1933 Act Registration No. 333-71853
1940 Act Registration No. 811-09225
As filed with the Securities and
Exchange Commission on April 20, 2000.
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 3 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 3 X
AAL VARIABLE ANNUITY ACCOUNT II
(Exact name of registrant as specified in charter)
Aid Association for Lutherans
(Name of Depositor)
4321 NORTH BALLARD ROAD
APPLETON, WISCONSIN 54919-0001
(Address of Principal Executive Offices)(Zip Code)
Depositor's Telephone Number, including Area Code: (920) 734-5721
WOODROW E. ENO, ESQ.
Senior Vice President, Secretary and General Counsel of
AID ASSOCIATION FOR LUTHERANS
4321 NORTH BALLARD ROAD
APPLETON, WISCONSIN 54919-0001
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[x ] on May 1, 2000 pursuant to paragraph (b)(1)(v) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485.
[ ] on _________, pursuant to paragraph (a)(1) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485.
[ ] on _________, pursuant to paragraph (a)(2) of Rule 485.
Title of securities being registered: Units of interest in single premium
immediate variable annuity certificates.
AAL VARIABLE ANNUITY ACCOUNT II
PROSPECTUS
MAY 1, 2000
FOR THE
SINGLE PREMIUM IMMEDIATE VARIABLE ANNUITY CERTIFICATES
This prospectus describes the single premium immediate variable annuity
certificate (the certificate) Aid Association for Lutherans (AAL, we, us, our)
offers. We are a fraternal benefit society organized under the laws of the State
of Wisconsin. We offer the certificates to people (you, your) who are eligible
for membership in AAL as well as employees of AAL and its affiliates.
The certificate may be sold to or issued in connection with retirement plans,
including plans that qualify for special federal income tax treatment under the
Internal Revenue Code.
You may allocate premiums and transfer your investment to one or more of the
seven subaccounts of AAL Variable Annuity Account II or the fixed account. The
assets of each subaccount are invested solely in a corresponding portfolio of
AAL Variable Product Series Fund, Inc. (the Fund).
Under the certificate, we make periodic annuity payments to you (or other
designated payees). The dollar amount of each annuity payment may vary according
to the investment performance of the portfolios in which the selected
subaccounts invest and the interest we credit under the fixed account. THE
CERTIFICATE IS NOT CONSIDERED A DEPOSIT OR OTHER OBLIGATION OF ANY BANK, CREDIT
UNION OR ANY AFFILIATED ENTITY. NEITHER THE FEDERAL DEPOSIT INSURANCE
CORPORATION (FDIC) NOR ANY OTHER AGENCY INSURES OR PROTECTS THE CERTIFICATES.
YOU BEAR THE INVESTMENT RISK OF AMOUNTS INVESTED IN THE VARIABLE ACCOUNT.
This prospectus sets forth the information about the variable account and the
certificate you should know before you purchase a certificate. You can get more
information about AAL, the variable account and the certificate in the Statement
of Additional Information. We filed the Statement of Additional Information,
bearing the same date, with the Securities and Exchange Commission and
incorporate by reference the Statement of Additional Information into this
prospectus. The Securities and Exchange Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding registrants
that file electronically with the Securities and Exchange Commission. A copy of
the Statement of Additional Information may be obtained without charge by
calling (800) 225-5225, or by writing AAL at its principal office at 4321 North
Ballard Road, Appleton, Wisconsin 54919-0001. The Telecommunications Device for
the Deaf (TDD) number is (800) 735-9644. A Table of Contents for the Statement
of Additional Information appears at the end of this prospectus.
A prospectus for the Fund accompanies this prospectus. Please read both
prospectuses carefully and keep them for future reference.
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED IN THIS DOCUMENT OR THAT WE HAVE REFERRED YOU TO. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
<PAGE>
TABLE OF CONTENTS
DEFINITIONS
SUMMARY
FEES AND EXPENSE TABLES
PERFORMANCE INFORMATION
AAL, THE ACCOUNTS AND THE FUND
THE CERTIFICATE
Application and Purchase
Crediting and Allocating Your Premium Payment
Free Look Period
Owners, Payees and Annuitants
Adult and Juvenile Certificates
Beneficiaries
Assignments of Ownership
ANNUITY PAYMENTS
Selecting an Annuity Payment Option
Annuity Payment Options
Annuity Payment Dates
Fixed Account Annuity Payments
Variable Annuity Payments
TRANSFERS AMONG SUBACCOUNTS AND/OR THE FIXED ACCOUNT
SURRENDERS AND WITHDRAWALS
DEATH OF THE OWNER AND/OR ANNUITANT
CERTIFICATE FEES AND CHARGES
GENERAL INFORMATION ABOUT THE CERTIFICATES
FEDERAL TAX MATTERS
OTHER INFORMATION
ILLUSTRATIONS OF ANNUITY PAYMENTS ASSUMING HYPOTHETICAL RATES OF RETURNCONDENSED
FINANCIAL INFORMATION
<PAGE>
DEFINITIONS
AAL, we, us, our: Aid Association for Lutherans, a fraternal benefit society
owned by and operated for its members.
AAL CMC: AAL Capital Management Corporation.
annuitant: The person on whose life or life expectancy the certificate is based.
annuity payment: One of a series of periodic distributions.
annuity payment date: The date of the month on which you elect to receive
annuity payments.
annuity payment period: The period during which annuity payments are made.
annuity unit: The accounting unit of measurement used to calculate the amount of
the annuity payment.
annuity unit value: The value of an annuity unit for a subaccount for a given
valuation period.
assumed investment return: The investment return upon which the variable annuity
payments are based.
beneficiary: The person who you have chosen to receive the death proceeds upon
the annuitant's death.
certificate: The contract between you and us providing the single premium
immediate variable annuity.
certificate anniversary: The same date in each year as the issue date.
certificate year: A period beginning on a certificate anniversary and ending on
the day immediately preceding the next certificate anniversary.
Code: The Internal Revenue Code of 1986, as amended.
commuted value: The present value of any remaining future payments for the rest
of the guaranteed payment period. In calculating the commuted value for the
fixed account, we will use an interest rate that is currently 0.5% higher than
the rate used to determine the annuity payments. The maximum valuation interest
rate for single premium immediate annuities is specified in your state's
insurance laws. For the variable subaccounts, the interest rate we currently use
is 0.5% greater than the assumed investment return you selected.
death proceeds: The amount payable from your certificate to your beneficiary in
the event of the annuitant's death (during the guaranteed payment period).
fixed account: Part of the general account of AAL, which includes all of AAL's
assets other than those in any separate account of AAL.
free look period: The period of time during which you may cancel the
certificate.
Fund: AAL Variable Product Series Fund, Inc.
home office: Our principal executive office located at 4321 North Ballard Road,
Appleton, Wisconsin, 54919-0001. The toll-free number is 800-225-5225, locally
(920) 734-5721.
issue date: The effective date of the certificate, generally the date on which
we apply your premium.
member: Generally, Lutherans and their families and persons serving or
associated with Lutherans or Lutheran organizations and their families. You
apply for membership by completing a membership application at the time you
complete an application for the AAL Single Premium Immediate Variable Annuity or
other AAL insurance product. Associate members do not have to buy an insurance
product but other requirements apply.
net asset value: Each portfolio's share value at the close of regular trading on
the New York Stock Exchange (currently 4:00 p.m. Eastern Time) for any valuation
date.
owner, you, your, yours: The person or entity who owns the certificate.
payee: The person you designate to receive payments under the certificate.
portfolio: One of a series of the Fund currently available for investment
through a corresponding subaccount.
proof of death: A certified copy of the death certificate or a certified decree
of a court of competent jurisdiction as to the finding of death or any other
proof satisfactory to AAL.
premium: The payment you invest in the certificate.
qualified plan: A retirement plan that receives favorable tax treatment under
Section , 403(b) or 408 of the Code.
service center: The AAL Variable Products Service Center located at 4321 North
Ballard Road, Appleton, Wisconsin, 54919-0001. The toll-free telephone number is
(800) 225-5225, locally (920) 734-5721.
subaccount: A division of the variable account that invests exclusively in
shares of a single portfolio of the Fund.
valuation date: Any date we are open for business and the New York Stock
Exchange is open for regular trading.
valuation period: The period of time from the end of one valuation date to the
end of the next valuation date.
variable account: AAL Variable Annuity Account II, which is a separate account
of AAL.
written request: A written request or notice signed by the owner, received in
good order by AAL at its service center and satisfactory in form and content to
AAL.
<PAGE>
SUMMARY
This summary only gives you a brief overview of the more significant aspects of
the certificate. Please refer to the remainder of this prospectus for more
detailed information. The certificate along with any riders or endorsements
constitutes the entire agreement between you and us. Please retain them as part
of your permanent records.
THE CERTIFICATE
The certificate is an individual single premium immediate variable annuity that
allows you to receive periodic payments whose amounts are adjusted up or down
according to the performance of various underlying subaccounts you select.
PURCHASE OF THE CERTIFICATE
You may purchase the certificate for a minimum single premium of $5000.
INVESTMENT OPTIONS
The certificate offers a choice of seven variable investment options. You bear
the investment risk as to the performance of the variable investment options.
The certificate also offers a fixed account option under which we pay a fixed
rate of interest at an annual rate of at least 3.5%. You bear the risk that we
do not pay a higher rate of interest.
Each variable investment option or subaccount invests in a corresponding
portfolio of the Fund. The portfolios include:
o AAL Variable Product Small Company Stock Portfolio
o AAL Variable Product International Stock Portfolio
o AAL Variable Product Large Company Stock Portfolio
o AAL Variable Product Balanced Portfolio
o AAL Variable Product High Yield Bond Portfolio
o AAL Variable Product Bond Portfolio
o AAL Variable Product Money Market Portfolio
CHARGES AND DEDUCTIONS
There are charges that occur on the variable account level and the Fund level.
If you invest in the variable account, you will incur a mortality and expense
risk charge computed at an aggregate annualized rate of 1.25% on the average
daily net asset value of the variable account.
If you withdraw from or surrender the certificate, we calculate the commuted
value you receive for the fixed account using an interest rate that is currently
0.5% higher than the rate used to determine the annuity payments. For variable
subaccounts, we currently use an interest rate of 0.5% greater than the assumed
investment return that you selected. Since we use a higher interest rate in
calculating the commuted value, the certificate has an indirect withdrawal and
surrender charge. Also, the amount that you will receive upon a withdrawal or
surrender of the certificate will be less than you would receive had you chosen
to continue receiving annuity payments. While there is no direct surrender
charge, the computation of the commuted value assumes an indirect charge that
varies with each situation. However, this indirect charge will never exceed 6%.
A daily charge based on a percentage of each portfolio's average daily net asset
value is payable by each portfolio to its investment adviser. In addition to the
investment advisory fees, each portfolio incurs other operating expenses that
may vary. See the accompanying Fund prospectus for more information concerning
the investment advisory fee.
FREE LOOK PERIOD
You may cancel your certificate within 10 days starting on the day you receive
it. This 10-day period is called the free look period. Some states require that
we provide you a longer free look period. In some states we restrict the initial
premium allocation to the Money Market Subaccount during the free look period.
For more information concerning our procedures see Free Look Period.
WITHDRAWALS AND SURRENDERS
Unless your certificate is irrevocable, you may withdraw from or surrender the
certificate for its commuted value. If you take a withdrawal from or surrender
the certificate before attaining age 59 1/2, you may be subject to a 10%
premature distribution penalty tax in addition to ordinary income tax.
TRANSFERS
You may transfer all or a part of your certificate's value among the subaccounts
or from the subaccounts to the fixed account subject to certain limitations. We
do not allow transfers from the fixed account. You may make up to twelve
transfers per certificate year. Certain other restrictions apply to transfers.
After the first two transfers from the subaccounts in a certificate year, we
will impose a $25 transfer charge.
ANNUITY PAYMENT AMOUNT
We determine the amount of your annuity payment based upon your premium, the
annuity payment option you choose, and the investment allocation(s) that you
make to the variable or fixed account.
FEDERAL TAX TREATMENT
All or a portion of every distribution or annuity payment will generally be
taxable as ordinary income. The taxable portion of most distributions will be
subject to withholding unless the payee elects otherwise. There may be tax
penalties if you take a distribution before reaching age 59 1/2. Current tax
laws may change at any time.
<PAGE>
FEES AND EXPENSE TABLES
These expense tables describe all of the expenses that you would incur
as a certificate owner. These tables are intended to help you in understanding
the various costs and expenses under the certificate. The certificates are not
currently subject to state premium taxes. No sales charge (load) is paid upon
the purchase of the certificate. The tables reflect all expenses for both the
variable account and the underlying Fund. For a complete discussion of
certificate costs and expenses see Certificate Fees and Charges. For more
information regarding the expenses of the Fund, see the attached Fund
prospectus.
CERTIFICATE OWNER TRANSACTION EXPENSES:
Sales Charge Imposed on Premium Payment NONE
Transfer Fee $25(1)
Maximum Indirect Surrender Charge 6%(2)
ANNUAL CERTIFICATE FEES: NONE
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of net assets of each
subaccount):
Mortality and Expense Risk Charges 1.25%
Administrative Charge NONE
----
Total Variable Account Annual Expenses 1.25%
AAL VARIABLE PRODUCT SERIES FUND, INC. ANNUAL EXPENSES:
(as a percentage of average net assets of each portfolio):
(1) You can make two free transfers from the subaccounts in each certificate
year. We will charge a $25 fee for each subsequent transfer. See Transfers
Among Subaccounts and/or the Fixed Account in this prospectus for more
information on this charge and the restrictions on transfers from the fixed
account.
(2) If you withdraw from or surrender the certificate, we will pay you the
commuted value of the future payments for the remaining guaranteed payment
period. We calculate the commuted value you receive for the fixed account
using an interest rate that is currently 0.5% higher than the rate used to
determine the annuity payments. For variable subaccounts, we currently use
an interest rate that is 0.5% greater than the assumed investment return
that you selected. Since we use a higher interest rate in calculating the
commuted value, the certificate has an indirect withdrawal and surrender
charge. Also, the amount that you will receive upon a withdrawal or
surrender of the certificate will be less than you would receive had you
chosen to continue receiving annuity payments.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
TOTAL ANNUAL FUND
PORTFOLIO OTHER EXPENSES EXPENSES AFTER
INVESTMENT ADVISORY AFTER EXPENSE EXPENSE
FEES REIMBURSEMENT REIMBURSEMENT(3)
Small Company Stock 0.35% 0% 0.35%
International Stock 0.80 0 0.80
Large Company Stock 0.32 0 0.32
Balanced 0.32 0 0.32
High Yield Bond 0.40 0 0.40
Bond 0.35 0 0.35
Money Market 0.35 0 0.35
</TABLE>
(3) AAL CMC has agreed to pay on behalf of the Fund or to reimburse the Fund
for all expenses in excess of 0.32% for the Large Company Stock and
Balanced Portfolios, 0.35% for the Small Company Stock, Bond and Money
Market Portfolios, 0.80% for the International Stock Portfolio and 0.40%
for the High Yield Bond Portfolio. We can reduce or terminate this
voluntary reimbursement upon 30-days' written notice to the Fund. Absent
the expense reimbursement, the total portfolio expenses for the period
ended December 31, 1999 would have been:
PORTFOLIO OTHER EXPENSES TOTAL ANNUAL FUND EXPENSES
Small Company Stock Portfolio 0.06% 0.41%
International Stock Portfolio 0.50 1.13
Large Company Stock Portfolio 0.03 0.35
Balanced Portfolio 0.04 0.36
High Yield Bond Portfolio 0.10 0.50
Bond Portfolio 0.09 0.44
Money Market Portfolio 0.06 0.41
EXAMPLES
The following examples illustrate the expenses incurred on a $1,000 investment
assuming a 5% annual return on assets and a female annuitant age 40 with a 3%
assumed investment return.
A. If you elect a life income payment option with a 10-year guaranteed payment
period and you do not surrender your certificate at the end of the periods
shown:
1 Year 3 Years
Small Company Stock $16 $48
International Stock 20 61
Large Company Stock 16 47
Balanced 16 47
High Yield Bond 17 49
Bond 16 48
Money Market 16 48
B. If you elect a 10-year fixed period payment option and you do not surrender
your certificate at the end of the periods shown:
1 Year 3 Years
Small Company Stock $15 $40
International Stock 19 51
Large Company Stock 15 40
Balanced 15 40
High Yield Bond 15 41
Bond 15 40
Money Market 15 40
C. If you elect a life income payment option with a 10-year guaranteed payment
period and you do surrender your certificate at the end of the periods
shown:
1 Year 3 Years
Small Company Stock $22 $51
International Stock 26 64
Large Company Stock 22 51
Balanced 22 51
High Yield Bond 22 53
Bond 22 51
Money Market 22 51
D. If you elect a 10-year fixed period payment option and you do surrender
your certificate at the end of the periods shown:
1 Year 3 Years
Small Company Stock $31 $50
International Stock 35 61
Large Company Stock 31 50
Balanced 31 50
High Yield Bond 32 51
Bond 31 50
Money Market 31 50
NOTE: THESE EXAMPLES SHOULD NOT BE CONSIDERED REPRESENTATIONS OF PAST OR FUTURE
EXPENSES FOR THE VARIABLE ACCOUNT OR FOR ANY PORTFOLIO. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN ABOVE. SIMILARLY, THE 5% ANNUAL RATE OF RETURN
ASSUMED IN THE EXAMPLES IS NOT AN ESTIMATE OR GUARANTEE OF FUTURE INVESTMENT
PERFORMANCE.
Condensed financial information containing the annuity unit value history
appears at the end of this prospectus.
PERFORMANCE INFORMATION
From time to time, the variable account may include in advertisements and other
sales materials several types of performance information for the subaccounts.
This information may include "average annual total return." The Bond , Balanced
, and High Yield Bond subaccounts may also advertise "yield." The Money Market
Subaccount may advertise "yield" and "effective yield." Advertised yields and
total returns include all charges and expenses attributable to the certificate.
Therefore, a portfolio's performance will not be directly comparable to that of
a mutual fund or an unmanaged index used as a benchmark.
The performance information that we may present is not an estimate or guarantee
of future investment performance and does not represent the actual investment
experience of amounts invested by a particular owner. Additional information
concerning a subaccount's performance appears in the Statement of Additional
Information.
Total Return and Yield Quotations. Average annual total return figures measure
the net income of a subaccount and any realized or unrealized gains or losses of
the underlying investments in the subaccount, over the period stated.
Yield is a measure of the net dividend and interest income earned over a
specific one-month or 30-day period (seven-day period for the Money Market
Subaccount), expressed as a percentage of the value of the subaccount's annuity
Units. Yield is an annualized figure, which means that we assume that the
subaccount generates the same level of net income over a one-year period and
compound that income on a semi-annual basis. We calculate the effective yield
for the Money Market Subaccount similarly, but include the increase due to
assumed compounding. The Money Market Subaccount's effective yield will be
slightly higher than its yield due to this compounding effect.
Expense and performance information for the portfolios may be compared in
advertising, sales literature and other communications to that of other variable
products tracked by Lipper Analytical Services, Inc. (Lipper), Variable Annuity
Research Data Service (VARDS), Morningstar, Inc. (Morningstar) and other
services. In addition, we may compare the performance of the portfolios to the
S&P 500 Index, the S&P SmallCap 600 Index, the Wilshire Small Cap Index, the
Lehman Bond Index, the Dow Jones Industrial Average, Merrill Lynch High Yield
Master Index and other widely recognized indices. Unmanaged indices assume the
reinvestment of dividends, if any, but do not reflect any deduction for fund
expenses. We periodically report performance ratings in financial publications
such as Forbes, Barron's, Fortune, Money Magazine, Business Week, Financial
Planning, The New York Times and The Wall Street Journal.
We may also report other information concerning the effect of tax-deferred
compounding on a subaccount's returns that may be illustrated by tables, graphs
or charts. All income and capital gains derived from subaccount investments are
reinvested and lead to substantial long-term accumulation of assets, provided
that the underlying portfolio's investment experience is positive.
See the Fund prospectus and Statement of Additional Information for a more
complete description of the methods used to calculate a portfolio's yield and
total return.
AAL, THE ACCOUNTS AND THE FUND
AAL
AAL is a fraternal benefit society owned by and operated for its members. AAL's
mission is to bring Lutheran people together to pursue quality living through
financial security, volunteer action and help for others. AAL was founded in
1902 under the laws of the State of Wisconsin as a non-stock, non-profit
corporation. As of December 31, 1999, AAL has approximately 1.7 million members
and is one of the world's largest fraternal benefit society in terms of
statutory assets (over $20 billion) and life insurance in force ($87 billion).
AAL is currently licensed to transact life insurance business in all 50 states
and the District of Columbia and is offering the certificates in all states
except New York.
THE VARIABLE ACCOUNT
We established the variable account as a separate account under the laws of the
State of Wisconsin on February 4, 1999. The variable account is registered as a
unit investment trust with the Securities and Exchange Commission (the SEC)
under the Investment Company Act of 1940 (the 1940 Act). The variable account
meets the definition of a separate account under Federal securities laws. The
SEC does not supervise the management or investment practices or policies of the
variable account.
The variable account is divided into subaccounts. A premium flows through the
certificate to either the variable account or the fixed account according to
your instructions. From the variable account, the premium flows to the
subaccounts in the amounts or percentages you allocate. In turn, the subaccounts
invest in shares of one of the corresponding portfolios of the Fund. The
portfolios and their investment objectives are described below. We make no
assurance that the portfolios will meet their investment objectives.
You bear all the investment risk for premiums allocated to the subaccounts.
Annuity payments and commuted value will vary with the performance of the
subaccounts.
Under Wisconsin law, the assets of the variable account that are equal to the
reserves and other contract liabilities of the variable account are not
chargeable with liabilities arising out of any other business we may conduct. We
will maintain an amount of assets in the variable account that always has a
value approximately equal to the reserves allocated to the variable account
under the certificates. This amount will always be greater than the commuted
values allocated to the variable account under the certificates. Income gains
and losses, whether or not realized, are, in accordance with the certificates,
credited to or charged against the variable account without regard to our other
income, gains or losses. Obligations arising under the certificates are our
obligations.
THE FIXED ACCOUNT
Amounts allocated to fixed account under the certificate are part of our general
account which supports our annuity and insurance obligations. BECAUSE OF
EXEMPTIVE AND EXCLUSIONARY PROVISIONS, WE HAVE NOT REGISTERED INTERESTS IN THE
FIXED ACCOUNT UNDER THE SECURITIES ACT OF 1933 NOR THE FIXED ACCOUNT AS AN
INVESTMENT COMPANY UNDER THE 1940 ACT. The SEC has not reviewed the disclosure
relating to the fixed account. However, disclosures regarding the fixed account
may be subject to certain generally applicable provisions of the federal
securities laws relating to the accuracy and completeness of statements in
prospectuses.
You have no voting rights with respect to fixed account values.
THE FUND
You may allocate your premium to one or more of the subaccounts. The
subaccounts, in turn, invest in shares of a corresponding portfolio of the AAL
Variable Product Series Fund, Inc. (the Fund). The Fund is a Maryland
corporation registered with the SEC under the 1940 Act as a diversified,
open-end investment company commonly known as a mutual fund. This registration
does not involve supervision by the SEC of the management or investment
practices or policies of the Fund.
The Fund currently offers its shares to three of our separate accounts: the AAL
Variable Annuity Account I and II , and the AAL Variable Life Account I as well
as retirement plans including the Aid Association for Lutherans Savings Plan. We
also purchase Fund shares directly.
Although the investment objectives and policies of certain portfolios are
similar to the investment objectives and policies of other portfolios that may
be managed or sponsored by the same investment adviser, manager, or sponsor,
nevertheless, we do not represent or assure that the investment results will be
comparable to any other portfolio, even where the investment advisers or manager
is the same. Differences in portfolio size, actual investments held, fund
expenses, and other factors all contribute to differences in portfolio
performance. For all of these reasons, you should expect investment results to
differ. In particular, certain portfolios available only through the certificate
have names similar to portfolios not available through the certificate. The
performance of a portfolio not available through the certificate does not
indicate performance of the similarly named portfolio available through the
certificate.
AAL CMC serves as investment adviser to the Fund and is registered as such under
the Investment Advisers Act of 1940. Oechsle International Advisors LLC is the
sub-adviser to the International Stock Portfolio.
The variable account will purchase and redeem shares from the Fund at net asset
value without any sales or redemption charge. We will redeem shares to the
extent necessary to collect charges under the certificates, to make annuity
payments, withdrawals or surrenders, to provide benefits under the certificates
or to make transfers from a subaccount to another subaccount and/or to the fixed
account as you request.
We automatically reinvest any dividends or capital gain distribution amounts
that we receive on shares of the portfolios held under the certificates. We
reinvest at the portfolio's net asset value on the date payable. Dividends and
capital gain distribution amounts will reduce the net asset value of each share
of the corresponding portfolio and increase the number of shares outstanding of
the portfolio by an equivalent value. However, these dividends and capital gain
distribution amounts do not change your number of annuity units.
The following chart indicates the names of the portfolios in which the
subaccounts invest, as well as the investment objectives, for each portfolio.
INVESTMENT
PORTFOLIO OBJECTIVES
Small Company Stock Portfolio Strives for capital
growth that approximates the performance of
the S&P SmallCap 600* Index, by investing
primarily in common stocks of the index.
International Stock Portfolio Strives for long-term capital
growth by investing primarily in foreign
stocks.
Large Company Stock Portfolio Strives for
investment results that approximate the
performance of the S&P 500* Index by
investing primarily in common stocks of the
index.
Balanced Portfolio Seeks capital growth and income by
investing in a mix of common
stocks, bonds and money market
instruments. Securities are
selected consistent with the
policies of the Large Company
Stock, Bond and Money Market
Portfolios.
High Yield Bond Portfolio Strives for high current
income and secondarily capital growth by
investing primarily in high risk, high yield
bonds commonly referred to as "junk bonds."
Bond Portfolio Strives for investment results
similar to the total return of the
Lehman Brothers Aggregate Bond
Index by investing primarily in
bonds and other debt securities
included in the index.
Money Market Portfolio Strives for maximum current income
while maintaining liquidity and a
constant net asset value of $1.00
per share by investing in
high-quality, short-term money
market instruments.
* "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "500", "Standard & Poor's
SmallCap 600" and "S&P SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by AAL. The product is not
sponsored, endorsed, sold or promoted by Standard & Poor's and Standard &
Poor's makes no representation regarding the advisability of investing in
the product. (Please see the Statement of Additional Information which sets
forth certain additional disclaimers and limitations of liabilities on
behalf of S&P.)
BEFORE SELECTING ANY SUBACCOUNT, YOU SHOULD CAREFULLY READ THE ACCOMPANYING
PROSPECTUS FOR THE FUND. YOU SHOULD PERIODICALLY CONSIDER YOUR ALLOCATION AMONG
SUBACCOUNTS IN LIGHT OF CURRENT MARKET CONDITIONS AND YOUR INVESTMENT GOALS,
RISK TOLERANCE AND FINANCIAL CIRCUMSTANCES. THE PROSPECTUS PROVIDES MORE
COMPLETE INFORMATION ABOUT THE PORTFOLIOS OF THE FUND IN WHICH THE SUBACCOUNTS
INVEST, INCLUDING INVESTMENT OBJECTIVES AND POLICIES, RISKS, CHARGES, AND
EXPENSES.
THE CERTIFICATE
APPLICATION AND PURCHASE
The certificate is an individual single premium immediate variable annuity. We
offer certificates to members, people who are eligible for membership and
employees of AAL who reside in Wisconsin (including employees of our
subsidiaries and affiliates).
We may issue the certificate as:
a Non-qualified annuity, a Traditional Individual Retirment Annuity, or a
Tax-Sheltered Annuity or in circumstances where the annuity may qualify for
special treatment under the Code.
You may purchase a certificate by completing and submitting an application. The
annuitant must be younger than 100 years as of the issue date. Some states may
have additional limitations.
You may apply for a certificate by completing a traditional paper application or
an electronic application available through your AAL representative. If you
submit an electronic application, you will be asked to certify the accuracy and
completeness of the information in your electronic application and sign a
electronic signature pad. The data will then be transmitted electronically to
us. We will attach a paper copy of your application to your certificate if the
certificate can be issued. The electronic application may not be available in
your state.
You must give us or arrange to have sent to us a single premium payment of at
least $5,000 along with your application. You can not make any additional
premium payments unless we agree. Single premium payments over $1,000,000
require our prior written approval.
Certain provisions of the certificates may vary from state to state in order to
conform with the law of the state in which you reside. This Prospectus describes
generally applicable provisions. You should refer to your certificate for any
variations required by state law.
CREDITING AND ALLOCATING YOUR PREMIUM PAYMENT
You may allocate your premium to any subaccount of the variable account and/or
the fixed account. Your allocation must be in whole percentages and total 100%
of the premium. You may not allocate less than $50 to any subaccount or the
fixed account. We will allocate your premium according to your allocation
instructions on your application. If you do not designate premium allocation
percentages, we will treat your application as not in good order.
If your application is in good order, we will allocate the premium to your
chosen subaccount(s) and/or fixed account (or in certain states, to the Money
Market Subaccount, as discussed below) within two days of receipt of the
completed application and premium. If we determine the application is not in
good order, we will attempt to complete the application within five business
days. If the application is not complete at the end of this period, we will
inform you of the reason for the delay and that the premium will be returned
immediately unless you specifically consent to our keeping the premium until the
application is complete.
Once each day that we are open for business, we determine the net asset value
(NAV) per share of the underlying portfolios at the close of regular trading on
the New York Stock Exchange, currently 4:00 p.m. Eastern Time. We also determine
the annuity unit value (AUV) of each subaccount at the end of each business day
also at 4:00 p.m. Eastern Time. We do not determine the NAV or AUV on holidays
observed by the Exchange or on holidays observed by AAL.
The Exchange is regularly closed on Saturdays and Sundays and on New Year's Day,
Martin Luther King Jr. Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. If one of these
holidays falls on a Saturday or Sunday, the Exchange will be closed on the
preceding Friday or the following Monday, respectively. During 2000, AAL will be
closed for business on the Friday following Thanksgiving. On that day, we will
not purchase or redeem any shares of the Fund notwithstanding the fact that the
New York Stock Exchange will be open. We will not purchase or redeem any annuity
units on any days that AAL is not open for business.
FREE LOOK PERIOD
Generally, you may return your certificate for cancellation within 10 days after
you initially receive it. However some states require a longer free look period.
Please review your certificate to determine your free look period.
In order to return your certificate, you must deliver or mail the certificate
along with a written request to your AAL representative or to our service
center. Upon cancellation, the certificate will be void as of the issue date and
you will be entitled to receive an amount equal to the certificate's free look
value as of the date you notify us or the date we receive your cancellation
request in our service center, whichever is earlier. The certificate's free look
value is the total of the free look value for each of the variable subaccounts
and fixed account that you selected. The free look value for each of the
variable subaccounts is the premium allocated to that subaccount multiplied by
the subaccount investment factor for each valuation period minus any payments
made attributable to that subaccount, see Subaccount Investment Factor. The free
look value for the fixed account is the amount of premium allocated to the fixed
account minus any payments made from the fixed account. You will generally
receive your money within seven days after we receive your request for
cancellation. However, if your certificate is an IRA, and you decide to cancel
it within seven days from the receipt of your IRA disclosure, we will refund
your premium less any payments made.
Certain states require a full refund of premium paid if a certificate is
returned during the free look period. In these situations we reserve the right
to place the premium you allocated to the variable subaccounts to the Money
Market Subaccount until the free look period expires plus an additional five-day
period to allow for your receipt of the certificate by mail. After this period,
we will allocate the value of the annuity units of the Money Market Subaccount
to the subaccount(s) according to your original instructions. In all such
states, we will refund the greater of the premium paid minus any payment paid or
the certificate's free look value.
OWNERS, PAYEES AND ANNUITANTS
You, as owner, are typically the recipient of all distributions under the
certificate. Unless the owner is an entity, the owner is also the annuitant. As
owner, you can name beneficiaries, and make transfers between subaccounts and to
the fixed account. You will receive all annuity payments during the annuitant's
lifetime, unless you designate another person or entity as the payee. Keep in
mind that if you designate another person or entity as payee, you may still be
responsible for any income tax payable on the payments.
In the event the annuitant(s) dies during the guaranteed payment period, the
death proceeds will be payable to the named beneficiary. We use the annuitant's
life to determine the amount and duration of any annuity payments. In the case
of a qualified retirement plan, the annuitant is the plan participant and the
owner is the retirement plan.
Under certain circumstances other entities, such as trusts, may purchase AAL
products but are not eligible for membership.
ADULT AND JUVENILE CERTIFICATES
We issue adult certificates to applicants who are age 16 or older who become
benefit members of AAL. We issue juvenile certificates when the proposed
annuitant is younger than age 16, but is otherwise eligible for benefit
membership.
In the case of the adult certificate, the annuitant must be 16 years of age or
older. Typically, the applicant of the certificate is the owner and annuitant of
the certificate. While the annuitant is alive, the owner of the certificate may
exercise every right and enjoy every benefit provided in the certificate. The
person who applies for the certificate becomes a benefit member of AAL upon our
approval of the membership application.
For the juvenile certificate, a juvenile is named as the annuitant and owner of
the certificate. However, because of age, the juvenile cannot exercise the
rights of ownership. Therefore, an adult must apply on behalf of the juvenile
and retain control over the certificate. The adult applicant controller
exercises certain rights of ownership on behalf of the juvenile annuitant. These
rights are described in the certificate. The adult controller may transfer
control to another eligible person, but cannot transfer ownership of the
certificate.
Transfer of control to the juvenile annuitant will take place at the first
certificate anniversary date following the earlier of:
o the annuitant's 21st birthday; or
o the annuitant's 16th birthday after the adult controller transfers
control to the annuitant in writing; or
o the death of the adult controller after the annuitant's 16th birthday.
