52% 0.30%
Mid Cap Growth Portfolio 45.80% -- --
World Growth Portfolio 3.77% 1.90% 1.30%
Growth Portfolio 17.15% 18.19% 9.79%
High Yield Portfolio -- -- --
Income Portfolio 3.15% 3.29% 4.78%
Money Market Portfolio -- -- --
CODE OF ETHICS
The Fund has adopted a code of ethics that imposes certain limitations
and restrictions on personal securities transactions by persons having
access to Fund investment information, including portfolio managers. Such
access persons may not purchase any security being offered under an initial
public offering, any security for which one of the Portfolios has a purchase
or sale order pending, or any security currently under active consideration
for purchase or sale by a Portfolio. Additionally, portfolio managers may
not purchase or sell any security within seven days before or after any
transaction in such security by the Portfolio that he or she manages. In
order for the Fund to monitor the personal investment transactions, all
access persons must obtain the approval of an officer of the Fund designated
by the Directors before they may purchase or sell any security and they must
have all such transactions reported to such officer by the broker-dealer
through which the transaction was accomplished.
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 rata 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.
NET ASSET VALUE
OPPORTUNITY GROWTH PORTFOLIO, MID CAP GROWTH PORTFOLIO, WORLD GROWTH
PORTFOLIO, GROWTH PORTFOLIO, HIGH YIELD PORTFOLIO, AND INCOME PORTFOLIO
The net asset value per share is determined at the close of each day
the New York Stock Exchange (the "NYSE") is open, or any other day as
provided by Rule 22c-1 under the Investment Company Act of 1940.
Determination of net asset value may be suspended when the Exchange is
closed or if certain emergencies have been determined to exist by the
Securities and Exchange Commission, as allowed by the Investment Company Act
of 1940.
Net asset value is determined by adding the market or appraised value
of all securities and other assets; subtracting liabilities; and dividing
the result by the number of shares outstanding.
The market value of each Portfolio's securities is determined at the
close of regular trading of the NYSE on each day the NYSE is open. The value
of portfolio securities is determined in the following manner:
- - Equity securities traded on the NYSE or any other national
securities exchange are valued at the last sale price. If there has
been no sale on that day or if the security is unlisted, it is
valued at prices within the range of the current bid and asked
prices considered best to represent value in the circumstances.
- - Equity securities not traded on a national securities exchange are
valued at prices within the range of the current bid and asked
prices considered best to represent the value in the circumstances,
except that securities for which quotations are furnished through
the nationwide automated quotation system approved by the NASDAQ
will be valued at their last sales prices so furnished on the date
of valuation, if such quotations are available for sales occurring
on that day.
- - Bonds and other income securities traded on a national securities
exchange will be valued at the last sale price on such national
securities exchange that day. Lutheran Brotherhood may value such
securities on the basis of prices provided by an independent
pricing service or within the range of the current bid and asked
prices considered best to represent the value in the circumstances,
if those prices are believed to better reflect the fair market
value of such exchange listed securities.
- - Bonds and other income securities not traded on a national
securities exchange will be valued within the range of the current
bid and asked prices considered best to represent the value in the
circumstances. Such securities may also be valued on the basis of
prices provided by an independent pricing service if those prices
are believed to reflect the fair market value of such securities.
For all Portfolios other than the Money Market Portfolio, short-term
securities with maturities of 60 days or less are valued at amortized cost;
those with maturities greater than 60 days are valued at the mean between
bid and asked price.
Prices provided by independent pricing services may be determined
without relying exclusively on quoted prices and may consider institutional
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data
employed in determining valuation for such securities.
All other securities and assets will be appraised at fair value as
determined by the Board of Director.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is
substantially completed each day at various times prior to the close of the
NYSE. The values of such securities used in computing the net asset value of
shares of a Portfolio are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the NYSE.
Occasionally, events affecting the value of such securities and exchange
rates may occur between the times at which they are determined and the close
of the NYSE, which will not be reflected in the computation of net asset
values. If during such periods events occur which materially affect the
value of such securities, the securities will be valued at their fair market
value as determined in good faith by the Directors of the Fund.