If the person who has control of the certificate dies before the annuitant gains
control, control will be vested in an eligible person according to our bylaws.
If we determine that it is best for the annuitant, we may transfer control of
the certificate to some other eligible person according to our bylaws.
The juvenile annuitant will become a benefit member of AAL on the first
certificate anniversary date on or following the juvenile's 16th birthday.
BENEFICIARIES
You may name one or more beneficiaries to receive the death proceeds payable
under the certificate, if any. If no beneficiary has been named or the
beneficiary does not survive the annuitant, the death proceeds will be paid to
you, if living, otherwise to your estate (in accordance with applicable state
law). Our bylaws list persons eligible to be beneficiaries. You may designate
beneficiaries as either first, second or third class. Unless otherwise
specified, we will distribute death proceeds in the following order to
beneficiaries:
o equally to the beneficiaries in the first class. If none are living, then;
o equally to the beneficiaries in the second class. If none are living, then;
o equally to the beneficiaries in the third class.
If a beneficiary dies within 15 days after the death of the annuitant, we will
consider the beneficiary to have died before the annuitant for purposes of
paying the death proceeds.
You may change beneficiaries by sending a written request to our service center.
We will give you a special form to make this request. We must approve any change
in beneficiary. Any such change is effective on the date you designate on your
written request, or the date we receive your written request at our service
center if no date appears on the request. A change in beneficiary is only
effective if the request was mailed or delivered to us while the annuitant is
alive. We are not liable for any payments made or actions taken by us before we
receive and approve changes in beneficiary designations.
If you elect not to have a guaranteed payment period or all annuitants live
beyond the guaranteed payment period, no death proceeds will be payable.
ASSIGNMENTS OF OWNERSHIP
The certificate can not be sold, assigned, discounted, or pledged as collateral
for a loan or as surety for performance of an obligation or for any other
purpose.
ANNUITY PAYMENTS
SELECTING AN ANNUITY PAYMENT OPTION
The annuity payment option specifies the type of annuity to be paid and
determines how long the annuity will be paid, the frequency of payment, and the
amount of the first annuity payment. You must select the annuity payment option
when applying for the certificate. You may not change the type of annuity
payment option once we issue the certificate.
If you choose a life income payment option, you must elect to characterize your
certificate and its annuity payments as either revocable or irrevocable. For all
other payment options, your certificate will be revocable. (However, some states
do not allow the characterization of a certificate as revocable.) If you elect
the irrevocable option, you cannot later change the annuity payments, or receive
a withdrawal or surrender from the certificate. If you elect the irrevocable
option, you cannot later change to the revocable option once we issue the
certificate. If yourcertificate is revocable you can:
o change the duration of the guaranteed payment period (to a shorter period):
o receive withdrawals; and
o surrender the certificate.
If your certificate is revocable and you have chosen a life income payment
option, you can later characterize your certificate as irrevocable. However,
once you characterize your certificate as irrevocable, you cannot later change
it to a revocable certificate once the change is made.
If you do not have any other sources of funds for emergencies or other financial
needs which may arise, an irrevocable certificate may be inappropriate for you.
In addition, even though you can take withdrawals from or surrender a revocable
certificate, a revocable certificate may be inappropriate for you if you intend
on taking additional withdrawals from or surrendering the certificate,
particularly in the short term. Withdrawals or surrenders from revocable
certificates result in the assessment of indirect withdrawal or surrender
charges, and the calculation of new commuted values . See Certificate Fees and
Charges for more information regarding the calculation of commuted values and
the assessment of indirect withdrawal or surrender charges.
You must also select the subaccounts and/or the fixed account to which we will
apply your premium. Except as discussed in Free Look Period , the annuity unit
value for each subaccount selected as of the valuation date when we receive your
premium, will be used to calculate the number of annuity units which determine
your first variable annuity payment. Your total annuity payment will be the
fixed account annuity payment, if any, plus the variable account annuity
payment.
If you do not specify an annuity payment option, we will treat your application
as not being in good order. If you do not specify whether or not the certificate
and its annuity Payments will be irrevocable or revocable, we will issue the
certificate as revocable.
You must also tell us at time of application which financial institution and
account you would like your payments sent to. We will send your annuity payments
via electronic funds transfer to the financial institution that you request. If
you do not tell us which financial institution and account you would like your
annuity payments sent to, we will treat your application as not being in good
order.
ANNUITY PAYMENT OPTIONS
Fixed Period Income
We make annuity payments at regular intervals for a fixed number of payments,
not to exceed the greater of 30 years or the annuitant's life expectancy. We
call this payment period the "guaranteed payment period." At the end of the
guaranteed payment period, all of the annuity payments will have been paid, the
commuted value of the certificate will be zero, and the certificate will
terminate.
Life Income with Guaranteed Payment Period
We make annuity payments at regular intervals for the lifetime of the annuitant.
If the annuitant dies during the guaranteed payment period, we will continue
payments to the beneficiary to the end of the guaranteed payment period. You may
choose a guaranteed payment period of 0 to 30 years at the time we issue the
certificate. The amount of the payments depends upon the sex and age of the
annuitant, at the time we issue the certificate. If you select a shorter
guaranteed payment period, you will receive larger annuity payments. Both the
commuted value and death proceeds, however, will be smaller if the guaranteed
payment period is shorter. If you die after the end of the guaranteed payment
period, no death proceeds will be payable. Also, no surrenders or withdrawals
are permitted after the end of the guaranteed payment period. If you have poor
health or have a shortened life expectancy, you may want to consider selecting a
longer guaranteed payment period.
Joint and Survivor Life Income with Guaranteed Payment Period
We make annuity payments at regular intervals for the lifetime of both
annuitants. Unless an entity is the owner, the annuitants also own the
certificate as joint owners. Upon the death of one of the annuitants, we will
continue payments for the lifetime of the surviving annuitant. If both
annuitants die during the guaranteed payment period, we will continue payments
to the beneficiary to the end of that period. You may choose a guaranteed
payment period of 0 to 30 years at the time of issue. You may also choose to
have the annuity payment reduced after the death of the first annuitant. The
annuity payment may be reduced by a factor of 1/2, 1/3, or 1/4. We will reduce
the payments immediately after the later of the first death of one of the
annuitants and the end of the guaranteed payment period. A higher reduction
amount will result in a higher payment while both annuitants are alive. The
amount of the payments depends upon the age and sex of the annuitants at the
time of issue.
ANNUITY PAYMENT DATES
Annuity payments may be made monthly, quarterly, semi-annually and annually. In
addition, payments may be made annually but paid monthly. Under this payment
option, the annuity payment will be distributed from the variable subaccounts
annually, but will be placed in the fixed account to earn interest. We will then
make monthly payments from the fixed account for the remainder of the year.
You may select the annuity payment date. This is the date you should generally
expect to receive your annuity payment. If you do not select a payment date, the
annuity payment date will be the same day of the month as the issue date. In the
event that you do not select a payment frequency, annuity payments will be made
monthly. Once you select the annuity payment frequency or the annuity payment
date, neither may be changed.
After the first annuity payment, we compute subsequent payments three business
days prior to the day you selected to receive annuity payments.
FIXED ACCOUNT ANNUITY PAYMENTS
You may choose to deposit some or none of your premium in the fixed account
portion of the certificate.
Premiums deposited in the fixed account will fund guaranteed periodic payments.
We will determine the guaranteed annuity payment at the time we issue the
certificate. We may pay more than the guaranteed annuity payment if the
investment experience of the fixed account is more favorable than the guaranteed
interest rate shown in the certificate. We may also pay more than the guaranteed
payment if our mortality experience or administration expenses are favorable. We
may change the amount of the fixed account annuity payment at any time, but will
not pay an amount lower than the guaranteed payment.
Premiums placed in the fixed account may not be transferred to the subaccounts.
VARIABLE ANNUITY PAYMENTS
First Variable Annuity Payment
Variable annuity payments are periodic payments we make, the amount of which
varies from one annuity payment date to the next as a function of the net
investment performance of the subaccounts you selected. The dollar amount of the
first variable annuity payment depends on the annuity payment option chosen, the
age of the annuitant, the gender of the annuitant (if applicable), the amount of
premium applied to purchase the variable annuity payments, and an assumed
investment return that you select.
The dollar value of the first variable annuity payment is the sum of the first
variable annuity payments attributable to each subaccount. The dollar amount of
the first total annuity payment is the sum of the first variable annuity payment
and the fixed account annuity payment.
The first payment is made at the time of issue. The second payment is made on
the next annuity payment date. However, if this results in the second payment
being received in the same month as the issue date, the second payment will be
made on the requested date of the next annuity payment thereafter.
ANNUITY UNITS
We initially determine the number of annuity units for each subaccount on the
issue date. We calculate the number of annuity units for each subaccount by
dividing the amount of the first variable annuity payment allocable to that
subaccount by the annuity unit value for that subaccount on the issue date. The
number of annuity units attributable to each subaccount under a certificate
remains fixed unless there is a transfer of annuity units between subaccounts.
SUBSEQUENT VARIABLE ANNUITY PAYMENTS
We determine the dollar amount of each subsequent variable annuity payment
attributable to each subaccount by multiplying the number of annuity units of
that subaccount by the annuity unit value for that subaccount for the valuation
period ending on the annuity payment date, or during which the annuity payment
date falls. We aggregate the subsequent variable annuity payments for each
subaccount to determine the variable annuity payment. When an annuity payment
date would fall on a day that is not a valuation date, we calculate the variable
annuity payment as of the valuation date immediately preceding what would have
been the annuity payment date.
The annuity unit value of each subaccount for any valuation period is equal to:
o the annuity unit value for the preceding valuation period; multiplied
by the subaccount investment factor for the current valuation period;
multiplied by
o a daily discount factor which adjusts the annuity unit value to
reflect the assumed investment return. This factor is compounded to
reflect the number of days in the valuation period.
SUBACCOUNT INVESTMENT FACTOR
The subaccount investment factor for any valuation period is equal to:
o the net asset value of the corresponding Fund portfolio at the end of
the valuation period;
o plus the amount of any dividend, capital gain or other distribution
paid by the portfolio if the "ex-dividend" date occurs during the
valuation period;
o plus or minus any cumulative credit or charge for taxes reserved from
the operation of the portfolio;
o minus the dollar amount of the mortality and expense risk charge we
deduct each day in the valuation period; and
o divided by the net asset value of the corresponding Fund portfolio at
the beginning of the valuation period.
ASSUMED INVESTMENT RETURN
The annuity unit value for each subaccount will increase or decrease from one
annuity payment date to the next in direct proportion to the net investment
return of that subaccount less an adjustment for assumed investment return that
you selected. The purpose of the adjustment is to ensure the annuity unit value
only changes when the subaccount investment factor represents a rate of return
greater than or less than the assumed investment return you selected.
The certificate permits you to select one of three assumed investment returns:
3%, 4% or 5%. A higher assumed investment return will result in a higher initial
payment, a more slowly rising series of subsequent payments when actual
investment performance (annualized, less deductions and expenses) exceeds the
assumed investment return, and a more rapid drop in subsequent payments when
actual investment performance (annualized, less any deductions and expenses) is
less than the assumed investment return.
For example, if you select a 5% assumed investment return and if the net
investment return of the subaccount is equal to 5% annualized, the variable
annuity payment attributable to that subaccount for that period will be the same
as the previous variable annuity payment. To the extent that the subaccount's
net investment return exceeds an annualized rate of return of 5% for a payment
period, the variable annuity payment for that period will be more than the
previous variable annuity payment. To the extent that the subaccount's return is
less than an annualized rate of 5%, the variable annuity payment for that period
will be less than the previous variable annuity payment.
TRANSFERS AMONG SUBACCOUNTS AND/OR THE FIXED ACCOUNT
Except for certain restrictions mentioned below, you may transfer the annuity
units of one or more subaccounts to one or more other subaccounts and/or the
fixed account. We will process requests for transfer that we receive before 4:00
p.m. Eastern Time as of the close of business on that valuation date. We will
process requests we receive after that time as of the close of business on the
following valuation date.
To accomplish a transfer from a subaccount, we will redeem the annuity units in
that subaccount and reinvest that value in annuity units of the other
subaccounts and/or the fixed account you specified. We impose the following
restrictions on transfers:
o You may make two free transfers in each certificate year. After that
we will charge you $25 for each subsequent transfer. We deduct the
transfer charge from your value in the subaccount from which the
transfer was made. When you transfer from two or more subaccounts, we
apply the $25 transfer charge among those subaccounts in proportion to
the amounts you transfer.
o You may not transfer from the fixed account.
o You may make up to twelve transfers each certificate year.
TELEPHONE TRANSFER REQUESTS
If we receive a signed Telephone Transaction Authorization (found on the
certificate application and on the Variable Annuity Option Selection Form), you
may make withdrawals and transfers pursuant to your telephone instructions
(telephone request). We employ reasonable security procedures to ensure the
authenticity of telephone instructions, including, among other things, requiring
identifying information, recording conversations, and providing written
confirmations of transactions. Nevertheless, we will honor telephone
instructions from anyone who provides the correct identifying information. We
may be liable for losses due to unauthorized or fraudulent instructions only if
we fail to observe reasonable procedures.
If several people want to make telephone Requests at or about the same time, or
if our recording equipment malfunctions, we may not be able to allow any
telephone requests at that time. If this happens, you must submit a written
request to our service center. If there is a malfunction with the telephone
recording system or the quality of the recording itself is poor, we will not
process the transaction.
The phone number for telephone transactions is (800) 225-5225 or (920) 734-5721
locally. We reserve the right to suspend or limit telephone transactions.
SURRENDERS AND WITHDRAWALS
If you elected the revocable option, you may surrender the certificate at any
time while an annuitant is alive. If you elected a fixed period income, you may
withdraw up to the commuted value of the certificate. If you elected a Single or
Joint Life Income, you may withdraw up to the commuted value of the certificate
less all previous withdrawals. Withdrawals will decrease subsequent annuity
payments. To surrender your certificate and receive the commuted value, you must
submit a written request to our service center. We will not accept telephone
requests for surrender requests. We must receive a withdrawal or surrender
request by 4:00 p.m. Eastern Time on a valuation date in order to process it on
the same day. We will send your withdrawal or surrender amount by electronic
funds transfer to the financial institution that you request.
Generally, we will pay you the requested withdrawal or surrender amount within
seven days of our receipt of your request. In certain cases we may postpone
payment of your withdrawal or surrender beyond the seven days. Please see
Postponement of Payments for more information.
You may select the source of a withdrawal by specifically indicating the
subaccount or fixed account. However, we must agree to any selection. If you
request a withdrawal and do not specify the source of the withdrawal (the
specific subaccount(s) or fixed account), we will take the withdrawal on a pro
rata basis from each subaccount and the fixed account. You may not withdraw less
than $1000 at one time. If you make a telephone request for a withdrawal, we are
required to withhold 10% for federal income taxes. If you take a withdrawal, we
will issue you a supplemental contract for the remaining annuity payments.
If you elect the irrevocable option, you may not surrender or make a withdrawal
from the certificate.
YOU SHOULD CONSULT YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES OF A
WITHDRAWAL OR SURRENDER. A withdrawal or surrender may result in adverse tax
consequences, including the imposition of a 10% federal income tax penalty. See
Federal Tax Matters for more details.
DEATH OF THE OWNER AND/OR ANNUITANT
If you are a joint annuitant and joint owner, and die during the guaranteed
payment period, we will continue making payments to the surviving joint owner,
if any. The surviving joint owner, if any, will become the sole annuitant and
owner. If you are a joint annuitant and joint owner and die after the end of the
guaranteed payment period, we will make payments to the surviving joint owner,
if any, based upon the reduction factor you selected.
If you are the only annuitant and owner and die during the guaranteed payment
period, we will continue making payments to your beneficiary for the remainder
of the guaranteed payment period, if any. Your beneficiary will have the option
of receiving the commuted value as a single lump sum in lieu of continuing to
receive payments.
If you are the only annuitant and owner and die after the guaranteed payment
period, no death proceeds would be payable.
If the owner is an entity, upon the annuitant's death, we will continue making
payments to the beneficiary for the remainder of the guaranteed payment period,
if any. Generally, the owner will also be the beneficiary. The beneficiary will
have the option of receiving the commuted value as a single lump sum in lieu of
continuing to receive payments. If the annuitant died after the guaranteed
payment period, no death proceeds would be payable.
Upon your death, any remaining annuity payments will be distributed at least as
rapidly as under the method of distribution being used as of the date of your
death.
We will calculate the death proceeds payable as of the date of death when we
receive notice of the death.
We will recover from the payee or recipient any annuity payments made on or
after the date of death but before we receive notice of the death.
Before we can process any death proceeds, we must receive:
o proof that the annuitant or owner died;
o a completed claim form; and
o any other information that we reasonably require to process the claim.
Upon receipt of instructions in proper form from the beneficiary or owner to
resume annuity payments, we will make any annuity payments which had went unpaid
since we had received notice of the death. We will then resume making annuity
payments. If we receive instructions to pay the death proceeds in a lump sum, we
will pay the commuted value as of the date of death, plus interest, minus any
annuity payments made before we were notified of the death.
CERTIFICATE FEES AND CHARGES
SALES CHARGE
There is no sales charge deducted from your premium payment.
PREMIUM TAX CHARGE
There is currently no premium tax applicable to the certificates.
WITHDRAWAL OR SURRENDER CHARGE
There is no direct withdrawal or surrender charge applicable to the certificate,
but if you withdraw from or surrender the certificate, we will pay you the
commuted value of the certificate. We calculate the commuted value you receive
for the fixed account using an interest rate that is 0.5% higher than the rate
used to determine the annuity payments. For variable subaccounts, we currently
use an interest rate that is 0.5% greater than the assumed investment return
that you selected. Since we use a higher interest rate in calculating the
commuted value, the certificate has an indirect withdrawal and surrender charge.
Also, the amount that you will receive upon a withdrawal or surrender of the
certificate will be less than you would have received had you chosen to continue
receiving annuity payments. While there is no direct surrender charge, the
computation of the commuted value assumes an indirect charge that varies with
each situation. However, this indirect charge will never exceed 6%.
TRANSFER CHARGE
You may make two free transfers in each certificate year. We will charge you $25
for each subsequent transfer.
MORTALITY AND EXPENSE RISK CHARGE
To compensate us for assuming these mortality and expense risks, we deduct a
daily mortality and expense risk charge from the net assets of each subaccount
in the variable account. We impose a mortality and expense risk charge at an
annual rate of 1.25% of the average daily net assets of such subaccount in the
variable account for the mortality and expense risks it assumes under the
certificates.
In assuming the mortality risk, we incur the risks that our actuarial estimate
of mortality rates may prove erroneous, and annuitants will live longer than
expected.
If the mortality and expense risk charge and other charges under a certificate
are insufficient to cover the actual mortality costs and administrative expenses
incurred by us, we will bear the loss. Conversely, if the mortality and expense
risk charge proves more than sufficient, we will keep the excess for any proper
corporate purpose including, among other things, payment of sales expenses. We
expect to make a profit from this charge.
MISCELLANEOUS
Each portfolio pays charges and expenses out of its assets. The prospectus for
the Fund describes the charges and expenses.
We reserve the right to impose charges or establish reserves for any federal or
local taxes that we incur today or may incur in the future and that we deem
attributable to the certificates.
TAXES
Currently, we do not assess a charge against the variable account for federal
income taxes or state premium taxes. We may assess such a charge in the future
if income or gains within the variable account result in any federal income tax
liability to us or we become subject to state premium taxes. Charges for any
other taxes attributable to the variable account may also be made. See Federal
Tax Matters.
GENERAL INFORMATION ABOUT THE CERTIFICATES
THE ENTIRE CONTRACT
The entire contract between you and us consists of:
o the certificate;
o the application;
o attached endorsements or amendments, if any; and
o the AAL Articles of Incorporation and bylaws in force as of the issue
date of your certificate.
We treat any statements you make in the application as representations and not
warranties. We will not use a statement to void the certificate or to deny a
claim unless it appears in the application. No representative of ours except the
president or the secretary may change any part of the certificate on our behalf.
We will not be able to contest the certificate after it has been in effect for
two years from its issue date, provided that the annuitant is still living.
GENDER NEUTRAL BENEFITS
Under our annuity payment options, we distinguish between men and women because
of their different life expectancies. However, we do not make any such
distinctions for certificates that we issue in the state of Montana. This is
because Montana enacted legislation that requires that optional annuity benefits
(i.e., the annuity payments under our annuity payment options) not vary based on
a person's sex. In Arizona Governing Committee v. Norris, the U.S. Supreme Court
held that optional annuity benefits provided under an employer's deferred
compensation plan could not, under Title VII of the Civil Rights Act of 1964,
vary between men and women on the basis of sex. Because of this decision, the
annuity payment option rates applicable to certificates purchased under an
employment-related insurance or benefit program may not, in some cases, vary on
the basis of sex. We will apply unisex rates to qualified plans and those plans
where an employer believes that the Norris decision applies. Employers and
employee organizations should consider, in consultation with legal counsel, the
impact of Norris and Title VII generally and any comparable state laws that may
be applicable, on any employment-related insurance or benefit plan for which a
certificate may be purchased.
VOTING RIGHTS
There are certain voting rights attributable to the portfolios underlying the
variable account portion of the certificates. As required by law, we will vote
the portfolio shares held in a subaccount. We will vote according to the
instructions of certificate owners who have interests in any subaccount involved
in the matter being voted upon. If the 1940 Act or any related regulation should
be amended or if the present interpretation of it should change and as a result
we determine that we are permitted to vote the Fund shares in our own right, we
may elect to do so.
We determine the number of votes you have the right to cast by applying your
percentage interest in a subaccount to the total number of votes in the variable
account attributable to the entire subaccount. We will count fractional shares.
We determine the number of votes of the portfolio you have the right to cast as
of the record date. These votes are cast at the meeting of the Fund. We will
solicit voting instructions by writing you before the meeting in accordance with
procedures established by the Fund.
Any portfolio shares held in a subaccount for which we do not receive timely
voting instructions we will vote in proportion to the voting instructions we
receive for all owners participating in that subaccount. We will vote any
portfolio shares our affiliates or we hold in proportion to the aggregate votes
of all shareholders in the portfolio. We will send to everyone having a voting
interest in a subaccount proxy materials, reports and other materials relating
to the appropriate portfolio.
SURPLUS REFUNDS
If our Board of Directors declares any surplus refunds to certificate owners, we
will pay you such surplus refunds on the portion that you have allocated to the
fixed account. Surplus refunds are paid in cash with that portion of each
payment attributable to the fixed account.
REPORTS TO OWNERS
At least annually, we will mail you a report showing the surrender value, Death
Benefit and annuity payments for your certificate as of a date not more than two
months prior to the date of mailing and any further information required by any
applicable law. We will mail reports to you at your last known address of
record. We will also promptly mail a confirmation of each premium, withdrawal,
surrender or transfer you make.
DATE OF RECEIPT
Unless we state otherwise, the date of receipt by us of any premium made,
written request, telephone request or any other communication is the actual date
it is received at our service center in proper form. If we receive them after
the close of regular trading on the New York Stock Exchange, usually 4:00
Eastern Time or on a date which is not a valuation date, we will consider the
date of receipt to be the next valuation date.
PAYMENT BY CHECK
If you make a premium by check and your check is returned to us for insufficient
funds, we do reserve the right to seek reimbursement for any payments we made to
you.
POSTPONEMENT OF PAYMENTS
We will normally make payments of your withdrawal or surrender value within
seven days after we receive your request at our service center. However, we may
delay this payment or any other type of payment from the variable account for
any period when:
o the New York Stock Exchange is closed for trading other than customary
weekend and holiday closings;
o trading on the New York Stock Exchange is restricted;
o an emergency exists, as a result of which it is not reasonably
practicable to dispose of securities or to fairly determine their
value; or
o the SEC by order permits the delay for the protection of owners.
We may also postpone transfers and allocations among the subaccounts and the
fixed account under these circumstances. We may delay payment of any withdrawal
or surrender value from the fixed account for up to six months after we receive
a request at our service center.
CERTIFICATE INQUIRIES
You may make inquiries regarding the certificate by writing or calling our
service center. The address is: AAL Variable Products Service Center, 4321 North
Ballard Road, Appleton, Wisconsin, 54919-0001. The toll-free telephone number is
(800) 225-5225, locally (920) 734-5721.
FEDERAL TAX MATTERS
We do not intend these discussions of tax matters and those in the Statement of
Additional Information as tax advice. The ultimate effect of federal income
taxes on a certificate or the economic benefit to the owner, annuitant or
beneficiary depends upon the tax status of such person and, if the certificate
is purchased under a qualified retirement plan, upon the tax and employment
status of the individual concerned. This discussion is based on our
understanding of federal income tax laws, as currently interpreted. We make no
representation regarding whether the Internal Revenue Service (IRS) will
continue its current interpretations of these laws. We do not make any guarantee
regarding the tax status of any certificate. Please consult with a qualified tax
adviser for your particular tax situation.
TAX STATUS OF AID ASSOCIATION FOR LUTHERANS
We are currently exempt from Federal income taxes under section 501(c)(8) of the
Code, and from most types of state and local taxes pursuant to the operation of
local law. As a result, no reserve for income taxes is currently charged against
or maintained by us with respect to the certificates. We may make charges for
such taxes if there is a material change in federal, state or local tax laws
attributable to either us or the variable account.
DIVERSIFICATION REQUIREMENTS
Under Section 817(h)(1) of the Code and related regulations, we are required to
ensure that the assets underlying the variable account portion of the
certificates are adequately diversified. This means that the underlying
portfolios must have enough distinctly different holdings to satisfy the
requirements. If we would not meet the requirements, the certificate would not
be treated as an annuity contract, unless the failure to satisfy the regulations
was inadvertent, the failure is corrected and you or we pay an amount to the
Internal Revenue Service . If we would fail to diversify and not correct the
problem, you would be deemed the owner of the underlying securities in the
portfolio and would be taxed on the earnings of your account.
We believe that the assets underlying the certificates meet these
diversification standards. We will continually monitor the Fund and the
regulations of the Treasury Department to ensure that the certificate will
continue to qualify as a variable annuity contract under the Code.
In certain circumstances, owners of variable contracts have been considered for
Federal income tax purposes to be the owners of the assets of the separate
account supporting their certificates due to their ability to exercise control
over those assets. Where this is the case, the certificate owners have been
currently taxed on income and gains attributable to the separate account assets.
There is little guidance in this area, and some features of the certificates,
such as the flexibility to allocate premiums and certificate annuity values,
have not been explicitly addressed in published rulings. While we believe that
the certificate does not give you investment control over the separate account
assets, we reserve the right to modify the certificate as necessary to prevent
you from being treated as the owner of the separate account assets supporting
the certificate.
TAXATION OF ANNUITIES IN GENERAL
Section 72 of the Code governs the federal income taxation of annuities in
general. We do not discuss the impact of estate, gift or state tax
considerations.
DISTRIBUTION REQUIREMENTS
The Code requires that nonqualified certificates contain specific provisions for
distribution of proceeds upon the death of any owner. In order to be treated as
an annuity contract for federal income tax purposes, the Code requires that such
certificates provide that if any owner dies on or after the annuity commencement
date and before the entire interest in the certificate has been distributed, the
remaining portion must be distributed at least as rapidly as under the method in
effect on such owner's death. Under the certificate, the beneficiary is the
designated beneficiary of an owner/annuitant and the successor owner is the
designated beneficiary of an owner who is not the annuitant. If any owner is not
a natural person, then for purposes of these distribution requirements, the
primary annuitant shall be treated as an owner and any death or change of such
primary annuitant shall be treated as the death of an owner. The nonqualified
policies contain provisions intended to comply with these requirements of the
Code. No regulations interpreting these requirements of the Code have yet been
issued and thus no assurance can be given that the provisions contained in the
certificate satisfy all such Code requirements. The provisions contained in the
certificate will be reviewed and modified if necessary to assure that they
comply with the Code requirements when clarified by regulation or otherwise.
CERTIFICATES HELD BY NATURAL PERSONS
You are not taxed on increases in the value of your certificate until a
distribution occurs, either in the form of a withdrawal, surrender, or as
annuity payments.
DISTRIBUTIONS
For variable annuity payments, the taxable portion is determined by dividing the
proportionate cost basis by the anticipated total number of payments payable
under the certificate, multiplying that amount by the number of payments payable
that year, and subtracting the result from each year's total payments. The
nontaxable portion of each year's payments equals the cost basis divided by the
anticipated number of payments. For fixed annuity payments, the taxable portion
is determined by applying a formula that establishes the ratio that the cost
basis of the certificate bears to the total value of annuity payments for the
term of the annuity. The nontaxable portion of each payment equals the amount of
the payment times that ratio. The balance of each year's payments is taxable.
Your entire payment will be taxable after you have recovered your entire cost
basis. If your annuity payments cease before you have recovered all of your cost
basis, you or your beneficiary may take a deduction for the remaining
unrecovered cost basis. For non-qualified annuities, your cost basis is
generally equal to your premium payments.
Payments from a withdrawal or surrender of a certificate are not considered
annuity payments. Therefore withdrawals and surrenders will generally be taxed
as ordinary income to the extent that the commuted value exceeds your cost basis
in the certificate.
The taxable portion of any annuity payment, withdrawal or surrender is taxed at
ordinary income tax rates.
DISTRIBUTIONS FROM QUALIFIED PLANS
In the case of a withdrawal from a certificate issued in connection with a
qualified plan, a ratable portion of the amount you receive is taxable,
generally based on the ratio of the "investment in the contract" to your total
accrued benefit under the retirement plan. The "investment in the contract"
generally equals the amount of any non-deductible purchase payments that you pay
or that are paid on your behalf.
For certain qualified plans involving pre-tax contributions, there may be no
cost basis in the certificate. In such event, the total payments received may be
taxable. You, the annuitant and any beneficiaries for your certificate should
seek qualified tax and financial advice about the tax consequences of
distributions under the qualified plans in connection with which such
certificates are purchased.
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Generally, withdrawals, and surrenders of a certificate before you attain age 59
1/2 will result in an additional federal income tax penalty of 10% of the amount
distributed that is included in your gross income. The penalty tax generally
will not apply to non-qualified annuity payments unless you purchased the
certificate with the proceeds exchanged from another annuity or life insurance
certificate.
The 10% federal income tax penalty also applies to certificates that are issued
in connection with qualified plans. This penalty will not apply if distributions
are made over the life or life expectancies of the IRA owner or plan participant
(or the joint life or life expectancies of the IRA owner/plan participant and
the designated beneficiary), or if you are over age 59 1/2. Additional
exemptions apply.
FEDERAL INCOME TAX WITHHOLDING
The taxable portion of annuity payments, withdrawals or surrenders is subject to
federal income tax withholding. Except for certificates issued in connection
with certain qualified plans, you can elect not to have federal income tax
withheld, but only by written request.
DEATH PROCEEDS
Generally, distributions received from your certificate by your beneficiary
because of your death are taxable in the year in which your beneficiary receives
the distribution. Your beneficiary will be taxed on the distributions in the
same manner that you would have been taxed. The 10% premature distribution
penalty does not apply to these distributions.
MULTIPLE CERTIFICATES
All nonqualified annuity certificates we issue to you during any calendar year
shall be treated as one certificate for determining the amount includible in
gross income. Therefore, distributions from one certificate will be taxable to
the extent there is a gain in any certificate issued in the same year. The total
impact of this rule to immediate annuities is not clear.
CHANGE IN PAYEE
The designation of a payee other than yourself may result in certain tax
consequences to you that are not discussed herein. If you are considering any
such change, you should consult a tax adviser as to the tax consequences.
TAX-FREE EXCHANGES (1035 EXCHANGES)
Section 1035 of the Code permits the exchange of certain life insurance,
endowment and annuity contracts for an annuity contract without a taxable event
occurring. If you already own an annuity or life insurance contract issued by
another insurer, you are generally able to exchange that contract for a
certificate issued by us tax-free. There are certain restrictions that apply to
such exchanges, including that the contract surrendered must truly be exchanged
for the certificate and not merely surrendered in exchange for cash. Further,
the owner of the new certificate must be the same as the owner of the exchanged
certificate. Careful consideration must be given to compliance with Code
provisions and regulations and rulings relating to exchange requirements. If you
are contemplating an exchange, please be sure that you understand any surrender
charges or loss of benefits that might arise in the exchange of the existing
certificate. If you are considering such an exchange, you should consult with
your tax adviser to ensure that the requirements of Section 1035 are met.
TRANSFERS AMONG SUBACCOUNTS
Transfers among subaccounts and between subaccounts and the fixed account are
tax-free.
QUALIFIED PLANS
You may use the certificate as a means to make distributions in conjunction with
several types of qualified plans, although the uses may be limited because of
the requirement to elect immediate payments. The tax rules that apply to
participants in such qualified plans vary according to the type of plan and the
terms and conditions of the plan. Therefore, no attempt is made to provide more
than general information about the use of the certificates with the various
types of qualified plans. We caution qualified plan participants, plan
administrators and beneficiaries that the rights of any person to any benefits
under such qualified plan may be subject to the terms and conditions of the plan
itself, regardless of the terms and conditions of the certificate issued in
connection with the plan. What follows are brief descriptions of the various
types of qualified plans.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits certain types of employers (organizations
specified under section 501(c)(3) of the Code such as schools, churches, etc.)
to purchase annuity contracts on behalf of their employees. These annuity
contracts are commonly referred to as tax-sheltered annuities. Section
403(b)(11) of the Code requires that distributions from a tax-sheltered annuity
that are attributable to employee salary reduction contributions may be paid
only when the employee reaches age 59 1/2, separates from service, dies, becomes
disabled or in the case of hardship. Because of these restrictions on
distributions, you may only purchase the certificate as a tax-sheltered annuity
if you are eligible to take distributions from your 403(b) funds.
TRADITIONAL INDIVIDUAL RETIREMENT ANNUITIES (TRADITIONAL IRAS)
If you are eligible for a distribution from certain other qualified plans, you
can rollover on a tax-deferred basis your qualified plan distribution into a
traditional Individual Retirement Annuity or Traditional IRA.
You may roll over assets from a qualified plan into a Traditional IRA in two
ways. First, you may directly roll over an eligible rollover distribution to a
Traditional IRA. The qualified plan administrator sends the funds directly to
the Traditional IRA as a direct rollover. Second, the employee may receive the
distribution from the qualified plan and roll over the same amount the employee
received within 60 days. However, any amount that was not distributed as a
direct rollover will be subject to mandatory 20% federal income tax withholding.
Unless you made nondeductible contributions to a Traditional IRA, you will
generally be taxed on any distributions from a Traditional IRA. If you are under
age 59 1/2 when you take the distribution, you may be subject to a 10% federal
premature distribution penalty on the taxable amount. If you elect a Joint or
Single Life Income or elect to have a guaranteed payment period over 10 years,
you are generally exempt from this penalty tax. You are required to begin
distributions from Traditional IRAs by April 1st of the year following the year
in which you attain age 70 1/2.
Because of the limitations on contributions under the certificate, you can only
purchase this certificate as a Traditional IRA certificate if you are at least
partially funding the certificate with proceeds from an existing qualified plan.
In addition, you should only purchase this certificate as a Traditional IRA if
you do not intend on making additional contributions and wish to begin the
immediate periodic distribution of your IRA.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEP-IRAS)
Section 408(k) of the Code permits employers to make deductible contributions
directly into IRAs established for their employees. Distribution limits and
restrictions similar to those of Traditional IRAs apply to these certificates.
Employers who use the certificates in connection with a SEP-IRA plan should seek
qualified tax advice. In addition, you should only purchase this certificate as
a SEP-IRA if you do not intend on making additional contributions to the
certificate and you wish to begin the immediate periodic distribution of your
SEP-IRA.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is always the
possibility that the tax treatment of the certificate could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the certificate.
OTHER TAX CONSIDERATIONS
Because of the complexity of the law and its application to a specific
individual, tax advice may be needed by a person contemplating purchase of a
certificate or the exercise of elections under a certificate. The above comments
concerning federal income tax consequences are not exhaustive and special rules
are provided with respect to situations not discussed in this Prospectus. The
above discussion is based upon our understanding of current federal income tax
law. Statutory changes in the Code with varying effective dates, and regulations
adopted thereunder may also alter the tax consequences of specific factual
situations. We have not taken into account estate and gift, state income or
other state tax considerations which may be involved in the purchase of a
certificate or the exercise of elections under the certificate. For complete
information on such federal and state tax considerations, you should consult a
qualified tax adviser.
OTHER INFORMATION
RIGHTS RESERVED BY AAL
Subject to applicable law, we reserve the right to make certain changes if we
determine they would serve your interests or if it would be appropriate in
carrying out the purposes of the certificate. When it is required, we will
obtain your approval or regulatory approval. Some examples of such changes we
may make include:
o To operate the variable account in any form allowed under the 1940 Act
or in any other form allowed by law;
o To add, delete, combine or modify subaccounts in the variable account;
o To restrict or eliminate any voting rights of certificate owners or
other persons who have voting rights as to the variable account;
o To add, delete or substitute, for the portfolio shares held in any
subaccount, the shares of another portfolio of the Fund or the shares
of another fund or any other investment allowed by law;
o To make any amendments to the certificates necessary for the
certificates to comply with the provisions of the Code or any other
applicable federal or state law; and
o To substitute the shares of any registered investment company for
shares of any other registered investment company already purchased or
to be purchased in the future by the variable account provided that
the substitution has been approved by the Securities and Exchange
Commission.
MAINTENANCE OF SOLVENCY
The certificate contains a maintenance-of-solvency provision that applies only
to values in the fixed account. If our reserves for any class of certificates
become impaired, you may be required to make an extra payment. Our Board of
Directors will determine the amount of any extra payment based on each member's
fair share of the deficiency. If you do not make the payment, we will charge it
as an indebtedness against your certificate with interest at a rate of 5% per
year, compounded annually. You may choose an equivalent reduction in benefits
instead of or in combination with the payment or indebtedness.
DISTRIBUTION ARRANGEMENTS
AAL CMC serves as the principal underwriter of the certificates. AAL CMC is a
wholly owned, indirect subsidiary of AAL. Principal offices of AAL CMC are
located at 222 West College Avenue, Appleton, Wisconsin, 54919. AAL CMC is a
member of the National Association of Securities Dealers, Inc. (NASD) and a
broker-dealer registered with the SEC under the Securities Exchange Act of 1934.
Duly licensed registered representatives of AAL CMC, who are also employees of
AAL, are licensed to sell the certificates by state insurance departments to
sell variable insurance products (AAL representatives). Representatives of other
broker-dealer firms, with which AAL CMC has executed a selling agreement, may
also sell the certificates. In addition, AAL may retain other firms to serve as
principal underwriters of the certificates. AAL offers the certificates in all
states where AAL is authorized to sell the certificates.
AAL CMC will pay the AAL representatives commissions and other distribution
compensation on the sale of certificates. This will not result in any charge to
you in addition to the charges already described in this Prospectus. AAL CMC
pays AAL representatives a commission of not more than 4% of the premiums paid
on the certificates. In addition to direct compensation, AAL representatives may
be eligible to receive certain employee benefits from AAL based on the amount of
earned commissions.
LEGAL MATTERS
We know of no material legal proceedings pending to which we are or the variable
account is a party or which would materially affect the variable account.
FINANCIAL STATEMENTS
Audited financial statements of AAL are included in the Statement of Additional
Information, and the audited financial statements of the variable account are
incorporated by reference in the Statement of Additional Information. The
consolidated financial statements of AAL at December 31, 1999 and 1998, and for
each of the three years in the period ended December 31, 1999 and the audited
financial statements of the variable account at December 31, 1999, appearing,
and incorporated by reference, in this Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing, and incorporated by reference, elsewhere herein. The
financial statements referred to above are included, and incorporated by
reference, in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
ILLUSTRATIONS OF ANNUITY PAYMENTS
ASSUMING HYPOTHETICAL RATES OF RETURN
The following illustrations have been prepared to show how investment
performance could affect variable annuity payments over time. The illustrations
show the annuity payments of a non-qualified annuity certificate under three
rates of return scenarios. Of course, the illustrations merely represent what
annuity payments might be paid under a HYPOTHETICAL non-qualified certificate.
Each amount illustrates the annual payments you would receive under a
hypothetical non-qualified certificate (described in more detail below) assuming
a different hypothetical rate of return for a single subaccount supporting the
certificate for each certificate year. The first illustration assumes that the
entire premium is allocated to a single subaccount. The second illustration
assumes that half the premium is allocated to a subaccount and the remaining
half was allocated to the fixed account. The fixed account annuity payment is
assumed to be only a guaranteed periodic payment based on the minimum guaranteed
interest rate we credit under the fixed account. In an actual certificate, the
fixed account annuity payment would reflect current payment rates and may be
more than the guaranteed payment amount. Amounts allocated to a subaccount
generate variable annuity payments. The amounts allocated to the fixed account
generate fixed account annuity payments. The total payment shown in the second
illustration is a total of both the variable annuity payment and the fixed
account annuity payment.
The variable annuity payments reflect three different assumptions for a constant
investment return before fees and expenses: 0%, 8% and 10%. Actual returns will
vary by subaccount chosen. Each annual variable annuity payment reflects the
assumed investment return net of all expenses of the illustrated subaccount (and
the underlying portfolio) over the periods shown in each illustration. The
mortality and expense risk charge is assumed to be at an annual rate of 1.25% of
the illustrated subaccount's average daily net assets. Total expenses for the
underlying portfolios vary between annual rates of 0.32% and 0.80% of the
average daily net assets. Because of the variances between the portfolios'
expenses, the subaccounts will have different expenses. We have illustrated
payments using an arithmetic average of the expenses for all subaccounts
(1.67%). This figure includes the mortality and expense risk charge and the
expenses for the underlying portfolios. The expenses for the portfolios reflect
AAL's agreement to voluntarily reimburse portfolio expenses above certain
specified levels as discussed in Fees and Expense Tables. In the absence of such
expense reimbursement arrangements, portfolio and correspondingly subaccount
expenses would be higher.
THE ANNUAL ANNUITY PAYMENTS SHOWN IN THE ILLUSTRATIONS ARE BASED ON HYPOTHETICAL
CERTIFICATES AND HYPOTHETICAL INVESTMENT RESULTS AND ARE NOT PROJECTIONS OR
INDICATIONS OF FUTURE RESULTS. AAL DOES NOT GUARANTEE OR EVER SUGGEST THAT ANY
SUBACCOUNT OR CERTIFICATE ISSUED BY IT WOULD GENERATE THESE OR SIMILAR ANNUAL
VARIABLE ANNUITY PAYMENTS FOR ANY PERIOD OF TIME. THE ILLUSTRATIONS ARE FOR
ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT ACTUAL VARIABLE ANNUITY PAYMENTS
OR FUTURE INVESTMENT RETURNS. Variable annuity payments under an actual
certificate may be more or less than those forming the basis for the variable
annuity payments shown in these illustrations if the actual returns of the
subaccounts you select are different from the hypothetical returns. Because it
is very likely that a subaccount's investment return will fluctuate over time,
you can expect variable annuity payments under your certificate to fluctuate.
Moreover, under an actual certificate, the total amount of variable annuity
payments ultimately received by you or your beneficiary depends upon which
annuity payment option you select and, for life contingent annuity payment
options, how long the annuitant lives. See Selecting an Annuity Payment Option.
Among the most important factors that determine the amount of variable annuity
payments is the assumed investment return you select. The hypothetical
certificate has an assumed investment return of 5%. Subject to state approval,
you may select a 3%, 4% or 5% assumed investment return under an actual
certificate. Generally, variable annuity payments will increase in size from one
annuity payment date to the next if the annualized net rate of return during
that time is greater than the assumed investment return, and will decrease if
the annualized net rate of return over this period is less than the assumed
investment return. (The assumed investment return is an important component of
the payment Factor.) For a discussion of assumed investment returns, see
Assumed Investment Returns.
In order to illustrate a hypothetical certificate, we had to make several
assumptions about the certificate. We assumed that:
(1) the hypothetical certificate is a non-qualified annuity certificate,
(2) the $50,000 premium of the hypothetical certificate is allocated as
shown and that the subaccount shown had a constant investment return
before fees and expenses of 0%, 8%, or 10%,
(3) the owner selected an assumed investment return of 5%,
(4) the owner elected to receive annual annuity payments,
(5) the annuitant is a 65-year old male, and
(6) a single life income with a 10-year guaranteed payment period was
selected.
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
Annuitant: Male, Age 65
Single Life Income with a 10 year Guaranteed Payment Period
Hypothetical illustration assumes that $50,000 premium allocated to a variable
subaccount with fees and expenses of 1.67%
<TABLE>
<CAPTION>
<S> <C> <C> <C>
HYPOTHETICAL 0% GROSS RATE HYPOTHETICAL 8% GROSS RATE HYPOTHETICAL 10% GROSS RATE
(-1.67% NET RATE) ANNUAL (6.33% NET RATE) ANNUAL (8.33% NET RATE) ANNUAL
PAYMENT PAYMENT PAYMENT
FOR EACH YEAR SHOWN FOR EACH YEAR SHOWN FOR EACH YEAR SHOWN
$50,000 PREMIUM $50,000 PREMIUM $50,000 PREMIUM
5% AIR 5% AIR 5% AIR
AGE ANNUAL PAYMENT ANNUAL PAYMENT ANNUAL PAYMENT
65 $3836 $3836 $3836
66 3592 3885 3958
67 3364 3934 4083
68 3151 3984 4213
69 2951 4035 4347
70 2763 4086 4485
71 2588 4138 4627
72 2424 4191 4774
73 2270 4244 4926
74 2126 4298 5082
75 1991 4352 5244
76 1864 4408 5410
77 1746 4464 5582
78 1635 4520 5759
79 1531 4578 5942
80 1434 4636 6131
85 1033 4938 7168
90 744 5260 8381
95 536 5603 9799
100 386 5968 11,457
</TABLE>
<PAGE>
Annuitant: Male, age 65
Single Life Income with a 10 year Guaranteed Payment Period
Hypothetical illustration assumes that $25,000 of the premium allocated to a
variable subaccount with fees and expenses of 1.67%; and $25,000 of the premium
allocated to the fixed account. For allocations to the fixed account,
illustration assumes a guaranteed payment of $1,787 (based on the annuity 2000
Mortality Table payment rates).
<TABLE>
<CAPTION>
<S> <C> <C> <C>
HYPOTHETICAL 0% GROSS RATE HYPOTHETICAL 8% GROSS RATE HYPOTHETICAL 10% GROSS RATE
(-1.67% NET RATE) ANNUAL (6.33% NET RATE) ANNUAL (8.33% NET RATE) ANNUAL
PAYMENT PAYMENT PAYMENT
FOR EACH YEAR SHOWN FOR EACH YEAR SHOWN FOR EACH YEAR SHOWN
$50,000 PREMIUM $50,000 PREMIUM $50,000 PREMIUM
5% AIR 5% AIR 5% AIR
AGE ANNUAL PAYMENT ANNUAL PAYMENT ANNUAL PAYMENT
81 $3621 $3621 $3621
82 3499 3145 3682
83 3385 3670 3745
84 3278 3695 3810
85 3178 3720 3876
86 3085 3746 3945
87 2997 3772 4017
88 2915 3798 4090
89 2838 3825 4166
90 2766 3852 4244
91 2698 3879 4325
92 2635 3907 4408
93 2576 3935 4494
94 2571 3963 4583
95 2469 3992 4674
96 2420 4021 4768
85 2220 4172 5287
90 2075 4333 5893
95 1971 4504 6602
100 1896 4687 7431
</TABLE>
<PAGE>
CONDENSED FINANCIAL INFORMATION
The table below shows the historical performance of annuity unit values and
numbers of annuity units for each of the 10 years (or shorter period for which
the relevant subaccount has been in existence) in the period ended December 31,
1999. You should read this information along with the variable account and AAL's
financial statements and notes which are included in the Statement of Additional
Information.
Note that the unit value of each subaccount of the variable account will not be
the same on any given day as the net asset value per share of the underlying
portfolio of the Fund in which that subaccount invests. One reason for this
deviation is that each unit value consists of the underlying portfolio's net
asset value minus charges to the variable account. In addition, dividends
declared by the underlying portfolio are reinvested by the subaccount in
additional shares of that portfolio. These distributions have the effect of
reducing the value of each share of the Fund and increasing the number of Fund
shares outstanding. However, the total cash value in the variable account does
not change as a result of such distributions.
ANNUITY UNIT VALUES:
SUBACCOUNT AUGUST 2, 1994(4) DECEMBER 31, 1999
- ---------- --------------- -----------------
Small Company Stock $16.10 $17.34
International Stock 11.85 15.27
Large Company Stock 24.93 27.54
Balanced 18.16 19.26
High Yield Bond 9.46 9.04
Bond 12.06 12.10
Money Market 1.17 1.19
(4) The date the subaccounts commenced operations.
NUMBER OF ANNUITY UNITS OUTSTANDING AT THE END OF THE PERIOD:
SUBACCOUNT DECEMBER 31, 1999
- ---------- -----------------
Small Company Stock 36,036
International Stock 25,778
Large Company Stock 149,769
Balanced 164,845
High Yield Bond 22,046
Bond 12,956
Money Market 1,507,483
<PAGE>
CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
General Information.....................................................
Regulation and Reserves.................................................
Principal Underwriter...................................................
Gender Neutral Benefits.................................................
Performance Information.................................................
Standard & Poor's Disclaimer............................................
Financial Statements....................................................
ORDER FORM
Please send me a copy of the most recent Statement of Additional Information for
the AAL Single Premium Immediate Variable Annuity certificate.
- ------------------------------- --------------------------------
(Date) (Name)
- ---------------------------------------------------------------------------
(Street Address)
- ---------------------------------------------------------------------------
(City) (State) (Zip Code)
Send to:
AAL Variable Products Service Center
4321 N. Ballard Road
Appleton, WI 54919-0001
AAL VARIABLE ANNUITY ACCOUNT II
STATEMENT OF ADDITIONAL
INFORMATION
DATED
MAY 1, 2000
SINGLE PREMIUM IMMEDIATE
VARIABLE ANNUITY CERTIFICATE
OFFERED BY:
AID ASSOCIATION FOR LUTHERANS
4321 NORTH BALLARD ROAD
APPLETON, WISCONSIN 54919
This Statement of Additional Information (SAI) is not a prospectus, but should
be read in conjunction with the prospectus dated May 1, 2000, for AAL Variable
Annuity Account II (the variable account) describing the individual single
premium immediate variable annuity certificates (certificates) that Aid
Association for Lutherans (AAL) offers to persons eligible for membership in
AAL. Terms used in this SAI that are not otherwise defined herein have the same
meanings given to them in the prospectus. A copy of the prospectus may be
obtained at no charge by writing AAL (attention: AAL Variable Products Service
Center) at the above address.
TABLE OF CONTENTS
Caption Page
GENERAL INFORMATION.......................................................SAI-2
REGULATION AND RESERVES...................................................SAI-2
PRINCIPAL UNDERWRITER.....................................................SAI-2
PERFORMANCE INFORMATION...................................................SAI-3
STANDARD & POOR'S DISCLAIMER..............................................SAI-5
FINANCIAL STATEMENTS......................................................SAI-5
<PAGE>
GENERAL INFORMATION
AAL is a fraternal benefit society organized under Internal Revenue Code section
501(c)(8) and established on November 24, 1902, under the laws of the State of
Wisconsin. Membership is open generally to Lutherans and their families, and
persons serving or associated with Lutherans or Lutheran organizations and their
families. AAL offers life insurance, disability income insurance and annuities
to its members. AAL Capital Management Corporation, a subsidiary of AAL, offers
mutual funds, variable annuities and variable life insurance. Members are part
of one of approximately 10,000local AAL branches throughout the United States.
AAL is currently licensed to transact life insurance business in all 50 states
and the District of Columbia.
REGULATION AND RESERVES
AAL is subject to regulation by the Office of the Commissioner of Insurance of
the State of Wisconsin and by insurance departments of other states and
jurisdictions in which it is licensed to do business. This regulation covers a
variety of areas, including benefit reserve requirements, adequacy of insurance
company capital and surplus, various operational standards and accounting and
financial reporting procedures. AAL's operations and accounts are subject to
periodic examination by insurance regulatory authorities. The forms of
certificates described in the prospectus are filed with and (where required)
approved by insurance officials in each state and jurisdiction in which
certificates are sold.
Although the federal government generally has not directly regulated the
business of insurance, federal initiatives often have an impact on the insurance
business in a variety of ways. Federal measures that may adversely affect the
insurance business include employee benefit regulation, tax law changes
affecting the taxation of insurance companies or of insurance products, changes
in the relative desirability of various personal investment vehicles and removal
of impediments on the entry of banking institutions into the insurance business.
Also, both the executive and legislative branches of the federal government
periodically have under consideration various insurance regulatory matters,
which could ultimately result in direct federal regulation of some aspects of
the insurance business. It is not possible to predict whether this will occur
or, if so, what the effect on AAL would be.
Pursuant to state insurance laws and regulations, AAL is obligated to carry on
its books, as liabilities, reserves to meet its obligations under outstanding
insurance contracts. These reserves are based on assumptions about, among other
things, future claims experience and investment returns. Neither the reserve
requirements nor the other aspects of state insurance regulation provide
absolute protection to holders of insurance contracts, including the
certificates, if AAL were to incur claims or expenses at rates significantly
higher than expected or significant unexpected losses on its investments.
PRINCIPAL UNDERWRITER
AAL Capital Management Corporation (AAL CMC), a wholly-owned, indirect
subsidiary of AAL, serves as the principal underwriter of the certificates
pursuant to a Principal Underwriting and Servicing Agreement to which AAL CMC
and AAL, on behalf of itself and the variable account, are parties. The
certificates are sold through AAL representatives who are licensed by state
insurance officials to sell the certificates and who are duly licensed
registered representatives of AAL CMC. Representatives of other broker-dealer
firms with which AAL CMC has executed a selling agreement may also sell the
certificates. In addition, AAL may retain other firms to serve as principal
underwriters of the certificates. The certificates are continuously offered in
all states where AAL is authorized to sell the certificates. AAL paid
underwriting commissions of $273,381 for the year ended December 31, 1999 . Of
this amount, AAL CMC retained $0.
PERFORMANCE INFORMATION
The variable account may, from time to time, advertise information relating to
the performance of its subaccounts. The performance information that may be
presented is not a prediction or guarantee of future investment performance and
does not represent the actual experience of amounts invested by a particular
owner.
MONEY MARKET SUBACCOUNT - YIELD AND EFFECTIVE YIELD
Advertisements for the certificates may include yield and effective yield
quotations for the Money Market Subaccount, which are computed in accordance
with standard methods prescribed by the SEC. Under these methods, the Money
Market Subaccount's yield is calculated based on a hypothetical pre-existing
account at the beginning of a specified seven-day period. Yield is computed by
dividing the net change, exclusive of capital changes, in the account during the
seven-day period, subtracting a hypothetical charge reflecting deductions from
owner accounts, dividing the difference by the account at the beginning of the
period to obtain the base period return and multiplying the base period return
by the fraction 365/7. The Money Market Subaccount's effective yield is
calculated by compounding the base period return (computed as described above)
for such period by adding 1 and raising the sum to a power equal to 365/7 and
subtracting 1 from the result. Yield and effective yield do not reflect the
deduction of withdrawal or surrender charges. The certificates currently are not
subject to charges for state premium taxes.
The yield and effective yield for the Money Market Subaccount for the seven-day
period ended December 31, 1999, were 5.26% and 5.39%, respectively.
OTHER SUBACCOUNTS
30-DAY YIELD: Advertisements for the certificates may include 30-day (or
one-month) yield quotations for each subaccount other than the Money Market
Subaccount, which are computed in accordance with a standard method prescribed
by the SEC. These 30-day yield quotations are computed by dividing the net
investment income per a hypothetical account earned during the period (the net
investment income earned by the Fund portfolio attributable to shares owned by
the subaccount less expenses incurred during the period) by the offering price
per annuity unit on the last day of the period, according to the following
formula that assumes a semi-annual reinvestment of income:
Yield = 2[(((a-b)/cd)+1)^6-1]
Where:
a = Net dividends and interest earned during the period by the
portfolio attributable to the subaccount
b = Expenses accrued for the period (net of reimbursements)
c = The average daily number of annuity units outstanding during the
period
d = The annuity unit Value per unit on the last day of the period
For the 30-day period ended December 31, 1999, the 30-day yield for the Bond
Subaccount was 5.12%, the Balanced Subaccount was 1.97% and the High Yield Bond
Subaccount was 9.14%.
STANDARDIZED AND NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURN: Advertisements
for the certificates may also include standardized and non-standardized average
annual total return quotations for each subaccount for 1, 5 and 10-year periods
(or the life of the subaccount, if less). Standardized average annual total
return quotations are computed in accordance with a standard method prescribed
by the SEC. The average annual total return for a subaccount for a specific
period is computed by finding the average annual compounded rates of return over
the applicable period that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1 + T)^n = ERV
Where:
P = A hypothetical initial payment of $1,000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5 or 10-year
periods (or fractional portion thereof)
STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1999:
NAME OF SUBACCOUNT SINCE INCEPTION(1)
- ------------------ ----------------
Small Company Stock 7.68%
International Stock 28.86
Large Company Stock 10.46
Balanced 6.05
High Yield Bond (4.49)
Bond 0.34
Money Market 1.62
Non-standardized average annual total returns are calculated in the same manner
and for the same time periods as the standardized average annual total returns
described immediately above, except that the value of the non-standardized total
returns do not reflect the effect of surrender charges.
NON-STANDARDIZED AVERAGE ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1999:
NAME OF SUBACCOUNT SINCE INCEPTION(1) 1 YEAR
- ------------------ ---------------- ------
Small Company Stock 7.68% 10.80%
International Stock 28.86 39.74
Large Company Stock 10.46 19.02
Balanced 6.05 9.62
High Yield Bond (4.49) (5.63)
Bond 0.34 (2.57)
Money Market 1.62 3.65
(1) Date of inception for each subaccount was August 2, 1999:
CUMULATIVE TOTAL RETURN: Advertisements for the certificates may also include
cumulative total return quotations for each subaccount, for which the SEC has
not prescribed a standard method of calculation. Cumulative total return is the
non-annualized cumulative rate of return on a hypothetical initial investment of
$1,000 in a subaccount for a specified period (hypothetical initial investment).
Cumulative total return is calculated by finding the cumulative rates of return
of the hypothetical initial investment over various periods, according to the
following formula and then expressing that as a percentage:
C = (ERV/P) - 1
Where:
P = A hypothetical initial payment of $1,000
C = Cumulative total return
ERV = Ending redeemable value of a hypothetical $1,000
payment made at the beginning of the applicable period
Performance quotations for each subaccount reflect the deduction of all
recurring fees and charges applicable to each subaccount, such as the mortality
and expense risk charge, and Fund operating expenses (net of reimbursements),
except that yield quotations and non-standardized average annual total return
calculations do not reflect any deduction of surrender charges. The certificates
are not currently subject to a charge for state premium taxes.
Standardized cumulative total returns for each subaccount were:
NAME OF SUBACCOUNT SINCE INCEPTION
- ------------------ ---------------
Small Company Stock 7.68%
International Stock 28.86%
Large Company Stock 10.46
Balanced 6.05
High Yield Bond (4.49)
Bond 0.34
Money Market 1.62
PERFORMANCE COMPARISONS
The performance of each of the subaccounts may be compared in advertisements and
sales literature to the performance of other variable annuity issuers in general
or to the performance of particular types of variable annuities investing in
mutual funds or series of mutual funds, with investment objectives similar to
each of the portfolios in which the subaccounts invest. Such comparisons may be
made by use of independent services that monitor and rank the performance of
variable annuity issuers in each of the major categories of investment
objectives on an industry-wide basis, ranking such issuers on the basis of total
return, assuming reinvestment of dividends and distributions, but excluding
sales charges, redemption fees or certain expense deductions at the separate
account level. Some rankings are based on total returns adjusted for withdrawal
or surrender charges or may consider the effects of market risk on total return
performance.
Companies providing rankings that may be used in advertisements and sales
literature include Lipper Analytical Services, Inc., Morningstar, Inc. and the
Variable Annuity Research and Data Service.
In addition, each subaccount's performance may be compared in advertisements and
sales literature to various benchmarks including the Standard & Poor's 500
Composite Stock Price Index, Morgan Stanley Capital International Europe,
Australasia and Far East (MSCI EAFE) Index, S&P SmallCap 600 Index, Merrill
Lynch High Yield Master Index, the Wilshire Small Cap Index and the Lehman
Brothers Aggregate Bond Index.
The portfolios may also, from time to time, illustrate the concepts of asset
allocation by use of hypothetical case studies representing various life cycles
and/or risk levels of a certificate owner.
STANDARD AND POOR'S DISCLAIMER
The certificates are not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the
certificates or any member of the public regarding the advisability of investing
in securities generally or in the certificates particularly or the ability of
the S&P 500 or the S&P SmallCap 600 Indexes to track general stock market
performance. S&P's only relationship to AAL is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 and S&P 600 SmallCap
Indexes which are determined composed and calculated by the S&P without regard
to the Licensee or the certificates. S&P is not responsible for, and has not
participated in, the determination of the prices and amount of the certificate
or the timing of the issuance or sale of the certificates or in the
determination or calculation of the equation by which the certificate is to be
converted into cash. S&P has no obligation or liability in connection with
administration, marketing or trading of the certificates.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 or
the S&P 600 SmallCap indexes or any data included therein and S&P shall have no
liability for any errors, omissions, or interruptions therein. S&P makes no
warranty, express or implied, as to results to be obtained by AAL, owners of the
certificates, or any other person/entity from the use of the S&P 500 or the S&P
600 SmallCap indexes or any data included therein. S&P makes no express or
implied warranties, and expressly disclaims all warranties of merchantability or
fitness for a particular purpose or use with respect to the S&P 500 or the S&P
600 SmallCap indexes or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of
the possibility of such damages.
FINANCIAL STATEMENTS
The financial statements of AAL should be considered only as bearing upon the
ability of AAL to meet its obligations under the certificates. The financial
statements of AAL should not be considered as bearing on the investment
experience of the assets held in the variable account.
The most current financial statements of AAL are those as of the end of the most
recent fiscal year ended December 31, 1999. AAL does not prepare financial
statements more often than annually and believes that any incremental benefit to
prospective certificate owners that may result from preparing and delivering
more current financial statements, though unaudited, does not justify the
additional cost that would be incurred.
The consolidated financial statements of AAL as of December 31, 1999 and 1998
and for each of the three years in the period ended December 31, 1999 are
included herein and have been audited by Ernst & Young LLP, Independent
Auditors, as set forth in their report thereon appearing elsewhere herein. The
financial statements referred to above are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements for AAL are as follows:
<PAGE>
AID ASSOCIATION FOR LUTHERANS
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Contents
Report of Independent Auditors................................................1
Consolidated Balance Sheets...................................................2
Consolidated Statements of Income.............................................3
Consolidated Statements of Changes in Certificateholders' Surplus.............4
Consolidated Statements of Cash Flows.........................................5
Notes to Consolidated Financial Statements....................................6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Aid Association for Lutherans
We have audited the accompanying consolidated balance sheets of Aid Association
for Lutherans (AAL) as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in certificateholders' surplus and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of AAL's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AAL at December
31, 1999 and 1998, and the consolidated results of its operations and its cash
flows for each of the three years ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
January 26, 2000
<PAGE>
AID ASSOCIATION FOR LUTHERANS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31
1999 1998
------------------ ------------------
(In Millions)
ASSETS
Investments:
Securities available for sale, at fair value
Fixed maturities $ 9,952 $ 9,067
Equity securities 849 824
Fixed maturities held to maturity, at amortized cost 3,261 3,906
Mortgage loans 3,151 3,150
Real estate 62 75
Certificate loans 494 500
Other invested assets 10
8
------------------ ------------------
Total investments 17,779 17,530
Cash and cash equivalents 243 232
Premiums and fees receivable 22 19
Accrued investment income 212 198
Deferred acquisition costs 807 667
Property and equipment 89 95
Assets held in separate accounts 2,002 1,406
Other assets
4 7
------------------ ------------------
TOTAL ASSETS $ 21,158 $ 20,154
================== ==================
LIABILITIES AND CERTIFICATEHOLDERS' SURPLUS Certificate liabilities and
accruals:
Future certificate benefits $ 2,970 $ 2,800
Unpaid claims and claim expenses 84 98
------------------ ------------------
Total certificate liabilities and accruals 3,054 2,898
Certificateholder funds 13,582 13,112
Liabilities related to separate accounts 2,002 1,406
Other liabilities 166 190
------------------ ------------------
TOTAL LIABILITIES 18,804 17,606
CERTIFICATEHOLDERS' SURPLUS
Accumulated surplus 2,363 2,137
Accumulated other comprehensive income (deficit) 411
(9)
------------------ ------------------
TOTAL CERTIFICATEHOLDERS' SURPLUS 2,354 2,548
------------------ ------------------
TOTAL LIABILITIES AND CERTIFICATEHOLDERS' SURPLUS $ 21,158 $ 20,154
================== ==================
</TABLE>
See accompanying notes.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
1999 1998 1997
----------------- ------------------ ------------------
(In Millions)
REVENUE
Insurance premiums $ 419 $ 406 $ 391
Insurance charges 309 297
307
Net investment income 1,266 1,232 1,211
Net realized investment gains 118 107
103
Other revenue 83 68
96
----------------- ------------------ ------------------
TOTAL REVENUE 2,191 2,148 2,074
BENEFITS AND EXPENSES
Certificate claims and other benefits 370 357
383
Increase in certificate reserves 173 151
184
Interest credited 800 775
809
Surplus refunds 112 110
115
----------------- ------------------ ------------------
Total benefits 1,491 1,455 1,393
Underwriting, acquisition and insurance
expenses 331 329
355
Fraternal benefits and expenses 115 104
119
----------------- ------------------ ------------------
Total expenses 446 433
474
----------------- ------------------ ------------------
TOTAL BENEFITS AND EXPENSES 1,965 1,901 1,826
----------------- ------------------ ------------------
NET INCOME $ 226 $ 247 $ 248
================= ================== ==================
</TABLE>
See accompanying notes.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
CONSOLIDATED STATEMENTS OF CHANGES IN CERTIFICATEHOLDERS' SURPLUS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE CERTIFICATEHOLDERS'
SURPLUS INCOME (DEFICIT) SURPLUS
------------------- ------------------------------------------
(In Millions)
BALANCE AT JANUARY 1, 1997 $ 1,642 $ 149 $ 1,791
Comprehensive income
Net income 248 - 248
Change in unrealized gains/losses
on securities available for sale * - 179 179
---------------------
---------------------
Total comprehensive income 427
------------------- ------------------- ---------------------
BALANCE AT DECEMBER 31, 1997 1,890 328 2,218
Comprehensive income
Net income 247 - 247
Change in unrealized gains/losses
on securities available for sale * -
83 83
---------------------
---------------------
Total comprehensive income 330
------------------- ------------------- ---------------------
BALANCE AT DECEMBER 31, 1998 2,137 411 2,548
Comprehensive income
Net income 226 - 226
Change in unrealized gains/losses
on securities available for sale * - (420) (420)
---------------------
---------------------
Total comprehensive loss (194)
------------------- ------------------- ---------------------
BALANCE AT DECEMBER 31, 1999 $ 2,363 $ (9) $ 2,354
=================== =================== =====================
* Net change in unrealized gains/losses on securities available for sale is
reported net of reclassification adjustment calculated as follows:
1999 1998 1997
------------------- ------------------- ---------------------
Unrealized gains/losses on
securities available for sale $ (237) $ 211 $ 248
Less: reclassification adjustment for
realized gains included in net income 183 128
69
------------------- ------------------- ---------------------
Change in unrealized gains/losses
on securities available for sale $ (420) $ 83 $ 179
=================== =================== =====================
</TABLE>
See accompanying notes.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEARS ENDED DECEMBER 31
1999 1998 1997
--------------- --------------- ---------------
(In Millions)
OPERATING ACTIVITIES:
Net Income $ 226 $ 247 $ 248
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in certificate liabilities and accruals 156 160 131
Increase in certificateholder funds 488 436 424
(Increase) decrease in deferred acquisition costs (24) 15
(9)
Realized gains on investments (96) (106) (104)
Provisions for amortization and depreciation 19 20 18
Changes in other assets and liabilities 51
9 (1)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 778 799 731
INVESTING ACTIVITIES:
Securities available for sale:
Purchases - fixed maturities (3,839) (6,269) (2,708)
Sales - fixed maturities 1,449 4,119 1,600
Maturities - fixed maturities 972 848 514
Purchases - equities (580) (428) (420)
Sales - equities 636 402 407
Securities held to maturity:
Purchases (82) (294) (530)
Maturities 730 752 577
Mortgage loans funded (249) (244) (213)
Mortgage loans repaid 259 318 309
Certificate loans, net
6 2 -
Other (51) 44
(8)
--------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (749) (750) (472)
FINANCING ACTIVITIES:
Universal life and investment contract receipts 1,028 1,029 1,052
Universal life and investment contract withdrawals (1,046) (1,137) (1,127)
--------------- --------------- ---------------
NET CASH USED IN FINANCING ACTIVITIES (18) (108) (75)
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11 (59) 184
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 232 291 107
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 243 $ 232 $ 291
=============== =============== ===============
</TABLE>
See accompanying notes.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Aid Association for Lutherans (AAL) is the nation's largest fraternal benefit
society in terms of assets and individual life insurance in force. It provides
its 1.8 million members with life insurance and retirement products (both fixed
and variable), as well as disability income and long-term care insurance, in
most states. AAL members are served by more than 1,700 district representatives
across the country and are offered ancillary services through various AAL
subsidiaries and affiliates. Mutual funds are offered to members by AAL Capital
Management Corporation (CMC), and personal asset management, administrative and
other trust services are offered by AAL Trust Company, FSB (AALTC). CMC and
AALTC are wholly-owned by AAL Holdings Inc., AAL's wholly-owned subsidiary.
Credit union services are available to members from the AAL Member Credit Union,
an affiliate of AAL.
BASIS OF PRESENTATION
The accompanying consolidated financial statements of AAL and its wholly-owned
subsidiary have been prepared in accordance with generally accepted accounting
principles ("GAAP").
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of AAL, its
wholly-owned subsidiary, AAL Holdings Inc., and its wholly-owned subsidiaries,
including CMC, AALTC and North Meadows Investment Ltd. All significant
intercompany transactions have been eliminated.
The significant accounting practices used in preparation of the financial
statements are summarized as follows:
INVESTMENTS
Investments in fixed maturities are classified as available for sale or held to
maturity according to the holder's intent. Securities classified in the
available for sale category are carried at fair value and consist of those
securities which AAL intends to hold for an indefinite period of time but not
necessarily to maturity. Securities in the held to maturity category are carried
at amortized cost and consist of those which AAL has both the ability and the
positive intent to hold to maturity.
Changes in fair values of available for sale securities, after adjustment of
deferred acquisition costs (DAC), are reported as unrealized gains or losses
directly in certificateholders' surplus as comprehensive income and,
accordingly, have no effect on net income. The DAC offsets to the unrealized
gains or losses represent valuation adjustments of DAC that would have been
required as a charge or credit to operations had such unrealized amounts been
realized.
The cost of fixed maturity investments classified as available for sale and as
held to maturity is adjusted for amortization of premiums and accretion of
discounts calculated using the effective interest method. That amortization or
accretion is included in net investment income.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Mortgage loans generally are stated at their outstanding unpaid principal
balances. Interest income is accrued on the unpaid principal balance. Discounts
and premiums are amortized to income using the effective interest method.
Investment real estate is valued at original cost plus capital expenditures less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of the property. Real estate expected to
be disposed of is carried at the lower of cost or fair value, less estimated
costs to sell.
Certificate loans are generally valued at the aggregate unpaid balances. Other
investments, consisting of limited partnerships, are valued on the equity basis.
All investments are carried net of allowances for declines in value that are
other than temporary; the changes in those reserves are reported as realized
gains or losses on investments.
Realized gains and losses on the sale of investments and declines in value
considered to be other than temporary are recognized in the Consolidated
Statements of Income on the specific identification basis.
Securities loaned under AAL's securities lending agreement are stated in the
Consolidated Balance Sheets at amortized cost or fair market value, consistent
with AAL's classifications of such securities as held to maturity or available
for sale. AAL measures the fair value of securities loaned against the
collateral received on a daily basis. Additional collateral is obtained as
necessary to ensure such transactions are adequately collateralized.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are carried at cost and include all highly liquid
investments purchased with an original maturity of three months or less.
DEFERRED ACQUISITION COSTS
Costs which vary with and are primarily attributable to the production of new
business have been deferred to the extent such costs are deemed recoverable from
future profits. Such costs include commissions, selling, selection and
certificate issue expenses. For interest sensitive life, participating life and
investment products, these costs are amortized in proportion to estimated
margins from interest, mortality and other factors under the contracts.
Amortization of acquisition costs for other certificates is charged to expense
in proportion to premium revenue recognized.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation. The
cost of property and equipment is being depreciated by the straight-line method
over the estimated useful lives. Accumulated depreciation was $102,000,000 and
$94,000,000 at December 31, 1999 and 1998, respectively.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CERTIFICATE LIABILITIES AND ACCRUALS
Reserves for future certificate benefits for participating life insurance are
net level reserves computed using the same interest and mortality assumptions as
used to compute cash values. Reserves for future certificate benefits for
non-participating life insurance are also net level reserves, computed using
assumptions as to mortality, interest and withdrawal, with a provision for
adverse deviation. Interest assumptions generally range from 2.5% to 4.0% for
participating life insurance and from 7.8% to 9.6% for non-participating life
insurance.
Reserves for future certificate benefits for universal life insurance and
deferred annuities consist of certificate account balances before applicable
surrender charges. The average interest rate credited to account balances in
1999 was 7.1% for universal life, 5.8% for portfolio-average deferred annuities,
and ranged from 4.3% to 7.2% for investment generation deferred annuities (IGA).
Reserves for health certificates are generally computed using current pricing
assumptions. For Medicare supplement, disability income and long term care
certificates, reserves are computed on a net level basis using realistic
assumptions, with provision for adverse deviation.
Claim reserves are established for future payments not yet due on claims already
incurred, relating primarily to health certificates. These reserves are based on
past experience and applicable morbidity tables. Reserves are continuously
reviewed and updated, with any resulting adjustments reflected in current
operations.
SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable annuity,
variable immediate annuity and variable universal life contracts, and for which
the certificateholder, rather than AAL, bears the investment risk. Fees charged
on separate account certificateholder deposits are included in insurance
charges. Separate account assets, which are stated at fair value based on quoted
market prices, and separate account liabilities are shown separately in the
Consolidated Balance Sheets. Operating results of the separate accounts are not
included in the Consolidated Statements of Income.
INSURANCE PREMIUMS AND CHARGES
For life and some annuity contracts other than universal life or investment
contracts, premiums are recognized as revenues over the premium paying period,
with reserves for future benefits established on a prorated basis from such
premiums.
Revenues for universal life and investment contracts consist of policy charges
for the cost of insurance, policy administration and surrender charges assessed
during the period. Expenses include interest credited to certificate account
balances and benefits incurred in excess of certificate account balances.
Certain profits on limited payment certificates are deferred and recognized over
the certificate term.
For health certificates, gross premiums are prorated over the contract term of
the certificates with the unearned premium included in the certificate reserves.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SURPLUS REFUNDS
Surplus refunds are recognized over the certificate year and are reflected in
the Consolidated Statements of Income. The majority of life insurance
certificates, except for universal life and term certificates, begin to receive
surplus refunds at the end of the second certificate year. Surplus refunds are
not currently being paid on interest-sensitive and health insurance
certificates. Surplus refund scales are approved annually by AAL's Board of
Directors.
FRATERNAL BENEFITS
Fraternal benefits and expenses include all fraternal activities as well as
expenses incurred to provide or administer fraternal benefits, and expenses
related to AAL's fraternal character. This includes items such as benevolences
to help meet the needs of people, educational benefits to raise community and
family awareness of issues, as well as various programs and church grants.
Expenses, such as those necessary to maintain the branch system, are also
included.
OTHER REVENUE
Other revenue consists primarily of concessions and investment advisory fees of
CMC.
INCOME TAXES
AAL, a fraternal benefit society, qualifies as a tax-exempt organization under
the Internal Revenue Code. Accordingly, income earned by AAL is generally exempt
from taxation. AAL's wholly-owned subsidiary and its subsidiaries are subject to
federal and state taxation; however, the resulting income taxes are not material
to AAL's financial statements.
RECENT PRONOUNCEMENTS
In June 1998, the FASB issued Statement 133, Accounting for Derivative
Instruments and Hedging Activities, adoption of which has been deferred to
fiscal years beginning after June 15, 2000. Because of AAL's minimal involvement
with derivative instruments and hedging activities, management does not
anticipate that the adoption of the new statement will have a significant effect
on earnings or the financial position of AAL.
RECLASSIFICATIONS
Certain 1998 amounts have been reclassified to conform with their 1999
presentation.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENTS
AAL's investments in available for sale securities and held to maturity
securities are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ------------- ------------- -----------------
(In Millions)
Available for sale securities at December 31, 1999:
Fixed maturity securities:
Loan-backed obligations of U.S.
Government corporations
and agencies $ 2,182 $ - $ (86) $ 2,096
Obligations of other
governments, states and
political subdivisions 17 17
- -
Corporate bonds 6,585 14 (267) 6,332
Mortgage & asset-backed securities 1,542 (36) 1,507
1
----------------- ------------- ------------- -----------------
Total fixed maturity securities 10,326 15 (389) 9,952
Equity securities 565 284 849
-
----------------- ------------- ------------- -----------------
Total $ 10,891 $ 299 $ (389) $ 10,801
================= ============= ============= =================
Held to maturity securities at December 31, 1999:
Fixed maturity securities:
U.S. Treasury securities and
non-loan-backed obligations
of U.S. Government
corporations and agencies $ 165 $ 3 $ (5) $ 163
Loan-backed obligations of U.S.
Government corporations
and agencies 128 130
3 (1)
Obligations of other
governments, states and
political subdivisions 48 47
- (1)
Corporate bonds 2,525 43 (48) 2,520
Mortgage & asset-backed securities 395 395
4 (4)
----------------- ------------- ------------- -----------------
Total $ 3,261 $ 53 $ (59) $ 3,255
================= ============= ============= =================
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENTS (CONTINUED)
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------- ------------- ------------- -----------------
(In Millions)
Available for sale securities at December 31, 1998:
Fixed maturity securities:
Loan-backed obligations of U.S.
Government corporations
and agencies $ 1,741 $ 18 $ (2) $ 1,757
Obligations of other
governments, states and
political subdivisions 19 20
1 -
Corporate bonds 5,862 148 (29) 5,981
Mortgage & asset-backed securities 1,292 19 1,309
(2)
----------------- ------------- ------------- -----------------
Total fixed maturity securities 8,914 186 (33) 9,067
Equity securities 531 293 824
-
----------------- ------------- ------------- -----------------
Total $ 9,445 $ 479 $ (33) $ 9,891
================= ============= ============= =================
Held to maturity securities at December 31, 1998:
Fixed maturity securities:
U.S. Treasury securities and
non-loan-backed obligations
of U.S. Government
corporations and agencies $ 199 $ 1 $ - $ 200
Loan-backed obligations of U.S.
Government corporations
and agencies 320 32 352
-
Obligations of other
governments, states and
political subdivisions 54 54
1 (1)
Corporate bonds 2,762 125 2,879
(8)
Mortgage & asset-backed securities 571 15 586
-
----------------- ------------- ------------- -----------------
Total $ 3,906 $ 174 $ (9) $ 4,071
================= ============= ============= =================
</TABLE>
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Available for Sale Held to Maturity
------------------------------- -------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- --------------- -------------- ---------------
(In Millions)
Due in one year or less $ 269 $ 268 $ 191 $ 191
Due after one year through five years 3,907 3,777 1,181 1,194
Due after five years through ten years 2,084 1,978 882 873
Due after ten years 342 326 484 472
-------------- --------------- -------------- ---------------
Total fixed maturity securities
excluding mortgage and
asset-backed bonds 6,602 6,349 2,738 2,730
Loan-backed obligations of U.S.
Government corporations and
agencies 2,182 2,096 128 130
Mortgage and asset-backed securities 1,542 1,507 395 395
-------------- --------------- -------------- ---------------
Total fixed maturity securities $10,326 $ 9,952 $ 3,261 $ 3,255
============== =============== ============== ===============
Major categories of AAL's investment income are summarized as follows:
Years Ended December 31
1999 1998 1997
--------------- -------------- ---------------
(In Millions)
Fixed maturity securities $ 942 $ 885 $ 854
Equity securities 13 20
23
Mortgage loans 270 279 294
Investment real estate 11 20
18
Certificate loans 35 35
35
Other invested assets
5 5 5
--------------- -------------- ---------------
Gross investment income 1,276 1,245 1,228
Investment expenses 10 17
13
--------------- -------------- ---------------
Net investment income $ 1,266 $ 1,232 $ 1,211
=============== ============== ===============
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENTS (CONTINUED)
AAL's realized gains and losses on investments are summarized as follows:
Years Ended December 31
1999 1998 1997
--------------- -------------- ---------------
(In Millions)
Securities available for sale:
Fixed maturity securities:
Gross realized gains $ 14 $ 69 $ 47
Gross realized losses (18) (11)
(16)
Equity securities:
Gross realized gains 152 66
76
Gross realized losses (62)
(37) (6)
Other investments, net 17 11
26
--------------- -------------- ---------------
Net realized investment gains $ 103 $ 118 $ 107
=============== ============== ===============
Net unrealized gains/losses on securities available for sale credited directly
to certificateholders' surplus as comprehensive income (loss) were as follows:
December 31
1999 1998 1997
--------------- -------------- ---------------
(In Millions)
Fair value adjustment to available for sale securities $ (90) $ 446 $ 361
Increase (decrease) in deferred acquisition costs 81 (33)
(35)
--------------- -------------- ---------------
Net unrealized (losses) gains on available for
sale securities $ (9) $ 411 $ 328
=============== ============== ===============
The change in accumulated other comprehensive income (deficit) due to unrealized
gains/losses on securities available for sale is as follows:
Years Ended December 31
1999 1998 1997
--------------- -------------- ---------------
(In Millions)
Fixed maturity securities available for sale $ (527) $ 6 $ 138
Equity securities available for sale 71
(9) 79
Deferred acquisition costs 116 (30)
(2)
--------------- -------------- ---------------
$ (420) $ 83 $ 179
=============== ============== ===============
</TABLE>
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INVESTMENTS (CONTINUED)
AAL invests in mortgage loans, principally involving commercial real estate.
Such investments consist of first mortgage liens on completed income producing
properties. AAL manages its investments in mortgage loans to limit credit risk
by diversifying among various geographic regions and property types as follows
as of December 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Percent
------------------ ----------
(In Millions)
Geographic Region:
Pacific $ 972 29.8
South Atlantic 1,091 33.5
Midwest 663 20.4
Other 532 16.3
------------------ ----------
Total Mortgage Loans $ 3,258 100.0
================== ==========
Property Type:
Office $ 844 25.9
Industrial 1,022 31.3
Retail 397 12.2
Residential 274 8.4
Church 237 7.3
Other 484 14.9
------------------ ----------
Total Mortgage Loans $ 3,258 100.0
================== ==========
</TABLE>
The following table presents changes in the allowance for credit losses:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
Balance at January 1 $ 118 $ 124 $ 140
Provisions for credit losses (credit) (11) (4) (13)
Charge offs (2) (3)
-
----------------- ----------------- -----------------
Balance at December 31 $ 107 $ 118 $ 124
================= ================= =================
</TABLE>
AAL's investment in mortgage loans includes $178,000,000 and $198,000,000 of
loans that are considered to be impaired at December 31, 1999 and 1998,
respectively, for which the related allowance for credit losses are $35,000,000
and $38,000,000 at December 31, 1999 and 1998, respectively. The average
recorded investment in impaired loans during the years ended December 31, 1999
and 1998, was $192,000,000 and $216,000,000, respectively. AAL recorded interest
income, using the accrual method, on impaired loans of $14,000,000, $17,000,000
and $19,000,000 for 1999, 1998 and 1997, respectively.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. DEFERRED ACQUISITION COSTS
The changes in deferred acquisition costs are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
Balance at beginning of year $ 667 $ 660 $ 705
Acquisition costs deferred:
Commissions, net of certificate charges 81 74 76
Other costs 29 29 27
----------------- ----------------- -----------------
Total deferred 110 103 103
Acquisition costs amortized (86) (94) (118)
----------------- ----------------- -----------------
Increase (decrease) in deferred acquisition costs 24 9 (15)
Change in unrealized gains/losses on
fixed maturity investments recorded
directly to certificateholders' surplus
as comprehensive income (loss) 116 (2) (30)
----------------- ----------------- -----------------
Total increase (decrease) 140 7 (45)
----------------- ----------------- -----------------
Balance at end of year $ 807 $ 667 $ 660
================= ================= =================
</TABLE>
NOTE 4. RETIREMENT AND SAVINGS PLANS AND POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS
AAL offers a noncontributory defined retirement plan and a contributory savings
plan to substantially all home office and field employees. The savings plan is
defined under the Internal Revenue Code section 401(k) as a profit sharing plan
that allows participant contributions on a before-tax basis as well as an
after-tax basis. AAL also provides postretirement benefits in the form of health
and life insurance for substantially all retired home office and field
personnel.
The following tables set forth the amounts recognized in AAL's financial
statements and the plans' funding status.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Retirement Plans Other Benefits
December 31
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(In Millions)
Projected benefit obligation for
services rendered to date $ 266 $ 269 $ 63 $ 42
Plan assets at fair value 332 321
- -
----------------- ----------------- ----------------- -----------------
Funded (unfunded) status of
the plan $ 66 $ 52 $ (63) $ (42)
================= ================= ================= =================
Accrued liability included in
consolidated balance sheet $ 10 $ 6 $ 44 $ 43
</TABLE>
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. RETIREMENT AND SAVINGS PLANS AND POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS (CONTINUED)
The following summarizes certain assumptions included in the preceding schedule:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Retirement Plans Other Benefits
Years Ended December 31
1999 1998 1997 1999 1998 1997
------------ ----------- ------------ ----------- ------------ ------------
Discount rate 7.5% 7.0% 7.5% 7.5% 7.0% 7.5%
Expected return
on plan assets 9.0% 9.0% 9.0% - - -
Rate of compensation
increase 5.0% 5.0% 5.0% - - -
Health care trend rate - - - 6.0% 6.0% 6.0%
Years Ended December 31
1999 1998 1997
----------- ------------ -----------
(In Millions)
Savings Plan
Benefit cost $ $ - $
- -
Employer contributions 4
5 4
Employee contributions 18 14 13
Benefits paid 18 22 18
Retirement Plans
Benefit cost $ 4 $ 5 $ 5
Employer contributions
- - 5
Employee contributions
- - -
Benefits paid 11 11
9
Other Benefits
Benefit cost $ 4 $ 4 $ 4
Employer contributions
- - -
Employee contributions
- - -
Benefits paid 2 2 3
</TABLE>
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SYNOPSIS OF STATUTORY FINANCIAL RESULTS
The accompanying financial statements differ from those prepared in accordance
with statutory accounting practices prescribed or permitted by regulatory
authorities. The more significant differences are as follows: (a) investments in
bonds are reported at amortized cost or at fair value with unrealized holding
gains and losses reported as a separate component of certificateholders'
surplus, depending on their designation at purchase as held to maturity or
available for sale, respectively, rather than being valued based on the bond's
NAIC rating; (b) certain acquisition costs of new business are deferred and
amortized rather than being charged to operations as incurred; (c) the
liabilities for future certificate benefits and expenses are based on reasonably
conservative estimates of expected mortality, interest, withdrawals and future
maintenance and settlement expenses rather than using statutory rates for
mortality and interest; (d) certain assets, principally costs in excess of net
assets acquired, furniture, equipment and agents' debit balances are reported as
assets rather than being charged to certificateholders' surplus and excluded
from the balance sheets; (e) the interest maintenance reserve and asset
valuation reserve are reported as part of certificateholders' surplus rather
than as a liability; and (f) revenues for universal life and investment-type
contracts include mortality, expense and surrender charges levied against the
certificateholders' accounts rather than including as revenues the premiums
received on these certificates. Expenses include interest added to the
certificateholders' accounts rather than reserve changes related to the
investment portion of these policies. Summarized statutory-basis financial
information for AAL on an unconsolidated basis is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
December 31
1999 1998
----------------- -----------------
(In Millions)
Assets $ 20,800 $ 19,418
================= =================
Liabilities $ 19,044 $ 17,900
Unassigned funds 1,756 1,518
----------------- -----------------
Total liabilities and unassigned funds $ 20,800 $ 19,418
================= =================
</TABLE>
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SYNOPSIS OF STATUTORY FINANCIAL RESULTS (CONTINUED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years ended December 31
1999 1998 1997
----------------- ----------------- -----------------
(In Millions)
Premium income and certificate proceeds $ 1,849 $ 1,806 $ 1,785
Net investment income 1,256 1,219 1,206
Other income
42 36 27
----------------- ----------------- -----------------
Total income 3,147 3,061 3,018
Reserve increase 623 569 519
Certificateholders' benefits 1,487 1,544 1,490
Surplus refunds 117 115 112
Commissions and operating costs 402 377 363
Other 350 367 364
----------------- ----------------- -----------------
Total benefits and expenses 2,979 2,972 2,848
----------------- ----------------- -----------------
Net gain from operations 168 170
89
Net realized capital gains
88 45 40
----------------- ----------------- -----------------
Net income $ 256 $ 134 $ 210
================= ================= =================
</TABLE>
AAL is in compliance with the statutory surplus requirements of all states.
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used in estimating fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the accompanying balance sheets for these
instruments approximate their fair values.
INVESTMENT SECURITIES
Fair values for fixed maturity securities are based on quoted market prices
where available, or are estimated using values obtained from independent pricing
services. All fixed maturity issues are individually priced based on year-end
market conditions, the credit quality of the issuing company, the interest rate
and the maturity of the issue. The fair values for investments in equity
securities are based on quoted market prices.
MORTGAGE LOANS
The fair values for mortgage loans are estimated using discounted cash flow
analyses, based on interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
CERTIFICATE LOANS
The carrying amounts reported in the accompanying balance sheets for these loans
are considered to be reasonable estimates of their fair value.
<PAGE>
AID ASSOCIATION FOR LUTHERANS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
SEPARATE ACCOUNTS
The fair values for separate account assets are based on quoted market prices.
FINANCIAL LIABILITIES
The fair values for AAL's liabilities under investment-type contracts, such as
deferred annuities and other liabilities, including supplementary contracts
without life contingencies, deferred income settlement options and refunds on
deposit, are estimated to be the cash surrender value payable upon immediate
withdrawal. These amounts are included in certificateholder funds in the
accompanying balance sheets.
The cost and estimated fair value of AAL's financial instruments are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1999 1998
---------------------------------- ----------------------------------
Estimated Estimated
Cost Fair Value Cost Fair Value
---------------- ---------------- ---------------- ----------------
(In Millions)
Financial Assets:
Fixed maturities $ 13,587 $ 13,207 $ 12,820 $ 13,138
Equity securities 565 849 531 824
Mortgage loans 3,151 3,204 3,150 3,628
Cash and cash equivalents 243 243 232 232
Certificate loans 494 494 500 500
Separate accounts 2,002 2,002 1,406 1,406
Financial Liabilities:
Deferred annuities 7,419 7,368 7,310 7,238
Variable annuities 2,016 1,923 1,433 1,356
Other 721 718 681 678
</TABLE>
NOTE 7. CONTINGENT LIABILITIES
AAL is involved in various lawsuits and contingencies that have arisen from the
normal conduct of business. Contingent liabilities arising from litigation, tax
and other matters are not considered material in relation to the financial
position of AAL. AAL has not made any provision in the financial statements for
liabilities, if any, that might ultimately result from these contingencies.
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Contents
Report of Independent Auditors............................................1
Statement of Net Assets...................................................2
Statement of Operations...................................................3
Statement of Changes in Net Assets........................................4
Notes to Financial Statements.............................................5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Certificate Owners
Aid Association for Lutherans
We have audited the accompanying statement of net assets of the AAL Variable
Annuity Account II (the Account) (comprising, respectively, the Money Market,
Bond, Balanced, Large Company Stock, Small Company Stock, International Stock,
and High Yield Bond Subaccounts) as of December 31, 1999, and the related
statements of operations and changes in net assets for the period August 2, 1999
(date operations commenced) to December 31, 1999. These financial statements are
the responsibility of the Account's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1999, by
correspondence with the transfer agent. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
subaccounts constituting the AAL Variable Annuity Account II at December 31,
1999, and the results of their operations and changes in their net assets for
the period August 2, 1999 (date operations commenced) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
January 26, 2000
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS
Investments in AAL Variable Product Series Fund, Inc.:
Small Company Stock Subaccount:
Small Company Stock Portfolio, 47,340 shares at net asset
value of $13.20 per share (cost $612,248) $ 624,734
International Stock Subaccount:
International Stock Portfolio, 25,494 shares at net asset
value of $15.44 per share (cost $362,983) 393,701
Large Company Stock Subaccount:
Large Company Stock Portfolio, 152,202 shares at net asset
value of $27.10 per share (cost $4,003,460) 4,124,971
Balanced Subaccount:
Balanced Portfolio, 189,914 shares at net asset value of $16.72
per share (cost $3,180,292) 3,175,732
High Yield Bond Subaccount:
High Yield Bond Portfolio, 25,903 shares at net asset value
of $7.69 per share (cost $200,715) 199,235
Bond Subaccount:
Bond Portfolio, 16,327 shares at net asset value of $9.60 per
share (cost $159,483) 156,696
Money Market Subaccount:
Money Market Portfolio, 1,798,099 shares at net asset value of
$1.00 per share (cost $1,798,099) 1,798,099
----------------------
Total Investments (cost $10,317,280) 10,473,168
LIABILITIES
-
----------------------
NET ASSETS $ 10,473,168
======================
Unit Extended
Units Value Value
---------------- ------------- ----------------------
Net Assets are represented by:
Small Company Stock Subaccount 36,036 $17.34 $ 624,734
International Stock Subaccount 25,778 15.27 393,701
Large Company Stock Subaccount 149,769 27.54 4,124,971
Balanced Subaccount 164,845 19.26 3,175,732
High Yield Bond Subaccount 22,046 9.04 199,235
Bond Subaccount 12,956 12.10 156,696
Money Market Subaccount 1,507,483 1.19 1,798,099
----------------------
Total Net Assets $ 10,473,168
======================
</TABLE>
The accompanying notes to the financial statements are an integral part of this
statement.
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 2, 1999 (1) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SMALL LARGE
COMPANY INTERNATIONAL COMPANY
STOCK STOCK STOCK
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
----------------- --------------- ---------------- ----------------
Investment income:
Dividends $ 42,153 $ 442 $ 2,225 $ 5,211
Capital gain distributions
138,304 27,964 2,262 31,823
----------------- --------------- ---------------- ----------------
Total investment income
180,457 28,406 4,487 37,034
Expenses-mortality and expense
risk charges
12,673 609 374 3,996
----------------- --------------- ---------------- ----------------
Net investment income
167,784 27,797 4,113 33,038
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) from
investment transactions
7,165 16 47 6,507
Change in unrealized
appreciation (depreciation)
of investments
155,888 12,486 30,718 121,511
----------------- --------------- ---------------- ----------------
Net gain (loss) on investments
163,053 12,502 30,765 128,018
----------------- --------------- ---------------- ----------------
Net increase (decrease) in net assets
resulting from operations $ 330,837 $ 40,299 $ 34,878 $ 161,056
================= =============== ================ ================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HIGH
YIELD MONEY
BALANCED BOND BOND MARKET
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------- ---------------- --------------- ---------------
Investment income:
Dividends $ 14,509 $ 3,002 $ 1,435 $ 15,329
Capital gain distributions
76,255 - - -
---------------- ---------------- --------------- ---------------
Total investment income
90,764 3,002 1,435 15,329
Expenses-mortality and expense
risk charges
3,740 225 179 3,550
---------------- ---------------- --------------- ---------------
Net investment income
87,024 2,777 1,256 11,779
Net realized and unrealized gain
(loss) on investments:
Net realized gain (loss) from
investment transactions
1,316 (697) (24) -
Change in unrealized
appreciation (depreciation)
of investments
(4,560) (1,480) (2,787) -
---------------- ---------------- --------------- ---------------
Net gain (loss) on investments
(3,244) (2,177) (2,811) -
---------------- ---------------- --------------- ---------------
Net increase (decrease) in net assets
resulting from operations $ 83,780 $ 600 $ (1,555) $ 11,779
================ ================ =============== ===============
</TABLE>
(1) Commencement of operations
The accompanying notes to the financial statements are an integral part of this
statement.
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD AUGUST 2, 1999 (1) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SMALL LARGE
COMPANY INTERNATIONAL COMPANY
STOCK STOCK STOCK
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
---------------- --------------- ----------------- ---------------
NET ASSETS AT AUGUST 2, 1999 $ - $ - $ - $ -
INCREASE IN NET ASSETS
Net investment income
167,784 27,797 4,113 33,038
Net realized gain (loss) from
investment transactions
7,165 16 47 6,507
Change in unrealized appreciation
(depreciation) of investments
155,888 12,486 30,718 121,511
---------------- --------------- ----------------- ---------------
Net increase (decrease) in net assets
resulting from operations
330,837 40,299 34,878 161,056
CAPITAL SHARE TRANSACTIONS
Transfers of net premiums 10,709,656
294,345 298,661 2,372,827
Transfers of surrenders
(145,857) (6,554) (3,591) (32,076)
Transfers between subaccounts
(421,468) 296,644 63,753 1,623,164
---------------- --------------- ----------------- ---------------
Net increase in net assets
resulting from capital
share transactions 10,142,331
584,435 358,823 3,963,915
---------------- --------------- ----------------- ---------------
Total increase in net assets 10,473,168
624,734 393,701 4,124,971
---------------- --------------- ----------------- ---------------
NET ASSETS AT DECEMBER 31, 1999 $ 10,473,168 $ 624,734 $ 393,701 $4,124,971
================ =============== ================= ===============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HIGH
YIELD MONEY
BALANCED BOND BOND MARKET
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
--------------- ---------------- ----------------- ----------------
NET ASSETS AT JULY 26, 1999 $ - $ - $ - $ -
INCREASE IN NET ASSETS
Net investment income
87,024 2,777 1,256 11,779
Net realized gain (loss) from
investment transactions
1,316 (697) (24) -
Change in unrealized appreciation
(depreciation) of investments
(4,560) (1,480) (2,787) -
--------------- ---------------- ----------------- ----------------
Net increase (decrease) in net assets
resulting from operations
83,780 600 (1,555) 11,779
CAPITAL SHARE TRANSACTIONS
Transfers of net premiums 5,730,554
1,750,753 164,758 97,758
Transfers of surrenders
(19,042) (3,025) (1,013) (80,556)
Transfers between subaccounts (3,863,678)
1,360,241 36,902 61,506
--------------- ---------------- ----------------- ----------------
Net increase in net assets
resulting from capital
share transactions 1,786,320
3,091,952 198,635 158,251
--------------- ---------------- ----------------- ----------------
Total increase in net assets 1,798,099
3,175,732 199,235 156,696
--------------- ---------------- ----------------- ----------------
NET ASSETS AT DECEMBER 31, 1999 $3,175,732 $ 199,235 $ 156,696 $1,798,099
=============== ================ ================= ================
</TABLE>
(1) Commencement of operations
The accompanying notes to the financial statements are an integral part of this
statement.
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The AAL Variable Annuity Account II (the Account) is a unit investment trust
registered under the Investment Company Act of 1940. The Account was established
as a separate investment account within Aid Association for Lutherans (AAL) to
fund single premium immediate variable annuity certificates. The Account
commenced operations on August 2, 1999.
The Account has seven separate subaccounts, each of which invests solely, as
directed by certificate owners, in a different portfolio of AAL Variable Product
Series Fund, Inc. (the Fund), an open-end, diversified management investment
company sponsored by AAL. Certificate owners also may direct investments to a
guaranteed interest subaccount held in the general account of AAL.
Investments in shares of the Fund are stated at market value, which is the
closing net asset value per share as determined by the Fund. The first-in,
first-out basis has been used in determining the net realized gain or loss from
investment transactions and unrealized appreciation or depreciation of
investments. Dividends and capital gain distributions paid to the Account are
automatically reinvested in shares of the Fund on the payment date.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE 2. EXPENSE CHARGES
The Account pays AAL certain amounts relating to the distribution and
administration of the certificates funded by the Account and as reimbursement
for certain mortality and other risks assumed by AAL. The following summarizes
those amounts.
Mortality and expense risks assumed by AAL are compensated for by a charge
equivalent to an annual rate of approximately 1.25% of the average daily net
asset value of the Account. There is a daily charge based on a percentage of
each portfolio's average daily net asset value that is payable to the
portfolio's investment advisor. The certificate owner may make up to twelve
transfers between investment options per certificate year, but thereafter, each
transfer is subject to a $25 transfer charge. Transfers from the fixed account
are not allowed. In addition, each certificate has an indirect withdrawal and
surrender charge. The net amount received upon surrender is the commuted value,
which for the fixed account is calculated using a maximum interest rate of 2%
higher than the maximum valuation interest rate for single premium immediate
annuities for the year and state in which the certificate was issued. For the
variable subaccounts, the commuted value is calculated using an interest rate of
1% greater than the assumed investment return selected.
NOTE 3. FEDERAL INCOME TAXES
The operations of the Account form a part of the operations of AAL. AAL, a
fraternal benefit society, qualifies as a tax-exempt organization under the
Internal Revenue Code. Under current law, no federal income taxes are payable
with respect to the Account's net investment income and net realized gains on
investments. Accordingly, no charge for income taxes is currently being made to
the Account. If such taxes are incurred by AAL in the future, a charge to the
Account may be assessed.
AAL VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVESTMENT TRANSACTIONS
The aggregate cost of investment securities purchased and proceeds from
investment securities sold by subaccount are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
PERIOD AUGUST 2, 1999 TO DECEMBER 31, 1999 Purchases Sales
------------------- -----------------
Small Company Stock Subaccount $ 613,064 $ 832
International Stock Subaccount 363,671 734
Large Company Stock Subaccount 4,100,556 103,604
Balanced Subaccount 3,223,466 44,490
High Yield Bond Subaccount 215,142 13,729
Bond Subaccount 177,983 18,475
Money Market Subaccount 3,891,629 2,093,529
------------------- -----------------
Combined $12,585,511 $2,275,393
=================== =================
</TABLE>
NOTE 5. SUMMARY OF CHANGES FROM UNIT TRANSACTIONS
Transactions in units of each subaccount were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
UNITS SOLD UNITS REDEEMED NET INCREASE
----------------------------------- -------------------------------- -------------------------------
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT
---------------- ------------------ --------------- --------------- -------------- ---------------
PERIOD AUGUST 2, 1999 TO
DECEMBER 31, 1999
Small Company Stock
Subaccount $ 595,208 $ 10,773 $ 584,435
37,021 985 36,036
International Stock Subaccount
26,688 366,211 910 7,388 25,778 358,823
Large Company Stock
Subaccount
153,745 4,054,856 3,976 90,941 149,769 3,963,915
Balanced Subaccount
171,938 3,188,458 7,093 96,506 164,845 3,091,952
High Yield Bond Subaccount
22,427 202,120 381 3,485 22,046 198,635
Bond Subaccount
13,104 160,068 148 1,817 12,956 158,251
Money Market Subaccount
4,880,394 5,730,535 3,372,911 3,944,215 1,507,483 1,786,320
------------ -------------------- ------------- ---------------- -------------- -------------------
Combined $ 14,297,456 $ 4,155,125 $ 10,142,331
5,305,317 3,386,404 1,918,913
============ ==================== ============= ================ ============== ===================
</TABLE>
AAL VARIABLE ANNUITY ACCOUNT II
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. NET ASSETS
The Account has an unlimited number of accumulation units authorized with no par
value. Net assets as of December 31, 1999, consisted of:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SMALL LARGE
COMPANY INTERNATIONAL COMPANY
STOCK STOCK STOCK
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------- ---------------------------------------------
Paid-in capital $ $ 584,435 $ 358,823 $3,963,915
10,142,331
Accumulated undistributed net
investment income (loss)
167,784 27,797 4,113 33,038
Accumulated undistributed net
realized gain (loss) from investment
transactions
7,165 16 47 6,507
Net unrealized appreciation
(depreciation) of investments
155,888 12,486 30,718 121,511
-------------- -------------- -------------- --------------
Net assets $ $ 624,734 $ 393,701 $4,124,971
10,473,168
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
HIGH
YIELD MONEY
BALANCED BOND BOND MARKET
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
-------------------------------------------- -------------
Paid-in capital $3,091,952 $ 198,635 $ 158,251 $1,786,320
Accumulated undistributed net
investment income (loss)
87,024 2,777 1,256 11,779
Accumulated undistributed net
realized gain (loss) from investment
transactions
1,316 (697) (24) -
Net unrealized appreciation
(depreciation) of investments
(4,560) (1,480) (2,787) -
---------------- -------------- -------------- -------------
Net assets $3,175,732 $ 199,235 $ 156,696 $1,798,099
============== ============== ============== =============
</TABLE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Part B: AAL Variable Annuity Account II
The following audited financial statements of AAL
Variable Annuity Account II are included in Part B of
this Registration Statement. The financial statements
are:
Report of Independent Auditors Statement of Net Assets as of December
31, 1999 Statement of Operations for the year ended December 31, 1999
Statement of Changes in Net Assets for the year ended December 31,
1999, and 1998 Notes to Financial Statements dated December 31, 1999
Aid Association for Lutherans
The following audited financial statements of Aid
Association for Lutherans ("Depositor") as of
December 31, 1999, December 31, 1998, and December
31, 1997, are included in Part B:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Certificate Holders' Surplus
Consolidated Statements of Cash Flow
Notes to Financial Statements
(b) Exhibits:
Except as noted below, all required exhibits have been previously filed and are
incorporated by reference from Registrant's prior Registration Statement.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EXHIBIT NAME OF EXHIBIT INCORPORATED BY REFERENCE FILED
NUMBER HEREWITH
1 Resolution of the Board of Directors of the Depositor Pre-Effective Amendment #1 dated
authorizing the establishment of AAL Variable Annuity February 5, 1999
Account II
2 Not applicable
3 Amended and Restated Principal Underwriting and
Servicing Agreement between Aid Association for
Lutherans (AAL), the Accounts and AAL Capital
Management Corporation (AAL CMC) dated January 1, 2000
X
4(a) Variable Annuity Certificate Post Effective Amendment #1
dated May 27, 1999
4(b) Omnibus IRA Endorsements Post Effective Amendments #5
dated February 27, 1998 and #7
dated April 24, 1999(1)
4(c) 403(b) Endorsement and SIMPLE-IRA Endorsement Post Effective Amendment #5
dated February 27, 1998(1)
4(d) Variation pages applicable to Certificates used in Post Effective Amendment #1
various states dated May 27, 1999
5(a) Standard Computer Certificate Application Form Post Effective Amendment #1
dated May 27, 1999
5(b) Immediate Variable Annuity Option Selection Form Post Effective Amendment #1
dated May 27, 1999(1)
6(a) Articles of Incorporation of Depositor X
6(b) Bylaws of Depositor X
7 Not applicable
8(a) Amended and Restated Participation Agreement between
AAL, the Accounts and the Fund as of January 1, 2000
X
8(b) Amended and Restated Participation Agreement between
AAL, the AAL Savings Plan, AAL CMC and the Fund dated
January 1, 2000 X
9 Opinion of Counsel as to the legality of the Post Effective Amendment #1
securities being registered (including written dated May 27, 1999
consent)
10 Consent of Independent Auditors X
11 Not applicable
12 Not applicable
13 Schedules for computation of each performance
quotation in the Registration Statement X
15 Powers of Attorney Post Effective Amendment #6
dated August 28, 1998(1)
16 Transmittal Letter X
</TABLE>
(1) Incorporated by reference from previously filed registration statement for
the AAL Variable Annuity Account I file Nos. 33-82054, 811-8660.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The directors, executive officers and, to the extent responsible for variable
annuity operations, other officers of Depositor, are listed below:
<TABLE>
<CAPTION>
<S> <C>
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH DEPOSITOR
John O. Gilbert Chairman of the Board, President and
4321 North Ballard Road Chief Executive Officer
Appleton, WI 54919
Raymond G. Avischious
formerly President & General Manager
Shurfine-Central 4200 Oaksbury Lane
Rolling Meadows, IL 60008 Director
Richard E. Beumer
Vice Chairman
Jacobs Engineering Group, Inc.
13723 Riverport Drive
Maryland Heights, MO 63043 Director
Kenneth Daly, CPA
Partner
KPMG LLP
1600 Market Street
Philadelphia, PA 19103-7201 Director
Elizabeth A. Duda
2450 Mikler Road
Oviedo, FL 32765 Director
Edward A. Engel
President
Edward A. Engel & Associates
P.O. Box 2039
Birmingham, MI 48012 Director
Gary J. Greenfield
President
Wisconsin Lutheran College
8830 West Bluemound Road
Milwaukee, WI 53226 Director
Robert H. Hoffman
Vice President, Communication Division
Taylor Corporation
1725 Roe Crest Drive
P.O. Box 3728 Director
North Mankato, MN 56002-3728
Robert E. Long
Senior Vice President
Park Bank
15850 West Bluemound Road
Brookfield, WI 53005 Director
Robert B. Peregrine
President
Peregrine & Roth, S.C.
633 West Wisconsin Avenue
Milwaukee, WI 53203-1960 Director
Paul D. Schrage
Formerly Sr. Exec. Vice President &
Chief Marketing Officer
McDonald's Corporation
42237 N. 112th Place
Scottsdale, AZ 85262 Director
James H. Scott
Principal
Miller Anderson & Sherrerd, LLP
One Tower Bridge
West Conshohocken, PA 19428-2899 Director
Kathi P. Seifert
Executive Vice President
Kimberly Clark Corporation
2100 Winchester Road
Neenah, WI 54956 Director
Roger G. Wheeler
Formerly President
Wheel-Air Charter, Inc.
6109 West 104th Street Director
Bloomington, MN 55438
E. Marlene Wilson
President
Volunteer Management Associates
320 South Cedar Brook Road
Boulder, CO 80304 Director
Rev. Thomas R. Zehnder
Pastor
King of Glory Lutheran Church
4897 Longhill Road
Williamsburg, VA 23188 Director
Walter S. Rugland Executive Vice President and
4321 North Ballard Road Chief Operating Officer
Appleton, WI 54919
Woodrow E. Eno, Esq.
4321 North Ballard Road Senior Vice President,
Appleton, WI 54919 Secretary and General Counsel
Steven A. Weber
4321 North Ballard Road
Appleton, WI 54919 Senior Vice President
Fred Ohlde
4321 North Ballard Road
Appleton, WI 54919 Senior Vice President
Jon M. Stellmacher
4321 North Ballard Road
Appleton, WI 54919 Senior Vice President
Carl Rudolph
4321 North Ballard Road Senior Vice President, Chief Financial Officer, Controller
Appleton, WI 54919 and Treasurer
James H. Abitz Senior Vice President and
222 West College Avenue Chief Investment Officer
Appleton, WI 54919
Russell H. Evenson
4321 North Ballard Road Senior Vice President
Appleton, WI 54919
Robert G. Same
222 W. College Avenue Vice President, Chief Compliance Officer and
Appleton, WI 54919 Deputy General Counsel
</TABLE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH DEPOSITOR OR
REGISTRANT
Registrant is a separate account of Depositor(AAL), established by the Board of
Directors of the Depositor in 1999, pursuant to the laws of the State of
Wisconsin. Depositor is a fraternal benefit society organized under the laws of
the State of Wisconsin and is owned by and operated for its members. It has no
stockholders and is not subject to the control of any affiliated persons.
Depositor controls the following wholly-owned, direct and indirect subsidiaries:
(a) AAL Holdings, Inc., a Delaware corporation that is a holding company that
has no independent operations; (b) AAL Capital Management Corporation (AALCMC),
a Delaware corporation that is a registered broker-dealer and investment
adviser; and (c) North Meadows Investment, Ltd., a Wisconsin corporation
organized for the purpose of holding and investing in real estate; (d) The AAL
Trust Company FSB, and (e) AAL Variable Product Series Fund, Inc. ("Fund"), a
Maryland corporation organized as an open-end management investment company.
Financial statements of AAL are filed on a consolidated basis with regard to
each of the foregoing entities, other than the Fund, which files separate
financial statements. The Depositor has established two other separate accounts
that use the same underlying Fund.
<TABLE>
<S> <C> <C> <C>
-------------------------------
Parent Company AAL
(Wisconsin corp.)
-------------------------------
Holding Company AAL Holdings, Inc.
(Delaware corp.)
-------------------------------
------------------------------ ----------------------------
Wholly-owned AAL Capital Management North Meadows Investment
subsidiaries of Corporation AAL Trust Co., FSB Ltd.
AAL Holdings, Inc. (Delaware corp.) (Federal charter) (Wisconsin corp.)
------------------------------ ------------------------------- ----------------------------
</TABLE>
ITEM 27. NUMBER OF CERTIFICATE OWNERS
As of March 31, 2000, there were approximately 207 qualified and 208
non-qualified certificate owners.
ITEM 28. INDEMNIFICATION
Section 33 of Depositor's Bylaws, filed as an Exhibit to this Registration
Statement, Section E, subsection (viii) of Article Seventh of the Fund's
Articles of Incorporation and Article X of the Fund's Bylaws, and Section Eight
of AAL CMC's Articles of Incorporation, contain provisions requiring the
indemnification by Depositor, the Fund, and AAL CMC of their respective
directors, officers and certain other individuals for any liability arising
based on their duties as directors, officers or agents of the Depositor, Fund or
AAL CMC, unless, in the case of the Fund, such liability arises due to the
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such office.
In addition, Section 3 of the Investment Advisory Agreement between the Fund and
AAL CMC contains a provision in which the Fund and AAL CMC mutually agree to
indemnify and hold the other party (including its officers, agents, and
employees) harmless for any and all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the other party arising out of their
performance under the Agreement, unless such liability is incurred as a result
of the party's gross negligence, bad faith, or willful misfeasance or reckless
disregard of its obligations and duties under the Agreement.
Sections 14 of the Transfer Agency Agreement between the Fund and AAL provide
that each party shall indemnify the other for certain liability. Section 14
states that AAL shall act in good faith and use best efforts within reasonable
limits to ensure the accuracy of the services performed for the Fund, but
assumes no responsibility for loss or damage due to errors. However, AAL will
hold the Fund harmless from all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the Fund as a result of AAL's gross
negligence, bad faith, or willful misfeasance or by reason of its reckless
disregard of its obligations and duties under the Agreement, or that of its
officers, agents and employees. The Fund shall indemnify and hold AAL harmless
for all loss, cost damage and expense resulting from the performance of its
duties, unless due to the gross negligence, bad faith, willful misfeasance or
reckless disregard of its obligations on the part of AAL, its officers,
employees and agents.
Section 8 of the Participation Agreement between AAL, the Accounts and the Fund
contains a provision in which the Fund and AAL mutually agree to indemnify and
hold the other party (including its Officers, agents, and employees) harmless
for any and all loss, cost damage and expense, including reasonable attorney's
fees, incurred by the other party arising out of their performance under the
Agreement, unless such liability is incurred as a result of the party's gross
negligence, bad faith, or willful misfeasance or reckless disregard of its
obligations and duties under the Agreement.
Section 8 of the Participation Agreement between AAL, the AAL Savings Plan, AAL
CMC and the Fund contains a provision in which the Fund and AAL mutually agree
to indemnify and hold the other party (including its Officers, agents, and
employees) harmless for any and all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the other party arising out of their
performance under the Agreement, unless such liability is incurred as a result
of the party's gross negligence, bad faith, or willful misfeasance or reckless
disregard of its obligations and duties under the Agreement.
Section 8 of the Principal Underwriting and Servicing Agreement between AAL and
AAL CMC contains a provision in which AAL and AAL CMC mutually agree to
indemnify and hold the other party (including its officers, agents, and
employees) harmless for any and all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the other party arising out of their
performance under the Agreement, unless such liability is incurred as a result
of the party's gross negligence, bad faith, or willful misfeasance or reckless
disregard of its obligations and duties under the Agreement.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
Registrant, pursuant to the foregoing provisions or otherwise, Registrant has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Depositor, the Fund or AAL CMC of
expenses incurred or paid by a director or officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person of Registrant in
connection with the securities being registered, Depositor, the Fund or AAL CMC
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether or not such indemnification by it is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITER
(a) AAL CMC, the principal underwriter of the Certificates, is also the
distributor of the shares of The AAL Mutual Funds, a Massachusetts
Business Trust offering a series of individual funds, including The AAL
Small Cap Stock, Mid Cap Stock, International, Capital Growth, Equity
Income, Balanced, High Yield Bond, Municipal Bond, Bond, Money Market
Funds (Class A and Class B) and The AAL U.S. Government Zero Coupon
Target Fund Series 2001 and The AAL U.S. Government Zero Coupon Target
Fund Series 2006, all of which are open-end management investment
companies. AAL CMC is also the investment adviser to the underlying
Fund of the Registrant.
(b) The directors and principal officers of AAL CMC are set out below.
Unless otherwise indicated, the principal business address of each
person named below is 222 West College Avenue, Appleton, Wisconsin,
54911.
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
Woodrow E. Eno Chairman of the Board
James H. Abitz Director, Senior Vice President
and Chief Investment Officer
Robert G. Same Director and President
Russell A. Evenson
4321 North Ballard Road
Appleton, WI 54919 Director
James H. Krueger
4321 North Ballard Road
Appleton, WI 54919 Director and Vice President
Jon M. Stellmacher
4321 North Ballard Road
Appleton, WI 54919 Director and Vice President
Carl J. Rudolph Director
4321 North Ballard Road
Appleton, WI 54919
Jeffrey L. Verhagen
4321 North Ballard Road
Appleton, WI 54919 Vice President
Frederick D. Kelsven Vice President and Secretary
Steven R. Wendt Vice President and Chief Financial
Officer
Jeffery R. Kargus Treasurer
Thomas R. Mischka
4321 North Ballard Road
Appleton, WI 54919 Vice President
Lori Richardson
125 North Superior Street
Appleton, WI 54911 Vice President
Michael Mevis Vice President
Marnie Loomans-Thuecks
4321 North Ballard Road
Appleton, WI 54919 Vice President
Krien VerBerkmoes III Vice President and Chief
Compliance Officer
Paul Stadler Vice President
Charles D. Gariboldi Vice President
Charles A. Friedman Vice President
Gordon Beckler Vice President
4321 North Ballard Road
Appleton, WI 54919
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of Registrant are located at the offices of the
Depositor at 4321 North Ballard Road, Appleton, Wisconsin, 54919, and 222 West
College Avenue, Appleton, Wisconsin, 54911, and 125 North Superior Street,
Appleton, Wisconsin, 54911.
ITEM 31. SERVICES
Not Applicable.
ITEM 32. UNDERTAKINGS
(a) Registrant undertakes to file a post-effective amendment to this
Registration Statement as frequently as is necessary to ensure that the
audited financial statements in this Registration Statement are never more
than 16 months old for so long as payments under the certificates may be
accepted.
(b) Registrant undertakes to include either: (1) as part of any application to
purchase a certificate offered by the prospectus, a space that an applicant
can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement of
Additional Information.
(c) Registrant undertakes to deliver any Statement of Additional Information or
financial statements required to be made available under this Form
promptly, upon either written or oral request.
(d) The Depository insurance company represents that the fees and charges
deducted under the contract, in the aggregate, are reasonable in relation
to the services rendered, the expenses expected to be incurred, and the
risks assumed by the Depositor.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company
Act of 1940, as amended, the Registrant certifies that it meets the requirements
of Securities Act Rule 485(b) for effectiveness of this amended Registration
Statement and has caused this amended Registration Statement to be signed on its
behalf in the City of Appleton and State of Wisconsin on this 20th day of April
2000.
AAL VARIABLE ANNUITY ACCOUNT II
(Registrant)
By: AID ASSOCIATION FOR LUTHERANS
(Depositor, on behalf of itself and Registrant)
By: /s/John O. Gilbert
-----------------------------------
John O. Gilbert
President and
Chief Executive Officer
As required by the Securities Act of 1933, this amended Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
/s/John O. Gilbert President and
- -------------------------- Chief Executive Officer
John O. Gilbert (Principal Executive Officer) April 20, 2000
/s/Carl J. Rudolph Senior Vice President, Controller,
- -------------------------- Treasurer, and Chief Financial Officer
Carl J. Rudolph (Principal Financial Officer,
Principal Accounting Officer) April 20, 2000
All of the Board of Directors:
Raymond G. Avischious Gary J. Greenfield James H. Scott
Richard E. Beumer Robert H. Hoffman Kathi P. Seifert
Kenneth Daly Robert E. Long Roger B. Wheeler
Elizabeth A. Duda Robert B. Peregrine E. Marlene Wilson
Edward A. Engel Paul D. Schrage Rev. Thomas R. Zehnder
John O. Gilbert, by signing his name hereto, does hereby sign this
document on behalf of himself and each of the above-named Directors of Aid
Association for Lutherans pursuant to powers of attorney duty executed by such
persons.
/s/John O. Gilbert April 20, 2000
- --------------------------
John O. Gilbert
Attorney-in-Fact
<PAGE>
AAL VARIABLE ANNUITY ACCOUNT II
INDEX TO EXHIBITS
The exhibits below represent only those exhibits which are newly filed
with this Registration Statement. See Item 24(b) of Part C for exhibits not
listed below.
EXHIBIT
NUMBER
NAME OF EXHIBIT
3 Amended and Restated Principal Underwriting and Servicing
Agreement between Aid Association for Lutherans (AAL) and AAL
Capital Management Corporation (AAL CMC) dated January 1, 2000
6(a) Articles of Incorporation of Depositor
6(b) Bylaws of Depositor
8(a) Amended and Restated Participation Agreement between AAL, the
Accounts, AAL CMC and the Fund as of January 1, 2000
8(b) Amended and Restated Participation Agreement between AAL, AAL
Savings Plan, AAL CMC, and the Fund dated January 1, 2000
10 Consent of Independent Auditors
13 Schedules for computation of each performance quotation in the
Registration Statement
16 Transmittal Letter
AMENDED AND RESTATED
PRINCIPAL UNDERWRITING
AND
SERVICING AGREEMENT
BY AND BETWEEN
AAL CAPITAL MANAGEMENT CORPORATION
AND
AID ASSOCIATION FOR LUTHERANS
DATED
JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
1. Appointment of DISTRIBUTOR
2. Underwriting Responsibilities of DISTRIBUTOR
3. Additional Services to be Provided by DISTRIBUTOR
3.1 Preparation of Sales Literature and Advertising Materials
3.2 Licensing of Field and Home Office Staff
3.3 Regulatory Compliance
3.4 Field Training
3.5 Confirmations
4. Responsibilities of AAL
4.1 Sales Commissions
4.2 Sales Credits and Field Expenses
4.3 Registrations of Securities and Investment Adviser
4.4 Books and Records
4.5 Duty to Keep Informed
4.6 Transfer Agent and Management
5 Joint Procedures for Communications with the Public and with registered
representatives
6. Fees to be Paid to DISTRIBUTOR by AAL
6.1 Services
6.2 Determination of Charge/Expense Formulas for Services
6.3 Preparation and Negotiation of Final Annual Budget for Services
6.4 Accounting Procedures
7. Independent Contractor
8. Indemnification
8.1 Indemnification of AAL
8.2 Indemnification of DISTRIBUTOR
9. Authorized Representations
10. Amendment or Assignment of Agreement
11. Termination of Agreement
12. Miscellaneous
13. Definition of Terms
14. Compliance with Securities Laws
15. Regulatory Examinations
16. Notices
17. Governing Law
Schedule A: Schedule of Sales Commissions
<PAGE>
PRINCIPAL UNDERWRITING AND SERVICING AGREEMENT
This PRINCIPAL UNDERWRITING AND SERVICING AGREEMENT (the "Agreement")
made and entered into this 1ST day of January, 2000, by and between AAL CAPITAL
MANAGEMENT CORPORATION, a corporation organized and existing under the laws of
the State of Delaware, ("DISTRIBUTOR" or "AAL CMC") and AID ASSOCIATION FOR
LUTHERANS ("AAL), a fraternal benefit society organized and existing under the
laws of the State of Wisconsin, on its own behalf and on behalf of AAL Variable
Annuity Accounts I & II and AAL Variable Life Account I, all collectively
referred to as "ACCOUNTS."
RECITALS
AAL and all its ACCOUNTS are registered as unit investment trusts under
the Investment Company Act of 1940 (the "1940 Act"), propose to offer for sale
certain flexible premium deferred variable annuity, single premium immediate
variable annuity and variable universal life certificates (the "Certificates"),
interests in the ACCOUNTS under the Certificates are registered with the
Securities and Exchange Commission (the "SEC") as securities under the
Securities Act of 1933 (the " 1933 Act").
Premiums received from owners of Certificates will be deposited at the
owner's designation in the respective ACCOUNTS and/or in the AAL General
Account. The ACCOUNTS will invest solely in portfolio shares of the AAL Variable
Product Series Fund, Inc. (the "FUND").
DISTRIBUTOR is a wholly-owned indirect subsidiary of AAL, is registered
as a broker-dealer with the SEC under the Securities Exchange Act of 1934 (the
"1934 Act") and with state securities authorities in all 50 states, is a member
of the National Association of Securities Dealers, Inc. ("NASD"), is authorized
to offer and sell mutual funds and variable insurance products, and acts as
DISTRIBUTOR of The AAL Mutual Funds, an investment company.
AAL and DISTRIBUTOR intend to enter into an agreement by which
DISTRIBUTOR will act as the principal underwriter in a continuous offering of
the Certificates for AAL, the offerings to begin no sooner than on the effective
date of the registration statements in connection with the Certificates under
the 1933 Act, and state securities and insurance registrations. This Agreement
pertains to the sale of Certificates by registered representatives licensed with
DISTRIBUTOR, and not to the sale of Certificates by any other party and/or
broker-dealer who may be authorized by AAL to sell Certificates or who may have
a separate Distribution or Selling Agreement with AAL or DISTRIBUTOR.
THEREFORE, in consideration of the covenants and mutual promises of the
parties and for other good and valuable consideration, the receipt and legal
sufficiency of which are hereby acknowledged, DISTRIBUTOR and AAL agree as
follows:
AGREEMENT
1. APPOINTMENT OF DISTRIBUTOR
AAL hereby appoints DISTRIBUTOR as the principal underwriter for the
Certificates during the term of this Agreement in each state or other
jurisdiction where the Certificates may legally be sold. Representatives of
other broker-dealer firms with which AAL CMC has executed a selling agreement
may also sell the Certificates. In addition, AAL may retain other firms to serve
as principal underwriters of the Certificates. Anything in this Agreement to the
contrary notwithstanding, AAL retains the ultimate right to suspend sales in any
jurisdiction or jurisdictions, or to refuse to sell a Certificate to any
applicant for any reason whatsoever.
2. UNDERWRITING RESPONSIBILITIES OF DISTRIBUTOR
DISTRIBUTOR agrees to offer and sell the Certificates, as agent for
AAL, from time to time during the term of this Agreement upon the terms
described in the Certificate Prospectuses. As used in this Agreement, the term
"Prospectuses" shall mean the Prospectus and the statement of additional
information included as part of the Registration Statement for AAL and the
ACCOUNTS, as such Prospectuses and statements of additional information may be
amended or supplemented from time to time. The term "Registration Statement"
shall mean the Registration Statement, as amended from time to time and filed by
AAL and the respective ACCOUNTS with the SEC, and effective under the 1933 Act
and/or the 1940 Act.
After the effective date of the Registration Statement for the
Certificates, DISTRIBUTOR will hold itself out to receive applications,
satisfactory to DISTRIBUTOR, for the purchase of the Certificates and will
promptly transmit applications and premiums received for the Certificates which
it accepts to AAL or to its designee.
All purchases shall be deemed effective at the time and in the manner
set forth in the Prospectuses. All applications, when accepted by DISTRIBUTOR
and by AAL, shall designate the allocation of premiums by the purchaser among
the separate investment options represented in the certificates, namely by the
subaccounts of the ACCOUNTS and the AAL General Account, as defined and
described in the Certificate Prospectuses. All premiums from purchasers shall be
deposited by AAL in either the ACCOUNTS, to be promptly allocated among the
subaccounts, or to the AAL General Account; as designated by the purchaser and
in accordance with the 1940 Act and rules thereunder. Premiums allocated to the
subaccounts of the ACCOUNTS shall be expressed as "accumulation units" of the
Certificate as that term is defined in the Prospectus. The above allocation
statements are subject to any specific allocation of premium requirements that
may be set forth in the Certificate.
DISTRIBUTOR agrees to be solely responsible for the operation of its
business as a registered broker-dealer in connection with all its underwriting
activities under this Agreement, and shall operate such business in accordance
with all applicable laws and regulations. All sales of the Certificates by
DISTRIBUTOR shall be made through registered representatives who are "Associated
Persons" ("Associated Persons" as defined by the 1934 Act) of DISTRIBUTOR, and
who are also agents or District Representatives of AAL. DISTRIBUTOR shall be
responsible for selling only through registered representatives who are properly
licensed to sell Certificates in jurisdictions where offers and sales take
place.
DISTRIBUTOR is responsible for certain services relating to the
distribution of all prospectus(es) of the ACCOUNTS and Fund used by its
registered representatives in the marketing of the Certificates. These services
include, but are not limited to design, layout, printing, mailing or other
delivery services.
3. ADDITIONAL SERVICES TO BE PROVIDED BY DISTRIBUTOR
3.1 PREPARATION OF SALES LITERATURE AND ADVERTISING MATERIALS
DISTRIBUTOR and AAL will cooperate in the initiation, preparation,
printing and distribution of all public sales literature and advertising
materials, as well as all training and marketing materials distributed to its
registered representatives as "broker-dealer only" materials under rules, which
are used by DISTRIBUTOR and its registered representatives in connection with
the sale of the Certificates. AAL will, in a timely manner, provide DISTRIBUTOR
with any and all materials and information necessary to enable DISTRIBUTOR to
fulfill its obligations set forth in this section regarding sales literature and
advertising materials. AAL will provide DISTRIBUTOR with the names of AAL
employees who will review and approve the materials described in this
subsection. DISTRIBUTOR will coordinate and provide copies of such materials to
designated employees of AAL during the development process and all advertising
and sales literature will be approved by both AAL and DISTRIBUTOR prior to use.
DISTRIBUTOR will complete all of the necessary filings and approvals with the
NASD and state securities authorities prior to the public use of such sales
material and advertising. DISTRIBUTOR will provide copies of all materials to
AAL. AAL will file and obtain approval of all such sales literature and
advertising with State Insurance Commissioners where such filing is required by
state laws. AAL will promptly advise DISTRIBUTOR when such filings and approvals
are completed. Materials will only be made available for public use or
registered representative use after all securities and insurance filings and
approvals are completed and AAL has given approval for materials to be used.
DISTRIBUTOR will be responsible for maintaining an inventory and approval
history of all of its sales literature, advertising and "broker-dealer only"
materials, and for the distribution of such materials to its registered
representatives and to the public.
3.2 LICENSING OF FIELD AND HOME OFFICE STAFF
DISTRIBUTOR will be responsible for managing the securities licensing
all of its registered representatives in connection with the sale of the
Certificates, and will directly handle all licensing by the NASD and state
securities authorities that is necessary for the sale of the Certificates. AAL
will be responsible for obtaining the necessary insurance licenses with state
insurance authorities for the offer and sale of the Certificates. AAL and
DISTRIBUTOR shall develop a joint electronic data base and reporting system to
consolidate securities and insurance licensing information for their District
Representatives and registered representatives, respectively. The system will
provide controls satisfactory to DISTRIBUTOR in the processing of Certificate
applications to ensure that all of its registered representatives are properly
licensed when offering and selling the Certificates. The system shall be kept
current by: (i) DISTRIBUTOR providing securities licensing data to AAL; and (ii)
AAL providing insurance licensing data to a database that shall be maintained by
AAL.
The system described herein shall be equally accessible to AAL and
DISTRIBUTOR. DISTRIBUTOR and AAL will cooperate to ensure the appropriate
licensing of AAL and DISTRIBUTOR's home office employees (including
DISTRIBUTOR's wholesalers) who require securities or insurance licenses in
connection with their work with the Certificates. DISTRIBUTOR will arrange for
pre-licensing study and training to assist such persons in obtaining their
securities licenses as requested by AAL. All AAL employees who are Associated
Persons of DISTRIBUTOR as a result of being licensed as registered
representatives will be subject to compliance procedures and supervision of
DISTRIBUTOR in connection with all work related to the Certificates in the same
manner as all other Associated Persons.
3.3 REGULATORY COMPLIANCE
DISTRIBUTOR will supervise all of its registered representatives who
are Associated Persons of DISTRIBUTOR (including employees of AAL) with respect
to all securities laws and regulations in connection with the offer and sale of
the Certificates. Supervision shall include, but not be limited to, the
following matters: acceptance of new business; suitability determinations (as
made in accordance with NASD rules, SEC or other regulatory authority's rules
and regulations); field training, supervision and sales practices; books and
records requirements; approval and use of all advertising, sales literature and
broker-dealer only materials; confirmation content and delivery; payment of
commissions; and compliance with the written supervisory procedures of
DISTRIBUTOR.
3.4 FIELD TRAINING
Immediately after the effective date of the Registration Statement for
the Certificates, DISTRIBUTOR shall be responsible for conducting field training
of all of its associated registered representatives authorized to sell the
Certificates in those states where the Certificates are approved for sale. The
training program shall be developed and conducted by DISTRIBUTOR, although AAL
may also participate in training activities. DISTRIBUTOR will coordinate with
AAL concerning those AAL employees who will be involved in the development of
the training program and in its execution. The training program shall be
approved by both AAL and DISTRIBUTOR prior to implementation.
3.5 CONFIRMATIONS
AAL shall be responsible to ensure that all purchases, sales or other
transactions occurring in the account of an owner of a Certificate sold by its
registered representatives shall be confirmed to the owner in writing in a form
and manner which complies with the requirements of the 1934 Act, blue sky laws,
and NASD rules. Such confirmations will be furnished by AAL to all owners of
Certificates in accordance with securities laws, will reflect the facts of the
transaction, and will show that they are being sent by AAL on behalf of
DISTRIBUTOR acting in the capacity of agent for DISTRIBUTOR. The parties agree
that the form and the manner of use of confirmations in connection with
transactions occurring in such accounts shall be supervised by DISTRIBUTOR. AAL
agrees AAL and its agent, if any, will prepare and distribute such confirmations
in accordance with DISTRIBUTOR's instructions. AAL represents that it will make
no changes or variations in either the form or the manner of distribution of
such confirmations without the written approval of DISTRIBUTOR and shall cause
such confirmations to be issued as directed by DISTRIBUTOR and on behalf of
DISTRIBUTOR.