For purposes of determining the net asset value of shares of a
Portfolio all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars quoted by a major bank that
is a regular participant in the foreign exchange market or on the basis of a
pricing service that takes into account the quotes provided by a number of
such major banks.
MONEY MARKET PORTFOLIO
Securities held by the Money Market Portfolio are valued on the basis
of amortized cost, which involves a constant amortization of premium or
accretion of discount to maturity regardless of the impact of fluctuating
interest rates on the market value of the security. While this method
provides certainty in valuation, it may result in periods in which the value
as determined by amortized cost is higher or lower than the price the Money
Market Portfolio would receive if it sold the security.
The Money Market Portfolio anticipates that under ordinary and usual
circumstances it will be able to maintain a constant net asset value of
$1.00 per share and the Money Market Portfolio will use its best efforts to
do so. However, such maintenance at $1.00 might not be possible if (1)
there are changes in short-term interest rates or other factors such as
unfavorable changes in the credit of issuers affecting the values of the
securities held by the Money Market Portfolio and the Money Market Portfolio
is compelled to sell such securities at a time when the prices which it is
able to realize vary significantly from the values determined on the
amortized cost basis or (2) the Money Market Portfolio should have negative
net income. It is expected that the Money Market Portfolio will have
positive net income at the time of each determination thereof.
The utilization of the amortized cost method of valuation requires
compliance with the requirements of Rule 2a-7 under the 1940 Act. Such
compliance requires, among other things, the following:
(1) The Directors must adopt procedures whereby the extent of
deviation, if any, of the current net asset value per share
calculated using available market quotations (or an appropriate
substitute which reflects current market conditions) from the
Money Market Portfolio's net asset value per share under the
amortized cost valuation method will be determined at such
intervals as the Directors deem appropriate and reasonable in
light of current market conditions, and the Directors must review
periodically the amount of the deviation as well as the methods
used to calculate the deviation;
(2) In the event such deviation from the Money Market Portfolio's net
asset value under the amortized cost valuation method exceeds
1/2 of 1%, the Directors must promptly consider what action should
be initiated by them, and when the Directors believe the extent of
any deviation from the Money Market Portfolio's net asset value
per share under the amortized cost valuation method may result in
material dilution or any other unfair results to investors or
existing shareholders, they must take such action as they deem
appropriate to eliminate or reduce to the extent reasonably
practicable such dilution or unfair results (shareholders will be
notified in the event any such corrective action is taken by the
Directors);
(3) The Money Market Portfolio may not purchase any instrument with a
remaining maturity greater than 397 calendar days or maintain a
dollar-weighted average portfolio maturity which exceeds 90 days;
(4) The Money Market Portfolio must limit its portfolio investments,
including repurchase agreements, to those United States dollar-
denominated instruments which the Directors determine present
minimal credit risks and which are "eligible securities" as
defined in Rule 2a-7; and
(5) The Money Market Portfolio must record, maintain and preserve
certain records and observe certain reporting obligations in
accordance with Rule 2a-7.
Securities in which the Money Market Portfolio invests must be U.S.
dollar-denominated Eligible Securities (as defined in Rule 2a-7 under the
1940 Act) that are determined to present minimal credit risks. In general,
the term "Eligible Security" is limited to any security that:
(i) (a) either (1) has received a short-term rating from a nationally
recognized statistical rating organization (NRSRO") or has been
issued by an issuer that has received a short-term rating from an
NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security with the security or (2) is subject to a guarantee that
has received a short-term rating from an NRSRO, or a guarantee
issued by a guarantor that has received a short-term rating from
an NRSRO with respect to a class of debt obligations (or any debt
obligation within that class) that is comparable in priority and
security with the guarantee, (b) has a remaining maturity of 397
calendar days or less and (c) has received a rating from the
requisite number of NRSROs (i.e.. two, if two organizations have
issued ratings and one if only one has issued a rating) in one of
the two highest short-term major rating categories; or
(ii) is unrated but is of comparable quality to a rated security as
described in (i), above, and which at the time of issuance (a)
had a remaining maturity of more than 397 calendar days and now
has a remaining maturity of 397 calendar days or less, and (b)
has not received a long-term rating from an NRSRO in any NRSRO
major rating category outside of the NRSRO's three highest major
rating categories, unless the security has received a long-term
rating from the requisite number of NRSROs (i.e., two, if two
organizations have issued ratings and one if only one has issued
a rating) in one of the three highest long-term major rating
categories.