4. RESPONSIBILITIES OF AAL
4.1 SALES COMMISSIONS
AAL will pay DISTRIBUTOR a sales commission on Certificate sales
pursuant to Schedule A attached hereto. DISTRIBUTOR intends to reallocate
commissions to its registered representatives (including General Agents) for the
sale of Certificates in accordance with a written fee schedule agreement between
DISTRIBUTOR and its registered representatives. DISTRIBUTOR, for its
convenience, authorizes AAL, as agent for DISTRIBUTOR, to make commission
payments due to DISTRIBUTOR directly to its registered representatives.
All commissions for the sale of the Certificates due to DISTRIBUTOR
from AAL shall be reflected on DISTRIBUTOR's financial records as a receipt from
AAL and a disbursement to DISTRIBUTOR'S registered representatives,
notwithstanding the direct payment of such commissions by AAL to such registered
representatives. AAL agrees to pay commissions directly to such registered
representatives as a convenience to DISTRIBUTOR and recognizes that this
agreement to pay is purely ministerial in nature and not discretionary.
Notwithstanding the foregoing, it is agreed that AAL shall have the
right in the payment of such commissions to treat such commissions as part of
AAL employee compensation to such registered representatives for the purpose of
calculation of AAL benefits programs and withholding taxes.
AAL will maintain and provide records and reports reflecting the
calculation of all commissions paid to, and any other cash and non-cash
compensation (collectively "Commissions"), received by DISTRIBUTOR'S registered
representatives and the details of the transactions upon which such Commissions
are based, and will respond to any inquiries about Commission payments, pursuant
to this section. DISTRIBUTOR shall designate to AAL the records required and
such records shall be maintained subject to the provisions of Section 4.3 below.
4.2 SALES CREDITS AND FIELD EXPENSES
Any AAL field charges or expenses for the Certificates will be paid
directly by AAL. Sales credits for sales of the Certificates will be based on
gross premiums received for the Certificates, subject to any exceptions that may
exist or be developed with respect to internal transfers of funds among AAL and
affiliated companies.
4.3 REGISTRATIONS OF SECURITIES
AAL shall be solely responsible, at its expense, for registration of
the Certificates and the ACCOUNTS with all required state and federal
authorities. AAL agrees to maintain such registrations in effect at all times
during the term of this Agreement, and to file such amendments, reports and
other documents as may be necessary to ensure that there will be no untrue
statement of material fact in any Registration Statement and that there shall be
no omission to state a material fact in the Registration Statement, which
omission would make the statements therein misleading. AAL may direct
DISTRIBUTOR, and DISTRIBUTOR shall perform, any or all of the services described
in this section.
4.4 BOOKS AND RECORDS
AAL agrees to maintain all books and records required and designated by
DISTRIBUTOR under the securities laws in connection with the offer and sale of
the Certificates by its registered representatives, as specifically required by
Section 17 of the 1934 Act, Rule 17a-3 and 17a-4 under the 1934 Act or as
required by the NASD, and such other or further books or records as may be
required by rule or regulation of any other federal or state regulatory
organization or self-regulatory organization, to the extent such requirements
are applicable to the variable product operations as mutually determined for
purposes of this Agreement by DISTRIBUTOR and AAL. AAL shall maintain such books
and records as agent on behalf of DISTRIBUTOR who shall be the owner thereof.
AAL agrees that such books and records will be open and available to DISTRIBUTOR
at all times, shall be surrendered promptly on request, without charge, to
DISTRIBUTOR, and shall be subject to inspection by the SEC in accordance with
Section 17 of the 1934 Act, and by the NASD or other regulatory authorities
having jurisdiction over the securities activities of the DISTRIBUTOR, at any
time. The parties represent and warrant that DISTRIBUTOR has provided a schedule
to AAL that describes the books and records to be maintained by AAL, on behalf
of DISTRIBUTOR.
4.5 DUTY TO KEEP INFORMED
AAL shall at its expense keep DISTRIBUTOR fully informed on a current
basis of any changes or other material matters affecting the Certificates or the
FUND. AAL will use its best efforts to provide advance notice to DISTRIBUTOR of
any proposed chances in the Certificates or the FUND and to discuss such matters
with DISTRIBUTOR prior to taking any action. AAL shall furnish DISTRIBUTOR
copies of all information, financial statements, books and records and other
papers that DISTRIBUTOR may reasonably request in connection with its due
diligence inquiry or for use in connection with the distribution of
Certificates.
4.6 TRANSFER AGENT AND MANAGEMENT
AAL shall be solely responsible for the selection and supervision of a
Transfer Agent for the Certificates; management of all Certificate accounts,
including the subaccounts, establishing and maintaining account records and
processing; and the receipt and disbursement of all monies related to the
Certificates. Notwithstanding its responsibility for these matters, AAL shall
keep DISTRIBUTOR currently informed, through reports requested by DISTRIBUTOR,
of all activities related to the Certificates and the FUND. AAL will also keep
DISTRIBUTOR informed and consult with DISTRIBUTOR in advance of any changes to
the procedures for the management or administration of the Certificates or to
any of the underlying records or documents related thereto. AAL recognizes that
any communications with Certificate owners, or prospective Certificate owners,
related to the Certificates sold by DISTRIBUTOR'S registered representatives are
subject to securities regulations and must be approved in advance by AAL and
DISTRIBUTOR and may require filing with and approval by the NASD and state
securities authorities. Such communications include but are not limited to:
correspondence statement stuffers, newspaper or magazine articles, confirmation
messages and other similar written materials.
5. JOINT PROCEDURES FOR COMMUNICATIONS WITH THE PUBLIC AND WITH REGISTERED
REPRESENTATIVES
The parties recognize that all written materials which are provided to
AAL members or prospective members in connection with the Certificates sold by
DISTRIBUTOR'S registered representatives are required to meet specific standards
established by securities and insurance regulatory authorities. Such materials
will include advertising and sales literature, correspondence, magazine
articles, newspaper articles, press releases and any other written public
communication. To ensure compliance with all applicable rules and laws, it is
agreed that DISTRIBUTOR will manage and coordinate the distribution of all
public written materials related to the Certificates sold by DISTRIBUTOR'S
registered representatives, including materials related to the FUND. No public
materials will be released without the prior written approval of both AAL and
DISTRIBUTOR, and both parties shall cooperate in the preparation and review of
such materials. AAL will provide DISTRIBUTOR with the names of its employees
designated to give approval for such written materials. All nonpublic written
communications with DISTRIBUTOR'S registered representatives and to employees of
AAL or DISTRIBUTOR, related to the Certificates shall be reviewed and approved
by both AAL and DISTRIBUTOR prior to use. Such materials include, without
limitation, field updates, "broker-dealer only" materials, training materials,
and compliance information. AAL and DISTRIBUTOR will establish internal policies
to insure that all such materials are appropriately and timely reviewed and
shall cooperate with each other in establishing such procedures.
6. FEES TO BE PAID TO DISTRIBUTOR BY AAL
6.1 SERVICES
DISTRIBUTOR shall perform certain services, as requested by AAL, in
connection with DISTRIBUTOR's role as principal underwriter in AAL's continuous
offering of the Certificates ("Services"). Services shall be initially
designated as "Marketing Services", "Broker-Dealer Administration", "Licensing",
"Regulatory Compliance", "Field Training", and "Consulting". The parties
represent and warrant that AAL and DISTRIBUTOR have mutually agreed to the
definition and composition of each of the foregoing Services. AAL and
DISTRIBUTOR agree that the definition and composition of each of the foregoing
Services, and additional services to be rendered in connection with the sale of
the Certificates, shall be reaffirmed or amended, as the case may be, on an
annual basis in connection with the preparation and negotiation of the "Final
Annual Budget" (as that term is defined in Section 6.3) for Services for such
year.
6.2 DETERMINATION OF CHARGE/EXPENSE FORMULAS FOR SERVICES
The parties represent and warrant that DISTRIBUTOR and AAL agree on the
methods to determine and calculate the amount of Services to be charged by
DISTRIBUTOR as an expense to AAL (the "Charge/Expense Formulas"). Charge/Expense
Formulas shall be initially determined and defined as "Sales Credit Charges",
"Direct Expenses", and "Per Hour Charges". AAL and DISTRIBUTOR covenant and
agree that: (i) Charge/Expense Formulas shall be reaffirmed or amended, as the
case may be, on an annual basis in connection with the preparation and
negotiation of the Final Annual Budget for Services for such year; and (ii)
Charge/Expense Formulas shall include a portion of DISTRIBUTOR's general
overhead expenses as specifically stated in the underlying detail schedules for
Charge/Expense Formulas ("Detail Schedules").
DISTRIBUTOR and AAL affirm and agree that the Detail Schedules were
reviewed by representatives of both AAL and DISTRIBUTOR in the due diligence
process. The parties represent and warrant that DISTRIBUTOR and AAL agree on the
allocation of dollar amounts of Services to the various categories of
Charge/Expense Formulas (" Services Allocation"). Services Allocation shall be
initially determined as set forth in the Final Annual Budget for the 1995
calendar year. AAL and DISTRIBUTOR covenant and agree that Services Allocation
shall be reaffirmed or amended, as the case may be, on an annual basis in
connection with the preparation and negotiation of the Final Annual Budget for
Services for such year.
6.3 PREPARATION AND NEGOTIATION OF FINAL ANNUAL BUDGET FOR SERVICES
Each successive year that this Agreement is in effect, DISTRIBUTOR
shall prepare a projected annual budget for the successive year (the " Projected
Annual Budget") and deliver the Projected Annual Budget to a designated
representative of AAL. Each successive year that this Agreement is in effect,
AAL shall provide comments to DISTRIBUTOR on the content of the Projected Annual
Budget. AAL and DISTRIBUTOR covenant and agree that: (i) a final, agreed form of
the Projected Annual Budget (the "Final Annual Budget") shall be determined on
or before the deadline date set forth for the submission of annual budgets
pursuant to AAL budget policies; and (ii) the policies, definitions and
operating procedures (including but not limited to "Billing Process", and
"Billable Items") set forth in P.O.P. 251 "Subsidiary and Affiliate Billing",
shall be followed in connection with the preparation and negotiation of the
Projected Annual Budget and the Final Annual Budget.
6.4 ACCOUNTING PROCEDURES
DISTRIBUTOR and AAL, covenant and agree that: (i) payroll & expense
records and procedures, (ii) invoicing procedures; and (iii) the time and manner
of charge/expense payment for the Services set forth in this Agreement shall be
determined by reference to certain AAL CMC accounting manuals and procedures.
Notwithstanding the foregoing, the parties covenant and agree that the
provisions of this Agreement pertaining to books and records (e.g. Section 4.4
hereof) shall apply to all transactions relating to Services and the offering
and sale of Certificates by DISTRIBUTOR. The parties agree that because of the
sensitive and confidential nature of these records and procedures, such records
and procedures shall not be disclosed nor disseminated except to authorized
accounting and management personnel of AAL and DISTRIBUTOR.
DISTRIBUTOR and AAL acknowledge that unanticipated conditions may
materially change the Final Annual Budget. DISTRIBUTOR and AAL agree that the
nature of these unanticipated conditions can be characterized as either a
"permanent change" or a "temporary change". For example, a permanent change is
the elimination of a Service that DISTRIBUTOR provides pursuant to this
Agreement and a temporary change is AAL's assumption of a Service, pursuant to
DISTRIBUTOR's request. DISTRIBUTOR and AAL covenant and agree that the
accounting treatment for permanent changes shall be redetermined on an annual
basis and the accounting treatment for a temporary change shall be as set forth
herein. In the event a temporary change occurs, DISTRIBUTOR and AAL covenant and
agree that AAL shall be permitted a payment credit towards any outstanding
charges/expenses for Services performed by DISTRIBUTOR, for certain services
rendered by AAL employees and agents in connection with the offering and sale of
the Certificates (e.g. legal or accounting services) ("Services Offset") The
relevant terms and conditions of this Agreement shall apply to the Services
Offset (e.g. determination for Final Annual Budget, accounting procedures). On a
monthly basis during the term of this Agreement: DISTRIBUTOR shall provide
written documentation to AAL for Services rendered, and AAL shall provide
written documentation to DISTRIBUTOR for Services Offset rendered (collectively,
the "Accounting Statements").
The Accounting Statements shall reasonably itemize and detail the
Services and Services Offset provided by each of the parties during the
preceding, month. The format for the Accounting Statements shall follow certain
CMC accounting procedures.
7. INDEPENDENT CONTRACTOR
In performing its duties hereunder, DISTRIBUTOR shall be an independent
contractor and neither DISTRIBUTOR, nor any of its officers, directors,
employees, or registered representatives is, or shall be, an employee of AAL in
the performance of DISTRIBUTOR's duties hereunder. DISTRIBUTOR shall be
responsible for the employment, control, and conduct of its officers, agents and
employees and for injury to such agents or employees or to others through its
agents or employees. DISTRIBUTOR assumes full responsibility for its agents and
employees under applicable statutes and agrees to pay all employee taxes
thereunder.
8. LNDEMNIFICATION
8.1 INDEMNIFICATION OF AAL
DISTRIBUTOR agrees to indemnify and hold harmless AAL and each of its
present or former directors, officers, employees, representatives and each
person, if any, who controls or previously controlled AAL within the meaning of
Section 15 of the 1933 Act, against any and all losses, liabilities, damages,
claims or expenses (including the reasonable costs of investigating or defending
any alleged loss, liability, damage, claims or expense and reasonable legal
counsel fees incurred in connection therewith) to which AAL or any such person
who may become subject under the 1933 Act, under any other statute, at common
law, or otherwise, arising out of the acquisition of any Certificate by any
person which may be based upon any wrongful act by DISTRIBUTOR or any of
DISTRIBUTOR's directors, officers, employees or representatives, or may be based
upon any untrue statement or alleged untrue statement of a material fact
contained in a registration statement, prospectus, shareholder report or other
information covering the Certificates filed or made public by AAL or any
amendment thereof or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading if such statement or omission was made in
reliance upon information furnished to AAL by DISTRIBUTOR.
In no case is DISTRIBUTOR's indemnity in favor of AAL, or any person
indemnified to be deemed to protect AAL or such indemnified person against any
liability to which AAL or such person would otherwise be subject by reason of
willful misfeasance, bad faith, or gross negligence in the performance of his
duties or by reason of his reckless disregard of his obligations and duties
under this Agreement, or is DISTRIBUTOR to be liable under its indemnity
agreement contained in this Section with respect to any claim made against AAL
or any person indemnified unless AAL or such person, as the case may be, shall
have notified DISTRIBUTOR in writing of the claim within a reasonable time after
the summons or other first written notification giving information of the nature
of the claim shall have been served upon AAL or upon such person (or after AAL
or such person shall have received notice to such service on any designated
agent). However, failure to notify DISTRIBUTOR of any such claim shall not
relieve DISTRIBUTOR from any liability which DISTRIBUTOR may have to AAL or any
person against whom such action is brought otherwise than on account of
DISTRIBUTOR's indemnity agreement contained in this Section. DISTRIBUTOR agrees
to promptly notify AAL of the commencement of any litigation or proceedings
against it or any of its officers, employees or representatives in connection
with the issue or sale of the Certificates.
8.2 INDEMNIFICATION OF DISTRIBUTOR
AAL agrees to indemnify and hold harmless DISTRIBUTOR and each of its
present or former directors, officers, employees, representatives and each
person, if any, who controls or previously controlled DISTRIBUTOR within the
meaning of Section 15 of the 1933 Act, under any other statute, at common law,
or otherwise, arising out of the acquisition, or with regard to the terms and
conditions, of any Certificates by any person that may be based upon any
wrongful act by AAL or any of AAL's directors, officers, employees or
representatives (other than DISTRIBUTOR) or any other broker/distributors who
are selling Certificates for AAL, may be based upon any untrue statement or
alleged untrue statement or a material fact contained in a registration
statement, prospectus, shareholder report or other information covering the
Certificates or FUND filed or made public by AAL or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading unless such statement or omission was made in reliance
upon information furnished to AAL by DISTRIBUTOR. In no case is AAL's indemnity
in favor of DISTRIBUTOR, or any person indemnified to be deemed to protect
DISTRIBUTOR or such indemnified person against any liability to which
DISTRIBUTOR or such person would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of his duties or
by reason of his reckless disregard of his obligations and duties under this
Agreement, or is AAL to be liable under its indemnity agreement contained in
this Section with respect to any claim made against DISTRIBUTOR or person
indemnified unless DISTRIBUTOR, or such person, as the case may be, shall have
notified AAL in writing of the claim within a reasonable time after the summons
or other first written notification giving information of the nature of the
claim shall have been served upon DISTRIBUTOR or upon such person (or after
DISTRIBUTOR or such person shall have received notice of such service on any
designated agent). However, failure to notify AAL of any such claim shall not
relieve AAL from any liability which AAL may have to DISTRIBUTOR or any person
against whom such action is brought otherwise than on account of AAL's indemnity
agreement contained in this Section. AAL shall be entitled to participate, at
its own expense, in the defense, or, if AAL so elects, to assume the defense of
any suit brought to enforce any such claim, but if AAL elects to assume the
defense, such defense shall be conducted by legal counsel chosen by AAL. AAL
agrees to promptly notify DISTRIBUTOR of the commencement of any litigation or
proceedings against it or any of its trustees, officers, employees, or
representatives in connection with the issue or sale of the Certificates.
9. AUTHORIZED REPRESENTATIONS
DISTRIBUTOR is not authorized by AAL to give on behalf of AAL any
information or to make any representations in connection with the sale of
Certificates other than the information and representations contained in a
Registration Statement filed with the SEC under the 1933 Act and/or the 1940
Act, covering the Certificates, the ACCOUNTS, or the FUND, as such Registration
Statements may be amended or supplemented from time to time, or contained in
shareholder reports or other material that may be prepared by or on behalf of
AAL for DISTRIBUTOR's use. This shall not be construed to prevent DISTRIBUTOR
from preparing and distributing advertising and sales literature or other
material as it may deem appropriate, subject to the requirements of Section 5
above.
10. AMENDMENT OR ASSIGNMENT OF AGREEMENT
This Agreement may not be amended or assigned except by written
agreement of both parties.
11. TERMINATION OF AGREEMENT
This Agreement may be terminated by either party hereto, without the
payment of any penalty, on 90 days prior notice in writing to the other party or
immediately if agreed upon by both parties.
12. MISCELLANEOUS
The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument. Nothing herein contained shall be deemed to require AAL to take any
action contrary to its Charter or by-laws, or any applicable statutory or
regulatory requirement to which it is subject or by which it is bound, or to
relieve or deprive the Board of Directors of AAL of responsibility for and
control of the conduct of the affairs of AAL. .
13. DEFINITION OF TERMS
Any questions of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the 1933 Act, the 1934 Act, the Advisers Act or the 1940 Act shall be
resolved by reference to such term or provision and to interpretation thereof,
if any, by the United States courts or, in the absence of any controlling
decision of any such court, by rules, regulations or orders of the SEC validly
issued pursuant to such Act.
14. COMPLIANCE WITH SECURITIES LAWS
AAL CMC represents that it is registered as an investment adviser under
the Advisers Act and agrees that it will comply with all the provisions of the
Act and of the rules and regulations thereunder. AAL CMC ,as investment adviser
to the Fund and as DISTRIBUTOR, agrees to comply with all of the applicable
terms and provisions of the 1933 Act, the 1934 Act, the 1940 Act, the Advisers
Act, and all applicable state laws. Each party to the Agreement shall advise the
other promptly of (a) any action of the SEC or any authorities of any state or
territory, of which it has knowledge, affecting the registration or
qualification of the ACCOUNTS or the Certificates, or the right to offer the
Certificates for sale or (b) the happening of any event which makes untrue any
statement, or which requires the making of any change in any Registration
Statement or any current Prospectus or Statement of Additional Information, in
order to make the statements therein not materially misleading.
15. REGULATORY EXAMINATIONS
DISTRIBUTOR and AAL agree to cooperate fully in any insurance
regulatory examination, investigation, or proceeding or any judicial proceeding
arising in connection with the Certificates. DISTRIBUTOR and AAL further agree
to cooperate fully in any securities regulatory examination, investigation or
proceeding or any judicial proceeding with respect to AAL, DISTRIBUTOR, their
affiliates and their agents or representatives, to the extent that such
examination, investigation or proceeding is in connection with Certificates
distributed under this Agreement. DISTRIBUTOR shall furnish applicable federal
and state regulatory authorities with any information or reports in connection
with its services under this Agreement which such authorities may request in
order to ascertain whether AAL's operations are being conducted in a manner
consistent with any applicable laws or regulations.
16. NOTICES
Any notice required to be given pursuant to this Agreement shall be
deemed duly given if delivered or mailed by registered mail, postage prepaid, to
DISTRIBUTOR or to AAL at 222 West College Avenue, Appleton, Wisconsin,
54919-0007.
17. GOVERNING LAW
This Agreement shall be governed and construed in accordance with the
laws of the State of Wisconsin.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their duly authorized representatives and their respective corporate
seals to be hereunto affixed, as of the dates first above written.
AID ASSOCIATION FOR LUTHERANS AAL CAPITAL MANAGEMENT CORPORATION
By: /s/John O. Gilbert By: /s/Robert G. Same
-------------------------- -----------------------------
John O. Gilbert Robert G. Same
President and President
Chief Executive Officer
By: /s/Woodrow E. Eno By: /s/Frederick D. Kelsven
-------------------------- -----------------------------
Woodrow E. Eno Frederick D. Kelsven
Senior Vice President, Secretary
Secretary and General Counsel
SCHEDULE A: SCHEDULE OF SALES COMMISSIONS
To the Principal Underwriting and Servicing Agreement
dated January 1, 2000
INDIVIDUAL FLEXIBLE PREMIUM DEFERRED VARIABLE ANNUITY CERTIFICATES
AND
SINGLE PREMIUM IMMEDIATE VARIABLE ANNUITY CERTIFICATES
AMOUNT OF PREMIUM DEPOSIT* COMMISSION
First $100,000 2.25%
Next $150,000 1.50%
Next $250,000 1.00%
Amounts in excess of $500,000 0.50%
AGE 80 AND ABOVE*
First $500,000 1.00%
Amounts in excess of $500,000 0.50%
- - Commission rate based on size of the individual premium applied. It is not
based on cumulative premiums.
- - An AUM service fee is payable quarterly.
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE CERTIFICATES
COMMISSIONS FOR: Initial issue with NO exchange of other AAL certificate.
ISSUE AGE 1ST AMOUNT EQUAL TO MFYP 2ND AMOUNT EQUAL TO MFYP
0-44 47.5% 20.5%
45. 43.5 18.5
46. 43.0 18.0
47. 42.0 17.5
48. 41.0 17.0
49. 40.0 16.5
50. 39.0 16.0
51. 38.0 15.5
52. 37.0 15.0
53. 36.0 14.5
54. 35.0 14.0
55. 34.5 13.5
56. 34.0 13.5
57. 33.5 13.5
58. 32.5 13.5
59. 31.5 13.5
60. 30.5 13.5
61. 29.5 13.5
62. 28.5 13.5
63. 27.5 13.5
64. 26.5 13.5
65. 25.5 13.5
66. 25.5 13.5
67. 25.5 13.5
68. 24.5 13.5
69. 24.5 13.5
70. 23.5 13.5
71. 23.5 13.5
72. 22.5 13.5
73. 22.5 13.5
74. 21.5 13.5
75. 21.5 13.5
76. 21.5 13.5
77. 21.5 13.5
78. 20.5 13.5
79. 20.5 13.5
80. 20.5 13.5
COMMISSIONS FOR: Special class rating for certificate issue, certificate or
benefit increase, or addition of benefits.
ISSUE AGE MFYP FOR RATING
All 70%
COMMISSIONS FOR: Disability Waiver, Accidental Death, Guaranteed Purchase
Option, or Applicant Waiver included at initial issue,
benefit increase or addition of benefit.
ISSUE AGE MFYP FOR BENEFIT/INCREASE
All 70%
SERVICE COMMISSIONS: The servicing registered representative, as determined by
AAL, will be paid service commissions at the rate of 2.5
percent on all premiums applied on the certificate.
AID ASSOCIATION FOR LUTHERANS
PREFACE
THE AAL ARTICLES OF INCORPORATION AND BYLAWS, PRINTED IN THIS BROCHURE, ARE PART
OF YOUR FRATERNAL CONTRACT WITH AID ASSOCIATION FOR LUTHERANS. (SEE BYLAWS,
SECTION 4, PAGE TWO.) THEY SET THE FRAMEWORK WITHIN WHICH ALL AAL PROGRAMS,
OPERATIONS AND POLICIES MUST FALL. MEMBERS OF THE AAL BOARD OF DIRECTORS, AS
REPRESENTATIVES OF ALL AAL MEMBERS, USE THE BYLAWS AND ARTICLES TO MAKE
DECISIONS ABOUT CORPORATE OBJECTIVES, POLICIES AND STRATEGY. THESE DECISIONS, IN
TURN, DICTATE THE COURSE OF MANAGEMENT DECISIONS.
ARTICLES OF INCORPORATION
AS AMENDED JANUARY 28, 2000
I
NAME
The name of this fraternal benefit society shall be "Aid Association for
Lutherans."
II
PLACE OF BUSINESS
The principal office of this fraternal benefit society shall be at Appleton,
Wisconsin.
III
POWERS
For the purposes set forth in these articles, Aid Association for Lutherans, a
Wisconsin corporation organized and operating under the laws governing
Fraternals, shall have all the powers granted by law.
IV
PURPOSE
The purpose of Aid Association for Lutherans is to associate Lutherans and their
families and persons serving or associated with Lutherans or Lutheran
organizations, and their families, who support the mission of Aid Association
for Lutherans and thereby enable them through membership in this fraternal
benefit society to aid themselves and others with programs of:
1. Insurance and other benefits permissible under the laws governing
Fraternals; and
2. Fraternal and benevolent activities in local branches; and
3. Assistance to Lutheran congregations and their institutions; and
4. Assistance to such other lawful social, intellectual, educational,
charitable, benevolent, moral, fraternal, patriotic or religious
endeavors as the board of directors may determine.
V
SUPREME GOVERNING BODY
The supreme governing body shall be a board of directors made up of benefit
members of this fraternal benefit society. The board shall consist of 12
elective directors, such appointive directors as the board may appoint in a
manner prescribed in the bylaws, and not more than two principal officers of the
society designated by the board from time to time. The elective directors shall
be elected by the benefit members in a manner prescribed in the bylaws, and
shall constitute a majority of the board in number.
<PAGE>
VI
MEMBERSHIP
1. CLASSES OF MEMBERS. There shall be the following classes of members:
A. BENEFIT MEMBER. A benefit member is a person of age 16 or more who has
been accepted for membership in accordance with eligibility rules as
determined by resolution of the board of directors and who is the
applicant member on a certificate of membership and insurance pursuant
to rules determined by resolution of the board of directors, or who
receives a settlement agreement benefit by virtue of such insurance.
When more than one person in a family is covered in a single
certificate only the applicant is a benefit member. Benefit members
may participate in the affairs and activities of the local branch in
which they are members and may also hold office therein. Benefit
members shall also have the right to vote in the corporate and
insurance affairs of this fraternal benefit society according to the
articles and bylaws.
B. ASSOCIATE MEMBER. An associate member is a person age 16 or more who
has been accepted for membership in accordance with eligibility rules
as determined by resolution of the board of directors and who is
issued a certificate of membership. Associate members may participate
in the affairs and activities of the local branch in which they are
members, and may hold office therein, but shall not have the right to
vote in the corporate and insurance affairs of this fraternal benefit
society.
C. YOUTH MEMBER. A youth member is a person under age 16 who has been
accepted for membership in accordance with eligibility rules as
determined by resolution of the board of directors and who is issued a
certificate of membership or is issued a certificate of membership and
insurance pursuant to paragraph 2 of this Article VI. Youth members
may participate in the affairs and activities of the local branch in
which they are members that are offered to youth members, but shall
not have the right to hold office or vote in local branch affairs or
vote in the corporate and insurance affairs of this fraternal benefit
society.
2. JUVENILES. This fraternal benefit society may insure the lives or
disability of children younger than the minimum age for benefit membership
but otherwise eligible for benefit membership. Such insurance shall be
issued upon the application of some adult person who shall not by reason
thereof, nor by reason of any benefit providing waiver of premiums, become
a benefit member. At age 16 the insured juvenile shall become a benefit
member.
VII
BRANCHES
Local branches may be chartered by the board of directors in a manner prescribed
in the bylaws, and shall have such powers as the board of directors shall
determine.
VIII
BYLAWS
The board of directors shall have power to make bylaws, and to repeal or amend
them. Notice of changes to the bylaws shall be given to benefit members and
applicants for juvenile insurance in a manner prescribed in the bylaws.
IX
ACTION WITHOUT MEETING
Any action required or permitted to be taken by the board of directors between
meetings may be taken by written action signed by two-thirds of the directors
then in office. A written consent under this provision has the same force and
effect as a vote of the board of directors taken at a meeting.
X
AMENDMENTS
These articles may be amended or repealed in whole or in part by a majority of
the votes cast by benefit members. Before submitting such changes to a vote of
the benefit members, the board of directors shall approve such changes by an
affirmative vote of a majority of the full board. Upon adoption by the benefit
members such changes shall be filed with the Commissioner of Insurance of the
state of Wisconsin and shall be published in the official publication in a
manner prescribed in the bylaws.
AID ASSOCIATION FOR LUTHERANS
BYLAWS
AS AMENDED DECEMBER 8, 1999
DEFINITIONS
SECTION 1. Wherever the term the "Association" appears in these bylaws, it means
"Aid Association for Lutherans." Wherever the term "board" appears in these
bylaws, it means "board of directors." Wherever the term "home office" appears
in these bylaws, it means "principal office."
APPLICATION FOR MEMBERSHIP
SECTION 2. Application for benefit membership shall be upon a form in use by the
Association. It shall be accompanied by evidence of insurability (if required)
which is acceptable to the Association under its rules and regulations.
Application for associate membership, if such be authorized by the board, shall
be upon a form in use by the Association.
JUVENILE INSURANCE
SECTION 3. Application for juvenile insurance shall be upon a form in use by the
Association and shall be accompanied by evidence of insurability (if required)
which is acceptable to the Association under its rules and regulations. Juvenile
certificates shall be under the control of the applicant for the period provided
in the certificate. If it be in the best interest of the juvenile as determined
by the Association, the applicant may be divested of control of a juvenile
certificate. If the applicant has been divested of control of the juvenile
certificate or if the applicant has died, control shall be vested in the legally
appointed guardian of the juvenile. If a guardian is not appointed, control
shall be vested in some person who shall appear to the Association to be
equitably entitled to it by reason of being responsible for the support and
maintenance of such juvenile, or by reason of relationship.
FRATERNAL CONTRACT
SECTION 4. The certificate of membership and insurance, together with any riders
or endorsements attached to it, the application, the declaration of insurability
(if any) signed by the applicant, the articles of incorporation and bylaws and
all amendments to them, constitute the entire contract when it is issued. Any
subsequent changes to the articles of incorporation or bylaws shall be binding
upon the member, beneficiaries or other persons affected, and shall govern and
control in all respects, except that no changes shall destroy or diminish
benefits promised in the certificate when it was issued.
BENEFICIARIES
SECTION 5. Any of the following persons may be designated as beneficiary: the
applicant benefit member, wife, husband, child, parent or other person related
to the benefit member by blood, marriage or legal adoption; foster parents of
the benefit member; betrothed of the benefit member; dependents of the benefit
member; or, where not prohibited by law, the estate of the benefit member. With
the consent of the Association, any of the following may also be designated as
beneficiary: a charitable institution; church or church organization;
educational institution; a nonprofit corporation; any corporation, community
chest, fund or foundation described in section 501(c)(3) of the Internal Revenue
Code of 1954 and its subsequent amendments and operated exclusively for
religious, charitable, scientific, literary or educational purposes; or a
person, corporation, partnership or other legal entity which has an interest in
the benefit member, provided that the proceeds are for the benefit, direct or
indirect, of the benefit member or the benefit member's family or dependents.
Wherever the applicable laws conflict with the above, only beneficiaries
permitted by such laws may be designated.
SECTION 6. Unless the beneficiary designation calls for some other method of
distribution, if some beneficiaries of the same class die before the insured,
the death benefit proceeds shall be paid in full to the surviving beneficiaries
of the same class. Each shall share equally the portion of the death benefit
proceeds not otherwise disposed of in the certificate. If all beneficiaries,
however designated, are dead when the insured dies, the death benefit
proceeds--where not otherwise required by law--shall be paid to the owner or to
the owner's estate. A beneficiary shall not have or acquire any claim against
the Association whatever until the insured dies unless otherwise provided by
law.
SECTION 7. No beneficiary change shall take effect unless received by the
Association at its home office. When it is received, any change shall take
effect as of the date the request for beneficiary change was signed, as long as
the request for change was mailed or actually delivered to the Association while
the insured was alive. Such beneficiary change shall be null and void where the
Association has made a good faith payment of the proceeds or has taken other
action before receiving the change.
SETTLEMENT OPTIONS
SECTION 8. In addition to the settlement options offered in the certificate, the
Association may offer any other manner of settlement made available by the
Association at the time certificate proceeds are to be paid.
MAINTENANCE OF SOLVENCY
SECTION 9. If the Association's reserves for any class of certificates, other
than those portions of any certificate that provide variable benefits based on
the experience of a separate account authorized under Section 10, become
impaired, the board may require that benefit members pay the Association an
equitable amount to eliminate the deficiency. If the amount is not paid, it
shall be charged as indebtedness against the certificate and shall draw interest
at the lower rate of either what is specified in the certificate for certificate
loans or what is specified in the certificate under the maintenance of solvency
provision. If the owner of the certificate agrees, an equivalent reduction in
benefits can be chosen instead of the payment or indebtedness charged against
the certificate.
SEPARATE ACCOUNTS AND VARIABLE CONTRACTS
SECTION 10. The hoard of directors may provide for the establishment and
operation of one or more separate accounts in accordance with applicable law.
AAL may issue contracts on a variable basis that provide for the dollar amount
of benefits or other contractual payments or values to vary so as to reflect the
investment results of such separate accounts. The board of directors may adopt
special procedures or create legal entities necessary or appropriate for the
conduct of the business and affairs of any variable contract and separate
account. Any provisions of the AAL Bylaws that are inconsistent with the
provisions of this bylaw shall not apply to any variable contract or separate
account.
TAXES
SECTION 11. If any jurisdiction requires the Association to pay any sum as a tax
on its operations, the board may determine an equitable apportionment of the
full amount of the taxes paid and make a levy of such amount upon the benefit
members and insureds residing in that jurisdiction. Notice of the levy,
including the manner in which it is to be paid, shall be given to those
affected. If the amount levied is not paid after 60 days from the date of the
notice, the amount shall be charged as an indebtedness against the certificate
and draw interest at 5 percent per annum compounded annually.
RESOLUTION OF DISPUTES
SECTION 12.
(A) PURPOSE. The purpose of this section is to prescribe the sole means to
present and resolve grievances, complaints or disputes brought by members,
certificate owners or beneficiaries, against the Association or its directors,
officers, agents and employees. Procedures set forth in this section are meant
to provide prompt, fair and efficient opportunities for dispute resolution,
consistent with the fraternal nature of the Association, without the delay and
expense of formal legal proceedings.
(B) SCOPE. This section applies to all past, current and future benefit
certificates, members, insureds,
<PAGE>
certificate owners, and beneficiaries. It applies to all claims, actions,
disputes and grievances of any kind or nature whatsoever. It includes, but is
not limited to, claims based on breach of benefit contract, as well as claims
based on fraud, misrepresentation, violation of statute, discrimination, denial
of civil rights, conspiracy, defamation, and infliction of distress, against the
Association or its directors, officers, agents or employees. This section does
not apply to claims or disputes made after the applicable statute of limitations
has expired. This section does not apply to actions brought by the Association,
including, but not limited to, actions for: declaratory judgment, determining
proper payees, recovering amounts due, and contesting insurance coverage or
membership eligibility.
(C) PROCEDURES. No lawsuits or any other actions may be brought for any claims
or disputes covered by this section. The following are the steps and procedures
for presenting and resolving disputes.
Step 1. Appeal. Appeal of the dispute to a designated reviewer within the
Association as appropriate to the dispute.
Step 2. Mediation. If step 1 does not result in a mutually satisfactory
resolution, either party has the right to have the matter mediated in accord
with the applicable mediation rules of the American Arbitration Association (or
other neutral organization as agreed upon by the parties).
Step 3. Arbitration. If there is still no mutually satisfactory resolution, the
matter will be resolved by binding arbitration in accord with rules of the
American Arbitration Association. The arbitrator(s) may award any actual damages
incurred for which there is liability, but may not award attorneys' fees, or
exemplary, extra-contractual or punitive damages. The decision of the
arbitrator(s) is binding and final. Additional procedural rules may be defined
in policies established by the Association and made available upon request. If a
claim or dispute is subject to law that prohibits parties from agreeing to
submit future disputes to binding arbitration, arbitration results shall be
non-binding, unless both the individual and the Association voluntarily agree to
binding arbitration after the claim or dispute has arisen.
(D) COSTS. Fees and expenses of the mediator and/or arbitrator shall be paid out
of a dispute resolution fund established by the Association. This does not
include attorneys' fees, experts' fees, or discovery costs, which each party
shall bear as its own responsibility.
(E) JOINDER OF DISPUTES. No claim or dispute may be brought against the
Association or its directors, officers, agents or employees, in a representative
capacity, or on behalf of any "class" of persons or members. Claims of multiple
persons may be joined and presented under this section provided all affected
members, certificate owners and beneficiaries consent in writing, or if the
Association determines that joinder is appropriate.
RECEIPT OF PAYMENTS NOT A WAIVER
SECTION 13. If the Association receives and temporarily holds a payment or
premium, this shall not constitute a waiver of any of its defenses. If a
certificate has lapsed or been forfeited, or if the Association has received a
notice of cancellation, the payment of any premium for the certificate shall not
revive or, continue the certificate, whether made on notice of premium due or
otherwise, and the payment shall be returned to the person making it.
BOARD OF DIRECTORS
SECTION 14. The affairs of the Association shall be managed under the direction
of the board. The board shall meet quarterly at dates to he set by the board.
All meetings shall be held at the home office of the Association unless some
other place is designated by the chief executive officer or board. Regular or
special meetings of the board of directors or its committees may also be
conducted by other means of communication, as prescribed by Wisconsin law, if so
designated by the board, the chairman of the board, the chief executive officer,
or the chairman of a committee of the board with respect to committee meetings.
Special meetings may be called by the chief executive officer or upon written
request to the secretary by at least five members of the board. The chief
executive officer or secretary shall notify board members, in writing or by
personal delivery, of the purpose, time and place of special meetings at least
seven calendar days before the date of the meetings. Except in the case of
removal of a director from office for cause, board members may waive their right
to receive notice individually and the board, by unanimous vote of the full
board, may suspend the requirement to given such notice.
SECTION 15. The board shall elect a chairman of the board and vice chairman of
the board from among its members for a term of up to one year. The chairman
shall preside at all meetings of the board and perform such other duties as may
be designated by the board. If the chairman of the board is a principal officer
of the Association, he or she shall be responsible only to the board. The vice
chairman shall preside at meetings of the board in the absence of the chairman.
SECTION 16. A majority of the members of the board shall constitute a quorum to
transact all business unless otherwise required in the articles of incorporation
or bylaws of the Association.
ELECTION OR APPOINTMENT OF DIRECTORS
SECTION 17. Twelve benefit members shall he elected to the board for terms of
office of four years each, three members being elected each year in the
following manner: The board, as well as each branch, shall have the right to
nominate benefit members as candidates for director. All nominations must be
reported to the secretary of the Association at the home office within the time
specified by the board. The secretary shall report the nominations to the board.
The board shall then direct the secretary to prepare the ballot and give notice
of the election, specifying the time and procedures for election. Each branch
shall conduct an election meeting within the time specified at which a vote
shall be taken on the candidates and shall be reported in the manner and within
the time specified in the notice of election. Those elective directors whose
terms do not expire with the current election shall constitute the Election
Committee. The tabulation of results of the election shall be done by an
independent certified public accounting firm selected by the board to report to
the Election Committee. The Election Committee shall declare the three
candidates receiving the highest number of valid votes to be duly elected for a
term beginning with the first quarterly meeting of the board in the year
following election.
SECTION 18. Vacancies in elective directorship positions shall be filled as soon
as possible by an affirmative vote of a majority of the remaining elective
directors. Such directors shall fill the unexpired terms and shall be considered
elective directors.
SECTION 19. Except as provided in Section 20, benefit members of the Association
shall not be eligible for election to the board unless they can serve the
duration of one full four-year term. No employee of the Association shall be
eligible for election to the board nor shall any former employee be eligible for
election to the board until the expiration of two years from the date of
termination of employment.
SECTION 20. The board may appoint up four benefit members of the Association to
serve as appointive directors for a term of office of one year. The board may
also appoint not more than two principal officers of the Association to serve as
directors as the board shall from time to time determine to be in the
Association's best interest. Any appointment or reappointment shall require the
affirmative vote of a majority of the elective directors. An appointive director
shall be eligible for election pursuant to Section 17 or appointment pursuant to
Section 18 if the date of initial appointment as an appointive director
proceeded such director's 67th birthday.
SECTION 21. No elective, appointive or principal officer director shall serve
beyond December 31 of the year in which age 70 is attained. A director may be
removed from office for cause by an affirmative vote of a majority of the full
board at a meeting of the board called for that purpose.
COMMITTEES OF DIRECTORS
SECTION 22. The board by resolution adopted by a majority of the full board may
designate a governance committee and one or more additional committees of
directors. Each committee shall consist of three or more directors who serve by
appointment of the board. Each committee shall have such authority as delegation
to it by the board. A majority of the members of each committee of directors
shall constitute a quorum for the transaction of all committee business.
Vacancies occurring on committees of directors shall be filled by the board as
soon as possible.
OFFICERS OF THE ASSOCIATION
SECTION 23. The principal officers of the Association shall be the chairman of
the board, chief executive officer, president, secretary, treasurer and all vice
presidents except second vice presidents and assistant vice presidents.
Principal officers shall be elected by the board and shall serve at the pleasure
of the board. Officers other than principal officers shall be appointed by the
chief executive officer.
SECTION 24. The board shall elect the person who shall serve as chief executive
officer of the Association. The chief executive officer shall be responsible
only to the board. All other officers and employees of the Association shall be
under the chief executive officers supervision and control. Subject to the
control and direction of the board, all activities and operations of the
Association shall be under the chief executive officer's supervision and
control.
SECTION 25. The board shall fix reasonable compensation for directors and
principal officers. The chief executive officer shall fix compensation for
officers other than principal officers, in accordance with policies established
by the board.
OFFICIAL PUBLICATION
SECTION 26. The official publication of the Association shall be called
Correspondent. Any notice, report or statement required by law, including notice
of election, may be published in Correspondent. If Association records show that
two or more benefit members or applicants for juvenile insurance have the same
mailing address, a Correspondent mailed to one of them is deemed mailed to all
of them at the same address unless a separate copy is requested.
All amendments to the Articles of Incorporation and Bylaws of the Association
shall be published in Correspondent not later than four months after the date of
filing such amendments with the Commissioner of Insurance of the state of
Wisconsin.
An affidavit by the secretary of the Association certifying that Correspondent
was mailed in accordance with this section shall be submitted to the board at
its next meeting after publication of any notice, report or statement required
by law. The affidavits shall be filed in the records of the secretary's office.
FISCAL YEAR
SECTION 27. The fiscal year of the Association shall begin on the first day of
January and end on the thirty-first day of December.
ANNUAL REPORT
SECTION 28. An annual statement of the transactions of each fiscal year shall be
prepared and published in Correspondent within six months following the close of
each fiscal year.
LOCAL BRANCHES
SECTION 29. Branches shall be created and maintained to foster voluntary
activity for aiding such lawful social, intellectual, educational, charitable,
benevolent, moral, fraternal, patriotic, or religious endeavors as the board
determines in accord with policies of the board; to provide members with the
opportunity to take part in benevolent and charitable activities of the
Association; and to provide benefit members with the opportunity to exercise
their right to vote in the corporate and insurance affairs of the Association.
SECTION 30. Branches shall be chartered by resolution of the board upon petition
to it by 10 benefit members who live in the same general locality. The petition
shall indicate acceptance of the Articles of Incorporation and Bylaws of the
Association and the constitution for local branches. Petitions for branch
charters by groups of less than 10 benefit members may be specially considered
by the board, and charters may be issued pursuant to such petitions when the
board finds that the circumstances are justified. Charters may be withdrawn when
the board determines it to be in the best interests of the Association. The form
of petition, charter and constitution for local branches shall be adopted lay
the board.
SECTION 31. Regular meetings of the branches shall be held at least monthly.
Meetings for election of directors and branch officers shall be held according
to procedures and during the time prescribed by the board.
SECTION 32. Branches may voluntarily join together to form regional groupings of
branches to assist each other in the performance of their fraternal and
benevolent activities, subject to the supervision and control of the board.
INDEMNIFICATION AND FIDELITY BONDS
SECTION 33. The Association shall indemnify any person who is or was a director,
officer or employee against liability for acts or omissions in the performance
of their duties. The Association shall also indemnify any person who is or was
serving at the request of the Association as a director, officer or trustee of
another corporation, partnership, joint venture, trust or other enterprise, or
any director, officer or employee who is or was serving in a fiduciary capacity
with regard to any employee benefit plan, against liability for acts or
omissions in the performance of their duties.
The Association may purchase and maintain insurance on behalf of an individual
who is an employee, agent, director or officer of the corporation against
liability asserted against and incurred by the individual in his or her capacity
as an employee, agent, director or officer, or arising from his or her status as
an employee, agent, director or officer, regardless of whether the Association
is required or authorized to indemnify or allow expenses to the individual
against the same liability. If such insurance is purchased, the amounts shall be
as determined by resolution of the board.
The Association shall maintain fidelity bonds on the officers and employees as
determined by resolution of the board.
AMENDMENTS
SECTION 34. These bylaws may be repealed or amended, or new bylaws may be
adopted, at any regular meeting of the board or at any special meeting called
for that purpose. Notice of the proposed change shall be mailed or personally
delivered to board members at least 30 calendar days before the date of the
meeting. Board members may waive their right to receive notice individually and
the board, by unanimous vote of the full board, may suspend the requirement to
give such notice. The number of votes required to repeal or amend these bylaws,
or adopt new bylaws, shall be an affirmative vote of a majority of the full
board. Such changes shall be effective from the date of passage or at such other
date as stipulated by the board and shall be filed promptly after adoption with
the Commissioner of Insurance of the state of Wisconsin. After filing, the
changes shall be published in the official publication as prescribed in these
bylaws.
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
AAL VARIABLE ANNUITY ACCOUNT I
AND
AAL VARIABLE ANNUITY ACCOUNT II
AND
AAL VARIABLE LIFE ACCOUNT I
AND
AAL CAPITAL MANAGEMENT CORPORATION
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
1. SALE OF FUND SHARES......................................................4
2. REPRESENTATIONS AND WARRANTIES...........................................5
3. PROSPECTUS AND PROXY STATEMENTS: VOTING..................................6
4. SALES MATERIAL AND INFORMATION...........................................6
5. FEES AND EXPENSES........................................................7
6. DIVERSIFICATION..........................................................8
7. MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.........................8
9. TERM AND TERMINATION OF THIS AGREEMENT..................................13
10. NOTICES.................................................................15
11. MISCELLANEOUS...........................................................16
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 1st day
of January, 2000, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and on behalf of AAL VARIABLE ANNUITY ACCOUNT I, AAL VARIABLE ANNUITY
ACCOUNT II, and AAL VARIABLE LIFE ACCOUNT I (the "ACCOUNTS"), AAL CAPITAL
MANAGEMENT CORPORATION ("AAL CMC"), and AAL VARIABLE PRODUCT SERIES FUND, INC.
(the "FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as sponsor and depositor of the
ACCOUNTS;
WHEREAS, the ACCOUNTS are legally segregated asset accounts of AAL,
established pursuant to the laws of the State of Wisconsin, with several
subaccounts (the "Subaccounts"), for the purpose of funding certain variable
universal life insurance contracts and variable annuity contracts (collectively
the "Certificates");
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions;
WHEREAS, to the extent permitted by applicable insurance, tax and other
laws and regulations, AAL intends to purchase shares in the FUND on behalf of
the ACCOUNTS to fund the Certificates or on its own behalf for related purposes,
and the FUND is authorized to sell such shares to the ACCOUNTS and to AAL at net
asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL CMC, dated the 1st day of January, 2000, as amended, wherein AAL CMC has
agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code"), as amended;
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
<PAGE>
1. SALE OF FUND SHARES
1.1 The Certificates funded through the ACCOUNTS will provide for the
allocation of net amounts among certain Subaccounts for investment
in such shares of the Portfolios as may be offered from time to
time in the prospectus of the ACCOUNTS for the Certificates. The
selection of the particular Subaccount is to be made by the
Certificate owner, and such selection may be changed in accordance
with the terms of the Certificates.
1.2 The FUND will sell to AAL those shares of each available Portfolio
that AAL orders based on transactions under Certificates,
effecting such orders on a daily basis at the Portfolio's net
asset value per share next computed as provided in the FUND
prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to
sell shares of any Portfolio to AAL, or suspend or terminate the
offering of shares of any Portfolio, if such action is required by
law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board, acting in good faith and in light of
their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the shareholders of the
FUND.
1.4 The FUND agrees that its shares will be sold only to: (a) AAL, on
its own behalf and on behalf of separate accounts that it
establishes from time to time and maintains to fund variable
annuity contracts and variable life insurance contracts of AAL,
including the ACCOUNTS; (b) other life insurance companies,
whether affiliated or unaffiliated with AAL, on behalf of separate
accounts funding variable annuity contracts and variable life
insurance contracts of such other insurance companies; and (c)
qualified pension or retirement plans, whether for the benefit of
employees of AAL and/or its affiliates or for the benefit of
unaffiliated entities ("Qualified Plans"). AAL separate accounts
(including the ACCOUNTS) and separate accounts of other life
insurance companies eligible to purchase shares of the FUND are
referred to in this Agreement as "Separate Accounts." No shares of
any Portfolio will be sold to the general public or to any life
insurance company (on its own behalf, as opposed to a Separate
Account maintained by such other insurance company) other than
AAL.
1.5 The FUND will redeem for cash from AAL those full or fractional
shares of each Portfolio that AAL requests based on transactions
under Certificates, effecting such requests on a daily basis at
the Portfolio's net asset value per share next computed as
provided in the FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry
only. Stock certificates will not be issued to AAL. Shares ordered
from the FUND will be recorded in an appropriate title for AAL.
1.7 The FUND shall furnish notice promptly to AAL of any income,
dividends or capital gain distributions payable on the shares of
any Portfolio. AAL hereby elects to receive all such income,
dividends and capital gain distributions as are payable on FUND
shares in additional shares of that Portfolio. AAL reserves the
right to revoke this election and to receive all such income,
dividends and capital gain distributions in cash. The FUND shall
notify AAL of the number of shares so issued as payment of such
income, dividends and distributions.
1.8 The FUND shall make the net asset value per share for each
Portfolio available to AAL on a daily basis, as soon as reasonably
practical after the net asset value per share is calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the Certificates, or delete, combine, or modify
existing Portfolios. The shares of any additional Portfolio may be
made available to the ACCOUNTS by the FUND, pursuant to the terms
of this Agreement, and any applicable reference to any Portfolio,
the FUND or its shares herein shall include a reference to any
such Portfolio.
2. REPRESENTATIONS AND WARRANTIES
2.1 AAL represents and warrants that interests in the ACCOUNTS under
the Certificates are or will be registered under the 1933 Act to
the extent required by the 1933 Act, that the Certificates will be
issued and sold in compliance in all material respects with all
applicable federal and state laws and that the sale of the
Certificates will comply in all material respects with state
insurance and federal securities law suitability requirements. AAL
further represents and warrants that it is a fraternal benefit
society organized under the laws of the State of Wisconsin and
engaged in the writing of life insurance, annuity contracts, and
other insurance products; that it has legally and validly
established its ACCOUNTS as segregated asset accounts under
Wisconsin insurance law; and that it has registered or will
register the ACCOUNTS as unit investment trusts in accordance with
the provisions of the 1940 Act to serve as segregated investment
accounts for the Certificates, to the extent required by the 1940
Act.
2.2 AAL represents and warrants that any interests in the ACCOUNTS
being offered for sale under the Certificates are or will be
registered under the 1933 Act to the extent required by the 1933
Act, that the Certificates will be issued and sold in compliance
in all material respects with all applicable federal and state
laws, and that the sale of the Certificates will comply in all
material respects with state insurance law, and federal securities
laws, including the rules of the National Association of
Securities Dealers, Inc. ("NASD").
2.3 The FUND represents and warrants that its shares sold pursuant to
this Agreement are or will be registered under the 1933 Act to the
extent required by the 1933 Act, duly authorized for issuance and
sold in compliance with the laws of the state of Maryland and all
applicable federal securities laws and that the FUND is or will be
registered under the 1940 Act to the extent required by the 1940
Act. The FUND will amend the registration statement for its shares
under the 1933 Act, as well as its registration statement under
the 1940 Act, as required in order to effect the continuous
offering of its shares. The FUND will register or qualify the
shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the FUND.
2.4 AAL represents and warrants that its Certificates are currently
treated as annuity contracts and universal life insurance
contracts under applicable provisions of the Code and that it will
make every effort to maintain such treatment.
2.5 The FUND makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses)
complies with the insurance laws or regulations of the various
states. On the request of any state insurance department, the FUND
agrees to provide and furnish to the department any information or
reports in connection with the FUND's operations or services that
will allow the insurance department to determine if the variable
product operations of AAL are being conducted in a manner
consistent with state laws. The FUND intends to comply with the
insurance laws of any relevant state regarding any Portfolio's
investment objectives, policies and restrictions to the extent
that AAL CMC advises the FUND, in writing, of such laws or any
change in such laws, provided the FUND's Board of Directors and/or
shareholders approve such changes as required by the 1940 Act.
2.6 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of
the Code and that the investments of each of its Portfolios will
comply with the diversification requirements of Section 817(h) of
the Code and the regulations thereunder, and that it will notify
AAL immediately upon having a reasonable basis for believing that
it has ceased to so qualify or that it might not so qualify in the
future.
3. PROSPECTUS AND PROXY STATEMENTS: VOTING
3.1 The FUND will provide such documentation (including a final copy
of any new prospectus, statement of additional information
("SAI"), or supplement) and other assistance as is reasonably
necessary in order for AAL or its designee to timely distribute
the current FUND prospectus, SAI and any supplement thereto, or,
in the alternative, to have the prospectus of the ACCOUNTS for the
Certificates and the FUND's prospectus printed together in one
document once each year (or more frequently if the prospectus for
the FUND is amended) (such FUND prospectus printing to be at the
FUND's expense, as provided in Section 5.1).
3.2 The FUND will provide such documentation (including a final copy
of any proxy material, report to shareholders, and other
communication to shareholders) and other assistance as is
reasonably necessary for AAL or its designee to timely distribute
the proxy material, report to shareholders, and other
communication (such printing and distribution to be the FUND's
expense, as provided in Section 5.1).
3.3 If, and to the extent required by law, AAL shall, at AAL's
expense, as provided in Section 5.2:
(a) solicit voting instructions from Certificate owners;
(b) vote Portfolio shares in accordance with instructions
received from Certificate owners;
(c) vote Portfolio shares for which no instructions have been
received, as well as Portfolio shares attributable to AAL
other than under Certificates, in the same proportion as
shares of such Portfolio for which instructions have been
received, so long as and to the extent that the SEC continues
to interpret the 1940 Act to require pass-through voting
privileges. AAL reserves the right to vote Portfolio shares
held in any segregated asset accounts or in general accounts
in its own right, to the extent permitted by law.
3.4 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the
FUND solely upon the authorization of its Board and/or
shareholders as required by the 1940 Act.
4. SALES MATERIAL AND INFORMATION
4.1 AAL or its designee will furnish, or will cause to be furnished,
to the FUND or its designee, each piece of sales literature or
other promotional material in which the FUND or AAL is named, at
least fifteen (15) days prior to its intended use. No such
material will be used if the FUND or its designee objects to such
intended use within fifteen (15) days after receipt of such
material.
4.2 AAL will not give any information or make any representation or
statement, or cause such information to be given or representation
to be made, on behalf of the FUND or concerning any Portfolio in
connection with the sale of the Certificates other than the
information or representations contained in the registration
statement, prospectus, and SAI for FUND shares, as such
registration statement, prospectus, and SAI may be amended or
supplemented from time to time, or in reports or proxy materials
for the FUND, or in sales literature or other promotional material
approved by the FUND or its designee, except with the permission
of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be
furnished, to AAL or its designee, each piece of sales literature
or other promotional material of the FUND in which AAL and/or its
ACCOUNTS is named, at least fifteen (15) days prior to its
intended use. No such material will be used if AAL or its designee
objects to such intended use within fifteen (15) days after
receipt of such material.
4.4 The FUND will not give any information or make any representations
or statements, or cause such information to be given or
representations to be made, on behalf of AAL or concerning AAL,
its ACCOUNTS or its Certificates other than the information or
representations contained in a registration statement or
prospectus for such ACCOUNTS, as such registration statement and
prospectus may be amended or supplemented from time to time, or in
published reports for the ACCOUNTS that are in the public domain
or approved by AAL for distribution to owners, or in sales
literature or other promotional material approved by AAL or its
designee, except with the permission of AAL or its designee .
4.5 The FUND will provide to AAL one complete copy of all registration
statements, prospectuses, SAI's, reports, proxy material, sales
literature and other promotional material, applications for
exemptions, requests for no-action letters, and all amendments to
any of the above, that relate to the FUND or its shares,
contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
4.6 AAL will provide to the FUND one complete copy of all registration
statements, prospectuses, SAI's, reports, solicitations for voting
instructions, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the ACCOUNTS or
its Certificates, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
5. FEES AND EXPENSES
5.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below,
each Portfolio will bear all of its operating expenses that are
not specifically assumed by AAL, including the following: (i)
interest and taxes (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses for those Directors who
are not "interested" persons under Section 2(a)(19) of the Act;
(v) independent legal and audit expenses; (vi) fees and expenses
of the FUND's custodian, shareholder servicing or transfer agent
and accounting services agent; (vii) expenses incident to the
issuance of its shares, including stock certificates and issuance
of shares on the payment of, or reinvestment of dividends; (viii)
fees and expenses incident to the registration under Federal or
state securities laws of the FUND or its shares; (ix) FUND or
portfolio organizational expenses; (x) FUND expenses of preparing,
printing and mailing reports and notices, proxy material and
prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii)
dues or assessments of or contributions to the Investment Company
Institute or any successor or other industry association; (xiii)
such non-recurring expenses as may arise, including litigation
affecting the FUND and the legal obligations which the FUND may
have to indemnify its officers and Directors with respect thereto;
and (xiv) cost of daily valuation of each of the Portfolio's
securities and net asset value per share.
5.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will bear the expenses of printing and
distributing to its Certificate owners the FUND proxy materials,
proxy cards and voting instruction forms (collectively "proxy
information"), tabulating the results of proxy solicitations to
its Certificate owners, printing and distributing to its
Certificate owners the FUND prospectus, SAI, supplement, proxy
material, report to shareholders, and other communication to
shareholders, and any expenses associated with administration of
its Certificates.
6. DIVERSIFICATION
6.1 The Portfolios will be invested in such a manner as to ensure that
the Certificates will be treated as variable life insurance
contracts and variable annuity contracts under the Code and the
regulations thereunder insofar as such investment is required for
such treatment. Without limiting the scope of the foregoing, the
Portfolios will at all times comply with Section 817(h) of the
Code and Treasury Regulations Section 1.817-5 relating to the
diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications
to such Section or Regulations.
6.2 The FUND shall furnish to AAL on a regular basis reports of all of
the investments of each Portfolio in a form sufficient to permit
AAL to determine whether each Portfolio is in compliance with the
diversification requirements of Section 817(h) of the Code and the
Regulations thereunder and shall take immediate action, on
learning through its own monitoring, or on advice from AAL, that
any Portfolio is not in compliance with such requirements, to
return to compliance with such requirements.
6.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with AAL in any effort to
correct such diversification failure under procedures established
by the Internal Revenue Service, including those set forth in
Revenue Procedure 92-25.
7. MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS
7.1 The FUND's Board of Directors will monitor the FUND for the
existence of any material irreconcilable conflict between and
among the interests of the certificateholders of the Separate
Accounts (including the ACCOUNTS) investing in the FUND and the
participants of any of the Qualified Plans investing in the FUND.
A material irreconcilable conflict may arise for a variety of
reasons, including: (a) action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance,
tax or securities laws or regulations, or a public ruling ,
private letter ruling, no-action or interpretive letter, or any
similar action by insurance, tax or securities regulatory
authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investment of the
FUND are being managed; (e) a difference in voting instructions
given by the Separate Accounts vis-a-vis voting instructions
provided by the trustees of the Qualified Plans; (f) a decision by
AAL or another life insurance company to disregard the voting
instructions of Certificate owners in one or more Separate
Accounts; or (g) if applicable, a decision by the trustee of a
Qualified Plan to disregard the voting instructions of the
participants of such Qualified Plan. A determination by the FUND's
Board that a material irreconcilable conflict exists will be a
final determination.
7.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, AAL (on behalf of the ACCOUNTS)
shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested directors of the
FUND), take whatever steps are necessary to remedy or eliminate
the material irreconcilable conflict. Such steps could include:
(a) withdrawing the assets allocable to some or all of the
ACCOUNTS from the FUND or any Portfolio of the FUND and
reinvesting such assets in a different investment medium,
including another portfolio of the FUND; (b) submitting the
question as to whether such segregation should be implemented to a
vote of all affected Certificate owners and, as appropriate,
segregating the assets of any appropriate (i.e., variable annuity
Certificate owners or variable life insurance Certificate owners
of one or more of AAL and any other insurance companies with
Separate Accounts investing in the FUND) that votes in favor of
such segregation, or offering to the affected Certificate owners
the option of making such change; or (c) establishing a new
registered management investment company or managed separate
account. If a material irreconcilable conflict arises because of a
decision by AAL to disregard voting instructions of owners of
Certificates in one or more of the ACCOUNTS, and that decision
represents a minority position or would preclude a majority vote
with respect to the vote being taken by shareholders of the FUND,
then AAL shall, at the election and direction of the FUND's Board,
withdraw each affected ACCOUNT's investment in the FUND (but no
charge or penalty shall be imposed as a result of such
withdrawal).
7.3 AAL is responsible, to the extent permitted by applicable law, for
taking remedial action on behalf of the affected ACCOUNT(s) in the
event that the FUND's Board determines a material irreconcilable
conflict exists. AAL will take remedial action only as it pertains
to assets of the affected ACCOUNT(s) and in accordance with its
fiduciary responsibility to Certificate owners in such affected
ACCOUNT(s). AAL, as the sponsor of the affected ACCOUNT(s), will
be responsible for the cost of any such remedial action. For the
purpose of this Section, a majority of the disinterested members
of the FUND's Board will determine whether or not any proposed
action adequately remedies any material irreconcilable conflict.
In no event shall the FUND, or AAL in its capacity as advisor to
the FUND, be required to establish a Portfolio or new funding
medium for any Certificate or any ACCOUNT. Nor, in its capacity as
sponsor of any ACCOUNT, shall AAL be required to establish a new
funding medium for any Certificate or any ACCOUNT if any offer to
do so has been declined by a vote of a majority of the Certificate
owners materially and adversely affected by the material
irreconcilable conflict.
7.4 The FUND promptly shall notify AAL in writing of any determination
by the FUND's Board as to the existence of a material
irreconcilable conflict and its implications
7.5 All reports of potential or existing conflicts received by the
FUND's Board and all Board actions with regard to or determining
the existence of a conflict of interest, notifying AAL of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of
the FUND's Board or other appropriate records, and such minutes or
other records will be made available to the SEC upon request.
7.6 The FUND will disclose in its prospectus that (a) shares of the
FUND may be offered to Separate Accounts and Qualified Plans; (b)
material irreconcilable conflicts may arise between the interest
of various certificateholders investing in the Separate Accounts
and the interests of participants in the Qualified Plans investing
in the FUND; and (c) the FUND's Board will monitor events in order
to identify the existence of any material conflict and determine
what action, if any, should be taken in response to such material
irreconcilable conflict.
7.7 No less than annually, AAL will submit to the FUND's Board such
reports, materials and data as the Board may reasonably request so
that the Board may carry out fully its obligations under this
Section. Such reports, materials and data will be submitted more
frequently if deemed appropriate by the FUND's Board. In any
event, AAL will promptly notify the FUND's Board in writing if it
becomes aware of any facts or circumstances that could give rise
to a material irreconcilable conflict between the interests of
various Certificate owners in the ACCOUNTS and the interests of
Qualified Plan participants investing in the FUND. All reports
submitted to the FUND's Board under this Section 7.7 shall include
all information reasonably necessary for the Board to consider the
conflict issues raised. In this regard, AAL promptly shall notify
the FUND's Board whenever AAL has determined to disregard voting
instructions of the Certificate owners of any ACCOUNT(s) on any
matter submitted to a vote of shareholders of the FUND.
8. INDEMNIFICATION
8.1 Indemnification By AAL
(a) AAL will indemnify and hold harmless the FUND and each of its
Directors, officers, and employees and each person, if any,
who controls the FUND within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement
with the written consent of AAL) or litigation (including
legal and other expenses), to which the Indemnified Parties
may become subject under any statute, regulation, at common
law or otherwise, and which:
(i) arise out of or are based upon any failure by AAL to
perform the duties or assume the general business
responsibilities of AAL with respect to the design,
drafting, state approvals, issuance, servicing and
administration of the Certificates, or the establishment
and maintenance of the ACCOUNTS; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the registration statement, prospectus, or SAI for the
Certificates, or the ACCOUNTS, or contained in the
Certificates or sales literature for the Certificates (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this Agreement to indemnify
will not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished in writing to AAL by or on behalf of
the FUND for use in the registration statement,
prospectus, or SAI for the Certificates or the ACCOUNTS or
in the Certificates or sales literature (or any amendment
or supplement) or otherwise for use in connection with the
sale of the Certificates or FUND shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by AAL, or
persons under its control) or wrongful conduct of AAL or
persons under its control, or failure to supervise persons
under AAL's control or entities or individuals with which
AAL contracts, with respect to the sale or distribution of
the Certificates or FUND shares; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the FUND by or on behalf of AAL;
or
(v) arise out of or result from any failure by AAL to provide
the services and furnish the materials contemplated
by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by AAL in this
Agreement or arise out of or result from any other
material breach of this Agreement by AAL, as limited by
and in accordance with the provisions of Sections 8.1(b).
and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this
Agreement or to the FUND, whichever is applicable.
(c) AAL will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified AAL in
writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify
AAL of any such claim will not relieve AAL from any liability
that it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, AAL shall be entitled to
participate, at its own expense, in the defense thereof. AAL
also will be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After
notice from AAL to such party of AAL's election to assume the
defense thereof, the Indemnified Party will bear the fees and
expenses of any additional counsel retained by it, and AAL
will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other
than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify AAL of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification By the FUND
(a) The FUND will indemnify and hold harmless AAL and each of its
directors, officers and employees and each person, if any, who
controls AAL within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of FUND) or litigation (including legal and
other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or
otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect
to the sale of shares of the FUND to AAL; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the sales literature for the FUND and/or the
Certificates, or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
the FUND by or on behalf of AAL for use in the
registration statement, prospectus, or SAI for use in the
sales literature or otherwise for use in connection with
the sale of Portfolio shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the FUND,
or persons under its control) or wrongful conduct of the
FUND or persons under its control, or failure to supervise
persons under the FUND's control or entities or
individuals with which the FUND contracts, with respect to
the sale or distribution of the Certificates or FUND
shares; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to AAL by or on behalf of AAL; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials
contemplated by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other
material breach of this Agreement by the FUND, except to
the extent provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification
provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the FUND, whichever is
applicable.
(c) The FUND will not be liable under this indemnification
provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have
notified the FUND in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the FUND of any such claim will not relieve
the FUND from any liability that it may have to the
Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified
Parties, the FUND shall be entitled to participate, at its own
expense, in the defense thereof. The FUND also will be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice
from the FUND to such party of the FUND's election to assume
the defense thereof, the Indemnified Party will bear the fees
and expenses of any additional counsel retained by it, and the
FUND will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof
other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. TERM AND TERMINATION OF THIS AGREEMENT
9.1 This Agreement will terminate:
(a) as to any party hereto, at the option of that party, upon
prior written notice to the other party as provided in Section
9.3 herein; or
(b) at the option of the FUND in the event that formal
administrative proceedings are instituted against AAL by the
NASD, the SEC, any state securities or insurance commissioner
or any other regulatory body regarding AAL's duties under this
Agreement or related to the sale of the Certificates, the
operation of the ACCOUNTS, or the purchase of FUND shares,
provided, however, that the FUND determines, in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of AAL to perform its obligations under this
Agreement; or
(c) at the option of AAL in the event that formal administrative
proceedings are instituted against the FUND by the NASD, the
SEC, or any state securities or insurance commission or any
other regulatory body, regarding the FUND's duties under this
Agreement or related to the sale of FUND shares or the
operation of the FUND, provided, however, that AAL determines,
in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the FUND to perform its obligations under
this Agreement; or
(d) at the option of AAL with respect to the ACCOUNTS, upon
requisite authority to substitute the shares of another
investment company for shares of the FUND in accordance with
the terms of the Certificates or in accordance with the
ACCOUNTS investment policy or standards of conduct; or
(e) at the option of AAL, in the event any of the FUND's shares
are not registered, issued, or sold in accordance with
applicable federal and any state law or such law precludes the
use of such shares as the underlying investment media of the
Certificates issued or to be issued by AAL; or
(f) at the option of AAL, if the FUND fails to meet the
requirements specified in Sections 2.3 or 2.6 hereof; or
(g) at the option of the FUND, if the investments of the ACCOUNTS
fail to satisfy the diversification requirements of the Code
and the regulations thereunder, or
(h) at the option of AAL, if the FUND dissolves or becomes
otherwise unable to sell shares to fund the ACCOUNTS.
9.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 9.1(a) may be
exercised for any reason or for no reason.
9.3 Notice Requirement for Termination
No termination of this Agreement will be effective unless and
until the party terminating this Agreement gives prior written
notice to the other party to this Agreement of its intent to
terminate, and such notice shall set forth the basis for such
termination. Furthermore,
(a) in the event that any termination is based upon the provisions
of Section 9.1(a) hereof, such prior written notice shall be
given at least one hundred eighty (180) days in advance of the
effective date of termination as required by such provision;
(b) in the event that any termination is based upon the provisions
of Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least ninety (90) days in advance of
the effective date of termination;
(c) in the event that any termination is based upon the provisions
of Section 9.1(d) hereof, AAL will give at least sixty (60)
days prior written notice to the FUND of the date of any
proposed action to substitute FUND shares, including the
filing of any applicable exemptive application under the 1940
Act relating to the ACCOUNTS; and AAL will provide the FUND
with a copy of any such exemptive application; and
(d) in the event that any termination is based upon the provisions
of Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof,
such prior written notice shall be given as soon as possible
within twenty-four (24) hours after the terminating party
learns of the event causing termination to be required.
9.4 Partial Termination
It is also understood that this Agreement may be terminated with
regard to a specific Portfolio or Portfolios of the FUND, or the
entire FUND at the discretion of the terminating party.
Notwithstanding any termination of this Agreement, the FUND, or
any Portfolio, provided its shares are then available for sale to
any persons, shall at the option of AAL, continue to make
available additional shares of the FUND pursuant to the terms and
conditions of this Agreement, for all Certificates in effect on
the effective date of termination of this Agreement (hereinafter
referred to as "Existing Certificates"). Specifically, without
limitation, the owners of the Existing Certificates shall be
permitted to transfer or reallocate investments under the
Certificates, redeem investments in the FUND and/or invest in the
FUND upon the making of additional purchase payments under the
Existing Certificates.
10. NOTICES
Any notice will be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to AAL: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Woodrow E. Eno, Secretary
If to AAL CMC 222 West College Avenue
Appleton, Wisconsin 54919-0007
Attention: Robert G. Same
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Frederick D. Kelsven, Secretary
<PAGE>
11. MISCELLANEOUS
11.1 This Agreement will be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of
Maryland, where the sale of any FUND share shall be deemed to have
been made; provided, however, that if such laws or any of the
provisions of this Agreement conflict with applicable Provisions
of the 1940 Act, the latter shall control.
11.2 If any provision of this Agreement will be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement will not be effected thereby.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the 1st day of January, 2000.
AID ASSOCIATION FOR LUTHERANS,
AAL VARIABLE ANNUITY ACCOUNT I,
AAL VARIABLE ANNUITY ACCOUNT II AAL VARIABLE PRODUCT SERIES FUND, INC.
AND
AAL VARIABLE LIFE ACCOUNT I
By: /s/John O. Gilbert By: /s/Robert G. Same
-------------------------- ---------------------------
John O. Gilbert Robert G. Same
President and President
Chief Executive Officer
By: /s/Woodrow E. Eno By: /s/Frederick D. Kelsven
-------------------------- ---------------------------
Woodrow E. Eno Frederick D. Kelsven
Senior Vice President, Secretary
Secretary and General Counsel
AAL CAPITAL MANAGEMENT CORPORATION
By: /s/Robert G. Same
--------------------------
Robert G. Same
President
By: /s/Frederick D. Kelsven
--------------------------
Frederick D. Kelsven
Secretary
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN
AND
AAL CAPITAL MANAGEMENT CORPORATION
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
1. Sale of FUND Shares.....................................................3
2. Representations and Warranties..........................................4
3. Prospectus and Proxy Statements: Voting.................................5
4. Sales Material and Information..........................................5
5. Monitoring of Material Irreconcilable Conflicts.........................6
6. Fees and Expenses.......................................................7
7. Diversification.........................................................8
8. Indemnification.........................................................9
9. Term and Termination of This Agreement.................................12
10. Notices................................................................13
11. Miscellaneous..........................................................13
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 1st day
of January, 2000, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and as plan sponsor of the Aid Association for Lutherans Savings Plan and
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN (the "PLAN"), AAL CAPITAL MANAGEMENT
CORPORATION ("AAL CMC"), and AAL VARIABLE PRODUCT SERIES FUND, INC. (the
"FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as plan sponsor of the;
WHEREAS, the PLAN is a qualified retirement plan established under Section
401(k) of the Internal Revenue Code by AAL for the benefit of its employees and
the employees of its subsidiaries and affiliates;
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions;
WHEREAS, to the extent permitted by applicable insurance, tax, ERISA, and
other laws and regulations, the PLAN intends to purchase shares in the FUND on
behalf of the PLAN's participants, and the FUND is authorized to sell such
shares to the PLAN at net asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL CMC, dated the 1st day of January, 2000, as amended, wherein AAL CMC has
agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code"), as amended;
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
1. SALE OF FUND SHARES
1.1 The PLAN will provide for the allocation of net amounts among
certain Portfolios as may be offered from time to time in the
PLAN's document. The selection of the particular Portfolio is to
be made by the Plan Participant, and such selection may be changed
in accordance with the terms of the PLAN's document.
1.2 The FUND will sell to the PLAN those shares of each available
Portfolio that the PLAN administrator or its delegate orders based
on authorizations from its participants, effecting such orders on
a daily basis at the Portfolio's net asset value per share next
computed as provided in the FUND prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to
sell shares of any Portfolio to the PLAN, or suspend or terminate
the offering of shares of any Portfolio, if such action is
required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board, acting in good faith
and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the
shareholders of the FUND.
1.4 The FUND agrees that its shares will be sold only to: (a) AAL, on
its own behalf and on behalf of separate accounts that it
maintains to fund variable annuity contracts and variable life
insurance contracts of AAL; (b) other life insurance companies;
whether affiliated or unaffiliated with AAL, on behalf of separate
accounts funding variable annuity contracts and variable life
insurance contracts of such other insurance companies; (c) the
PLAN; and (d) other qualified pension or retirement plans. AAL
separate accounts and separate accounts of other life insurance
companies eligible to purchase shares of the FUND are referred to
in this Agreement as "Separate Accounts," and the PLAN and other
qualified pension and or retirement plans eligible to purchase
shares of the FUND are referred to together in this Agreement as
"Qualified Plans." No shares of any Portfolio will be sold to the
general public or to any life insurance company on its own behalf
(as opposed to a Separate Account it maintains) other than AAL.
1.5 The FUND will redeem for cash from the PLAN those full or
fractional shares of each Portfolio that the PLAN requests based
on transactions of the PLAN's participants, effecting such
requests on a daily basis at the Portfolio's net asset value per
share next computed as provided in the FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry
only. Stock certificates will not be issued to the PLAN. Shares
ordered from the FUND will be recorded in an appropriate title for
the PLAN.
1.7 The FUND shall furnish notice promptly to the PLAN administrator
or its delegate of any income, dividends or capital gain
distributions payable on the shares of any Portfolio. The PLAN
hereby elects to receive all such income, dividends and capital
gain distributions as are payable on FUND shares in additional
shares of that Portfolio. The PLAN reserves the right to revoke
this election and to receive all such income, dividends and
capital gain distributions in cash. The FUND shall notify the PLAN
administrator or its delegate of the number of shares so issued as
payment of such income, dividends and distributions.
1.8 The FUND shall make the net asset value per share for each
applicable Portfolio available to PLAN on a daily basis, as soon
as reasonably practical after the net asset value per share is
calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the PLAN, or delete, combine, or modify existing
Portfolios. The shares of any additional Portfolio may be made
available to the PLAN by the FUND, pursuant to the terms of this
Agreement, and any applicable reference to any Portfolio, the FUND
or its shares herein shall include a reference to any such
Portfolio.
2. REPRESENTATIONS AND WARRANTIES
2.1 AAL represents and warrants that it is a fraternal benefit society
organized under the laws of the State of Wisconsin and engaged in
the writing of life insurance, annuity contracts, and other
insurance products; that it has legally and validly established
its PLAN as a qualified retirement plan under section 401(k) of
the Internal Revenue Code of 1986, as amended. AAL has applied for
and received a valid determination letter from the Internal
Revenue Service for the PLAN. The PLAN complies with the Employee
Retirement Income Security Act of 1974 and all relevant federal
and state statutory provisions.
2.2 The FUND represents and warrants that its shares sold pursuant to
this Agreement are or will be registered under the 1933 Act to the
extent required by the 1933 Act, duly authorized for issuance and
sold in compliance with the laws of the state of Maryland and all
applicable federal securities laws and that the FUND is or will be
registered under the 1940 Act to the extent required by the 1940
Act. The FUND will amend the registration statement for its shares
under the 1933 Act, as well as its registration statement under
the 1940 Act, as required in order to effect the continuous
offering of its shares. The FUND will register or qualify the
shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the FUND.
2.3 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of
the Code and that the investments of each of its Portfolios will
comply with the diversification requirements of Section 817(h) of
the Code and the regulations thereunder, and that it will notify
the PLAN immediately upon having a reasonable basis for believing
that it has ceased to so qualify or that it might not so qualify
in the future.
3. PROSPECTUS AND PROXY STATEMENTS: VOTING
3.1 The FUND will provide the PLAN administrator or its delegate with
current FUND prospectus, statement of additional information and
any supplement thereto in a manner so as to allow the PLAN
administrator or its delegate to timely distribute the current
FUND prospectus, SAI and any supplement thereto, to each current
and prospective PLAN participant.
3.2 The FUND will provide a final copy of any proxy material, report
to shareholders, and other communication to shareholders to the
PLAN administrator or its delegate in a timely manner.
3.3 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the
FUND solely upon the authorization of its Board and/or
shareholders as required by the 1940 Act.
3.4 The PLAN will vote Portfolio shares in accordance with the terms
of the PLAN documents.
4. SALES MATERIAL AND INFORMATION
4.1 The PLAN administrator or its delegate will furnish, or will cause
to be furnished, to the FUND or its designee, each piece of sales
literature or other promotional material in which the FUND, or the
PLAN is named, at least fifteen (15) days prior to its intended
use. No such material will be used if the FUND or its designee
objects to such intended use within fifteen (15) days after
receipt of such material.
4.2 The PLAN will not give any information or make any representation
or statement, or cause such information to be given or
representation to be made, on behalf of the FUND or concerning any
Portfolio in connection with the sale of FUND shares other than
the information or representations contained in the registration
statement, prospectus, and SAI for FUND shares, as such
registration statement, prospectus, and SAI may be amended or
supplemented from time to time, or in reports or proxy materials
for the FUND, or in sales literature or other promotional material
approved by the FUND or its designee, except with the permission
of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be
furnished, to the PLAN administrator or its delegate, each piece
of sales literature or other promotional material of the FUND in
which the PLAN is named, at least fifteen (15) days prior to its
intended use. No such material will be used if the PLAN
administrator or its delegate objects to such intended use within
fifteen (15) days after receipt of such material.
4.4 The FUND will not give any information or make any representations
or statements, or cause such information to be given or
representations to be made, on behalf of or concerning the PLAN
other than the information or representations contained in a
registration statement or prospectus, as such registration
statement and prospectus may be amended or supplemented from time
to time, or in published reports for the PLAN that are in the
public domain or approved by the PLAN administrator or its
delegate for distribution to PLAN Participants, or in sales
literature or other promotional material approved by the PLAN
administrator or its delegate, except with the permission of the
PLAN administrator or its delegate.
4.5 The FUND will provide to the PLAN one complete copy of all
registration statements, prospectuses, SAI's, reports, proxy
material, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the FUND or its
shares, contemporaneously with the filing of such document with
the SEC or other regulatory authorities.
4.6 The PLAN will provide to the FUND one complete copy of all
reports, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the PLAN and
the FUND, contemporaneously with the filing of such document with
the SEC, IRS or other regulatory authorities.
5. MONITORING OF MATERIAL IRRECONCILABLE CONFLICTS
5.1 The FUND's Board of Directors will monitor the FUND for the
existence of any materials irreconcilable conflict between and
among the interests of the Certificateholders of the Separate
Accounts investing in the FUND and the participants of the PLAN,
and any other Qualified Plans investing in the FUND. A material
irreconcilable conflict may arise for a variety of reasons,
including: (a) action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investment of the FUND are being
managed; (e) a difference in voting instructions given by variable
annuity Certificateholders and variable universal life
Certificateholders of the Separate Accounts vis-a-vis voting
instructions provided by the trustees of the Qualified Plans; (f)
a decision by AAL or another life insurance company to disregard
the voting instructions of Certificateholders in one or more of
the Separate Accounts; or (g) if applicable, a decision by the
trustee of a Qualified Plan to disregard the voting instructions
of the participants of such Qualified Plan. A determination by the
FUND's Board that a material irreconcilable conflict exists will
be a final determination.
5.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, the PLAN shall, at its expense and
to the extent reasonably practicable (as determined by a majority
of the disinterested directors of the FUND), take whatever steps
are necessary to remedy or eliminate the material irreconcilable
conflict. Such steps could include withdrawing the assets
allocable to the PLAN from the FUND or any Portfolio of the FUND
(but no charge or penalty shall be imposed as a result of
withdrawal) and reinvesting such assets in a different investment
medium, which could include another Portfolio of the FUND.
5.3 The PLAN is responsible, to the extent permitted by applicable
law, for taking remedial action in the event that the FUND's Board
determines a material irreconcilable conflict exists. The PLAN
will take remedial action only as it pertains to PLAN assets and
in accordance with its fiduciary responsibility to the PLAN
participants. The PLAN will be responsible for the cost of any
such remedial action. For the purposes of this Section, a majority
of the disinterested members of the FUND's Board will determine
whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event shall the FUND or
AAL be required to establish a new Portfolio or new funding medium
for any variable annuity or variable universal life contract. The
PLAN will not be required by this Section to establish a new
funding medium if (a) a majority of its participants materially
and adversely affected by the irreconcilable material conflict
vote to decline such offer or (b) pursuant to the PLAN's documents
and applicable law, the PLAN makes such decision without a vote of
its participants.
5.4 The FUND's Board determination of the existence of a material
irreconcilable conflict and its implications will be made known
promptly and in writing to the PLAN administrator.
5.5 All reports of potential or existing conflicts received by the
FUND's Board and all Board actions with regard to, or determining
the existence of, a conflict of interest, notifying the PLAN of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of
the FUND's Board or other appropriate records, and such minutes or
other records will be made available to the SEC upon request.
5.6 The FUND will disclose in its prospectus that (a) shares of the
FUND may be offered to both Separate Accounts and to Qualified
Plans; (b) material irreconcilable conflicts may arise between the
interest of various Certificateholders investing in the Separate
Accounts and the interests of Qualified Plans participants
investing in the FUND; and (c) the FUND's Board will monitor
events in order to identify the existence of any material conflict
and determine what action, if any, should be taken in response to
such material irreconcilable conflict.
5.7 No less than annually, the PLAN will submit to the FUND's Board
such reports, materials and data as the Board may reasonably
request so that the Board may carry out fully its obligations
under this Section. Such reports, materials and data will be
submitted more frequently if deemed appropriate by the FUND's
Board. In any event, the PLAN promptly will notify the FUND's
Board in writing if it becomes aware of any facts or circumstances
that could give rise to a material irreconcilable conflict between
the interests of various Certificateholders in the Separate
Accounts and the interests of the Qualified Plan participants
investing in the FUND. All reports submitted to the FUND's Board
under this Section 5.7 shall include all information reasonably
necessary for the Board to consider the conflict issues raised. In
this regard, if the PLAN documents ever permit pass-through voting
to plan participants, the PLAN promptly shall notify the FUND's
Board whenever the PLAN trustee has determined to disregard PLAN
participant voting instructions on any matter submitted to a vote
of shareholders of the FUND.
6. FEES AND EXPENSES
6.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below,
each Portfolio will bear all of its operating expenses that are
not specifically assumed by AAL, including the following: (i)
interest and taxes (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses for those Directors who
are not "interested" persons under Section 2(a)(19) of the Act;
(v) independent legal and audit expenses; (vi) fees and expenses
of the FUND's custodian, shareholder servicing or transfer agent
and accounting services agent; (vii) expenses incident to the
issuance of its shares, including stock certificates and issuance
of shares on the payment of, or reinvestment of dividends; (viii)
fees and expenses incident to the registration under Federal or
state securities laws of the FUND or its shares; (ix) FUND or
portfolio organizational expenses; (x) FUND expenses of preparing,
printing and mailing reports and notices, proxy material and
prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii)
dues or assessments of or contributions to the Investment Company
Institute or any successor or other industry association; (xiii)
such non-recurring expenses as may arise, including litigation
affecting the FUND and the legal obligations which the FUND may
have to indemnify its officers and Directors with respect thereto;
and (xiv) cost of daily valuation of each of the Portfolio's
securities and net asset value per share.
6.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will pay for all expenses for the
printing and distribution to the PLAN administrator or its
delegate the FUND proxy materials, proxy cards and voting
instructions forms (collectively "proxy information"), tabulating
the results of proxy solicitations, printing and distributing to
the PLAN administrator or its delegate the FUND prospectus, SAI,
supplements, proxy materials, report to shareholders and other
communication to shareholders.
6.3 The PLAN will pay all expenses incident to the PLAN's performance
under this Agreement. In addition, the PLAN will bear any expenses
associated with administration of the PLAN.
7. DIVERSIFICATION
7.1 The Portfolios will be invested in accordance with the terms of
the FUND's prospectus and the PLAN document. Without limiting the
scope of the foregoing, the Portfolios will at all times comply
with Section 817(h) of the Code and Treasury Regulations Section
1.817-5 relating to the diversification requirements for
segregated asset accounts and any amendments or other
modifications to such Section or Regulations.
7.2 The FUND shall furnish to the PLAN, on a regular basis, reports of
all of the investments of each Portfolio in a form sufficient to
permit the PLAN to determine whether each Portfolio is in
compliance with the diversification requirements of Section 817(h)
of the Code and the Regulations thereunder and shall take
immediate action, on learning through its own monitoring, or on
advice from AAL or the PLAN, that any Portfolio is not in
compliance with such requirements, to return to compliance with
such requirements.
7.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with the PLAN in any effort
to correct such diversification failure under procedures
established by the Internal Revenue Service, including those set
forth in Revenue Procedure 92-25.
8. INDEMNIFICATION
8.1 Indemnification by AAL, as PLAN Sponsor
(a) AAL, as PLAN sponsor, will indemnify and hold harmless the
FUND and each of its Directors, officers, and employees and
each person, if any, who controls the FUND (collectively, the
"Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent
of AAL and the PLAN), or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, and
which:
(i) arise out of or are based upon any failure by the PLAN or
AAL to perform the duties or assume the general business
responsibilities of the PLAN with respect to the design,
drafting, federal approvals, issuance, servicing and
administration of the PLAN, or the establishment and
maintenance of the PLAN; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the registration statement, prospectus, or SAI
regarding the PLAN, or contained in the sales literature
for the PLAN (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
Agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
AAL or the PLAN by or on behalf of the FUND for use in the
registration statement, prospectus, or SAI for the PLAN or
in the PLAN or sales literature (or any amendment or
supplement) or otherwise for use in connection with the
sale of the FUND shares to PLAN participants; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the PLAN,
or persons under its control), or wrongful conduct of the
PLAN or persons under its control, or failure to supervise
persons under AAL's or the PLAN's control or entities or
individuals with which the PLAN contracts, with respect to
the sale or distribution of the FUND shares to PLAN
participants; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the FUND by or on behalf of AAL;
or
(v) arise out of or result from any failure by AAL or the PLAN
to provide the services and furnish the materials
contemplated by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by AAL: in this
Agreement or arise out of or result from any other
material breach of this Agreement by AAL or the PLAN, as
limited by and in accordance with the provisions of
Sections 8.1(b). and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this
Agreement or to the FUND, whichever is applicable.
(c) AAL will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the AAL in
writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify
AAL of any such claim will not relieve AAL from any liability
that it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the AAL and or the PLAN shall
be entitled to participate, at its own expense, in the defense
thereof. AAL also will be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the
action. After notice from AAL to such party of the AAL's
election to assume the defense thereof, the Indemnified Party
will bear the fees and expenses of any additional counsel
retained by it, and AAL will not be liable to such party under
this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the AAL of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification by the FUND
(a) The FUND will indemnify and hold harmless the PLAN and each of
its directors, officers and employees and each person, if any,
who controls the PLAN (collectively, the "Indemnified Parties"
for purposes of this Section 8.2) against any and all losses,
claims, damages, liabilities (including amounts paid in
settlement with the written consent of FUND) or litigation
(including legal and other expenses) to which the Indemnified
Parties may become subject under any statute, regulation, at
common law or otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect
to the sale of shares of the FUND to the PLAN; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the sales literature for the FUND and/or the
Certificates, or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
the FUND by or on behalf of the PLAN for use in the
registration statement, prospectus, or SAI for use in the
sales literature or otherwise for use in connection with
the sale of Portfolio shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the FUND,
or persons under its control) or wrongful conduct of the
FUND or persons under its control, or failure to supervise
persons under the FUND's control or entities or
individuals with which the FUND contracts, with respect to
the sale or distribution of the Certificates or FUND
shares; or
(iv) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the PLAN by or on behalf of the
PLAN; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials
contemplated by this Agreement; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other
material breach of this Agreement by the FUND, except to
the extent provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification
provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the FUND, whichever is
applicable.
(c) The FUND will not be liable under this indemnification
provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have
notified the FUND in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the FUND of any such claim will not relieve
the FUND from any liability that it may have to the
Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified
Parties, the FUND shall be entitled to participate, at its own
expense, in the defense thereof. The FUND also will be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice
from the FUND to such party of the FUND's election to assume
the defense thereof, the Indemnified Party will bear the fees
and expenses of any additional counsel retained by it, and the
FUND will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof
other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. TERM AND TERMINATION OF THIS AGREEMENT
9.1 This Agreement will terminate:
(a) as to any party hereto, at the option of that party, upon
prior written notice to the other party as provided in Section
9.3 herein; or
(b) at the option of the FUND in the event that formal
administrative proceedings are instituted against the PLAN by
the IRS, DOL or any other regulatory body regarding the PLAN's
duties under this Agreement or related to the sale of shares
to PLAN participants, the operation of the PLAN, provided,
however, that the FUND determines, in its sole judgment
exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of the PLAN to perform its obligations under this
Agreement; or
(c) at the option of the PLAN in the event that formal
administrative proceedings are instituted against the FUND by
the NASD, the SEC, or any state securities or insurance
commission or any other regulatory body, regarding the FUND's
duties under this Agreement or related to the sale of FUND
shares or the operation of the FUND, provided, however, that
the PLAN determines, in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of the FUND to
perform its obligations under this Agreement; or
(d) at the option of the PLAN, upon requisite authority to
substitute the shares of another investment company for shares
of the FUND in accordance with the PLAN investment policy or
standards of conduct; or
(e) at the option of the PLAN, in the event any of the FUND's
shares are not registered, issued, or sold in accordance with
applicable federal and any state law or such law precludes the
use of such shares as an investment of the PLAN; or
(f) at the option of the PLAN, if the FUND fails to meet the
requirements specified in Section 2.2 or 2.3 hereof; or
(g) at the option of the FUND, if the investments of the PLAN
fail to satisfy the diversification requirements of the Code
and the regulations thereunder, or
(h) at the option of the PLAN, if the FUND dissolves or becomes
otherwise unable to sell shares to fund the PLAN.
9.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 9.1(a) may be
exercised for any reason or for no reason.
9.3 Notice Requirement for Termination. No termination of this
Agreement will be effective unless and until the party terminating
this Agreement gives prior written notice to the other party to
this Agreement of its intent to terminate, and such notice shall
set forth the basis for such termination. Furthermore,
(a) in the event that any termination is based upon the provisions
of Section 9.1(a) hereof, such prior written notice shall be
given at least sixty (60) days in advance of the effective
date of termination as required by such provision;
(b) in the event that any termination is based upon the provisions
of Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least sixty (60) days in advance of
the effective date of termination;
(c) in the event that any termination is based upon the provisions
of Section 9.1(d) hereof, the PLAN will give at least sixty
(60) days prior written notice to the FUND of the date of any
proposed action to substitute FUND shares, including the
filing of any applicable exemptive application under the 1940
Act relating to the PLAN; and the PLAN will provide the FUND
with a copy of any such exemptive application; and
(d) in the event that any termination is based upon the provisions
of Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof,
such prior written notice shall be given as soon as possible
within twenty-four (24) hours after the terminating party
learns of the event causing termination to be required.
9.4 Partial Termination. It is also understood that this Agreement may
be terminated with regard to a specific Portfolio or Portfolios of
the FUND, or the entire FUND at the discretion of the terminating
party. Notwithstanding any termination of this Agreement, the
FUND, or any Portfolio, provided its shares are then available for
sale to any persons, shall at the option of the PLAN, continue to
make available additional shares of the FUND pursuant to the terms
and conditions of this Agreement, for all PLAN participants who
own FUND shares on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Shares").
Specifically, without limitation, the owners of Existing Shares
shall be permitted to transfer or reallocate investments under
terms of the PLAN, redeem investments in the FUND and/or invest in
the FUND upon the making of additional purchase payments under the
Existing Shares.
10. NOTICES
Any notice will be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to AAL or the PLAN: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Steven F. Mielke
If to AAL CMC: 222 West College Avenue
Appleton, Wisconsin 54919-0007
Attention: Robert G. Same
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Robert G. Same
11. MISCELLANEOUS
11.1 This Agreement will be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of
Wisconsin, where the sale of any FUND share shall be deemed to
have been made; provided, however, that if such laws or any of the
provisions of this Agreement conflict with applicable Provisions
of the 1940 Act, the latter shall control.
11.2 If any provision of this Agreement will be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement will not be effected thereby.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the 1st day of January, 2000.
AID ASSOCIATION FOR LUTHERANS AAL CAPITAL MANAGEMENT CORPORATION
By: /s/John O. Gilbert By: /s/Robert G. Same
------------------------- -----------------------------
John O. Gilbert Robert G. Same
President and President
Chief Executive Officer
By: /s/Woodow E. Eno By: /s/Frederick D. Kelsven
------------------------- -----------------------------
Woodrow E. Eno Frederick D. Kelsven
Senior Vice President, Secretary
Secretary and General Counsel
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN
By: /s/Steven F. Mielke
-------------------------
Steven F. Mielke
Benefit Plan Administrative Officer
By: /s/Woodrow E. Eno
-------------------------
Woodrow E. Eno
Senior Vice President,
Secretary and General Counsel
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Financial Statements"
and to the use of our report dated January 26, 2000, with respect to Aid
Association for Lutherans and to the incorporation by reference of our report
dated January 26, 2000, with respect to AAL Variable Annuity Account II, in this
Post-Effective Amendment No. 3 to Form N-4 Registration Statement under the
Securities Act of 1993 (File No. 333-71853) and this Amendment No. 3 to the
Registration Statement under the Investment Company Act of 1940 (File No.
811-09225) and related prospectus and statement of additional information of AAL
Variable Annuity Account II.
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
April 18, 2000
SPIVA PROSPECTUS ILLUSTRATION DEMOSTRATION
Annuity Payment Calculation Formulas
Initial Annuity Payment
The initial annuity payment is determined from actuarial first principles
using the AIR and the Annuity 2000 mortality table.
Subsequent Payments
Subsequent payments are determined by multiplying the previous payment by
the net investment return since the last payment, adjusted for the AIR.
That is,
Annuity Payment = Previous Payment x (1 + NIR) / (1+ AIR)
where NIR = net investment return since the last payment
AIR = assumed investment return
Example
Assumptions
Insured is a male, age 65.
Annuity payment option: Life Income with a 10 year guaranteed payment
period.
AIR = 5.00%
Single Premium = $50,000
Gross investment return = 8.00%
Annual M&E charge = 1.25%
Average investment advisor 0.4157% (arithmetic average of all subaccounts)
Net investment return = 6.3343%
First Annual Payment = $3,836 (Using the Annuity 2000 mortality table and
5.00% interest.)
Calculations
-----------------------------------------------------------------------
(1+NIR)
Previous ------- Current
Year Age Payment (1+NIR) (1+AIR) (1+AIR) Payment
-----------------------------------------------------------------------
1 65 $ 3,836
2 66 $ 3,836 1.063343 1.05 1.012707 $ 3,885
3 67 $ 3,885 1.063343 1.05 1.012707 $ 3,934
4 68 $ 3,934 1.063343 1.05 1.012707 $ 3,984
5 69 $ 3,984 1.063343 1.05 1.012707 $ 4,035
6 70 $ 4,035 1.063343 1.05 1.012707 $ 4,086
7 71 $ 4,086 1.063343 1.05 1.012707 $ 4,138
8 72 $ 4,138 1.063343 1.05 1.012707 $ 4,191
9 73 $ 4,191 1.063343 1.05 1.012707 $ 4,244
10 74 $ 4,244 1.063343 1.05 1.012707 $ 4,298
11 75 $ 4,298 1.063343 1.05 1.012707 $ 4,352
12 76 $ 4,352 1.063343 1.05 1.012707 $ 4,408
13 77 $ 4,408 1.063343 1.05 1.012707 $ 4,464
14 78 $ 4,464 1.063343 1.05 1.012707 $ 4,520
15 79 $ 4,520 1.063343 1.05 1.012707 $ 4,578
16 80 $ 4,578 1.063343 1.05 1.012707 $ 4,636
17 81 $ 4,636 1.063343 1.05 1.012707 $ 4,695
18 82 $ 4,695 1.063343 1.05 1.012707 $ 4,755
19 83 $ 4,755 1.063343 1.05 1.012707 $ 4,815
20 84 $ 4,815 1.063343 1.05 1.012707 $ 4,876
21 85 $ 4,876 1.063343 1.05 1.012707 $ 4,938
22 86 $ 4,938 1.063343 1.05 1.012707 $ 5,001
23 87 $ 5,001 1.063343 1.05 1.012707 $ 5,064
24 88 $ 5,064 1.063343 1.05 1.012707 $ 5,129
25 89 $ 5,129 1.063343 1.05 1.012707 $ 5,194
26 90 $ 5,194 1.063343 1.05 1.012707 $ 5,260
27 91 $ 5,260 1.063343 1.05 1.012707 $ 5,327
28 92 $ 5,327 1.063343 1.05 1.012707 $ 5,394
29 93 $ 5,394 1.063343 1.05 1.012707 $ 5,463
30 94 $ 5,463 1.063343 1.05 1.012707 $ 5,532
31 95 $ 5,532 1.063343 1.05 1.012707 $ 5,603
32 96 $ 5,603 1.063343 1.05 1.012707 $ 5,674
33 97 $ 5,674 1.063343 1.05 1.012707 $ 5,746
34 98 $ 5,746 1.063343 1.05 1.012707 $ 5,819
35 99 $ 5,819 1.063343 1.05 1.012707 $ 5,893
36 100 $ 5,893 1.063343 1.05 1.012707 $ 5,968
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