As indicated in the Prospectus, at least 95% of the Money Market
Portfolio's total assets will consist of government securities and "first
tier" eligible securities as defined in Rule 2a-7 under the 1940 Act, with
the balance of the Money Market Portfolio's assets invested in "second tier"
eligible securities as defined in Rule 2a-7. For this purpose, "second
tier" eligible securities generally are those which have been (i) rated by
at least two nationally recognized statistical rating organizations in one
of the two highest rating categories for short-term obligations (or so rated
by one such organization if it alone has rated the security), (ii) issued by
an issuer with comparable short-term obligations that are rated in one of
the two highest rating categories, or (iii) if unrated, determined to be
comparable to such securities. The Money Market Portfolio may not invest
more than the greater of 1% of its total assets or $1 million in "second
tier" eligible securities of any single issuer.
TAX STATUS
The Portfolios expect to pay no federal income tax because they intend
to meet requirements of Subchapter M of the Internal Revenue Code applicable
to regulated investment companies and to receive the special tax treatment
afforded to such companies. To qualify for this treatment, each Portfolio
must, among other requirements:
- derive at least 90% of its gross income from dividends,
interest, gains from the sale of securities, and certain
other investments;
- invest in securities within certain statutory limits; and
- distribute at least 90% of its ordinary income to
shareholders.
It is each Portfolio's policy to distribute substantially all of its
income on a timely basis, including any net realized gains on investments
each year.
To avoid payment of a 4% excise tax, each Portfolio is also generally
required to distribute to shareholders at least 98% of its ordinary income
earned during the calendar year and 98% of its net capital gains realized
during the 12-month period ending December 31.
CAPITAL GAINS
While the Portfolios do not intend to engage in short-term trading,
they may dispose of securities held for only a short time if Lutheran
Brotherhood believes it to be advisable. Such changes may result in the
realization of capital gains. Each Portfolio distributes its realized gains
in accordance with federal tax regulations. Distributions from any net
realized capital gains will usually be declared in February.
CALCULATION OF PERFORMANCE DATA
The total return and yield of each of the Portfolios will be calculated
as set forth below. Calculations of performance data for the Portfolios
includes the effect of the investment advisory fee charged to the Fund but
does not reflect the expenses charged to the variable contracts at the
separate account level.
TOTAL RETURN
Average annual total return is computed by determining the average
annual compounded rates of return over the designated periods that, if
applied to the initial amount invested would produce the ending redeemable
value, according to the following formula:
P(1+T)(n) = ERV
[In the above formula "n" is an exponent.]
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that all dividends
and distributions by the Portfolio are reinvested at net asset value on the
reinvestment dates during the periods. The investment advisory fee charged
to the Fund is also taken into account as described later herein.
YIELD
Yield is computed by dividing the net investment income per share
earned during a recent month or other specified 30-day period by the
applicable maximum offering price per share on the last day of the period
and annualizing the result, according to the following formula:
[A formula is expressed here that is as follows:
Yield is equal to 2 times the difference between the sixth power of a
number and 1, where that number is equal to the sum of the quotient of a
divided by b and 1.]
Where:
a = dividends and interest earned during the period
minus the investment advisory fee accrued for the
period
b = the average daily number of shares outstanding
during the period that were entitled to receive
dividends multiplied by the maximum offering
price per share on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Portfolio computes the yield to maturity of each obligation
held by a Portfolio based on the market value of the obligation (including
actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the
period, the purchase price (plus actual accrued interest). The yield to
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the
obligation is in the portfolio. Dividend income is recognized daily based on
published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to
monthly payments of principal and interest ("paydowns"), a Portfolio
accounts for gain or loss attributable to actual monthly paydowns as a
realized capital gain or loss during the period. Each Portfolio has elected
not to amortize discount or premium on such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the
end of the base period, has not been declared as a dividend, but is
reasonably expected to be declared as a dividend shortly thereafter.
Yield information is useful in reviewing a Portfolio's performance, but
because yields fluctuate, such information cannot necessarily be used to
compare an investment in a Portfolio's shares with bank deposits, savings
accounts and similar investment alternatives which are insured and/or often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that yield is a function of the kind and
quality of the instruments in the portfolio, portfolio maturity and
operating expenses and market conditions.
The tables below present the average annual returns for all Portfolios
except the Money Market Portfolio and the yields for the High Yield
Portfolio, and the Income Portfolio for the indicated periods ended December
31, 1998.
<TABLE>
<CAPTION>
Current
SEC Average Annual Total Returns as of 12/31/98 Date
Yield --------------------------------------------- of
Portfolio 12/31/98 1-Year 5-Years 10-Years Inception Inception
- -------------------------- -------- ------ ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Opportunity Growth Portfolio n/a -2.99% n/a n/a 5.36% 01/18/96
Mid Cap Growth Portfolio n/a n/a n/a n/a 11.62% 01/30/98
World Growth Portfolio n/a 16.75% n/a n/a 9.99% 01/18/96
Growth Portfolio n/a 28.38% 21.76% 18.77% n/a --
High Yield Portfolio 10.82% -1.50% 7.47% 11.01% n/a --
Income Portfolio 5.59% 9.37% 6.92% 9.36% n/a --
</TABLE>
YIELD - MONEY MARKET PORTFOLIO
When the Money Market Portfolio quotes a "current annualized" yield, it
is based on a specified recent seven calendar-day period. It is computed by
(1) determining the net change, exclusive of capital changes, in the value
of a hypothetical preexisting account having a balance of one share at the
beginning of the period, (2) dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
return, then (3) multiplying the base period by 52.14 (365 divided by 7).
The resulting yield figure is carried to the nearest hundredth of one
percent.
The calculation includes (1) the value of additional shares purchased
with dividends on the original share, and dividends declared on both the
original share and any such additional shares, and (2) all fees charge to
all shareholder accounts, in proportion to the length of the base period.
The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Portfolio's effective (compounded) yield will be computed
by dividing the seven-day annualized yield as defined above by 365, adding 1
to the quotient, raising the sum to the 365th power, and subtracting 1 from
the result.
Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.
Money Market
Portfolio
----------
Annualized Current Yield For 7-day Period Ended 12/31/98 4.84%
Effective Yield For 7-day Period Ended 12/31/98 4.95%
NONSTANDARDIZED TOTAL RETURN
A Portfolio may provide the above described average annual total return
results for periods which end no earlier than the most recent calendar
quarter end and which begin one, five and ten years before such quarter end
and at the commencement of such Portfolio's operations. In addition, a
Portfolio may provide nonstandardized total return results for differing
periods, such as for the most recent six months, and/or without taking sales
charges into account. Such nonstandardized total return is computed as
otherwise described under "Total Return" except that the result may or may
not be annualized, and as noted any applicable sales charge may not be taken
into account and therefore not deducted from the hypothetical initial
payment of $1,000.
DESCRIPTION OF DEBT RATINGS
Moody's Investors Service, Inc. describes grades of corporate debt
securities and "Prime-1" and "Prime-2" commercial paper as follows:
BONDS:
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edged". Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect
to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
COMMERCIAL PAPER:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
o Leading market positions in well-established industries.
o High rates of return of funds employed.
o Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
o Well established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of senior short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above
but to a lesser degree. Earning trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Standard & Poor's Corporation describes grades of corporate debt
securities and "A" commercial paper as follows:
BONDS:
AAA Debt rated AAA has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from AAA issues only in small degree.
A Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in
higher rated categories. However, the obligor's capacity to meet
its financial commitments on the obligation is still strong.
BBB Debt rated BBB exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitments on the obligation in this category than in higher rated
categories.
BB Debt rated BB is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions
