1933 Act Registration No. 33-82056
1940 Act Registration No. 811-8662
As filed with the Securities and Exchange Commission on
February 27, 1998.
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 6 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 X
AAL VARIABLE PRODUCT SERIES FUND, INC.
(Exact name of registrant as specified in charter)
4321 NORTH BALLARD ROAD
APPLETON, WISCONSIN 54919-0001
(Address of Principal Executive Offices)(Zip Code)
Registrant'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 Offerings: Continuous
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b):
X March 1, 1998 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on (date) pursuant to paragraph (a)(1)
75 days after filing pursuant to paragraph (a)(2)
on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite number or amount of its securities under
the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. Registrant filed a Rule 24f-2 Notice on or before February 28,
1998.
<PAGE>
THE AAL VARIABLE PRODUCT SERIES FUND, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495 under the Securities Act of 1933 indicating the location of
the information called for by the Items of Parts A and B of Form N-1A.
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Item No. Caption Location
Part A
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial Highlights; Prospectus Summary
4. General Description of Registrant, Cover Page; Prospectus Summary;
Depositor, and Portfolio Companies Investment Objectives and Policies; Other
Investment and Risk Factors Regarding the
Portfolios
5. Management of the Fund Management of the Fund
5A. Management's Discussion of Fund Annual Report
Performance
6. Capital Stock and Other Securities Description of Shares; Shareholder
Inquiries; Dividends, Distributions and
Taxes
7. Purchase of Securities Being Offered Purchase and Redemption of Shares;
Net Asset Value
8. Redemption or Repurchase Purchase and Redemption of Shares;
Other Investment and Risk Factors
Regarding The Portfolios Repurchase
Agreements and Borrowing
9. Pending Legal Proceedings Not applicable
Part B
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
13. Investment Objectives and Policies Introduction; Investment Techniques;
Options and Futures; Investment
Restrictions
14. Management of the Fund Management of the Fund Board of
Directors and Executive Officers
15. Control Persons and Principal Management of the Fund Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other Services Management of the Fund The
Investment Adviser; Management of the
FundCCustodian, Transfer Agent and
Independent Auditors for the Fund
17. Brokerage Allocation and Other Portfolio Transactions
Practices
18. Capital Stock and Other Securities Not applicable
19. Purchase, Redemption and Pricing of Purchases and Redemptions; Pricing
Securities Being Offered Considerations
20. Tax Status Dividends and Distributions
21. Underwriters Not applicable
22. Calculation of Performance Data Calculation of Yield and Total
Return
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered in Part C to this Registration Statement.
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
March 1, 1998
The AAL Variable Product Series Fund, Inc. (the Fund) is an open-end
diversified investment company, commonly called a mutual fund. The Fund is made
up of seven separate Portfolios, each with its own specific investment
objective. Shares of the Fund are sold only to two separate accounts. The
separate accounts (the AAL Variable Annuity Account I and the AAL Variable Life
Account I) fund variable annuity and variable life insurance certificates (the
Certificates) offered by Aid Association for Lutherans (AAL). AAL also serves as
the Investment Adviser to the Fund. AAL will use its professional experience to
help the Portfolios to meet their individual objectives however, no assurance
can be made that these objectives will be met. This Fund Prospectus describes
the following Portfolios:
The AAL Variable Product Money Market Portfolio seeks to provide maximum
current income to the extent consistent with liquidity and a stable net asset
value of $1.00 per share by investing in a diversified portfolio of
high-quality, short-term money market instruments. An investment is neither
insured nor guaranteed by the U.S. government. There can be no assurance that
the Portfolio will be able to maintain a stable net asset value of $1.00 per
share.
The AAL Variable Product Bond Portfolio seeks to achieve investment
results that approximate the total return of the Lehman Brothers Aggregate Bond
Index by investing primarily in bonds and other debt securities included in the
index.
The AAL Variable Product Balanced Portfolio seeks to achieve investment
results that reflect investment in common stocks, bonds and money market
instruments, each of which will be selected consistent with the investment
policies of the AAL Variable Product Large Company Stock, Bond, and Money Market
Portfolios, respectively.
The AAL Variable Product Large Company Stock Portfolio seeks to achieve
investment results that approximate the performance of the Standard & Poor's 500
Composite Stock Price Index by investing primarily in common stocks included in
the index.
The AAL Variable Product Small Company Stock Portfolio seeks to achieve
investment results that approximate the performance of the Standard &Poor's
SmallCap 600 Index by investing primarily in common stocks included in the
index.
The AAL Variable Product International Stock Portfolio seeks to achieve
long-term capital growth by investing primarily in a diversified portfolio of
foreign stocks.
The AAL Variable Product High Yield Bond Portfolio seeks to achieve high
current income and secondarily capital growth by investing primarily in a
diversified portfolio of high risk, high yield bonds commonly referred to as
"junk bonds." The Portfolio actively seeks to achieve a secondary objective of
capital growth to the extent it is consistent with the primary objective of high
current income.
This Fund Prospectus provides information that buyers of the Certificates
ought to know before investing. Read this Fund Prospectus carefully along with
the accompanying Account Prospectus and keep them for future reference. The Fund
has filed a Statement of Additional Information, dated March 1, 1998 , with the
Securities and Exchange Commission. The information contained in the Statement
of Additional Information is incorporated by reference into this Prospectus. You
may obtain a copy of the Statement of Additional Information and/or the Annual
Report without charge by writing the Fund at the AAL Variable Products Service
Center, 4321 North Ballard Road, Appleton, Wisconsin, 54919-0001 or calling
800-225-5225 or 734-5721 locally. The Telecommunications Device for the Deaf
(TDD) number is 800-735-9644.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION HAVE
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary
Organization of the Fund
The Fund and the Certificates
Reading the Prospectus
The Portfolios
Money Market Portfolio
Bond Portfolio
Balanced Portfolio
Large Company Stock Portfolio
Small Company Stock Portfolio
International Stock Portfolio
High Yield Bond Portfolio
Other Investment and Risk Factors Regarding the Portfolios
Investment Restrictions
Performance Information
Management of the Fund
Purchase and Redemption of Shares
Net Asset Value
Dividends, Distributions and Taxes
Additional Information
Fund Organization and Description of Shares
Voting Privileges
Indemnity and Limitation of Liability of Directors and Officers
Custodian, Transfer Agent and Independent Auditors
Shareholder Inquiries
Appendix: Security Ratings
Ratings in General
Corporate Bond Ratings
Commercial Paper Ratings
<PAGE>
PROSPECTUS SUMMARY
Organization of the Fund
The AAL Variable Product Series Fund, Inc. (the Fund) is registered with
the SEC as an open-end diversified management investment company. The Fund
currently consists of seven Portfolios, each of which represents a separate
series of shares of beneficial interest in the Fund. The Fund serves as a
funding vehicle for the AAL Variable Annuity Certificates and AAL Variable Life
Insurance Certificates (the Certificates). We issue the Certificates through one
of two separate accounts: AAL Variable Annuity Account I and AAL Variable Life
Account I (the Variable Accounts). The rights of the Variable Accounts as
shareholders of the Fund are distinguished from your rights as the Certificate
Owners; however certain voting privileges are passed down to you. See Voting
Privileges in this Fund Prospectus and the accompanying Account Prospectus for
more information concerning your rights as a Certificate Owner.
We include the Fund's financial statements and performance results in
the Statement of Additional Information for the AAL Variable Annuity. You can
obtain a Statement of Additional Information free of charge by calling
800-225-5225 or completing the order form at the end of the Account Prospectus.
We also give you performance information in this Prospectus for the Standard
&Poor's 500(R) Index, the Standard &Poor's SmallCap 600 Index and the Lehman
Brothers Aggregate Bond Index. Certain of the Portfolios seek to achieve
investment results that approximate the performance of these indexes. See
Performance Information for more information
The Fund and the Certificates
The Fund is the investment vehicle used by two separate accounts: the
AAL Variable Annuity Account I and the AAL Variable Life Account I. We
established both Variable Accounts under the laws of the State of Wisconsin. We
also registered them as unit investment trusts with the Securities and Exchange
Commission (the SEC) under the Investment Company Act of 1940 (the 1940 Act).
Each Variable Account meets the definition of a separate account under the
Federal securities laws. The SEC does not supervise the management or investment
practices or policies of the Variable Accounts.
The purpose of the Accounts is to fund either Annuity or Life Insurance
Certificates. Each Variable Account is divided into Subaccounts. A Premium
payment flows through the Certificate to either a Variable Account or a Fixed
Account according to your instructions. From the Variable Account, the premiums
flow 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 the performance of the Portfolios and their
corresponding Subaccount. The share price will vary with the performance of the
Portfolios.
Reading the Prospectus
References to "you" and "your" in this Fund Prospectus refer to you as
an indirect owner of the Fund through your ownership of either the AAL Variable
Annuity or the AAL Variable Life Insurance Certificates. References to "we,"
"us," or "our" refer to Aid Association for Lutherans, also known as AAL. We are
the Adviser of the Fund, the Transfer Agent for the Fund shares and the issuer
of the Certificates.
The Portfolios
In the Prospectus, we provide you with information on: the investment
objectives, policies and risks of investing in the Portfolios. We also include
the description of the management of the Fund and other services provided to the
Fund. In addition to each separate Portfolio description, we give more detailed
information on the risks of investing under Additional Investment Risks.
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Primary Primary Primary
Objective Investments Risks
AAL Variable Product Money Current Income Money Market Instruments Interest Rate and Credit
Market Portfolio
AAL Variable Product Bond Current Income with Total Investment Grade Bonds Interest Rate and Credit
Portfolio Return approximating the
Lehman Brothers Index
AAL Variable Product Balanced Income and Long-Term Large Company Stocks and Financial, Market, Interest
Portfolio Capital Growth Investment Grade Bonds Rate and Credit
AAL Variable Product Large Long-Term Capital Growth Large Company Stocks Financial and Market
Company Stock Portfolio with Total Return
approximating the S&P 500 (R)
Index
AAL Variable Product Small Long-Term Capital Growth Small Company Stocks Financial and Market
Company Stock Portfolio with Total Return
approximating the S&P
SmallCap 600 Index
AAL Variable Product Long-Term Capital Growth Foreign Stocks Financial, Market and
International Stock Portfolio Foreign Investment
AAL Variable Product High High Level of Current Below Investment Grade Bonds Interest Rate, Credit and
Yield Bond Portfolio Income and Capital Growth Market
</TABLE>
THE AAL VARIABLE PRODUCT MONEY MARKET PORTFOLIO
Investment Objective
The Money Market Portfolio seeks to provide maximum current income, to
the extent consistent with liquidity and a stable net asset value of $1.00 per
share, by investing in a diversified portfolio of high-quality, short-term money
market instruments.
Investment Policies
We invest in short-term money market instruments for the Portfolio, such as:
1. obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, or shares of money market mutual funds that limit their
investments to the foregoing securities;
2. certificates of deposit, bankers acceptances and similar obligations of
U.S. banks, savings associations, foreign branches of U.S. banks, and
domestic branches of foreign banks. Issuing banks must have total assets at
the time of purchase in excess of $1 billion, and must be members of the
Federal Deposit Insurance Corporation;
3. commercial paper that at the time of purchase is defined as First Tier or
Second Tier by the Investment Company Act of 1940, as long as we do not
invest more than 5% of the Portfolio's total assets in Second Tier
commercial paper;
4. corporate obligations, including variable rate master notes, which at the
date of investment are rated in one of the two highest categories by a
nationally recognized statistical rating organization, or, if unrated,
issued by a corporation with outstanding short-term debt that has an
equivalent or better rating at the time of investment.
We invest in securities maturing in 397 days or less and the Portfolio
maintains a dollar-weighted average portfolio maturity of not more than 90 days.
By limiting the maturity of the Portfolio's investment, we seek to lessen the
changes in asset values caused by fluctuations in short-term interest rates. To
the extent it is practical, we try to maintain a constant net asset value per
share of $1.00 for the Portfolio.
Do not consider the Portfolio as a deposit or other obligation of any
bank, credit union or any affiliated entity. The Federal Deposit Insurance
Corporation (FDIC) nor any other government agency insures nor protects your
investment. You bear all of the investment risk including the loss of principal.
Investment Risks
Interest Rate Risk
Changes in interest rate levels affect the yield of the money market
instruments in the Portfolio.
Credit Risk
The creditworthiness of the issuers of certain securities may decline
during the Portfolio's holding period.
Portfolio Manager
Alan D. Onstad, CFA, has managed the Money Market Portfolio since its
inception on June 14, 1995. Mr. Onstad is Assistant Vice President of Securities
and has been employed by us since 1973.
Annual Advisory Fee
We receive an investment advisory fee as compensation for its services
to the Fund. The fee is a daily charge equal to an annual rate of 0.35% of the
average daily net assets of each Portfolio up to $250,000,000 and 0.30% of the
average daily net assets of each Portfolio in excess of that amount.
Financial Highlights
The following Financial Highlights table covers the Money Market Portfolio
for the periods shown. This information was audited by Ernst & Young LLP, the
Fund's independent auditors. You should read the Financial Highlights together
with the Fund's audited financial statements and notes which, together with the
auditor's report thereon, are included in the December 31, 1997 Annual Report of
the AAL Variable Product Series Fund, Inc. You can obtain the Annual Report free
of charge. While this performance information should help you evaluate a
Portfolio and its investment objectives, past performance does not guarantee
future results of the Portfolios.
<TABLE>
Money Market
Portfolio Highlights
--------------------------------------------------
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (1) 1996 1997
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Net asset value: beginning of period $1.00 $1.00 $1.00
Income from Investment Operations:
Net investment income 0.03 0.05 0.05
Net realized and unrealized gains (losses)
on investments - - -
Total from Investment Operations 0.03 0.05 0.05
Less Distributions:
From investment income (0.03) (0.05) (0.05)
From realized gains - - -
Total Distributions (0.03) (0.05) (0.05)
Net increase (decrease) in net asset value - - -
Net asset value: end of period $1.00 $1.00 $1.00
Total return (a) 3.02% 5.23% 5.33%
Net assets, end of period (in thousands) $7,045 $17,125 $25,460
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35%
Ratio of net investment income to average
net assets (b) (c) 5.71% 5.10% 5.24%
Portfolio turnover rate N/A N/A N/A
Average commission rate paid (d) N/A N/A N/A
(1) From commencement of operations on June 14, 1995.
(a) Total return does not reflect expenses that
apply at the Variable Account level. Inclusion of
these expenses would reduce the total return for
the periods shown.
(b) Calculated on an annualized basis.
(c) Without reimbursements the above ratios, on an
annualized basis, would have been:
Ratio of expenses to average net assets 1.40% 0.65% 0.46%
Ratio of net investment income to average
net assets 4.66% 4.80% 5.13%
(d) Amount shown reflects the average brokerage
commission paid on each share of stock traded by
the Portfolio during the period presented.
</TABLE>
THE AAL VARIABLE PRODUCT BOND PORTFOLIO
Objective
The Bond Portfolio seeks to achieve investment results that approximate
the total return of the Lehman Brothers Aggregate Bond Index (the Lehman Bond
Index) by investing primarily in bonds and other debt securities included in the
index.
Lehman Brothers reserves the right to make changes to the Lehman Bond
Index at any time, and eligible investments for the Bond Portfolio will include
any additional asset classes included in the Lehman Bond Index.
Policies
We invest only in a representative sample of fixed income and
mortgage-backed securities included in the Lehman Bond Index. We cannot invest
in all of the issues that make up the Lehman Bond Index because of the
prohibitive cost to acquire and maintain such a large number of issues. We
invest 80% or more of the Bond Portfolio's assets in securities that are
included in the Lehman Bond Index. Each security included must meet the
following criteria:
- have a maturity of no less than one year;
- have at least $100 million par amount outstanding;
- be rated as investment-grade quality;
- be fixed rate;
- be dollar-denominated and nonconvertible; and
- be publicly issued, no private placements.
We divide the Bond Portfolio into four classes of investment grade
fixed-income securities. As of December 31, 1997, these four classes represented
the following proportions of the Portfolio's total market value:
Percent of Total
U.S. Treasury & Government Agency 50.3%
Corporate 20.1
Mortgage-Backed 28.6
Asset-Backed 1.0
Total 100%
We may purchase mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, and the Federal Housing
Authority. GNMA securities are guaranteed by the U.S. government as to the
timely payment of principal and interest; securities from other
government-sponsored entities are generally not secured by an explicit pledge of
the U.S. government. We may also invest in conventional mortgage-backed
securities, which are packaged by private corporations and are not guaranteed by
the U.S. government. We will invest in the securities of a particular agency
only when the Portfolio Manager is satisfied that the credit risk is minimal.
Mortgage-backed securities that are guaranteed by the U.S. government are
guaranteed only as to the timely payment of principal and interest. The market
value of such securities is not guaranteed and may fluctuate.
We make every effort to ensure that the Portfolio will remain fully
invested. Our ability to match the performance of the Lehman Bond Index will be
affected to some extent by the size and timing of cash flows into and out of the
Portfolio. We will manage the Portfolio to reduce such effects. Portfolio
turnover is expected to be less than 50% per year. Although the Portfolio will
attempt to achieve a high correlation with the target Lehman Bond Index, it
cannot guarantee that such results will be achieved. Other factors that will
affect the Portfolio's ability to approximate the target index return are: the
size of the bid-ask spread associated with Portfolio investments and Portfolio
management expenses incurred. A portion of the assets, normally expected to be
less than 5% of the Portfolio's assets, may at times be invested in money market
investments. No securities, other than futures contracts, will be purchased on
margin.
Investment Risks
Interest Rate Risk
The direction of changes in interest rate levels generally have an
opposite directional affect on the value of the bonds in the Portfolio.
Credit Risk
There is a risk that the creditworthiness of an issuer of securities held
by the Portfolio could deteriorate as a result of developments unique to the
issuer, or which affect the issuer's industry or the economy generally. Such a
deterioration in creditworthiness indicates a higher risk of a default by the
issuer on interest and principal payments on its securities, and/or a higher
risk of bankruptcy. These increased risks likely would cause the value of the
issuer's securities to decline, which would cause a corresponding decline in the
net asset value of the Portfolio.
Portfolio Manager
R. Jerry Scheel has managed the Bond Portfolio since its inception on
June 14, 1995. Mr. Scheel is Second Vice President of Securities and has been
employed by us since 1972.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of 0.35%
of the average daily net assets of the Portfolio up to $250,000,000 and 0.30% of
the average daily net assets of the Portfolio in excess of that amount.
Financial Highlights
The following Financial Highlights table covers the Bond Portfolio for the
periods shown. This information was audited by Ernst & Young LLP, the Fund's
independent auditors. You should read the Financial Highlights together with the
Fund's audited financial statements and notes which, together with the auditor's
report thereon, are included in the December 31, 1997 Annual Report of the AAL
Variable Product Series Fund, Inc. You can obtain the Annual Report free of
charge. While this performance information should help you evaluate a Portfolio
and its investment objectives, past performance does not guarantee future
results of the Portfolios.
<TABLE>
Bond Portfolio Highlights
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Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (1) 1996 1997
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Net asset value: beginning of period $10.00 $10.23 $9.90
Income from Investment Operations:
Net investment income 0.34 0.63 0.64
Net realized and unrealized gains (losses)
on investments 0.23 (0.33) 0.25
Total from Investment Operations 0.57 0.30 0.89
Less Distributions:
From investment income (0.34) (0.63) (0.64)
From realized gains - - -
Total Distributions (0.34) (0.63) (0.64)
Net increase (decrease) in net asset value 0.23 (0.33) 0.25
Net asset value: end of period $10.23 $9.90 $10.15
Total return (a) 5.80% 3.10% 9.37%
Net assets, end of period (in thousands) $9,363 $17,666 $26,710
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35%
Ratio of net investment income to average net
assets (b) (c) 6.54% 6.51% 6.55%
Portfolio turnover rate 6.51% 11.65% 18.41%
Average commission rate paid (d) N/A N/A N/A
(1) From commencement of operations on June 14, 1995.
(a) Total return does not reflect expenses that
apply at the Variable Account level. Inclusion of
these expenses would reduce the total return for the
periods shown. (b) Calculated on an annualized basis.
(c) Without reimbursements the above ratios, on an
annualized basis, would have been:
Ratio of expenses to average net assets 1.25% 0.68% 0.52%
Ratio of net investment income to average
net assets 5.64% 6.18% 6.38%
(d) Amount shown reflects the average brokerage commission
paid on each share of stock traded by the Portfolio during
the period presented.
</TABLE>
THE AAL VARIABLE PRODUCT BALANCED PORTFOLIO
Objective
The Balanced Portfolio seeks to achieve investment results that reflect
investment in common stocks, bonds and money market instruments, each of which
will be selected consistent with the investment policies of the Large Company
Stock, Bond, and Money Market Portfolios, respectively.
Policies
We invest in the following three asset classes within the ranges given
for the Portfolio:
minimum maximum
- common stocks 35% 75%
- debt securities 25 50
- money market instruments 0 40
We select common stocks from the same pool of stocks that make up the
Large Company Stock Portfolio. The weighting of those stocks will be
proportionate to the weightings in the Large Company Stock Portfolio. For debt
securities, we will generally select securities from the same pool of securities
that make up the Bond Portfolio. At times, however, a debt security may be
selected that is not in the Bond Portfolio but will be selected in accordance
with that Portfolio's objectives. In similar fashion, we will select money
market instruments in keeping with the Money Market Portfolio, however, the
Balanced Portfolio will not always hold the same issues as the Money Market
Portfolio.
We periodically review and adjust the mix of investments among the three
security classes. In doing this, we strive to take advantage of changing
financial markets and economic conditions that could result in increased
returns. We strive to keep the annual turnover rate at below 50%. As of December
31, 1997, we weighted the investments in the classes as follows:
percent weighted
- common stocks 55%
- debt securities 35
- money market instruments 10
===
total 100%
Investment Risks
Financial Risk
There is the possibility that an individual company may not perform
well, and as a result, the value of that company's security may decline.
Market Risk
Over time, the stock market tends to move in cycles, with periods when
stock prices rise generally and periods when stock prices decline generally. The
value of the Portfolio's investments may increase and decrease more than the
stock market in general, as measured by the S&P 500(R). We do not employ any
temporary or defensive measures in times of generally declining market
conditions. You could lose money investing in the Portfolio.
Interest Rate Risk
The direction of changes in interest rate levels generally have an
opposite directional affect on the value of the bonds in the Portfolio.
Credit Risk
The creditworthiness of the issuers of certain securities may decline
during the Portfolio's holding period.
Portfolio Manager
John A. Larson, CFA, has managed the Balanced Portfolio since its inception
on June 14, 1995. Mr. Larson is Director of Securities and has been employed by
us since 1971.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of 0.35%
of the average daily net assets of the Portfolio up to $250,000,000 and 0.30% of
the average daily net assets of the Portfolio in excess of that amount.
Financial Highlights
The following Financial Highlights table covers the Balanced Portfolio for
the periods shown. This information was audited by Ernst & Young LLP, the Fund's
independent auditors. You should read the Financial Highlights together with the
Fund's audited financial statements and notes which, together with the auditor's
report thereon, are included in the December 31, 1997 Annual Report of the AAL
Variable Product Series Fund, Inc. You can obtain the Annual Report free of
charge. While this performance information should help you evaluate a Portfolio
and its investment objectives, past performance does not guarantee future
results of the Portfolios.
<TABLE>
Balanced Portfolio Highlights
---------------------------------------------------
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (1) 1996 1997
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Net asset value: beginning of period $10.00 $10.92 $11.96
Income from Investment Operations:
Net investment income 0.22 0.41 0.46
Net realized and unrealized gains (losses)
on investments 0.92 1.05 2.09
Total from Investment Operations 1.14 1.46 2.55
Less Distributions:
From investment income (0.21) (0.41) (0.46)
From realized gains (0.01) (0.01) -
Total Distributions (0.22) (0.42) (0.46)
Net increase (decrease) in net asset value 0.92 1.04 2.09
Net asset value: end of period $10.92 $11.96 $14.05
Total return (a) 11.46% 13.65% 21.71%
Net assets, end of period (in thousands) $28,759 $126,518 $306,501
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35%
Ratio of net investment income to average net
assets (b) (c) 4.07% 3.89% 3.62%
Portfolio turnover rate 2.29% 5.43% 6.86%
Average commission rate paid (d) $0.0400 $0.0400 $0.0400
(1) From commencement of operations on June 14, 1995.
(a) Total return does not reflect expenses that
apply at the Variable Account level. Inclusion of
these expenses would reduce the total return for the
periods shown.
(b) Calculated on an annualized basis.
(c) Without reimbursements the above ratios,
on an annualized basis, would have been:
Ratio of expenses to average net assets 1.15% 0.60% 0.43%
Ratio of net investment income to
average net assets 3.27% 3.65% 3.53%
(d) Amount shown reflects the average brokerage
commission paid on each share of stock traded by
the Portfolio during the period presented.
</TABLE>
THE AAL VARIABLE PRODUCT LARGE COMPANY STOCK PORTFOLIO
Objective
The Large Company Stock Portfolio seeks to achieve investment results
that approximate the performance of the Standard & Poor's 500 Composite Stock
Price Index (the S&P 500(R) Index) by investing primarily in common stocks
included in the index.
Policies
We select stocks with the help of computer models instead of using
traditional analysis to emulate the S&P 500(R) Index. The Large Company Stock
Portfolio will strive to hold all of the stocks included in the S&P 500(R) Index
from time to time. The Portfolio will hold each stock in proportion to its
weighting in the S&P 500(R) Index. When periodic changes are made to the Index,
we will attempt to make similar changes to our Portfolio as soon as is
practicable. We expect Portfolio turnover no more than 50% per year.
To the extent possible, we try to remain fully invested. Our ability to
match the performance of the S&P 500(R) Index will be affected to some extent by
the size and timing of cash flows into and out of the Portfolio. We will try to
manage the Portfolio to reduce such effects. Other factors that will affect the
Portfolio's ability to approximate the target index return are: commission
expenses, other transaction fees, the size of the bid-ask spread associated with
stocks that are traded in the over-the-counter market, and Portfolio management
expenses incurred. We may also invest to some degree in money market
instruments. We do not expect them to exceed 3% of the Portfolio's assets. We
may invest up to 20% of the Portfolio's net assets, valued at the time of
purchase, in securities of foreign issuers, including American Depositary
Receipts (ADRs). The Portfolio may also invest in Standard & Poor's Depositary
Receipts (SPDRs). These are interests in a closed-end fund which generally
correspond to the price and yield performance of the S&P 500(R). In addition, we
may write (sell) covered call options in order to provide additional revenue and
to reduce the effect of price fluctuations in the Portfolio's securities. As the
writer of a covered call option, we may forego, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the call option above the sum of the premium and the exercise price of
the call option. No securities, other than futures contracts, will be purchased
on margin. Although we will attempt to achieve a high correlation with the
target S&P 500 Index, we cannot guarantee that a high correlation will be
achieved.
Investment Risks
Financial Risk
There is the possibility that an individual company may not perform
well, and as a result, the value of that company's security may decline.
Market Risk
Over time, the stock market tends to move in cycles, with periods when
stock prices rise generally and periods when stock prices decline generally. The
value of the Portfolio's investments may increase and decrease more than the
stock market in general, as measured by the S&P 500(R). You could lose money
investing in the Portfolio. We do not employ any temporary or defensive measures
in times of generally declining market conditions. As a result, you have a
greater risk of losing your money invested in this Portfolio.
Portfolio Manager
David J. Schnarsky, CFA, has managed the Large Company Stock Portfolio
since its inception on June 14, 1995. Mr. Schnarsky is Assistant Vice President
and has been employed by us since 1991.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of 0.35%
of the average daily net assets of the Portfolio up to $250,000,000 and 0.30% of
the average daily net assets of the Portfolio in excess of that amount.
Financial Highlights
The following Financial Highlights table covers the Large Company Portfolio
for the periods shown. This information was audited by Ernst & Young LLP, the
Fund's independent auditors. You should read the Financial Highlights together
with the Fund's audited financial statements and notes which, together with the
auditor's report thereon, are included in the December 31, 1997 Annual Report of
the AAL Variable Product Series Fund, Inc. You can obtain the Annual Report free
of charge. While this performance information should help you evaluate a
Portfolio and its investment objectives, past performance does not guarantee
future results of the Portfolios.
<TABLE>
Large Company
Stock Portfolio Highlights
--------------------------------------------------
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (1) 1996 1997
<CAPTION>
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $11.51 $13.83
Income from Investment Operations:
Net investment income 0.11 0.23 0.23
Net realized and unrealized gains (losses)
on investments 1.52 2.34 4.25
Total from Investment Operations 1.63 2.57 4.48
Less Distributions:
From investment income (0.11) (0.23) (0.23)
From realized gains (0.01) (0.02) (0.02)
Total Distributions (0.12) (0.25) (0.25)
Net increase (decrease) in net asset value 1.51 2.32 4.23
Net asset value: end of period $11.51 $13.83 $18.06
Total return (a) 16.39% 22.47% 32.59%
Net assets, end of period (in thousands) $23,138 $120,089 $318,475
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35%
Ratio of net investment income to average net
assets (b) (c) 2.27% 1.97% 1.48%
Portfolio turnover rate 0.47% 1.77% 1.00%
Average commission rate paid (d) $0.0400 $0.0400 $0.0400
(1) From commencement of operations on June 14, 1995.
(a) Total return does not reflect expenses that
apply at the Variable Account level. Inclusion of
these expenses would reduce the total return for the
periods shown.
(b) Calculated on an annualized basis.
(c) Without reimbursements the above ratios, on an
annualized basis, would have been:
Ratio of expenses to average net assets 1.26% 0.63% 0.43%
Ratio of net investment income to average
net assets 1.37% 1.69% 1.39%
(d) Amount shown reflects the average brokerage
commission paid on each share of stock traded by the
Portfolio during the period presented.
</TABLE>
THE AAL VARIABLE PRODUCT SMALL COMPANY STOCK PORTFOLIO
Objective
The Small Company Stock Portfolio seeks to achieve investment results
that approximate the performance of the S&P SmallCap 600 Index by investing
primarily in common stocks included in the index.
Policies
We select stocks with the help of computer models instead of using
traditional analysis to emulate the S&P SmallCap 600 Index. The Small Company
Stock Portfolio will hold each stock in similar proportions as in the S&P
SmallCap 600 Index. The Portfolio will try to hold as many of the 600 issues in
the index as is practicable. When periodic changes are made to the Index, we
will attempt to make similar changes to our Portfolio as soon as is practicable.
We expect Portfolio turnover of no more than 50% per year, althogh the turnover
for 1998 may be greater because of the one-time change in holdings to reflect
the S&P SmallCap 600 Index.
To the extent possible, we try to remain fully invested. Our ability to
match the performance of the S&P SmallCap 600 Index will be affected to some
extent by the size and timing of cash flows into and out of the Portfolio. We
try to manage the Portfolio to reduce such effects. Other factors that affect
the Portfolio's ability to approximate the target index return are: commission
expenses, other transaction fees, the size of the bid-ask spread associated with
stocks that are traded in the over-the-counter market, and Portfolio management
expenses incurred. We may also invest to some degree in money market
instruments. We do not expect them to exceed 3% of the Portfolio's assets. We
may invest up to 20% of the Portfolio's net assets, valued at the time of
purchase, in securities of foreign issuers, including American Depositary
Receipts (ADRs). In addition, we may write (sell) covered call options in order
to provide additional revenue and to reduce the effect of price fluctuations in
the Portfolio's securities. As the writer of a covered call option, we may
forego, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call option. No securities, other than
futures contracts, will be purchased on margin. Although we attempt to achieve a
high correlation with the target S&P SmallCap 600 Index, we cannot guarantee
that a high correlation will be achieved.
Prior to March 1, 1998, the Portfolio's objective was to approximate the
performance of Wilshire Small Cap Index.
Investment Risks
Financial Risk
Small, less-established companies may have relatively lower revenues, limited
product lines, lack of management depth and a lower share of the market for
their products or services than larger companies. Stocks of these companies
present a greater risk of losing value than stocks of larger, more established
companies.
Market Risk
Over time, the stock market tends to move in cycles, with periods when stock
prices rise generally and periods when stock prices decline generally.
Historically, small capitalization stocks have experienced more price volatility
than mid-size and large capitalization stocks. Some of the reasons they have
greater volatility include:
less certain growth prospects of small firms;
lower degree of liquidity in the markets for such stocks; and
greater sensitivity of small companies to changing economic conditions.
As a result, the value of the Portfolio's investments tends to increase and
decrease substantially more than the stock market in general, as measured by the
S&P 500(R). We do not employ any temporary or defensive measures in times of
generally declining market conditions. As a result, you have a greater risk of
losing your money invested in this Portfolio.
Portfolio Manager
Brian J. Flanagan, CFA, has managed the Small Company Stock Portfolio
since March 1, 1997. Mr. Flanagan is Investment Manager and has been employed by
us since 1994. From 1992 to 1994 he was an investment assistant with Valley
Trust Company, Madison, Wisconsin and an investment analyst for Northwestern
National Insurance Group, Brookfield, Wisconsin.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of 0.35%
of the average daily net assets of the Portfolio up to $250,000,000 and 0.30% of
the average daily net assets of the Portfolio in excess of that amount.
Financial Highlights
The following Financial Highlights table covers the Small Company Portfolio
for the periods shown. This information was audited by Ernst & Young LLP, the
Fund's independent auditors. You should read the Financial Highlights together
with the Fund's audited financial statements and notes which, together with the
auditor's report thereon, are included in the December 31, 1997 Annual Report of
the AAL Variable Product Series Fund, Inc. You can obtain the Annual Report free
of charge. While this performance information should help you evaluate a
Portfolio and its investment objectives, past performance does not guarantee
future results of the Portfolios.
<TABLE>
Small Company
Stock Portfolio Highlights
--------------------------------------------------
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (1) 1996 1997
<CAPTION>
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $10.99 $12.54
Income from Investment Operations:
Net investment income 0.08 0.12 0.11
Net realized and unrealized gains (losses)
on investments 0.99 1.86 3.05
Total from Investment Operations 1.07 1.98 3.16
Less Distributions:
From investment income (0.07) (0.12) (0.11)
From realized gains (0.01) (0.31) (0.71)
Total Distributions (0.08) (0.43) (0.82)
Net increase (decrease) in net asset value 0.99 1.55 2.34
Net asset value: end of period $10.99 $12.54 $14.88
Total return (a) 10.70% 18.19% 25.37%
Net assets, end of period (in thousands) $15,666 $70,209 $152,928
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35%
Ratio of net investment income to average
net assets (b) (c) 1.43% 1.14% 0.81%
Portfolio turnover rate 2.85% 20.14% 29.65%
Average commission rate paid (d) $0.0400 $0.0400 $0.0400
(1) From commencement of operations on June 14, 1995.
(a) Total return does not reflect expenses that
apply at the Variable Account level. Inclusion of
these expenses would reduce the total return for the
periods shown.
(b) Calculated on an annualized basis.
(c) Without reimbursements the above ratios, on an
annualized basis, would have been:
Ratio of expenses to average net assets 1.37% 0.75% 0.45%
Ratio of net investment income to average
net assets 0.41% 0.74% 0.71%
(d) Amount shown reflects the average brokerage
commission paid on each share of stock traded by
the Portfolio during the period presented.
</TABLE>
THE AAL VARIABLE PRODUCT INTERNATIONAL STOCK PORTFOLIO
Investment Objectives
The Portfolio seeks long-term capital growth by investing primarily in a
diversified portfolio of foreign stocks.
Investment Policies
Under ordinary circumstances, we invest in at least 65% of the
Portfolio's total assets in foreign stocks, and securities convertible into
foreign stocks of companies domiciled in at least three different countries not
including the United States: We invest in a variety of different regions and
countries including but not limited to Argentina, Australia, Austria, Belgium,
Brazil, Canada, Chile, Denmark, Finland, France, Germany, Greece, Hong Kong,
India, Indonesia, Ireland, Italy, Japan, Luxembourg, Malaysia, Mexico, The
Netherlands, New Zealand, Norway, Peru, Philippines, Portugal, Singapore, South
Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, and the
United Kingdom.
Typically, we consider a stock to be a "foreign stock" if it is issued
by a company that is domiciled in a particular country if it:
(1) is organized under the laws of that country; or
(2) has at least 50% of the value of its assets located in that country; or
(3) derives at least 50% of its income from operations or sales in that country.
For stocks that do not meet the above domicile criteria, we make a
good-faith determination based on such factors as the location of issuer's
assets, personnel, sales and earnings.
We may invest the remaining 35% of the Portfolio's total assets in:
additional foreign stocks; U.S. stocks; structured notes and/or preferred
stocks; and up to 20% of the Portfolio's total assets in U.S. and foreign bonds
and other debt obligations, including lower-rated debt, commonly referred to as
"junk bonds" (i.e., securities rated BB or lower by Standard & Poor's
Corporation(R) or Ba or lower by Moody's Investor Services, Inc.) and unrated
securities.
We do not place any restrictions on the debt ratings of securities
acquired or, the portion of the Portfolio's assets we may invest, in a
particular rating category. We may also invest up to 100% of total assets in
emerging countries.
Investment Risks
Foreign Investment Risk
Foreign investment risks include currency, liquidity, political,
economic and market risks, as well as risks associated with governmental
regulation and nonuniform corporate disclosure standards. We may invest from 0%
to 100% of the Portfolio's total assets in emerging growth countries, which may
entail more risk than investing in mature countries. The greater the percentage
of net assets the Portfolio invests in emerging countries, the greater the
investment risks.
There are other specific investment risks to certain of the securities
that make up the International Stock Portfolio. See Additional Investment Risks
for more information.
Sub-Adviser
We hired Oechsle International Advisors, L.P. (Oechsle), a Delaware limited
partnership, with principal offices at One International Place, Boston,
Massachusetts, 02110, as the Sub-adviser to the Portfolio. The general partner
of Oechsle is Oechsle Group, L.P., and the managing general partner of Oechsle
Group, L.P. is Walter Oechsle. Oechsle is an independently owned money
management organization primarily focused on the management of international
securities. The organization is a partnership, formed and registered as an
investment adviser with the Securities and Exchange Commission in 1986 by a
group of investment professionals who previously worked as a team at Putnam
International Advisors. The founding partners of Oechsle have worked together
for an average of 15 years. As of September 30, 1997, Oechsle has managed $10
billion in assets. Oechsle began serving as sub-adviser to the Portfolio at its
inception on March 1, 1998.
Oechsle makes the day-to-day investment decisions for the Portfolio
under our direction and control. Oechsle determines which securities to purchase
and sell, arranges the purchases and sales, and gives other help in formulating
and implementing the investment program for the Portfolio.
Portfolio Manager
Kathleen Harris and Sean Roche have managed the Portfolio since its
inception on March 1, 1998. Both Ms. Harris and Mr. Roche are employees of
Oechsle, the sub-adviser. Ms. Harris has been a Portfolio Manager at Oechsle
since January 1995. Prior to this, she was portfolio manager and Investment
Director for the State of Wisconsin Investment Board and a Fund Manager and
Equity Analyst for Northern Trust Company. Mr. Roche has been a general partner
and portfolio manager with Oechsle since 1986.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of .80%
of the average daily net assets of the Portfolio. From this amount we pay the
Sub-adviser the following fee based on assets under management:
Total Assets Annual Fee
First $20 million .54%
Next $30 million .45%
Over $50 million .36%
THE AAL VARIABLE PRODUCT HIGH YIELD BOND PORTFOLIO
Investment Objective
The High Yield Bond Portfolio seeks high current income and secondarily
capital growth by investing primarily in a diversified portfolio of high risk,
high yield bonds commonly referred to as "junk bonds." The Portfolio actively
seeks to achieve a secondary objective of capital growth to the extent it is
consistent with the primary objective of high current income.
Investment Policies
Usually, we invest at least 65% of the Portfolio's total assets in high
yield bonds. By high yield bonds, we mean debt securities rated below
investment grade by a nationally recognized statistical rating organization,
such as a Ba rating or lower by Moody's Investors Services, Inc. or BB or lower
by Standard & Poor's Ratings Group, or, if unrated, of comparable quality as we
determine. See the Appendix for information on credit ratings. We define high
yield bonds to include:
- fixed; - floating rate interest debt obligations;
- variable; - deferred interest debt obligations;
- convertible bonds; - structured debt obligations;
- zero coupon bonds; - asset-backed debt obligations; and
- pay-in-kind bonds; - mortgage-backed debt obligations.
We may invest the remaining 35% of the Portfolio's total assets in any
combination of: additional high yield bonds; common and preferred stocks;
investment grade bonds; and government obligations. We may invest up to 20% of
the Portfolio's net assets in bonds of foreign issuers.
In evaluating the quality of a particular high yield bond for investment
in the Portfolio, we do not rely exclusively on credit ratings. In appropriate
circumstances, we perform our own credit analysis. We consider the issuer's:
- financial resources; - debt maturity schedules;
- operating history; - borrowing requirements; and
- sensitivity to economic - management's abilities.
conditions and trends;
- relative values based on anticipated
cash flow, interest and asset coverages
and earning prospects
We attempt to identify those issuers of high yield bonds whose financial
condition is adequate to meet future obligations, has improved or is expected to
improve in the future. However, we do not have restrictions on the rating level
of the securities in the Portfolio and may purchase and hold securities in
default.
Investment Risks
Interest Rate Risk
The direction of changes in interest rate levels generally have an
opposite directional affect on the value of the bonds in the Portfolio.
Credit Risk
The primary risk of investing in the high yield sector is the credit
risk. Bonds rated below investment grade have greater risks of default than
investment grade bonds. In fact, some may already be in default.
Market Risk
Frequently, high yield bonds have a less liquid resale market than the
market for investment grade bonds. In some cases, these bonds have no resale
market at all. As a result, we may have difficulty valuing portfolio securities,
choosing the securities to sell in order to meet redemption requests, and/or
selling or disposing of portfolio securities on favorable terms. The high yield
market has in the past, and may in the future, experience market risk due to
adverse publicity and investor perceptions, whether or not based on fundamental
analysis, decreasing market sales and liquidity, especially on the lesser traded
issues.
There are other specific investment risks to certain of the securities
that make up the High Yield Bond Portfolio. See Additional Investment Risks for
more information.
Sub-Adviser
We have hired AAL Capital Management Corporation (AALCMC) to provide
portfolio management services for the High Yield Bond Portfolio. AALCMC is a
registered investment adviser and is an affiliate of ours. In addition to being
the sub-adviser, AALCMC is also the distributor of the AAL Variable Annuity and
AAL Variable Life Insurance Certificates. Under our Sub-Advisory Agreement,
AALCMC determines which securities to purchase and sell, arranges the purchases
and sales, and gives other help in formulating and implementing the investment
program for the Portfolio.
Portfolio Manager
Dave Carroll, CFA, has managed the High Yield Bond Portfolio since the
Portfolio's inception on March 1, 1998. Currently, Mr. Carroll is also managing
the AAL High Yield Bond Fund, which is one of The AAL Mutual Funds. Prior to
this, he served as an analyst and trader for Cargill Financial Services from
January through September 1996. From 1986 to August 1995, he was a second vice
president and portfolio manager for Fortis Advisers, Inc.
Annual Advisory Fee
We receive an investment advisory fee as compensation for providing
services to the Fund. The fee is a daily charge equal to an annual rate of 0.40%
of the average daily net assets of the Portfolio. We pay the sub-adviser an
annual fee of 0.25% of average daily net assets from our advisory fee as
compensation for its services.
OTHER INVESTMENT AND RISK FACTORS REGARDING THE PORTFOLIOS
Temporary Defensive Purposes
For the International Stock and High Yield Bond Portfolios we have a
temporary defensive position policy that allows us to invest up to 100% of a
Portfolio's total assets in cash and short-term money market obligations,
including tax-exempt money market funds and investment grade fixed-income
securities when significant adverse market, economic, political or other
circumstances require immediate action to avoid losses. Primarily, we may
purchase the following types of securities for temporary defensive purposes:
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities; commercial paper rated at the time of purchase in the highest
rating category by NRSROs; and bank obligations, including repurchase
agreements, of banks having total assets in excess of $1 billion.
We may invest up to 100% of the International Stock Portfolio's total
assets in U.S. securities or in securities primarily traded in one or more
foreign countries, or up to 100% in debt securities.
Interest Rate Risk
For the Bond, Balanced, High Yield Bond and Money Market Portfolios, you
can expect that interest rate changes will significantly impact upon the value
of your Portfolio investments. Interest rates are influenced by supply and
demand as well as economic monetary policies. In general, a decline in
prevailing interest rate levels generally will increase the value of the
securities, particularly the bonds, held as assets in a portfolio and vice
versa. As a result, interest rate fluctuations will affect a Portfolio's net
asset values but not the income received from its existing investments. However,
changes in the prevailing interest rate level will affect the yield on
subsequently purchased securities. Because yields on the securities available
for purchase by the Portfolios will vary over time, we cannot assure a specific
yield on a Portfolio's shares.
Longer-term bonds are more sensitive to interest rate changes than
shorter-term bonds, reflecting the greater risk of holding these bonds for a
longer period of time. Longer-term bond prices increase more dramatically when
interest rates fall and decrease more dramatically when interest rates rise.
Prices of short-term debt, such as money market instruments, are less price
sensitive to interest rate changes because of their short durations.
Income-producing equity securities generally pay higher than average
dividends. Due to the regular payment of higher dividends, these securities,
like bonds, are more sensitive to interest rate levels than other equity
securities.
Investing in Bonds Versus Investing in a Portfolio
Investing in a Portfolio that owns bonds is not the same as buying an
individual bond. Both bonds and portfolios owning bonds offer regular income.
While individual bonds can offer a fixed amount of regular income until
maturity, a Portfolio may include a constantly changing pool of bonds with
differing interest rates and maturity prices. Both share prices and dividends
may fluctuate in a Portfolio owning bonds.
Investment grade and Medium grade Bond Investments
We may purchase investment grade bonds for the Bond, Balanced,
International and High Yield Bond Portfolios. A debt or other fixed-income
security is considered investment grade if it is rated investment grade by a
NRSRO, such as BBB or better by Duff and Phelps Credit Rating Co. (Duff &
Phelps) and Standard & Poor's Corporation (Standard & Poor's) or Baa or better
by Moody's Investors Services, Inc. (Moody's). Securities rated in the fourth
highest category, such as BBB by Duff & Phelps or Standard & Poor's or Baa by
Moody's, are considered medium grade bonds and are more sensitive to economic
changes and have speculative characteristics. If a bond in a Portfolio has lost
its rating or has its rating reduced, we do not have to sell the security, but
we will consider the lost or reduced rating in determining whether that
Portfolio should continue to hold the bond.
Mortgage-Backed Securities
For the Bond, Balanced, and High Yield Bond Portfolios, we may invest in
mortgage-backed securities with amortizing payments consisting of both interest
and principal and prepayment privileges (the ability to prepay the principal or
a portion of it without penalty). Mortgaged-backed securities represent interest
in pools of mortgage loans made by lenders such as savings and loan
institutions, mortgage bankers, commercial banks and others. Various government,
government-related and private organizations combine these mortgages for sale to
investors (such as the Government National Mortgage Association (GNMA) that
guarantees and issues mortgage-backed securities). Mortgage-backed securities
generally provide for a "pass through" of monthly payments made by individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of the securities. The yield on these securities applies
only to the unpaid principal balance.
We reinvest the periodic payments of principal and interest and
prepayments, if any, in securities at the prevailing market interest rates. The
prevailing rates may be higher or lower than the rate on the original
investment. During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities tend to accelerate. Accordingly, any
prepayments on mortgage-backed securities that we hold for a Portfolio reduce
our ability to maintain positions in high-yielding, mortgage-backed securities
and reinvest the principal at comparable yields for the Portfolio. If we buy any
mortgage-backed securities for a Portfolio at a premium, the Portfolio receives
prepayments, if any, at par or stated value, which lowers the return on the
Portfolio. Finally, the risk of prepayment tends to cause the value of a
Portfolio's investments in mortgage-backed securities to increase less in times
of decreasing interest rates and decline more in times of increasing interest
rates. On the other hand, these securities tend to have a higher yield than do
securities with no prepayment feature.
High Yield Bond Investments
We may invest in high yield bonds for the International Stock and High
Yield Bond Portfolios.
Credit Risk
The primary risk of investing in the high yield sector is the credit
risk. Bonds rated below investment grade have greater risks of default than
investment grade bonds (including medium-grade bonds) and, may in fact, be in
default. Issuers of high yield bonds usually do not have strong historical
financial conditions, requiring them to offer higher yields to compensate for
the greater risk of default on the payment of interest and principal. These
bonds have speculative characteristics or are speculative. As a result, their
market values are less sensitive to interest rate changes on a short-term basis,
but more sensitive to adverse economic developments or individual corporate
developments because of their lower credit quality. During an economic downturn
or period of rising interest rates, issuers of lower-rated bonds may have more
difficulty meeting their principal and interest payment obligations or obtaining
additional financing to make the interest payments on their debt. When issuers
have difficulty meeting projected goals or obtaining additional financing, the
default rate on high yield bonds will likely rise.
Market Risk
Frequently, high yield bonds are less liquid than investment-grade
bonds. In some cases, these bonds have no resale market at all. As a result,
these bonds are more difficult to price accurately and are subject to price
volatility. We may experience difficulty in valuing the high yield securities in
these portfolios or purchasing or disposing of them on favorable terms,
particularly during adverse market or economic conditions. In the event of an
illiquid market or in the absence of readily available market quotations for
certain high yield bonds in the Portfolios' portfolios, our judgment will play a
greater role in valuing the securities.
Portfolio Turnover
We expect the High Yield Bond Portfolio to have portfolio turnover
greater than 100% and the other Portfolios to have a portfolio turnover of less
than 100%. We do not calculate a portfolio turnover rate for The Money Market
Portfolio because of the short maturities of its investments. Due to the high
volume of buying and selling activity in a Portfolio with turnover in excess of
100%, we may pay more commissions for a Portfolio and may realize more taxable
gains than in portfolios with less turnover, which may result in an increase in
a Portfolio's expenses and lower returns for shareholders. We may trade for a
Portfolio at a portfolio turnover rate significantly exceeding 100%, when we
believe the benefits of short-term investments outweigh any increase in
transactions costs or capital gains. For more information on transaction
expenses and taxes, please refer to sections entitled Portfolio Transactions,
Dividends, Distributions, and Taxes, and Performance Information.
Financial Futures Contracts and Options
Except for the Money Market Portfolio, we may engage in options, futures
and options on futures transactions for the Portfolios, but only for bona fide
hedging or other permissible risk management purposes. Specifically, each
Portfolio may enter into futures contracts provided that not more than 5% of its
assets are required as a futures contract margin deposit; in addition, a
Portfolio may enter into futures contracts and options transactions only to the
extent that obligations under such contracts or transactions represent no more
than 33% of the Portfolio's assets. We may use these strategies for several
reasons:
- to maintain cash reserves while simulating full investment,
- to facilitate trading,
- to reduce transaction costs or
- to hedge against price movements.
Our ability to use futures and options transactions successfully
depends upon our skill for predicting the level and direction of the securities,
options and futures markets, interest rates and other factors. An incorrect
prediction may make the implementation of the hedging strategy in furtherance of
a Portfolio's investment objectives difficult. For example, significant
differences may exist between the securities and the options and futures markets
that could result in an imperfect correlation between them. Also, an incorrect
prediction on the changes in the level and direction of interest rates could
cause us to have a lower return for the Portfolio than it would have had if we
had not attempted the hedging transaction. In the absence of the ability to
hedge, however, we might make other Portfolio decisions in anticipation of the
same market movements with similar investment results, but, most likely, at
greater transaction costs.
When-Issued and Delayed Delivery Securities
To ensure the availability of suitable securities, we may buy
when-issued or delayed delivery securities for the International Stock, Bond,
Balanced, High Yield Bond and Money Market Portfolios. Generally, we will not
pay for when-issued securities or start earning interest until we have received
the underlying securities for the Portfolios. We do not speculate in when-issued
securities for the Portfolios. We purchase the securities with the expectation
of acquiring the underlying securities when delivered. However, we sell
when-issued securities before the settlement date when we believe it is in the
best interest of a Portfolio.
Illiquid and Restricted Securities
Except for the Balanced (money market instruments portion) and Money
Market Portfolios, we may hold up to 15% of a Portfolio's net assets in illiquid
securities. We may hold up to 10% of the Money Market Portfolio's net assets in
restricted and illiquid securities. Illiquid securities are securities we
believe cannot be sold within seven days in the normal course of business at
approximately the amount at which we have valued or priced the securities for a
Portfolio, including securities we acquired in private placements that have
restrictions on their resale (restricted securities). We deem time deposits and
repurchase agreements maturing in more than seven days illiquid. Because an
active market may not exist for illiquid securities, we may experience delays
and additional cost when trying to sell illiquid securities. For more
information on restricted and other illiquid securities regarding the Money
Market Portfolio, please refer to the Statement of Additional Information,
Privately Issued Securities: The Money Market Portfolio. The Board of Directors
has established procedures for determining the liquidity of Portfolio securities
and has delegated the day-to-day liquidity determinations to the Adviser.
Subject to the limitations for illiquid investments stated above, we may
purchase liquid restricted securities eligible for resale under Rule 144A under
the Securities Act of 1933 (the Act), without regard to the 15% or 10%
limitation. Rule 144A permits certain qualified institutional buyers, such as
the Portfolios, to trade in privately placed securities not registered under the
Act. Institutional markets for restricted securities have developed as a result
of Rule 144A, providing both readily ascertainable market values for 144A
securities and the ability to liquidate these investments to satisfy redemption
orders. However, an insufficient number of qualified institutional buyers
interested in purchasing certain Rule 144A securities held by a Portfolio could
adversely affect their marketability, causing us to sell the securities at
unfavorable prices.
Variable Rate Demand Notes
All of the Portfolios may purchase variable rate securities. The Money
Market Portfolio may purchase variable rate securities (the yields will vary in
relation to changes in specific money market rates, such as the prime rate) with
actual maturities of 397 days or more, but only under conditions established by
the Securities and Exchange Commission rules that permit such securities to be
considered as having maturities of less than 397 days. We intend to invest in
these longer-term variable rate securities only when, in our view, we may be
able to take advantage of the higher yield that is usually paid on these
securities over other short-term securities, and it appears to us that the
variable rates on these securities may reduce the fluctuations in market value
typical of longer-term securities. We also may purchase variable rate securities
with a put option, which may further reduce the risk of fluctuations in market
value.
Structured Securities
The International Stock Portfolio may invest in structured notes and/or
preferred stocks. These securities have a value (i.e., principal amount at
maturity and/or coupons or dividend amounts) linked to currencies, interest
rates, commodities, indices or other financial indicators. Typically, these
securities are debt securities or deposits whose value at maturity (i.e.,
principal value) or coupon rate is determined by reference to a specific
instrument or statistic. For example, gold structured securities may provide for
maturity values that depend on the price of gold, resulting in securities whose
prices tend to rise and fall together with gold prices. These securities involve
additional risk, including structures that may reduce the coupons and/or
dividend amounts to zero or the redemption amounts payable at maturity as a
result of a decline in the value of the underlying instrument. Structured
securities may have more volatility than the price of the underlying instrument
Foreign Securities
The Portfolios may invest in foreign securities domestically through
American Depository Receipts (ADRs) and securities of foreign issuers traded on
a U.S. national securities exchange or the NASDAQ National Market System The
International Stock Portfolio may invest in foreign securities other than ADRs,
and may invest in ADRs without limit. Foreign securities may present a greater
degree of risk (including risks related to tax provisions or appropriation of
assets) than do securities of domestic issuers.
Foreign Investing Expenses
Investing in foreign securities costs more than investing in U.S.
securities due generally to higher transaction costs, such as the commissions
paid per share. As a result, Portfolios that invest in foreign securities tend
to have higher expenses, particularly funds that invest primarily in foreign
securities. In addition to higher commissions, they generally have higher
advisory and custodial fees. However, you may find investing in a fund that
purchases foreign securities a more efficient way to invest in foreign
securities than investing in individual foreign securities. Higher expenses
attributable to a Portfolio that invests in foreign securities does not mean
that the Portfolio has higher expenses than others with similar investment
policies and percentages of assets invested in foreign securities.
Foreign Currency Transactions
Foreign securities have currency risk, meaning the risk that changes in
foreign currency exchange rates and exchange control regulations will affect
favorably or unfavorably the U.S. dollar value of these securities (and any
income generated from them). To manage this risk and facilitate the purchase and
sale of foreign securities for a Portfolio, we may engage in foreign currency
transactions involving:
- the purchase and sale of forward foreign currency exchange
contracts (agreements to exchange one currency for another at a
future date);
- options on foreign currencies;
- currency futures contracts; or
- options on currency futures contracts.
Although we use foreign currency transactions to protect against adverse
currency movements, they involve the risk that we may not accurately predict the
currency movements, which could adversely affect a Portfolio's total return. We
set forth further information on foreign securities and currency transactions in
the Statement of Additional Information.
Risks of Investing in Foreign Securities
Currency Risk
Even though a Portfolio may hold securities denominated or traded in
foreign securities, we measure a Portfolio's performance in terms of U.S.
dollars, which may subject the Portfolio to foreign currency risk. Foreign
currency risk is the possibility that the U.S. dollar value of foreign
securities (and any income generated therefrom) held by a Portfolio may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations. Therefore, the net asset value of a Portfolio
may go up or down as the value of the dollar rises or falls compared to a
foreign currency.
Liquidity Risk
Foreign markets or exchanges tend to have less trading volume than the
New York Stock Exchange or other domestic stock exchanges or markets, meaning
the foreign market may have less liquidity. The lower liquidity in a foreign
market can affect our ability to purchase or sell blocks of securities and
obtain the best price in the foreign market for a security. Foreign markets tend
to have greater spreads between bid and asked prices, trading interruptions or
suspensions and brokerage and other transaction costs. Settlement practices vary
from country to country and many foreign markets have longer settlement periods
for their securities in comparison to domestic securities. These differing
practices may cause us to lose opportunities for favorable purchases elsewhere
and interest income. Also, foreign markets may trade on days when the Portfolios
do not value their portfolios. This means that a Portfolio's Net Asset Value can
change on days when you cannot access your account. We may incur extra costs for
a Portfolio when involved in currency hedging. For example, restrictions on
converting a foreign currency into U.S. dollars may adversely affect the value
of a Portfolio.
Political, Economic and Market Risks
The degree of political and economic stability varies from country to
country. If a country seizes money from foreigners or nationalizes an industry,
a Portfolio may lose some or all of any particular investment in that country.
Individual foreign economies may vary favorably or unfavorably from the U.S.
economy in such areas as growth of gross national product, inflation rate,
savings, balance of payments and capital investment, which may affect the value
of a Portfolio's investment in any foreign country.
Governmental Regulation
Many foreign countries do not subject their markets to the same degree
and type of laws and regulations that cover the U.S. markets. Also, many foreign
governments impose restrictions on investments in their capital markets as well
as taxes or other restrictions on repatriation of investment income. The
regulatory differences in some foreign countries make investing or trading in
their markets more difficult and risky.
Nonuniform Corporate Disclosure Standards
Many countries have laws making information on publicly-traded
companies, banks and governments unavailable, more difficult to obtain or
incomplete. The lack of uniform accounting standards and practices among
countries impairs the ability of investors to compare common valuation measures,
such as price/earnings ratios, as applied to securities of different countries.
INVESTMENT RESTRICTIONS
In addition to those policies noted above with respect to specific
investments, the Portfolios are subject to certain investment restrictions which
are set forth in the Statement of Additional Information under the caption
"Investment Restrictions." Among other restrictions, a Portfolio may not:
(a) invest more than 25% of its total assets in securities of issuers
whose principal business activities are in the same industry,
excluding securities issued or guaranteed by the United States
government or any of its agencies or instrumentalities; or
(b) invest more than 5% of its total assets in a single issuer or purchase
more than 10% of the outstanding voting securities of a single issuer,
except that up to 25% of the Portfolio's total assets may be invested
without regard to this limitation and except that this limitation does
not apply to securities issued or guaranteed by the United States
government or its agencies or instrumentalities.
The foregoing investment restrictions and the additional investment
restrictions set forth in the Statement of Additional Information, and the
investment policies of any Portfolio with respect to specific investments, may
be changed by the Fund's Board of Directors without shareholder approval.
However, each Portfolio's investment objective is fundamental, meaning it cannot
by changed unless the shareholders of the Portfolio approve the change.
PERFORMANCE INFORMATION
From time to time, we calculate and advertise performance information
for different historical periods of time by quoting yields or total returns
designed to inform you of the performance of a Portfolio. We show yields and
total returns based on historical performance but these yields and returns do
not reflect charges or deductions against the relevant Variable Account or the
relevant Certificates. We expect each indexed Portfolio to track its respective
index as closely as possible. However, a Portfolio has operating expenses that
an index does not, so a Portfolio will not be able to match the performance of
its index exactly. Historical performance does not indicate future performance.
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, the performance of the Portfolios is compared 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, and other widely recognized
indexes. Unmanaged indexes 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.
Keep in mind, yield and total return quotations reflect the performance
of a hypothetical investment during a specified period. They are based on
historical performance and do not in any way indicate future performance.
Quotations of a Portfolio's yield and total return do not reflect charges or
deductions against the Certificates or the Variable Account. Since you can only
purchase shares of the Portfolios through a Variable Annuity or Variable Life
Insurance Certificate, you should carefully review the Account Prospectus for
information on additional charges and expenses. Excluding these charges from
quotations of the Portfolio's performances has the effect of increasing the
performance quoted. You should keep in mind the effect of these charges when
comparing the Portfolios' performances to those of other mutual funds. Please
review carefully the yield and total return figures for the relevant Subaccounts
which accompany the yields and total returns quoted for the Portfolios.
Yields and Total Returns
The yield of a Portfolio refers to the income generated by an investment
in the Portfolio over a specified thirty-day period (seven-day for the Money
Market Portfolio) expressed as a percentage rate of return for that period. We
calculate the yield by dividing the net investment income per share for the
period by the price per share on the last day of that period. This yield is
annualized and shown as a percentage. This means that the income is assumed to
be earned for each 30-day period for twelve periods and is expressed as a
percentage of the investments. The effective yield for the Money Market
Portfolio is calculated similarly, but for a seven-day period. The effective
yield will be slightly higher than the yield quotation because of the
compounding effect of the assumed weekly reinvestment.
The total return of a Portfolio refers to the percentage change in value
of an investment in the Portfolio. For this calculation, we assume all income
and capital gains distributions are reinvested and a proportional share of Fund
expenses is deducted during a specified period of time. We calculate total
returns for one-, five-, ten-year periods or for the life of the Portfolio.
Average annual total return is the constant rate of return over a specified
period that is compounded annually.
Whenever we advertise performance, we include standardized yield and
total return information calculated in accordance with methods established by
the SEC. We may also include other total return calculations (known as a
nonstandardized calculation) such as cumulative rates of return or returns
calculated for periods other than those prescribed by the SEC. For more
information about the Portfolios' performance, see the Statement of Additional
Information and the Fund's annual report.
Index Information
From time to time, we may compare the performance of the Portfolios with
that of their benchmark index. Four Portfolios are considered to be indexed
Portfolios: Bond, Balanced, Large Company Stock, and Small Company Stock. These
Portfolios are passively managed; securities that comprise the Portfolio are the
same securities in their respective index or a representative sample of
securities of their index. The other Portfolios (Money Market, International,
and High Yield Bond) are actively managed; the Portfolio Manager uses his own
discretion to determine whether to include a security in the Portfolio. We may
compare some of these actively managed Portfolios to benchmark indexes to give
you a perspective on the Portfolios' performance.
The table below presents a comparison of average annual total returns for
certain of the Fund's Portfolios, as compared with their respective benchmark
indexes for the period shown. The total return information for each of the
Portfolios reflects the reinvestment of all dividends and capital gains
distributions, and the deduction of the Portfolio's operating expenses net of
expense reimbursements by us. Without these reimbursements, the total return
figures for each of the Portfolios would have been lower. It is presently
anticipated that we will continue making reimbursements at the present rate
through the current fiscal year.
<TABLE>
Average Annual Total Returns
For Periods Ended December 31, 1997
<CAPTION>
<S> <C> <C> <C> <C> <C>
1 Year 5 Years 10 Years Best Year for Index Worst Year for Index
Bond 1.20% n/a n/a
Lehman Bond Index* 9.65 7.48% 9.18% 32.62% (2.92)%
Large Company Stock 22.70 n/a n/a
S&P 500 Index** 33.36 20.26 18.02 53.99 (10.80)
Small Company Stock 16.01 n/a n/a
S&P SmallCap 600 Index*** 25.58 n/a n/a 29.96 (4.77)
Wilshire Small Cap 26.83 17.09 n/a 26.83 (3.13)
Index+
- -----------------------------------
*Lehman Bond Index began 12/31/75.
**S&P 500 Index began 3/4/57.
***S&P SmallCap 600 Index began 10/31/94.
+Wilshire Small Cap Index began 9/28/92.
</TABLE>
It is important for you to note the extraordinary performance of
equities in recent years and put these short-term returns into the context of
historical norms. Along with sharp up-swings, we can expect some down-swings in
the short-term. But over the long-term, history causes us to expect more
conservative and stable growth.
Lehman Bond Index
The Lehman Brothers Aggregate Bond Index (Lehman Bond Index) invests
primarily in bonds and other debt securities. This index is a broad-based bond
index that encompasses four major classes of investment-grade fixed income
securities in the United States: U.S. Treasury and U.S. government agency
securities, corporate debt obligations, mortgage-backed securities and
asset-backed securities. As of December 31, 1997, these four classes represented
the following proportions of the index's total market value:
[SHOW AS PIE CHART]
Lehman Bond Index
December 31, 1997
Percent of Total
U.S. Treasury & Government Agency 49.5%
Corporate 19.3
Mortgage-Backed 30.2
Asset-Backed 1.0
Total 100%
The effective average weighted maturity of the index was 8.7 years as of
December 31, 1997.
Lehman Brothers can change asset classes and the weightings in the index at any
time.
S&P 500(R) and S&P SmallCap 600 Indexes
Standard & Poor's Corporation (R) (Standard & Poor's or S&P) compiles
several broad-based indexes used as benchmarks for tracking certain market
sectors. The most widely known is the S&P 500(R) Composite Stock Price Index
(S&P 500(R) Index). The S&P 500(R) index is a market-value weighted index of 500
common stocks representing more than 70% of the total market value of all
publicly traded common stocks. The weightings make each company's influence on
the index performance directly proportional to that company's market value. This
characteristic has made the S&P 500(R) Index the investment industry standard
for measuring the performance of portfolios comprised of large-capitalization
stocks. The companies whose stocks are included in this index tend to be the
leading companies in leading industries within the U.S. economy.
This index is a standard used to measure the performance of larger
capitalization stocks. The index is constructed by Standard & Poor's, which
chooses stocks on the basis of market values and industry diversification. Most
of the largest 500 companies listed on U.S. stock exchanges are included in the
index. Additional stocks that are not among the 500 largest stocks, by market
value, are included in the S&P 500 Index for diversification purposes. The index
is capitalization weighted--that is, stocks with a larger capitalization (shares
outstanding times current price) have a greater weight in the index
Another index from Standard & Poor's(R) we use as a benchmark is the S&P
SmallCap 600 Index. The S&P SmallCap 600 Index is a benchmark index for tracking
small-capitalization stocks ranging in value from approximately $29 million to
$2.9 billion. While this index is relatively new, the industry recognizes it as
a good benchmark for tracking small-cap stocks. The 600 stocks that make up the
index are listed on either the New York Stock Exchange, the American Stock
Exchange or the NASDAQ quotation system. In addition, the stocks that make up
the index are liquid, meaning they are easily traded. These characteristics of
the S&P SmallCap 600 Index make it relatively easy to emulate. The easier it is
to track an index, the more likely that a Portfolio is to tracking the index'
performance. As of March 1, 1998, we began investing in the stocks that make up
the S&P SmallCap 600 Index and use the index for comparison purposes for our
Small Company Stock Portfolio.
Both the 500 and the 600 indexes are comprised of U.S. equity stocks.
S&P(R) periodically makes additions and deletions of stock to its indexes.
Selection of a stock for inclusion in either S&P(R) index in no way implies an
opinion by S&P(R) as to its attractiveness as an investment. Standard &
Poor's(R) only relationship to the Fund is the licensing of the Standard &
Poor's(R) marks, the S&P 500(R) Index, and the S&P SmallCap 600 Index. These
indexes are determined, composed and calculated by Standard & Poor's(R) without
regard to any particular Portfolio of the Fund. "Standard & Poor's(R),"
"S&P(R)," "Standard & Poor's 500," "S&P 500(R)," "500," "Standard &Poor's
SmallCap 600 Index," and "S&P SmallCap 600 Index" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by AAL and the Fund.
The Fund and the Certificates are not sponsored, endorsed, sold or promoted by
Standard & Poor's(R). Standard & Poor's(R) makes no representation regarding the
advisability of investing in the Fund. See the Statement of Additional
Information for additional disclaimers and limitations of liabilities on behalf
of S&P.
Wilshire Small Cap Index
This index is also known as the Wilshire 250. The index is a creation of
Wilshire Associates Incorporated, the Pacific Stock Exchange and the Chicago
Board of Trade. The index is comprised of 250 small-capitalization stocks.
Component stocks are U.S. equity stocks selected according to liquidity,
industry sector and market capitalization parameters. The index is
custom-designed to represent the performance attributes of the
small-capitalization segment of the U.S. equity markets.
Before March 1, 1998, the objective of the Small Company Stock Portfolio
was to seek investment results that approximate the Wilshire 250. Due to a
change in investment objective, the Small Company Stock Portfolio now seeks to
approximate the investment results of the S&P SmallCap 600.
MANAGEMENT OF THE FUND
Fund officers and officers of AAL are responsible for the day-to-day
operations of the Fund. The Fund's Board of Directors decides matters of general
policy and reviews the activities of the Fund's Adviser and the Fund's officers.
The Adviser
Aid Association for Lutherans (AAL) is the Adviser to the Fund. AAL has
extensive investment management experience. Currently, AAL manages almost $18
billion in assets for its insurance portfolios in addition to the $831 million
of assets for the Fund. AAL's principal business is selling insurance and other
financial products to its members including: life, disability income, long-term
care and Medicare supplement insurance and annuities to its members. Through its
affiliates, AAL Capital Management offers mutual funds and the AAL Member Credit
Union offers credit union services. Membership is open to Lutherans and their
families.
AAL was organized on November 24, 1902 as a fraternal benefit society
under Internal Revenue Code section 501(c)(8) and incorporated under the laws of
the state of Wisconsin as a non-stock, non-profit corporation. As of December
31, 1997, AAL has approximately 1.7 million members and is the world's largest
fraternal benefit society in terms of statutory assets (almost $18 billion). The
principal address of the Adviser is 4321 North Ballard Road, Appleton, Wisconsin
54919-0001.
AAL has entered into an Investment Advisory Agreement with the Fund.
According to the agreement, AAL manages the investment and reinvestment of the
Fund's assets and supervises the Fund's daily business affairs subject to the
supervision of the Fund's Board of Directors. AAL provides the Fund with the
personnel and facilities necessary to manage the Fund. AAL formulates and
implements a continuous investment program for the Portfolios consistent with
each Portfolio's investment objectives, policies and restrictions.
Generally, AAL will reimburse the Fund for substantially all of its
operating expenses other than investment advisory fees, brokerage commissions,
and any extraordinary items such as litigation expenses or income tax
liabilities. Notwithstanding the reimbursement, each Portfolio will bear all of
its operating expenses that are not specifically assumed by AAL, including:
interest and taxes; brokerage commissions; insurance premiums; compensation and
expenses for those Directors who are not affiliated with AAL; independent legal
and audit expenses; fees and expenses of the Fund's custodian, shareholder
servicing or transfer agent and accounting services agent; expenses incident to
the issuance of its shares, including stock certificates and issuance of shares
on the payment of, or reinvestment of dividends; fees and expenses incident to
the registration under Federal or state securities laws of the Fund or its
shares; Fund or Portfolio organizational expenses; expenses of preparing,
printing and mailing Fund reports, notices, proxy material and prospectuses to
shareholders of the Fund; all other expenses incidental to holding meetings of
the Fund's shareholders; dues of, or assessments of, or contributions to, the
Investment Company Institute or any successor or other industry association;
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 cost of daily valuation of each of the
Portfolio's securities and net asset value per share. AAL may withdraw this
undertaking on 30 days' written notice to the Fund. AAL has informed the Fund's
Board of Directors that it currently intends to bear all of the Fund's operating
expenses, other than those specified immediately above, through at least
December 31, 1998.
AAL has also engaged two sub-advisers, each with its own distinct
contract with AAL. AAL Capital Management Corporation (a wholly-owned subsidiary
of AAL) has agreed to act as sub-adviser for the High Yield Bond Portfolio. AAL
Capital Management Corporation also sells, distributes and advises the AAL
Mutual Funds. The principal offices for AAL Capital Management Corporation is
222 West College Avenue, Appleton, Wisconsin, 54919-0007. Oechsle has agreed to
act as sub-adviser for the International Stock Portfolio. The principal offices
for Oechsle is One International Place, Boston, Massachusetts, 02210. Oechsle is
a Delaware limited partnership. The general partner of Oechsle is Oechsle Group,
L.P., and the managing general partner of Oechsle Group, L.P. is Walter Oechsle.
According to the terms of the agreements with each of the sub-advisers, they are
subject to our direction and that of the Board of Directors. However, each
sub-adviser determines the securities to be purchased or sold. The sub-advisers
may assist AAL in formulating and implementing the investment program for its
respective Portfolio. Both sub-advisers are registered as investment advisers
with the Securities and Exchange Commission.
The Administrator
We have entered into an agreement with AAL Capital Management
Corporation (AAL CMC) to perform certain administrative services including
portfolio accounting, expense accrual, valuation and financial reporting, and
tax accounting services for each Portfolio. We pay AAL CMC a specified rate not
to exceed the rates charged by unaffiliated vendors for comparable services. In
addition, we reimburse certain expenses as may be approved annually by a
majority of the Fund's Board of Directors. The Fund does not directly reimburse
us for the cost of services provided by AAL CMC.
Our agreement with AAL CMC will continue year to year as long as it is
specifically approved at least annually by the Fund's Board of Directors or by a
vote of a majority of the outstanding voting securities, and, in either case, a
majority of the Fund's disinterested Directors.
Third Party Administrator
We have entered into a Service Agreement with The Continuum Company,
Inc. (Continuum), pursuant to which Continuum will provide certain services in
connection with the Variable Accounts including, among other things, application
and premium processing. Continuum has the necessary equipment and personnel to
provide and support remote terminal access to our annuity processing system for
the establishment and maintenance of annuity records, processing information,
and the generation of output with respect to the records and information. Our
contract with Continuum expires March 6, 1998. After that time, we will assume
these responsibilities.
Portfolio Transactions
We direct the placement of orders for the purchase and sale of the
Fund's securities. In directing orders, we will consider a number of factors to
attain what we believe is the best combination of price and execution for the
Portfolios including when we believe that more than one broker or dealer is
capable of providing the best combination of price and execution in a
transaction. Normally we will select a broker or dealer who furnishes brokerage
and research services.
In addition to the Fund, we make investment decisions for our general
account and other clients. If these entities desire to buy or sell the same
securities at about the same time, combined purchases and sales may be made and
allocated at the average net unit price for the securities and, as nearly as
practicable, on a pro-rata basis in proportion to the amounts desired to be
purchased or sold by each entity. It is possible that this procedure could have
a detrimental effect on the price or volume of the security to be purchased or
sold. However, as far as a Portfolio is concerned, we believe that this
procedure would generally contribute to better overall execution of the Fund's
Portfolio transactions, including the realization of lower commission rates and
advantageous prices. For example, coordination with transactions for other
clients and the ability to participate in volume transactions could benefit the
Fund. Where combined purchases and sales are not made, volume transactions and
any resulting benefit, of course, would not be available. We do not expect that
the opportunity to make such combined purchases and sales will arise in the
ordinary course of its business.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are currently offered only to AAL Variable Annuity
Account I and AAL Variable Life Account I to fund benefits payable under the
Certificates. You may not purchase or redeem shares of the Fund directly. If you
wish to make a purchase or redemption, please refer to the applicable Account
Prospectus. We may at some later date, also offer shares of the Fund to other
separate accounts of AAL or a subsidiary or affiliated company of AAL. Shares of
the Fund were sold directly to AAL in connection with the initial capitalization
of the Portfolios.
Shares of all Portfolios are continuously offered and redeemed by the Fund,
without sales charge, at prices equal to the respective per share net asset
value (NAV) of each Portfolio. The Variable Accounts purchase and redeem shares
of each Portfolio at the NAV next determined after the Fund receives such
request. The Variable Account forwards share purchase and redemption requests to
the Fund when the accumulation unit value is next determined after you submit
your purchase or redemption request to your Subaccount.
Orders to purchase or redeem Fund shares which are not based on actions
by Certificate Owners, Annuitants or Beneficiaries or routine deductions of
charges by AAL will be effected at the Portfolio's NAV per share next computed
after the order is placed.
We are required to pay the proceeds for redemption of all full and
fractional shares of the Fund within seven days after the date as of which the
redemption is priced. There are specific events which may require us to suspend
the right to redeem shares or to receive payment with respect to any redemption
including: any period during which trading on the New York Stock Exchange is
restricted as determined by the Securities and Exchange Commission; when such
exchange is closed (other than customary weekend and holiday closings); any
period during which an emergency exists as defined by the Securities and
Exchange Commission as a result of which disposal of a Portfolio's securities or
determination of the Portfolio's NAV is not reasonably practicable; and for such
other periods as the Securities and Exchange Commission may by order permit for
the protection of shareholders of any Portfolio.
NET ASSET VALUE
Once each day that we are open for business, we determine the NAV per
share of any Portfolio at the close of regular trading on the New York Stock
Exchange, currently 4:00 p.m. We do not determine the NAV on holidays observed
by the Exchange. The Exchange is regularly closed on Saturdays and Sundays and
on New Year's Day, Martin Luther King Day, the third Monday in February, Good
Friday, the last Monday in May, 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. In
addition, during 1998, AAL will be closed for business on the Friday following
Thanksgiving and the day before Christmas. On those days, we will not redeem any
shares notwithstanding the fact that the New York Stock Exchange will be open.
We compute the NAV of shares by adding the sum of the value of the
securities held by each Portfolio plus any cash or other assets it holds, less
all of that Portfolio's liabilities, and dividing the result by the total number
of outstanding shares of that Portfolio at such time. We value securities owned
by the Fund for which market quotations are readily available at current market
value. However, we value all securities of the AAL Variable Product Money Market
Portfolio on the basis of its amortized cost, which approximates market value.
We determine, in good faith, the value of all other securities and assets at
fair value by or under the direction of the Fund's Board of Directors.
DIVIDENDS, DISTRIBUTIONS AND TAXES
We intend to have each Portfolio of the Fund to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code (the Code),
as amended. We intend to take all other actions that are required so that no
federal income tax will be owed by any Portfolio of the Fund. Accordingly, each
Portfolio will be treated as a separate entity for federal income tax purposes.
The Portfolios will qualify as regulated investment companies if they distribute
all of heir respective investment company income and net capital gains for each
fiscal year according to the Code. Additionally, we intend to have each
Portfolio comply with the diversification requirements under 817(h) of the Code
related to the tax-deferred status of insurance company separate accounts (the
Variable Accounts). Our failure to comply with these diversification
requirements may result in immediate taxation to you. The tax status of your
investment in the Fund depends upon the features of your Certificate. See the
Account Prospectus for more information.
We expect to distribute substantially all of each Portfolio's ordinary
income and capital gains each year. For each Portfolio, this consists of all net
investment income (including cash dividends and interest paid on the Portfolio's
investments), all net realized short-term and long-term capital gains if any,
earned during the year, less estimated expenses (including the Advisory Fee).
Net investment income of the Money Market Portfolio consists of accrued interest
and/or earned, plus or minus all realized gains and losses, less the estimated
expenses of the Portfolio (including the Advisory Fee).
We reinvest all income dividends and capital gains distributions in the
form of additional shares of the respective Portfolio at NAV. Except for the
Money Market Portfolio, the value of each Portfolio's shares is based on the
amount of its net assets, including any undistributed net income, any
distribution of income or capital gains results in a decrease in the value of
the Portfolio's shares equal to the amount of the distribution.
Shares of a Portfolio begin accruing dividends on the day following the
date as of which the shares are credited to a Variable Account. Dividends are
generally declared and reinvested daily on the Money Market Portfolio, and
monthly on all other Portfolios except for the International Stock Portfolio
which declares dividends annually. However, we may distribute dividends on any
Portfolio more or less frequently, as needed. We will also declare and
distribute annually all net realized capital gains of the Fund, other than
short-term gains of the Money Market Portfolio, which are declared as dividends
daily. We usually make a capital gain distribution in December.
ADDITIONAL INFORMATION
Fund Organization and Description of Shares
We organized the Fund as a Maryland business corporation on June 14,
1994. The Fund may issue up to 2 billion shares of common stock, $.001 par
value, in one or more series (Portfolios) as the Board of Directors may
authorize. Currently, the Board has authorized seven series which bear the
designation of the names of the respective Portfolios. The Board of Directors
may, in the future, authorize the issuance of more series of shares. Each share
of a Portfolio is entitled to participate in a pro rata basis any dividend or
other distribution declared by the Board with respect to that Portfolio. All
shares of a Portfolio have equal rights in the event of liquidation of that
Portfolio.
We provided the initial capitalization of each Portfolio.
Voting Privileges
Your voting privileges are explained in the accompanying Account
Prospectus relating to the Certificates. As the owner of the assets in both the
AAL Variable Annuity Account I and the AAL Variable Life Account I, we will
attend shareholder meetings and vote all of the shares of the Portfolios held to
fund the benefits under the Certificates. Still we generally will do so in
accordance with your instructions as the Certificate Owner. We will vote in
proportion to the voting instructions that are received with respect to all
Certificates participating in a Portfolio for any shares for which no timely
voting instructions are received, and any shares held by us or any of our
subsidiaries or affiliates for our own account, However, we may disregard voting
instructions received from you under certain circumstances as described in
Voting Privileges in the Fund's Statement of Additional Information.
Shareholders are entitled to one vote for each share held with proportionate
voting for fractional shares.
We are not required to hold annual shareholder meetings for the Fund.
However, we may call special meetings for purposes such as electing or removing
Directors, changing fundamental policies, or approving an investment advisory
contract. Matters that may affect one Portfolio distinctly from the other
Portfolios require a separate vote of shares of that Portfolio. Shares of all
the Portfolios vote together on matters that affect all of the Portfolios such
as the election of Directors. Shareholders of a total of 10% or more of the
outstanding shares of the Fund may request a meeting at any time for the purpose
of voting to remove a Director or Directors.
Indemnity and Limitation of Liability of Directors and Officers
To the fullest extent permitted by Maryland and federal law, the Fund
will indemnify and limit the liability of Directors and officers of the Fund
from any personal liability to the Fund or the holders of shares of its series
or classes for money damages. However, this limitation and indemnification does
not protect any Director or officer from liability to which the Director or
officer would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her office.
Custodian, Transfer Agent And Independent Auditors
Citibank, N.A., 111 Wall Street, New York, NY 10043, serves as Custodian
for the Fund. We serve as Transfer Agent for the Fund. Ernst & Young LLP, 111
East Kilbourn Avenue, Suite 900, Milwaukee, Wisconsin 53202, serves as
independent auditors for the Fund. The Financial Highlights included in this
Prospectus and the financial statements of the Fund incorporated by reference
into the Statement of Additional Information were audited by Ernst & Young LLP,
and were included in reliance on their report as experts in accounting and
auditing.
SHAREHOLDER INQUIRIES
All inquiries from Certificate Owners regarding the Fund should be
directed to the Fund at AAL Variable Annuity Service Center, 4321 North Ballard
Road, Appleton, Wisconsin, 54919-0001 or telephone number 1-800-225-5225.
<PAGE>
APPENDIX: SECURITY RATINGS
Ratings in General
A rating by a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general and
are not absolute standards as to the creditworthiness of an issuer. We
continuously monitor the ratings given to securities in the Portfolios by rating
services. individual analysts give different weightings to the various factors
involved in credit analysis. A rating is not a recommendation to purchase, sell
or hold a security, because it does not take into account market value or
suitability for a particular investor. When a security has received a rating
from more than one service, each rating should be evaluated independently.
Ratings are based on current information furnished by the issuer or obtained by
the rating services from other sources which they consider reliable. Ratings may
be changed, suspended, or withdrawn as a result of changes in, or unavailability
of, such information, or for other reasons.
The following is a description of the characteristics of ratings used by
Moody's, S&P and Duff & Phelps:
CORPORATE BOND RATINGS
Ratings by Moody's
Aaa: Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact may have
speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over a long period of time may be small.
Caa: Bonds that are rated Caa have poor standing. Such issues may be in default
or present elements of danger with respect to principal or interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rate C are the lowest-rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
Ratings by Standard & Poor's
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Extremely strong capacity to pay principal and interest.
AA+,AA,AA-: Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A+,A,A-: Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB+,BBB,BBB-: Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB, B, CC, C , C: Debt rated BB, B, CCC, CC and C is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions that could lead to inadequate
capacity to meet timely interest and principal payments. The BBB rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions likely will impair capacity or willingness to
pay interest and repay principal. The B rating is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt that
is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt that is
assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation in which a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The D rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
NR: Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
the particular type of obligation as a matter of policy.
Note: The ratings from AA to CCC may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major category.
Ratings by Duff & Phelps
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+,AA,AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+,A,A-: Good quality investment-grade securities. Protection factors are
average but adequate. However, risk factors are more variable and greater in
periods of economic stress.
BBB+,BBB,BBB-: Below average protection factors but still considered sufficient
for institutional investment. Considerable variability risk during economic
cycles.
BB+, BB, BB-: Below investment-grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B-: Below investment-grade and possessing risk that the obligation might
no be met when due. Financial protection factors will fluctuate widely according
to economic cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this category or into a higher
or lower rating category.
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and or
interest payments.
Note: The Duff & Phelps ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major ratings categories.
COMMERCIAL PAPER RATINGS
Ratings by Moody's
Moody's commercial paper ratings are opinions of the ability to repay
punctually the obligations. Moody's employs the following three investment-grade
designations to indicate the relative repayment capacity of the rated issuers:
Prime 1 (Highest Quality); Prime 2 (Higher Quality); Prime 3 (High Quality).
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
strength of any parent company and the relationships which exist with the
issuer; and recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to meet such
obligations. These factors are all considered in determining whether the
relative repayment capacity of the issuer is rated Prime-1 (Highest Quality),
Prime-2 (Higher Quality), or Prime-3 (High Quality). The Portfolios will not
invest in commercial paper rated Prime-3.
Ratings by Standard & Poor's
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from A for the highest quality obligations to D for the lowest.
A: Issues assigned the highest rating category, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: The designation A-1 indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. A + designation is applied to
those issues rated A-1 that possess extremely strong safety characteristics.
A-2: Capacity for timely payment on issues with the designation A-2 is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
A-3: Issues carrying the designation A-3 have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effect of
changes in circumstances than obligations carrying the higher designations.
Ratings by Duff & Phelps
Category 1:Top Grade
Duff 1 plus: Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or ready access to alternative sources
of funds, is clearly outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
Duff 1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by strong fundamental protection factors. Risk factors are minor.
Duff 1 minus: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Category 2:Good Grade
Duff 2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing internal funds needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Category 3: Satisfactory Grade
Duff 3: Satisfactory liquidity and other protection factors qualify issue as to
investment-grade. Risk factors are larger and subject to more variation.
Nevertheless timely payment is expected.
<PAGE>
[Back Cover of Prospectus]
Investment Adviser and Transfer Agent:
Aid Association for Lutherans
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Service Center:
AAL Variable Products Service Center
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Telephone (800) 225-5225
Custodian:
Citibank, N.A.
111 Wall Street
New York, NY 10043
Independent Auditors:
Ernst & Young LLP
111 East Kilbourn Avenue, Suite 900
Milwaukee, Wisconsin 53202
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
4321 North Ballard Road
Appleton, Wisconsin 54919
(920) 734-5721
Statement of Additional Information
Dated March 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus but
provides additional information which should be read in conjunction with the
prospectus of the AAL Variable Product Series Fund, Inc., dated March 1, 1998.
Capitalized terms used in this SAI that are not otherwise defined herein have
the same meaning given to them in the prospectus. The Fund's prospectus may be
obtained at no charge by writing or telephoning the Fund at the address and
telephone number above.
The investment objectives of the Portfolios are as follows:
The AAL Variable Product Money Market Portfolio seeks to provide maximum current
income, to the extent consistent with liquidity and a stable net asset value of
$1.00 per share, by investing in a diversified portfolio of high-quality,
short-term money market instruments.
The AAL Variable Product Bond Portfolio seeks to achieve investment results that
approximate the total return of the Lehman Brothers Aggregate Bond Index by
investing primarily in bonds and other debt securities included in the index.
The AAL Variable Product Balanced Portfolio seeks to achieve investment results
that reflect investment in common stocks, bonds, and money market instruments,
each of which will be selected consistent with the investment policies of the
AAL Variable Product Large Company Stock Portfolio, Bond Portfolio, and Money
Market Portfolio, respectively.
The AAL Variable Product Large Company Stock Portfolio seeks to achieve
investment results that approximate the performance of the Standard & Poor's
500(R) Composite Stock Price Index by investing primarily in common stocks
included in the index.
The AAL Variable Product Small Company Stock Portfolio seeks to achieve
investment results that approximate the performance of the Standard & Poor's
SmallCap 600 Index by investing primarily in common stocks included in the
index.
The AAL Variable Product International Stock Portfolio seeks long-term capital
growth by investing primarily in a diversified portfolio of foreign stocks.
The AAL Variable Product High Yield Bond Portfolio seeks high current income and
secondarily capital growth by investing primarily in a diversified portfolio of
high risk, high yield bonds commonly referred to as "junk bonds." The Fund
actively seeks to achieve the secondary objective of capital growth to the
extent it is consistent with the primary objective of high current income.
Statement of Additional Information
Table of Contents
Page
INTRODUCTION
VOTING PRIVILEGES
INVESTMENT TECHNIQUES
THE S&P 500 INDEX
THE S&P SMALLCAP 600
INDEX OPTIONS AND FUTURES
INVESTMENT RESTRICTIONS
PURCHASES AND REDEMPTIONS
MANAGEMENT OF THE FUND
SUBADVISERS
PORTFOLIO TRANSACTIONS
DIVIDENDS AND DISTRIBUTIONS
CALCULATION OF YIELD AND TOTAL RETURN
PRICING CONSIDERATIONS
GENERAL
FINANCIAL STATEMENTS
<PAGE>
INTRODUCTION
The following information supplements the discussion in the Fund's prospectus of
the Portfolios' respective investment objectives and policies and other aspects
of the Fund's management and operations.
VOTING PRIVILEGES
Each Portfolio's investment objective is a fundamental policy, which may not be
changed without the approval of a "majority of the outstanding voting
securities" of that Portfolio. A "majority of the outstanding voting securities"
means the approval of the lesser of (i) 67% or more of the voting securities at
a meeting if the holders of more than 50% of the outstanding voting securities
of a Portfolio are present or represented by proxy or (ii) more than 50% of the
outstanding voting securities of a Portfolio.
While AAL, as the owner of the assets of its AAL Variable Annuity Account I and
the AAL Variable Life Account I (the "Variable Accounts"), is entitled to vote
all of the shares of a Portfolio held to fund the benefits under Variable
Annuity Certificates and Variable Life Insurance Certificates funded through the
Variable Accounts (together the "Certificates"), it will generally do so in
accordance with the instructions of Certificate owners ("Owners"). However, AAL
may disregard voting instructions received from Owners that would require shares
to be voted to (i) disapprove a change from a diversified to a non-diversified
investment company (or vice versa) or a change in investment objective, if such
change is required by an insurance regulatory authority; (ii) approve any
investment advisory agreement that has been disapproved by an insurance
regulatory authority; (iii) approve any change in investment objective or
policies that would violate state law or result in the purchase of securities
that vary from the general quality and nature of investments or investment
techniques used by any other separate accounts of AAL or its affiliates that
have similar investment objectives; (iv) approve a change in any principal
underwriter of the Fund that is reasonably disapproved by AAL; or (v) approve a
change in the Fund's investment adviser initiated by insurance contract owners
or the Fund's Board of Directors, if the proposed advisory fee exceeds any
applicable maximums specified in any insurance contract participating in the
Fund or if the proposed investment adviser may be expected to use investment
techniques different from those generally used by the current adviser or to
advise the purchase or sale of securities which would not be consistent with the
investment objectives of the Fund or which would vary from the quality and
nature of the investments made by any other separate accounts of AAL and its
affiliates that have similar investment objectives.
Any such shares of a Portfolio attributable to a Certificate for which no timely
voting instructions are received, and shares of that Portfolio held by AAL or
any of its subsidiaries or affiliated companies for their own account, will be
voted by AAL in proportion to the voting instructions that are received with
respect to all Certificates participating in that Portfolio.
INVESTMENT TECHNIQUES
The Portfolios may use the following applicable techniques in pursuit of their
investment objective.
Lending Portfolio Securities
Subject to restriction (4) under "INVESTMENT RESTRICTIONS," a Portfolio may lend
its portfolio securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents maintained on a
current basis in an amount at least equal to the market value of the securities
loaned by the Portfolio. The Portfolio would continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities loaned, and
would also receive an additional return which may be in the form of a fixed fee
or a percentage of the collateral. The Portfolio would have the right to call
the loan and obtain the securities loaned at any time on notice of not more than
five business days. The Portfolio would not have the right to vote the
securities during the existence of the loan but would call the loan to permit
voting of securities during the existence of the loan if, in the Adviser's
judgment, a material event requiring a shareholder vote would otherwise occur
before the loan was repaid. In the event of bankruptcy or other default of the
borrower, the Portfolio could experience both delays in liquidating the loan
collateral or recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the securities loaned
during the period while the Portfolio seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income during this
period, and (c) expenses of enforcing its rights.
When-Issued and Delayed Delivery Securities
A Portfolio may purchase securities on a when-issued or delayed delivery basis,
as described in the prospectus. A Portfolio makes such commitments only with the
intention of actually acquiring the securities, but may sell the securities
before settlement date if the Adviser deems it advisable for investment reasons.
At the time a Portfolio enters into a binding obligation to purchase securities
on a when-issued basis, liquid high-grade debt obligations of the Portfolio,
having a value at least as great as the purchase price of the securities to be
purchased, will be identified on the books of the Portfolio and held by the
Portfolio's custodian throughout the period of the obligation. The use of these
investment strategies may increase NAV fluctuation.
Rated Securities
For a description of certain ratings applied by rating services to debt
securities, please refer to the Appendix to this SAI. The rated debt securities
described under "Investment Objectives and Policies" in the prospectus for each
Portfolio include securities given a rating conditionally by Moody's Investors
Service, Inc. ("Moody's"), or provisionally by Standard and Poor's Corporation
("S&P") or Duff & Phelps, Inc. ("Duff & Phelps"). If the rating of a security
held by a Portfolio is lost or reduced, the Portfolio is not required to sell
the security, but the Adviser will consider such fact in determining whether
that Portfolio should continue to hold the security. To the extent that the
ratings accorded by Moody's, S&P, or Duff & Phelps for debt securities may
change as a result of changes in such organization, or changes in their rating
systems, a Portfolio will attempt to use comparable ratings as standards for its
investments in debt securities in accordance with its investment policies.
Foreign Securities
The AAL Variable Product Large Company Stock and Small Company Stock Portfolios
and the stock component of the Balanced Portfolio may invest in the common stock
of foreign corporations, including American Depositary Receipts ("ADRs"), but
only if such securities are listed and traded on a U.S. national securities
exchange. The AAL Variable Product Bond and High Yield Bond Portfolios and the
bond component of the AAL Variable Product Balanced Portfolio may invest in debt
securities of foreign issuers that are payable in U.S. dollars. The AAL Variable
Product Money Market Portfolio and the money market component of the AAL
Variable Product Balanced Portfolio may invest in short-term Eurodollar and
Yankee bank obligations. Foreign securities may represent a greater degree of
risk (including risks relating to tax provisions or expropriation of assets)
than do securities of domestic issuers.
Repurchase Agreements and Borrowing
To earn income on available cash or for temporary defensive purposes,
we may invest in repurchase agreements for the Portfolios. In a typical
repurchase agreement, we would acquire an underlying obligation for a relatively
short period (usually from one to seven days) subject to an obligation of the
seller to repurchase, and the Portfolio to resell, the obligation at an
agreed-upon price and time, thereby determining the yield during the Portfolio's
holding period. This arrangement results in a fixed rate of return that is not
subject to market fluctuations during the Portfolio's holding period. We require
the sellers to post collateral (in cash, U.S. government securities, or
obligations issued by banks) in an amount at all times equal to, or in excess
of, the market value of the securities which are the subject of the agreement.
In the event of a bankruptcy or other default of a seller of a repurchase
agreement, there may be delays and expenses in liquidating the securities,
decline in their value and loss of interest. We maintain procedures for
evaluating and monitoring the creditworthiness of firms with which they enter
into repurchase agreements. No Portfolio may invest more than 15% (10% in the
case of the Money Market Portfolio) of its total assets in repurchase agreements
maturing in more than seven days or in securities that are subject to legal or
contractual restrictions on resale or are otherwise illiquid.
The Money Market Portfolio may enter into reverse repurchase agreements,
subject to its investment restrictions. A reverse repurchase agreement involves
a sale by the Portfolio of securities that it holds concurrently with an
agreement by the Portfolio to repurchase the same securities at an agreed upon
price and date. The Portfolio uses the proceeds of reverse repurchase agreements
to provide liquidity to meet redemption requests and to make cash payments of
dividends and distributions when the sale of the Portfolio's securities is
considered to be disadvantageous. Cash, U.S. government securities or other
liquid high grade debt obligations equal in value to the Portfolio's obligations
with respect to the reverse repurchase agreements, are segregated and maintained
with the Portfolio's custodian. The Money Market Portfolio's obligations under
reverse repurchase agreements will be counted towards the limitation on the
Portfolio's borrowings, described below.
We may borrow, but only from banks, for temporary or emergency purposes
in amounts not exceeding 10% of a Portfolio's total assets. We will repay any
borrowings before we purchase any more securities for the Portfolio. Any
interest we pay on such borrowings will reduce a Portfolio's net income.
Foreign Securities - The AAL Variable Product International Stock Portfolio
The AAL Variable Product International Stock Portfolio normally invests at least
65% of its total assets in foreign securities primarily trading in at least 3
different countries, not including the U.S. Foreign investments and may involve
risks that are in addition to the risks inherent in U.S. securities. In many
countries there is less public information available about issuers and foreign
companies may not be subject to uniform accounting, auditing and financial
reporting standards. The value of foreign investments may rise or fall because
of changes in currency exchange rates, and a Fund may incur costs in converting
securities denominated in foreign currencies into U.S. dollars. Dividends and
interest on foreign securities may be subject to foreign withholding taxes,
which would reduce a Fund's income without providing a tax credit to
shareholders. Obtaining and enforcing judgments, when necessary, in foreign
countries may be more difficult and expensive than in the U.S. Although this
Fund intends to invest in securities of issuers of stable and developed
countries, there is the possibility of expropriation, confiscatory taxation,
nationalization, currency blockage or political or social instability that could
affect investments in such countries.
The AAL Variable Product International Stock Portfolio may invest in American
Depository Receipts ("ADRs") without limit. ADR facilities may be either
"sponsored" or "unsponsored." While similar, distinctions exist relating to the
rights and duties of ADR holders and market practices. A depository may
establish an unsponsored facility without the participation by or consent of the
issuer of the deposited securities, although a letter of non-objection from the
issuer is often requested. Holders of unsponsored ADRs generally bear all the
costs of such facility, which can include deposit and withdrawal fees, currency
conversion fees and other service fees. The depository of an unsponsored
facility may be under no duty to distribute shareholder communications from the
issuer or to pass through voting rights. Issuers of unsponsored ADRs are not
obligated to disclose material information in the U.S. and, therefore, there may
not be a correlation between such information and the market value of the ADR.
Sponsored facilities enter into an agreement with the issuer that sets out
rights and duties of the issuer, the depository and the ADR holder. This
agreement also allocates fees among the parties. Most sponsored agreements also
provide that the depository will distribute shareholder notices, voting
instructions and other communications. The AAL Variable Product International
Stock Portfolio may invest in sponsored and unsponsored ADRS.
In addition to ADRs, The AAL Variable Product International Stock Portfolio may
hold foreign securities in the form of American Depository Shares ("ADSs"),
Global Depository Receipts ("GDRs") and European Depository Receipts ("EDRs"),
or other securities convertible into foreign securities. These receipts may not
be denominated in the same currency as the underlying securities. Generally,
American banks or trust companies issue ADRs and ADSs, which evidence ownership
of underlying foreign securities. GDRs represent global offerings where an
issuer issues two securities simultaneously in two markets, usually publicly in
a non-U.S. market and privately in the U.S. market. EDRs (sometimes called
Continental Depository Receipts ("CDRs")) are similar to ADRs, but usually
issued in Europe. Typically issued by foreign banks or trust companies, EDRs and
CDRs evidence ownership of foreign securities. Generally, ADRs and ADSs in
registered form trade in the U.S. securities markets, GDRs in the U.S. and
European markets, and EDRs and CDRs (in bearer form) in European markets. The
Adviser and Sub-Adviser for The AAL Variable Product International Stock
Portfolio consider investments in ADRs, ADSs, GDRs, EDRs and CDRs as investments
in the underlying stocks for purposes of diversification.
Foreign Currency Exchange Transactions
Because all of the Portfolios except the Money Market Portfolio may buy and sell
securities denominated in currencies other than the U.S. dollar, and receive
interest, dividends and sale proceeds in currencies other than the U.S. dollar,
the Portfolios may enter into foreign currency exchange transactions to convert
United States currency to foreign currency and foreign currency to United States
currency as well as convert foreign currency to other foreign currencies. A Fund
either enters into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or uses forward
contracts to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation by a Fund to
purchase or sell a specific currency at a specified price and future date, which
may be any fixed number of days from the date of the contract. Forward foreign
currency exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A forward
foreign currency exchange contract generally has no deposit requirement and is
traded at a net price without commission. Neither spot transactions nor forward
foreign currency exchange contracts eliminate fluctuations in the prices of a
Fund's portfolio securities or in foreign exchange rates, or prevent loss if the
prices of these securities should decline.
The Portfolios may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated portfolio position. Since consideration of the prospect for
currency parities will be incorporated into a Fund's long-term investment
decisions, the Portfolios will not routinely enter into foreign currency hedging
transactions with respect to portfolio security transactions; however, it is
important to have the flexibility to enter into foreign currency hedging
transactions when it is determined that the transactions would be in the Fund's
best interest. Although these transactions tend to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the value of the hedged
currency increase. The precise matching of the forward contract amounts and the
value of the securities involved will not generally be possible because the
future value of these securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
High Yield "Junk" Bonds
The AAL Variable Product International Stock and High Yield Bond Portfolios
invest in high yield, high risk bonds, with The AAL Variable Product High Yield
Bond Portfolio normally investing at least 65% of its total assets in such
securities. While the market for high yield bonds has existed for many years and
has weathered previous economic downturns, the 1980s brought a dramatic increase
in the use of such securities to fund highly leveraged corporate acquisitions
and restructuring. Past experience may not provide an accurate indication of the
future performance of the high yield bond market, especially during periods of
economic recession. From 1989 to 1991, the percentage of lower-quality
securities that defaulted rose significantly above prior default levels.
However, the default rate decreased subsequently.
The AAL Variable Product High Yield Bond Portfolio may invest in lower-rated
asset and mortgage-backed securities, including interest in pools of lower-rated
bonds, consumer loans or mortgages, or complex instruments such as
collateralized mortgage obligations ("CMOs") and stripped mortgage-backed
securities (the separate income or principal components). Changes in interest
rates, the market's perception of the issuers and the creditworthiness of the
parties involved may significantly affect the value of these bonds. Some of
these securities may have a structure that makes their reaction to interest
rates and other factors difficult to predict, causing their value to be highly
volatile. These bonds also may be subject to prepayment risk. During periods of
declining interest rates, prepayment of the loans and mortgages underlying these
securities tend to accelerate. Accordingly, any prepayments on these securities
held by the Fund reduces our ability to maintain positions in high-yielding,
mortgage-backed securities and reinvest the principal at comparable yields.
Certain high yield bonds carry particular market risks. Zero coupon, deferred
interest and payment-in-kind ("PIK") bonds, which are issued at deep discounts,
may experience greater volatility in market value. Asset and mortgage-backed
securities, including collateralized mortgage obligations, in addition to
greater volatility, may carry prepayment risks.
Collateralized Mortgage Obligations And Multi-Class Pass-Through Securities
- --The AAL Variable Product Balanced, Bond and High Yield Bond Portfolios
The AAL Variable Product Balanced, Bond and High Yield Bond Portfolios may
invest in mortgage-backed securities, including CMOs and multi-class
pass-through securities, which are debt instruments issued by special purpose
entities secured by pools of mortgage loans or other mortgage-backed securities.
Multi-class pass-through securities are interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on the underlying collateral provide the money to pay debt service on
the CMO or make scheduled distributions on the multi-class pass-through
security. Multi-class pass-through securities, CMOs, and classes thereof
(including those discussed below) are examples of the types of financial
instruments commonly referred to as "derivatives."
In a CMO, a series of bonds or certificates is issued in multiple classes. Each
class of CMO, often referred to as a "tranche," is issued a specified coupon
rate and has a stated maturity or final distribution date. Principal payments on
collateral underlying a CMO may cause it to be retired substantially earlier
than the stated maturity or final distribution dates. Interest is paid or
accrues on all classes of a CMO on a monthly, quarterly or semi-annual basis.
The principal and interest on the underlying mortgages may be allocated among
the several classes of a CMO's series in many ways. In a common structure,
payment of principal on the underlying mortgages are applied according to
scheduled cash flow priorities to classes of a CMO's series.
There are many classes of CMOs. There are "IOs," which entitle the holder to
receive distributions consisting solely or primarily of all or a portion of the
interest in an underlying pool of mortgages or mortgage-backed securities
("Mortgage Assets"). There are also "POs," which entitle the holder to receive
distributions consisting solely or primarily of all or a portion of principal
payments of the underlying pool of Mortgage Assets. In addition, there are
"inverse floaters," which have a coupon rate that moves in the reverse direction
to an applicable index, and accrual (or "Z") bonds, which are described below.
Each Portfolio may not invest more than 7.5% of its net assets in any IOs, POs,
inverse floaters or accrual bonds at any one time or more than 15% of its net
assets in all such obligations at any one time. Inverse floating CMOs are
typically more volatile than fixed or adjustable rate tranches of CMOs.
Investments in inverse floating CMOs would be purchased by the Portfolios to
attempt to protect against a reduction in the income earned on the Portfolios'
investments due to a decline in interest rates. The Portfolios would be
adversely affected by the purchase of such CMOs in the event of a increase in
the interest rates because the coupon rate thereon will decrease as interest
rates increase, and, like other mortgage-backed securities, the value will
decrease as interest rates increase.
The cash flows and yields on IO and PO classes are extremely sensitive to the
rate of principal payments (including prepayments) on the related underlying
pool of mortgage loans or mortgage-backed securities. For example, a rapid or
slow rate of principal payments may have a material adverse effect on the yield
to maturity of IOs or POs, respectively. If the underlying Mortgage Assets
experience greater than anticipated prepayments of principal, the holder of an
IO may incur substantial losses even if the IO class is rate AAA. Conversely, if
the underlying Mortgage Assets experience slower than anticipated prepayments of
principal, the yield and market value for the holder of a PO will be affected
more severely than would be the case with a traditional mortgage-backed
security. However, if interest rates were expected to rise, the value of an IO
might increase and may partially offset other bond value declines, and if rates
were expected to fall, the inclusion of POs could balance lower reinvestment
rates.
An accrual or Z bondholder is not entitled to receive cash payments until one or
more other classes of the CMO have been paid in full from payments on the
mortgage loans underlying the CMO. During the period in which cash payments are
not being made on the Z tranche, interest accrues on the Z tranche at a stated
rate, and this accrued interest is added to the amount of principal that is due
to the holder of the Z tranche. After the other classes have been paid in full,
cash payments are made on the Z tranche until its principal (including
previously accrued interest that was added to principal, as described above) and
accrued interest at the stated rate have been paid in full. Generally, the date
upon which cash payments begin to be made on a Z tranche depends on the rate at
which the mortgage loans underlying the CMO are prepaid, with a faster
prepayment rate resulting in an earlier commencement of cash payments on the Z
tranche. Like a zero coupon bond, during its accrual period the Z tranche of a
CMO has the advantage of eliminating the risk of reinvesting interest payments
at lower rates during a period of declining market interest rates. At the same
time, however, and also like a zero coupon bond, the market value of a Z tranche
can be expected to fluctuate more widely with changes in market interest rates
than would the market value of a tranche that pays interest currently. Changes
in market interest rates also can be expected to influence prepayment rates on
the mortgage loans underlying the CMO of which a Z tranche is a part. As noted
above, such changes in prepayment rates affect the date at which cash payments
begin to be made on a Z tranche, and therefore also influence its market value.
Structured Securities -- The AAL Variable Product International Stock And High
Yield Bond Portfolios
The AAL Variable Product International Stock and High Yield Bond Portfolios may
invest in structured notes and/or preferred stocks, the value of which is linked
to currencies, interest rates, other commodities, indices or other financial
indicators. The securities differ from other securities in which the Funds may
invest in several ways. For example, the coupon, dividend and/or redemption
amount at maturity may be increased or decreased depending on the value of the
underlying instrument. Investment in structured securities involves certain
risks. In addition to the credit risk of the issuer and the normal risks of
changes in interest rates, the redemption amount may increase or decrease as a
result of price changes in the underlying instrument. Further, in the case of
certain structured securities, the coupon and/or dividend may be reduced to
zero, and any further declines in the value of the underlying instrument may
then reduce the redemption amount payable at maturity. Finally, structured
securities may have more volatility than the price of the underlying instrument.
Privately Issued Securities: The AAL Variable Product Money Market Portfolio
Commercial paper and other securities in which the AAL Variable Product Money
Market Portfolio may invest include securities issued by major corporations
without registration under the Securities Act of 1933 in reliance on certain
exemptions, including the "private placement" exemption afforded by Section 4(2)
of that Act. Section 4(2) paper is restricted as to disposition under the
federal securities laws in that any resale must be made in an exempt
transaction. This paper normally is resold to other institutional investors
through, or with, the assistance of investment dealers who make a market in it,
thus providing liquidity. In the opinion of the Adviser, Section 4(2) paper is
no less liquid or salable than commercial paper issued without legal
restrictions on disposition. However, regulatory interpretations currently in
effect require that the Portfolio will not purchase Section 4(2) paper if more
than 10% of its total assets would consist of such paper and illiquid (including
other restricted) securities.
Standard & Poor's Depositary Receipts
The AAL Variable Product Large Company Stock Portfolio may, consistent with its
objectives, purchase Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs are
American Stock Exchange-traded securities that represent ownership in the SPDR
Trust, a trust which has been established to accumulate and hold a portfolio of
common stocks that is intended to track the price performance and dividend yield
of the S&P 500 Index. This trust is sponsored by a subsidiary of the American
Stock Exchange. SPDRs may be used for several reasons, including but not limited
to: facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risk to the Portfolio as the
price movement of the instrument does not perfectly correlate with the price
action of the underlying index. The AAL Variable Product Small Company Stock
Portfolio may purchase an equivalent to SPDRs if available and under the same
circumstances.
THE S&P 500(R) INDEX
The S&P 500(R) Index is a broad index of larger capitalization stocks. It is
composed of 500 common stocks representing more than 70% of the total market
value of all publicly traded common stocks. The index is constructed by Standard
& Poor's Corporation, which chooses stocks on the basis of market values and
industry diversification. Most of the largest 500 companies listed on U.S. stock
exchanges are included in the index. Most stocks in the index are listed on the
New York Stock Exchange. A much smaller number come from the American Stock
Exchange and the over-the-counter market. Additional stocks that are not among
the 500 largest stocks, by market value, are included in the S&P 500(R) Index
for diversification purposes. The index is capitalization-weighted--that is,
stocks with a larger capitalization (shares outstanding times current price)
have a greater weight in the index. Market capitalizations of stocks in the
index as of December 1997, range from a maximum of $256.3 billion to a minimum
of $458 million. The median capitalization was $7.3 billion. S&P periodically
makes additions and deletions to the index. Selection of a stock for inclusion
in the S&P 500(R) Index in no way implies an opinion by Standard & Poor's as to
its attractiveness as an investment.
THE STANDARD & POOR'S SMALLCAP 600 INDEX
The Standard & Poor's SmallCap 600 Index is a capitalization-weighted index of
600 domestic stocks chosen for market size, liquidity, and industry
representation. The component stocks are weighted according to the total market
value of their outstanding shares. The impact of a component's price change is
proportional to the issue's total market share value, which is share price times
the number of shares outstanding. These are summed up for all 600 stocks and
divided by a predetermined base value. The base value for the Standard & Poor's
SmallCap 600 Index is adjusted to reflect changes in capitalization resulting
from mergers, acquisitions, stock rights and substitutions, as well as other
activities.
DISCLAIMERS AND LIMITATIONS OF LIABILITIES OF STANDARD & POOR'S
The disclaimers and limitations below are set forth in a contract between
Standard & Poor's and AAL. The Product refers to the Large Company Stock and
Small Company Stock Portfolios and the Licensee refers to AAL. Standard & Poor's
requires that such disclaimers be disclosed in this Registration Statement.
The Product is 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 Product or
any member of the public regarding the advisability of investing in securities
generally or in the Product particularly or the ability of the S&P 500 Index or
the S&P SmallCap 600 Index to track general stock market performance. S&P's only
relationship to the Licensee is the licensing of certain trademarks and trade
names of S&P, the S&P 500 Index and the S&P SmallCap 600 Index which is
determined, composed and calculated by S&P without regard to the Licensee or the
Product. S&P has no obligation to take the needs of the Licensee or the owners
of the Product into consideration in determining, composing or calculating the
S&P 500 Index or the S&P SmallCap 600 Index. S&P is not responsible for and has
not participated in the determination of the prices and amount of the Product or
the timing of the issuance or sale of the Product or in the determination or
calculation of the equation by which the Product is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Product.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or the S&P SmallCap 600 Index, 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 Licensee,
owners of the product, or any other person or entity from the use of the S&P 500
Index or the S&P SmallCap 600 Index, or any other 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 Index or the S&P SmallCap 600 Index, or any data included therein.
Without Limiting any of the foregoing, in no event shall S&P have any liability
for any special, punitive, indirect, or conseqential damages (including lost
profits), even if notified of the possibility of such damages.
OPTIONS AND FUTURES
All Portfolios except the Money Market Portfolio may write (sell) covered call
options to provide additional revenue and to reduce the effect of price
fluctuations in that Portfolio's securities. In addition, through the purchase
of options and the purchase and sale of futures contracts and related options,
these Portfolios may at times seek to enhance current returns or to hedge
against a decline in the value of currently-owned securities or an increase in
the price of securities intended to be purchased. Options and futures contracts
may also be used to facilitate trading, reduce transaction costs or to simulate
full investment while maintaining cash reserves.
Additional types of options, futures contracts, futures options and related
strategies that are not described in the Fund's prospectus or this SAI also may
be employed if approved by the Board of Directors and if their use is consistent
with the Portfolio's investment objective.
Options on Securities and Indexes
Options may be purchased and sold on debt or other securities or indexes in
standardized contracts traded on national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ. In addition, agreements sometimes
called cash puts may accompany the purchase of a new issue of bonds from a
dealer.
An option on a security (or index) is a contract that gives the holder of the
option, in return for a premium, the right to buy from ("call") or sell to
("put") the writer of the option of the security underlying the option (or the
cash value of a multiple of the index) at a specified exercise price at any time
during the term of the option. The writer of an option on a security has the
obligation upon exercise of the option to deliver the underlying security upon
payment of the exercise price or to pay the exercise price upon delivery of the
underlying security. Upon exercise, the writer of an option on an index is
obligated to pay the difference between the cash value of the index and the
exercise price multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular financial or
securities market, a specific group of financial instruments or securities, or
certain economic indicators.)
A Portfolio will write call options and put options only if they are "covered."
In the case of a call option on a security, the option is covered if the
Portfolio owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount are held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. For a call option on an
index, the option is covered if the Portfolio maintains, in a segregated account
with its custodian, cash or cash equivalents equal to the contract value. A call
option also is covered if the Portfolio holds a call on the same security or
index as the call written where the exercise price of the call held is (i) equal
to or less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
Portfolio in cash or cash equivalents in a segregated account with its
custodian. A put option on a security or an index is covered if the Portfolio
maintains cash or cash equivalents equal to the exercise price in a segregated
account with its custodian. A put option also is covered if the Portfolio holds
a put on the same security or index as the put written where the exercise price
of the put held is (i) equal to or greater than the exercise price of the put
written, or (ii) less than the exercise price of the put written, provided the
difference is maintained by the Portfolio in cash or cash equivalents in a
segregated account with its custodian.
Prior to the earlier of exercise or expiration, an option may be closed out by
an offsetting purchase or sale of an option of the same series (type, exchange,
underlying security or index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction can be effected
when the Portfolio desires.
The principal factors affecting the market value of a put or call option include
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until the
expiration date.
The premium paid for a put or call option purchased by a Portfolio is an asset
of the Portfolio. The premium received for an option written by a Portfolio is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes
There are several risks associated with transactions in options on securities
and on indexes. For example, there are significant differences between the
securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a Portfolio seeks
to close out an option position. If a Portfolio were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If a
Portfolio were unable to close out a covered call option that it had written on
a security, it would not be able to sell the underlying security unless the
option expires without exercise. As the writer of a covered call option, a
Portfolio forgoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Portfolio, the Portfolio
would not be able to close out the option. If restrictions on exercise were
imposed, the Portfolio might be unable to exercise an option it has purchased.
Except to the extent that a call option on an index written by the Portfolio is
covered by an option on the same index purchased by the Portfolio, movements in
the index may result in a loss to the Portfolio; however, such losses may be
mitigated by changes in the value of the Portfolio's securities during the
period the option was outstanding.
Options On Foreign Stock Indexes: The AAL Variable Product International Stock
Portfolio
The effectiveness of purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price movements in the portion of
the securities portfolio of the AAL Variable Product International Stock
Portfolio correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of the index
rather than the price of a particular stock, whether the Fund realizes a gain or
loss from the purchase or writing of options on an index is dependent upon
movements in the level of stock prices in the stock market generally or, in the
case of certain indexes, in an industry or market segment, rather than movements
in the price of a particular stock. Accordingly, successful use by the Fund of
options on stock indexes will be subject to Oechsle's ability to predict
correctly movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. There can be no assurance
that such judgment will be accurate or that the use of these portfolio
strategies will be successful. The Fund will engage in stock index options
transactions that are determined to be consistent with its efforts to control
risk.
When the Fund writes an option on a stock index, the Fund will establish a
segregated account with its custodian or with a foreign sub-custodian in which
the Fund will deposit cash or cash equivalents or a combination of both in an
amount equal to the market value of the option, and will maintain the account
while the option is open.
Futures Contracts and Options on Futures Contracts
All Portfolios except the Money Market Portfolio may use interest rate and index
futures contracts. An interest rate or index futures contract provides for the
future sale by one party and purchase by another party of a specified quantity
of a financial instrument or the cash value of an index at a specified price and
time. A futures contract on an index is an agreement by which two parties agree
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the close of the last trading day of the contract and
the price at which the index contract was originally written. Although the value
of an index might be a function of the value of certain specified securities, no
physical delivery of those securities is made.
Use of futures could facilitate the handling of portfolio cash flows and trading
and reduce transaction costs. Futures would not be used by the Bond, Large
Company Stock, and Small Company Stock Portfolios for hedging purposes but to
gain exposure to the underlying indices with available cash. The S&P 500(R)
Index Future would be the instrument used to gain S&P 500(R) Index exposure in
the AAL Variable Product Large Company Stock Portfolio. The Russell 2000 Index
future would be the instrument used to gain small capitalization market exposure
in the AAL Variable Product Small Company Stock Portfolio. The Russell 2000
Index futures was introduced on the Chicago Mercantile Exchange on February 3,
1993 and has become the most liquid of the small capitalization index futures.
A public market exists in futures contracts covering a number of other indexes,
as well as the following financial instruments: U.S. Treasury bonds, U.S.
Treasury notes, GNMA certificates, three-month U.S. Treasury bills, 90 day
commercial paper, bank certificates of deposit, and Eurodollar time deposits. It
is expected that other futures contracts will be developed and traded. A
Portfolio may engage in transactions involving new futures contracts (or options
thereon) if, in the opinion of the Board of Directors, they are appropriate in
carrying out the investment objectives of the Portfolio.
The Portfolios may purchase or write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes. A futures option gives the holder the right, in return for the premium
paid, to assume a long position (call) or short position (put) in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise of a call option, the holder acquires a long position in
the futures contract and the writer is assigned the opposite short position. In
the case of a put option, the opposite is true.
Each Portfolio will only enter into futures contracts and futures options which
are standardized and traded on a U.S. exchange, board of trade, or similar
entity, or quoted on an automated quotation system. Options on futures contracts
may be liquidated without exercise if the Fund enters into an offsetting
position in the identical option prior to the expiration date.
When a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. A Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day the Portfolio
pays or receives cash, called "variation margin," equal to the daily change in
value of the futures contract. This process is known as "marking to market."
Variation margin does not represent a borrowing or loan by a Portfolio but is
instead settlement between the Portfolio and the broker of the amount one would
owe the other if the futures contract expired. In computing daily net asset
value, each Portfolio will mark to market its open futures positions.
In similar fashion, a Portfolio also is required to deposit and maintain margin
with respect to put and call options on futures contracts written by it. Such
margin deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market value
of the option, and other futures positions held by the Portfolio.
Risks Associated with Futures
There are several risks associated with the use of futures contracts and futures
options. A purchase or sale of a futures contract may result in losses in excess
of the amount invested in the futures contract. There can be no guarantee that
there will be a correlation between price movements in the futures contract and
in the underlying index or debt instrument. There are significant differences
between the securities and futures markets that could result in an imperfect
correlation between the markets. The degree of imperfection of correlation
depends on circumstances such as: variations in speculative market demand for
futures, futures options and debt securities, including technical influences in
futures and futures options trading and differences between the financial
instruments owned or eligible to be acquired by the Portfolios and the
instruments underlying the standard contracts available for trading, in such
respects as interest rate levels, maturities, and creditworthiness of issuers.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day,
and therefore does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or futures option position, and the
Portfolio would continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed above are
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Limitations on Options and Futures
A Portfolio will not enter into a futures contract or purchase or write an
option thereon if, immediately thereafter, the initial margin deposits for
futures contracts held and options thereon written by that Portfolio plus
premiums paid by it for open futures options positions, less the amount by which
any such positions are "in the money," would exceed 5% of the Portfolio's net
assets. A call option is "in the money" if the price of the futures contract
that is the subject of the option exceeds the exercise price. A put option is
"in the money" if the exercise price exceeds the price of the futures contract
that is the subject of the option.
When purchasing a futures contract or writing a put on a futures contract, a
Portfolio must maintain, in a segregated account with its custodian, cash or
cash equivalents which, when added to the related initial margin maintained by
the Portfolio, equals the market value of such contract. When writing a call
option on a futures contract, the Portfolio similarly will maintain with its
custodian cash or cash equivalents which, when added to the related initial
margin maintained by the Portfolio, at all times equals the amount such option
is in the money until the option expires or is closed out by the Portfolio.
A Portfolio may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if, in
the aggregate, the market value of all such open positions exceeds the current
value of the securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative volatility of
the relationship between the portfolio and the positions. For this purpose, to
the extent the Portfolio has written call options on specific securities in its
portfolio, the value of those securities will be deducted from the current
market value of the securities portfolio.
Taxation of Options and Futures
If a Portfolio exercises a call or put option it owns, the premium paid for the
option is added to the cost of the security purchased (call) or deducted from
the proceeds of the sale (put). For cash settlement options and futures options,
the difference between the cash received at exercise and the premium paid is a
capital gain or loss.
If a call or put option written by a Portfolio is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost of the security purchased (put). For cash settlement options
and futures options, the difference between the cash paid at exercise and the
premium received is a capital gain or loss.
A Portfolio will realize a capital gain from a closing purchase transaction if
the cost of the closing option is less than the premium received from writing
the option, or, if it is more, the Portfolio will realize a capital loss. If the
premium received from a closing sale transaction is more than the premium paid
to purchase the option, the Portfolio will realize a capital gain or, if it is
less, the Portfolio will realize a capital loss. If an option was "in the money"
at the time it was written and the security covering the option was held for
more than six months prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long term. The holding period
of the securities covering an "in the money" option will not include the period
of time the option is outstanding.
If an option written by a Portfolio expires, the Portfolio realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by a Portfolio expires unexercised, the Portfolio realizes a
capital loss equal to the premium paid.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
A futures contract held until delivery results in capital gain or loss equal to
the difference between the price at which the futures contract was entered into
and the settlement price on the earlier of the delivery notice date or
expiration date. If a Portfolio delivers securities under a futures contract,
the Portfolio also realizes a capital gain or loss on those securities.
For federal income tax purposes, a Portfolio generally is required to recognize
as income for each taxable year its net unrealized gains and losses as of the
end of the year on options (other than an option on a stock), futures and
futures options positions ("year-end mark to market"). Generally, any gain or
loss recognized with respect to such positions (either by year-end mark to
market or by actual closing of the positions) is considered to be 60% long term
and 40% short term, without regard to the holding periods of the contracts.
However, in the case of positions classified as part of a "mixed straddle," the
recognition of losses on certain positions (including options, futures and
futures options positions, the related securities and certain successor
positions thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or buying put
options (or futures put options) which are intended to hedge against a change in
the value of securities held by a Portfolio: (1) will affect the holding period
of the hedged securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
In order for each Portfolio to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income: i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities. Any net gain realized from futures (or futures options) contracts
will be considered gain from the sale of securities and therefore be qualifying
income for purposes of the 90% requirement. In order to avoid realizing
excessive gains on securities held less than three months, the Portfolio may be
required to defer the closing out of certain positions beyond the time when it
would otherwise be advantageous to do so. Year-end mark to market gains on
positions open for less than three months as of the end of a Portfolio's fiscal
year are considered gains on securities held three months or more for purposes
of the 30% test.
Each Portfolio intends to distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
year-end mark to market gains) on options and futures transactions. Such
distributions are combined with distributions of capital gains realized on the
Portfolio's other investments and shareholders are advised of the nature of the
payments.
INVESTMENT RESTRICTIONS
Each Portfolio operates under the following investment restrictions. A Portfolio
may not:
(1) make any investment if, immediately thereafter, less than 75%
of its total assets would be represented by (a) cash,
receivables and other cash items, (b) securities issued by the
U.S. government, its agencies or instrumentalities, and (c)
other securities limited in respect of any one issuer to an
amount not greater in value than 5% of such total assets. For
purposes of this restriction, repurchase agreements fully
collateralized by securities of the U.S. government, its
agencies and instrumentalities shall be considered to be
securities issued by the governmental entity in question,
rather than by the repurchase agreement obligor;
(2) purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of
portfolio securities, but it may, to the extent consistent
with its investment objectives and policies, make margin
deposits in connection with transactions in options, futures
and options on futures;
(3) make short sales of securities or maintain a short position,
or write, purchase, or sell puts, calls, straddles, spreads,
or combinations thereof, except, to the extent consistent with
its investment objectives and policies, transactions in
options on securities or indexes, interest rate and index
futures and options on such futures;
(4) make loans to other persons, except that the Portfolios
reserve freedom of action, consistent with their other
investment policies and restrictions and as described in the
prospectus and this SAI, to (i) invest in debt obligations,
including those which are either publicly offered or of a type
customarily purchased by institutional investors, even though
the purchase of such debt obligations may be deemed the making
of loans, (ii) enter into repurchase agreements, and (iii)
lend portfolio securities, provided that no Portfolio may lend
securities if, as a result, the aggregate value of all
securities loaned would exceed 33% of its total assets (taken
at market value at the time of such loan);
(5) issue senior securities or borrow, except that a Portfolio may
borrow in amounts not in excess of 10% of its total assets,
taken at current value, and then only from banks, as a
temporary measure for extraordinary or emergency purposes. The
Portfolios will not borrow to increase income but may borrow,
among other things, to meet redemption requests which
otherwise might require untimely dispositions of portfolio
securities;
(6) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by a
Portfolio except as may be necessary in connection with and
subject to the limits in restriction (5);
(7) underwrite any issue of securities, except to the extent that
the purchase of securities directly from an issuer thereof in
accord with a Portfolio's investment objectives and policies
may be deemed to be underwriting or to the extent that in
connection with the disposition of portfolio securities a
Portfolio may be deemed an underwriter under federal
securities laws;
(8) purchase or sell real estate, provided that a Portfolio may
invest in securities secured by real estate or interests
therein or issued by companies which invest in real estate or
interests therein;
(9) purchase or sell commodities or commodity contracts, except
that, to the extent consistent with its investment objective
and policies, a Portfolio may purchase or sell interest rate
and index futures and options thereon. For purposes of this
restriction, foreign exchange contracts are not considered to
be commodities contracts;
(10) invest more than 25% of its total assets (taken at current
value at the time of each investment) in securities of issuers
whose principal business activities are in the same industry.
For purposes of this restriction, telephone, water, gas and
electric public utilities are each regarded as separate
industries, and wholly-owned finance subsidiaries are
considered to be in the industry of their parents if their
activities are primarily related to financing the activities
of their parents. Nor does this restriction apply to
investments by a Portfolio in obligations of the U.S.
government or any of its agencies or instrumentalities. Nor,
with respect to the AAL Variable Product Money Market
Portfolio, does this restriction apply to certificates of
deposit, bankers' acceptances or similar obligations of
domestic banking institutions;
(11) invest in oil, gas or mineral related programs or leases;
(12) invest in repurchase agreements maturing in more than seven
days or in other securities with legal or contractual
restrictions on resale if, as a result thereof, more than 15%
of a Portfolio's total assets (10% in the case of the AAL
Variable Product Money Market Portfolio), taken at current
value at the time of such investment, would be invested in
such securities;
(13) purchase securities of other investment companies, if the
purchase would cause more than 10% of the value of a
Portfolio's total assets to be invested in investment company
securities, provided that (a) no investment will be made in
the securities of any one investment company if, immediately
after such investment, more than 3% of the outstanding voting
securities of such company would be owned by a Portfolio or
more than 5% of the value of a Portfolio's total assets would
be invested in such company, and (b) no restrictions shall
apply to a purchase of investment company securities in
connection with a merger, consolidation, acquisition or
reorganization; or
(14) purchase more than 10% of the outstanding voting securities of
an issuer or invest for the purpose of exercising control or
management.
For purposes of any restrictions or limitations to which the Fund is subject, no
Portfolio, by entering into any futures contract or acquiring or writing any
option thereon or on any security or market index, shall be deemed:
(1) to have acquired or invested in any securities of any exchange
or clearing corporation for any such instrument; or
(2) to have acquired or invested in any debt obligations or in any
stocks comprising indexes on which such instrument is based,
but which the Portfolio does not hold directly in its
portfolio.
In pursuing their respective objectives, each Portfolio may employ the
investment techniques described in the prospectus and elsewhere in this SAI.
Each Portfolio's investment objective is a fundamental policy, which may not be
changed without the approval of a "majority of the outstanding voting
securities" of that Portfolio Each of the restrictions (1) through (14), above,
are not deemed fundamental policies, and therefore, may be changed without
shareholder approval.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the prospectus under the headings
"Purchase and Redemption of Shares," "Description of Shares," and "Net Asset
Value," and that information is incorporated herein by reference.
The Fund's net asset value is determined only on days on which the New York
Stock Exchange (the "Exchange") is open for trading and on which AAL is open for
business. The Exchange is regularly closed on Saturdays and Sundays and on New
Year's Day, the third Monday in February, Good Friday, the last Monday in May,
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. In addition to the
foregoing, during 1998, AAL will be closed for business on the day after
Thanksgiving, and the day before Christmas.
The Fund intends to pay all redemption proceeds in cash. However, redemptions
may be paid wholly or partly by a distribution "in-kind" of securities if the
Fund's Board of Directors deems this to be in the best interest of the Fund or
its shareholders. If redemptions were made in-kind, the redeeming shareholders
might incur brokerage fees in selling the securities received in the
redemptions.
Each Portfolio reserves the right to suspend or postpone redemptions during any
period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the Securities and Exchange Commission, or that Exchange is closed
for other than customary weekend and holiday closings; (b) the Securities and
Exchange Commission has by order permitted such suspension; or (c) an emergency,
as determined by the Securities and Exchange Commission, exists, making disposal
of portfolio securities or valuation of net assets of the Portfolio not
reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of shareholders of
each Portfolio.
The AAL Variable Product Money Market Portfolio-Amortized Cost Valuation
The AAL Variable Product Money Market Portfolio values its portfolio securities
on the basis of their amortized cost. Amortized cost is an approximation of
market value, whereby the difference between acquisition cost and value at
maturity is amortized on a straight line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account and thus, the amortized
cost method of valuation may result in the value of a security being higher or
lower than its actual market value. In addition, if a large number of
redemptions take place at a time when interest rates have increased, the
Portfolio may have to sell portfolio securities prior to maturity and at a price
which might not be as desirable.
The Portfolio uses its best efforts to maintain a constant NAV of $1.00 per
share for purchases and redemptions. The Board of Directors has established
procedures for this purpose, which procedures include a review of the extent of
any deviation of NAV per share, based on available market quotations, from the
$1.00 amortized cost per share. Should that deviation exceed 1/2 of 1% for the
Portfolio, the Board of Directors will promptly consider whether any action
should be initiated to eliminate or reduce material dilution or other unfair
results to shareholders. Such action may include redemption of shares in kind,
selling portfolio securities prior to maturity, reducing or withholding
dividends, and utilizing a NAV per share as determined by using available market
quotations. The Portfolio will maintain a dollar-weighted average portfolio
maturity of 90 days or less and will not purchase any instrument deemed to have
a remaining maturity greater than 397 days, will limit portfolio investments,
(including repurchase agreements), to those dollar denominated instruments that
the Board of Directors determine present minimal credit risks as advised by the
Adviser, and will comply with the requirements as to the quality of certain
portfolio securities specified by the Securities and Exchange Commission for
money market funds using the amortized cost method of valuation and with certain
related reporting and recordkeeping procedures. There is no assurance that
constant NAV per share can be maintained at all times. In the event amortized
cost ceases to represent fair value, the Board will take appropriate action.
MANAGEMENT OF THE FUND
Board of Directors and Executive Officers
The Directors and executive officers of the Fund and their principal occupations
during the past five years are described below. Unless otherwise specified, the
business address of all Directors and officers is 4321 North Ballard Road,
Appleton, WI 54919-0001:
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Address and Age Position with the Fund Principal Occupation
John O. Gilbert
dob 8/30/42 Director* President and Chief
Executive Officer
Aid Association for Lutherans
Ronald G. Anderson
dob 10/2/48 Director* President, AAL Capital Management
Corporation; Senior Vice President and
Chief Investment Officer, Aid Association
for Lutherans
Richard L. Gady
dob 2/28/43
One Con Agra Drive Director Vice President
Omaha, NE 68102-5001 Public Affairs and Chief Economist
ConAgra, Inc. (agribusiness)
F. Gregory Campbell
dob 12/16/39 Director President
2001 Alford Park Drive Carthage College
Kenosha, WI 53140
D. W. Russler
dob 10/28/28 Director Retired; formerly Senior Vice President
24 Turnbridge Drive Finance and Administration
Hilton Head Island, SC 29928 NCR Corporation (computers and related
equipment); Member, Advisory
Board - Saratoga Partners II
(corporate-buyout Limited
Partnership)
Lawrence M. Woods
dob 4/14/32 Director Retired; formerly
524 Sunset Drive Executive Vice President and Director
Worland, WY 82401 Mobil Oil Corporation
Steven A. Weber
dob 10/29/52 President and Senior Vice President
Director* Aid Association for Lutherans
Robert G. Same
dob 7/25/45 Assistant Secretary Executive Vice President,
Chief Operating Officer
AAL Capital Management Corporation
Carl J. Rudolph
dob 10/16/45 Treasurer Vice President, Controller and Treasurer
Aid Association for Lutherans
James H. Abitz dob
5/27/45 Assistant Treasurer Vice President, Investments
Aid Association for Lutherans
Mark J. Mahoney
dob 5/11/53 Secretary Insurance Products and Securities
Aid Association for Lutherans
Daniel L. Shinnick
dob 4/12/59 Vice President Vice President
Aid Association for Lutherans
Kathy Brost
dob 9/2/61 Assistant Secretary Associate Attorney
Insurance Products and Securities
Aid Association for Lutherans
- ---------------------------
* Denotes Directors who are "interested persons" of the Fund, as defined in
the Investment Company Act of 1940.
</TABLE>
The following table shows the compensation paid to the Directors* of the Fund
for the year ended December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Compensation
Pension or From Fund and AAL
Retirement Benefits Fund Complex**
Aggregate Accrued As Part of Estimated Annual Paid to Directors
Compensation Fund Expenses Benefits Upon
Name, Position from Fund Retirement
John O. Gilbert, -0- -0- -0- -0-
Director
Richard L. Gady, $5750 -0- -0- $22,500
Director
F. Gregory Campbell, $5750 -0- -0- $22,500
Director
D.W. Russler, $5750 -0- -0- $22,500
Director
Lawrence M. Woods, $5750 -0- -0- $22,500
Director
Steven A. Weber, -0- -0- -0- -0-
Director
Ronald G. Anderson -0- -0- -0- -0-
Director
- ---------------------------
* The Fund did not pay any compensation to its executive officers during this period.
** The AAL Fund Complex includes The AAL Mutual Funds with respect to
which each of the Fund's independent directors serves as a trustee.
</TABLE>
The Investment Adviser
Please refer to the description of the Adviser, its Advisory Agreement with the
Fund, and fees under "MANAGEMENT OF THE FUND" in the prospectus, which is
incorporated herein by reference.
The Advisory Agreement provides that, subject to Section 36 of the Investment
Company Act of 1940 (the "1940 Act"), the Adviser shall not be liable to the
Fund for any error of judgment or mistake of law or for any loss arising out of
any investment or for any act or omission in the management of the Fund and the
performance of its duties under the Agreement except for willful misfeasance,
bad faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its obligations and duties under the Agreement.
In the event the expenses of a Portfolio (including the fees of the Adviser and
amortization of organization expenses, but excluding interest, taxes, brokerage
commissions, extraordinary expenses and sales charges and distribution fees) for
any fiscal year exceed the limits set by applicable regulations of state
securities commissions, the Adviser will reduce its fee by up to the amount of
such excess. Any such reductions are subject to readjustment during the year.
The payment of the management fee at the end of any month will be reduced or
postponed or, if necessary, a refund will be made to a Portfolio so that at no
time will there by any accrued, but unpaid, liability under this expense
limitation.
The Fund has agreed to use its best efforts to change its name if the Adviser
ceases to act as such with respect to the Fund and the continued use of the
Fund's present name would create confusion in the context of the Adviser's
business.
The Advisory Agreement was most recently approved by the Board of Directors of
the Fund, including a majority of the Directors who are not interested persons
(as defined in the 1940 Act) of any party to the Agreement, on February 28,
1996, and was approved by Fund shareholders on November 19, 1997. The Advisory
Agreement terminates automatically upon assignment or at any time without
penalty by vote of the Fund's Board of Directors or, with respect to any
Portfolio, by the vote of a majority of the outstanding shares of such
Portfolio, or by the Adviser, in each case on 60 days' written notice to the
other party.
AAL received the following investment advisory fees:
<TABLE>
June 14, 1995
(commencement of
Operations) through Year ended Year ended
December 31, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<CAPTION>
<S> <C> <C> <C>
Money Market Portfolio $8,720 $43,414 $74,988
Bond Portfolio 12,744 48,124 73,743
Balanced Portfolio 35,948 257,782 721,800
Large Company Stock 26,916 221,856 754,142
Portfolio
Small Company Stock 17,641 139,625 383,123
Portfolio
International Stock N/A N/A N/A
Portfolio
High Yield Bond Portfolio N/A N/A N/A
</TABLE>
Please refer to the prospectus for a description of the administrative services
provided to the Fund by AAL Capital Management Corporation, the Fund's
Administrator, pursuant to its Administrative Services Agreement with AAL. For
services rendered for the year ended December 31, 1997 the Administrator
received fees from AAL in the amount of $ 35,000 per Portfolio. None of these
fees resulted in additional charges to any Portfolio.
SUB-ADVISERS
AAL Capital Management Corporation, a Delaware corporation organized in 1986, is
the sub-adviser for The AAL Variable Product High Yield Bond Portfolio. Under
its sub-advisory agreement with the Adviser, AAL Capital Management Corporation
determines which securities and other investments will be purchased, retained or
sold for the AAL Variable Product High Yield Bond Portfolio; places orders for
the Portfolio; manages the Portfolio's overall cash position; and provides the
Adviser with research and a quarterly review of economic and investment
developments relevant to the Portfolio. The Adviser, among other things, assists
and consults with AAL Capital Management Corporation in connection with the AAL
Variable Product High Yield Bond Portfolio's continuous investment program;
reviews the Portfolio's investment policies and restrictions and recommends
appropriate changes to the Board of Directors; and provides the Board of
Directors and AAL Capital Management Corporation with information concerning
relevant economic and political developments. AAL Capital Management Corporation
will provide services under this agreement in accordance with the Portfolio's
investment objectives, policies and restrictions. Unless sooner terminated by
the Adviser or Board of Directors upon sixty days' written notice, the
sub-advisory agreement will continue in effect from year to year as long as such
continuance is approved at least annually as described above. As of December 31,
1997, AAL CMC managed about $4.5 billion. AAL indirectly owns the all the
outstanding stock in AAL Capital Management Corporation.
Oechsle International Advisors, L.P. (Oechsle), with principal offices at One
International Place, Boston, Massachusetts 02210, serves as sub-adviser to the
AAL Variable Product International Stock Portfolio. Oechsle is a Delaware
limited partnership. The general partner of Oechsle is Oechsle Group, L.P., and
the managing general partner of Oechsle Group, L.P. is Walter Oechsle. As of
November 30, 1997, Oechsle had discretionary management authority with respect
to approximately $9.2 billion of assets.
Under its sub-advisory agreement with The Adviser, Oechsle determines which
securities and other investments will be purchased, retained or sold for the AAL
Variable Product International Stock Portfolio; places orders for the Portfolio;
manages the Portfolio's overall cash position; and provides The Adviser with
foreign broker research and a quarterly review of international economic and
investment developments. The Adviser, among other things, assists and consults
with Oechsle in connection with the AAL Variable Product International Stock
Portfolio's continuous investment program; reviews the Portfolio's investment
policies and restrictions and recommends appropriate changes to the Board of
Directors; and provides the Board of Directors and Oechsle with information
concerning relevant economic and political developments. Oechsle will provide
services under this agreement in accordance with the Portfolio's investment
objectives, policies and restrictions. Unless sooner terminated by The Adviser
or Board of Directors upon sixty days' written notice, the sub-advisory
agreement will continue in effect from year to year as long as such continuance
is approved at least annually as described above.
Custodian, Transfer Agent and Independent Auditors for the Fund
Citibank, N.A., 111 Wall Street, New York, NY 10043, serves as Custodian for the
Fund. The Custodian is responsible for holding the Fund's assets and provides
certain administrative and accounting services to the Fund, including
maintaining the original entry documents and books of record and general
ledgers; posting cash receipts and disbursements; reconciling bank account
balances monthly; recording purchases and sales based on Adviser communications;
and preparing monthly and annual summaries to assist in the preparation of
financial statements of, and regulatory reports for, the Fund.
AAL serves as Transfer Agent and Dividend Disbursing Agent for the Fund. In its
capacity as Transfer Agent, AAL is responsible for, among other things, issuing
shares of the Fund, recording the issuance of those shares, computing the number
of issuable shares in the case of an order for a specific dollar amount of
shares, processing redemptions and repurchases of shares, maintaining certain
shareholder records, mailing proxy cards supplied by the Fund in connection with
Fund shareholder meetings, examining and tabulating those proxies that have been
returned, and certifying the vote of each Portfolio of the Fund. In its capacity
as Dividend Disbursing Agent, AAL is responsible for distributing or crediting
income or capital gains payments, as the case may be. AAL receives no monetary
compensation for serving as Transfer Agent and Dividend Disbursing Agent for the
Fund.
Ernst & Young LLP, 111 East Kilbourn Avenue, Suite 900, Milwaukee, Wisconsin
53202, independent auditors for the Fund, examine and audit the Fund's annual
financial statements and assist in the preparation of certain reports to the
Securities and Exchange Commission and the Fund's federal and state tax returns.
Principal Holders of Securities
As of January 31, 1998, AAL owned of record and beneficially the percentages of
each Portfolio's outstanding shares as shown below. AAL, which was organized in
1902 under the laws of the State of Wisconsin, is located at 4321 North Ballard
Road, Appleton, Wisconsin 54919.
AAL Variable Product Money Market Portfolio 0.00%
AAL Variable Product Bond Portfolio 18.99
AAL Variable Product Balanced Portfolio 0.00
AAL Variable Product Large Company Stock Portfolio 0
AAL Variable Product Small Company Stock Portfolio 0.00
As of January 31, 1998, the AAL Variable Annuity Account I owned of record the
percentages of each Portfolio's outstanding shares as shown below. The Variable
Account is located at 4321 North Ballard Road, Appleton, Wisconsin 54919.
Certificate Owners may be deemed to beneficially own shares of one or more of
the Portfolios, to the extent that they are given the right to provide voting
instructions with regard to shares of those Portfolios. To the knowledge of the
Fund, no Certificate Owner beneficially owns five percent or more of any
Portfolio.
AAL Variable Product Money Market Portfolio 100.00%
AAL Variable Product Bond Portfolio 81.01%
AAL Variable Product Balanced Portfolio 100.00%
AAL Variable Product Large Company Stock Portfolio 100.00%
AAL Variable Product Small Company Stock Portfolio 100.00%
As of January 31, 1998, the Directors and officers of the Fund as a group owned
beneficially less than 1% of the outstanding shares of any Portfolio.
PORTFOLIO TRANSACTIONS
For more information, please refer to "MANAGEMENT OF THE FUND - - Portfolio
Transactions," in the prospectus, which is incorporated herein by reference.
The Adviser directs the placement or orders for the purchase and sale of the
Funds' portfolio securities.
The costs of securities transactions for each Portfolio will consist primarily
of brokerage commissions or dealer or underwriter spreads. Bonds and money
market instruments are generally traded on a net basis and do not normally
involve brokerage commissions. Occasionally, securities may be purchased
directly from the issuer, which does not involve the payment of commissions.
For securities traded primarily in the over-the-counter market, the dealers who
make a market in the securities will be dealt with directly unless better prices
and execution are available elsewhere. Such dealers usually act as principals
for their own account. In placing portfolio transactions, the Adviser seeks the
best combination of price and execution.
In determining which brokers and dealers provide best price and execution, the
Adviser looks primarily to the price quoted by the broker or dealer, and
normally places orders with the broker or dealer through which the most
favorable price can be obtained. It is expected that securities will ordinarily
be purchased in the primary markets, and that in assessing the best net price
and execution available to a Portfolio, the Adviser will consider all factors
deemed relevant, including the breadth or the market in the security, the price
of the security, the financial condition and execution capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis).
Assuming equal execution capabilities and price, other factors may be taken into
account in selecting brokers or dealers to execute particular transactions and
in evaluating the best net price and execution available. The Adviser may
consider "brokerage and research services" (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934), statistical quotations,
specifically the quotations necessary to determine the Portfolios' net asset
values, and other information provided to the Fund or to the Adviser. The
Adviser may also cause a Portfolio to pay to a broker who provides brokerage and
research services a commission for executing a portfolio transaction which is in
excess of the amount of commission another broker would have charged for
effecting that transaction. The Adviser must determine, in good faith, however,
that such commission is reasonable in relation to the value of the brokerage and
research services provided, viewed in terms of that particular transaction or in
terms of all the accounts over which the Adviser exercises investment
discretion. It is possible that certain of the services received by the Adviser
attributable to a particular transaction will benefit one or more other accounts
for which investment discretion is exercised by the Adviser.
Brokerage commissions paid by each of the Portfolios listed below were as
follows:
<TABLE>
June 14, 1995
(commencement of
Portfolio Name Year Ended 1997 Year Ended 1996 operations) to
December 31, 1995
<CAPTION>
<S> <C> <C> <C>
Money Market N/A N/A N/A
Bond N/A N/A N/A
Balanced $ 50,053 $121,832 $28,386
Large Company Stock 103,198 80,143 16,760
Small Company Stock 152,305 45,929 11,899
International Stock N/A N/A N/A
High Yield Bond N/A N/A N/A
</TABLE>
Certain of the Portfolios acquired securities of their regular brokers or
dealers, or their parents, during the period from January 1, 1997 through
December 31, 1997. As of December 31, 1997, the market value of each Portfolio's
aggregate holdings of each broker's securities was as follows:
AAL Variable Product Money Market Portfolio:
Money Market Portfolio
Market Value
Broker Name Commercial Paper Common Stock
Merrill Lynch & Co. $760,748
Balanced Portfolio
Market Value
Broker Name Commercial Paper Common Stock
Merrill Lynch & Co. $539,738 $5,831,084
Charles Schwab 245,334
Morgan Stanley-Dean Witter 774,242
Large Company Stock Portfolio
Market Value
Broker Name Commercial Paper Common Stock
Merrill Lynch & Co. $1,028,419
Morgan Stanley-Dean Witter 1,467,778
Small Company Stock Portfolio
Market Value
Broker Name Commercial Paper Common Stock
Merrill Lynch & Co. $973,018
Quick & Reilly $1,161,000
DIVIDENDS AND DISTRIBUTIONS
Each of the Portfolios' dividends from net investment income together with
distributions of short-term capital gains (collectively "income dividends") are
taxable as ordinary income to AAL as sole shareholder, whether reinvested in
additional shares or paid in cash. Any long-term capital gains ("capital gain
distributions") distributed to shareholders are treated as such by the
shareholder, whether received in cash or in additional shares, regardless of the
length of time a shareholder has owned the shares. All of the Portfolios intend
to distribute all their net investment income and net realized long-term capital
gains. The AAL Variable Product Bond, Balanced, Large Company Stock, Small
Company Stock, International Stock and High Yield Bond Portfolios expect to pay
any income dividends monthly. The AAL Variable Product Money Market Portfolio
will accrue income dividends daily and expects to pay these dividends daily. All
of the Portfolios expect to distribute long-term capital gains, if any,
annually.
The fact that dividends and distributions may be taxable to AAL as sole
shareholder does not necessarily imply a tax consequence to the Owner. For
information regarding tax consequences to Owners, please refer to "FEDERAL TAX
STATUS" in the Certificate prospectus.
CALCULATION OF YIELD AND TOTAL RETURN
From time to time the Fund may advertise yield and total return for various
periods of investment. Such advertisements will always include uniform
performance calculations based on standardized methods established by the
Securities and Exchange Commission, and may also include other total return
information. Performance information should be considered in light of the
particular Portfolio's investment objectives and policies, characteristics and
quality of its portfolio securities and the market conditions during the
applicable periods and should not be considered as a representation of what may
be achieved in the future. Investors should consider these factors, in addition
to differences in the methods used in calculating performance information and
the impact of taxes on alternative investments, when comparing a particular
Portfolio's performance to any performance data published for alternative
investments.
Standardized Performance Information
Average Annual Total Return. For each of the Portfolios, except the AAL Variable
Product Money Market Portfolio, standardized average annual total return is
computed by finding the average annual compounded rates of return over the 1-,
5- and 10-year periods (or, in the case of a start-up Fund such as this, the
portion thereof during which the Fund has been in existence) 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 $1,000 initial payment;
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 and 10 year
periods (or fractional portion thereof).
Average Annual Total Return
Portfolio Name Year Ended Period from Inception
December 31, 1997 (June 14, 1995) to
December 31, 1997
Money Market 5.33% 5.34%
Bond 9.37 7.16
Balanced 21.71 18.49
Large Company Stock 32.59 28.35
Small Company Stock 25.37 21.41
* The total return figures provided for each Portfolio (except for the
Money Market Portfolio) are provided on an annualized basis for the
period indicated. Additionally, these values reflect the deduction of a
.35% annual management fee, but do not reflect Portfolio expenses which
are voluntarily paid by AAL or reimbursed by AAL. Without the payment
and reimbursement of expenses by AAL, which can be changed on 30 days
notice, these total returns would have been lower.
Current Yield. Current yield quotations for the Portfolios, except the AAL
Variable Product Money Market Portfolio, are based on a 30-day (or one-month)
period, and are computed by dividing the net investment income per share earned
during the period by the maximum offering price per share on the last day of the
period, according to the following formula:
Yield= 2[(((a-b)/cd)+1)^6-1]
a = Dividends and interest earned during the period;
b = Expenses accrued for the period (net of reimbursements);
c = The average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = The maximum offering price per share on the last day of the
period.
For purposes of this calculation, income earned on debt obligations is
determined by applying a calculated yield-to-maturity percentage to the
obligations held during the period. Interest earned on mortgage-backed
securities will be calculated using the coupon rate and principal amount after
adjustment for a monthly paydown. Income earned on common and preferred stocks
is determined by using the stated annual dividend rate applied over the
performance period.
For the one-month period ended December 31, 1997, the current yield for the AAL
Variable Product Bond Portfolio was 5.96% and for the AAL Variable Product
Balanced Portfolio was 3.57%.
Calculation of Yield -- AAL Variable Product Money Market Portfolio
The AAL Variable Product Money Market Portfolio may quote a "Current Yield" or
"Effective Yield" from time to time. The Current Yield is an annualized yield
based on the net change in account value for a seven-day period. The Effective
Yield is an annualized yield based on a daily compounding of the Current Yield.
These yields are each computed by first determining the "Net Change in Account
Value" for a hypothetical account having a balance of one share at the beginning
of a seven-day period ("Beginning Account Value"), excluding capital changes.
The yields then are computed as follows:
Current Yield = (Net Change in Account Value/Beginning Account Value)
x (365/7)
Effective Yield = [(Net Change in Account Value/Beginning Account
Value)^(365/7)]-1
In addition to fluctuations reflecting changes in net income of the Portfolio
resulting from changes in income earned on its portfolio securities and in its
expenses, the Portfolio's yield also would be affected if the Portfolio were to
restrict or supplement its dividends in order to maintain its NAV at $1.00 per
share. See "PURCHASES AND REDEMPTIONS--The AAL Variable Product Money Market
Portfolio--Amortized Cost Valuation." Portfolio changes resulting from net
purchases or net redemptions of Portfolio shares may affect yield. Accordingly,
the Portfolio's yield may vary from day to day and the yield stated for a
particular past period is not a representation as to its future yield. The
Portfolio's yield is not guaranteed, nor is its principal insured; however, the
Portfolio will attempt to maintain its NAV per share at $1.00.
For the seven days ended December 31, 1997, the Current and Effective Yields of
the AAL Variable Product Money Market Portfolio were 5.60% and 5.76%,
respectively.
Other Performance Information
All of the Portfolios may, from time to time, include in their advertisements,
total return quotations computed for a time period, or by a method which differs
from the computations described in the foregoing section. Calculations of the
growth of an investment, at various assumed interest rates and compounding, may
be used to show the effect of the length of time, interest rate and/or tax
deferral on an investment.
Comparison of the Portfolio's yield with those of alternative investments (such
as savings accounts, various types of bank deposits, and other money market
funds) should consider differences between the Portfolio and the alternative
investments, differences in the periods and methods used in the calculation of
the yields being compared, and the impact of taxes on alternative investments.
The Portfolios may, from time to time, illustrate the benefits of tax deferral
by comparing taxable investments to investments made in tax-deferred retirement
plans and may illustrate in graph or chart form, or otherwise, the benefit of
dollar cost averaging by comparing investments made pursuant to a systematic
investment plan.
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 an Owner.
PRICING CONSIDERATIONS
Reliable market quotations are not considered to be readily available for many
long-term corporate bonds and notes, certain preferred stocks, or certain
foreign securities. These investments are stated at fair value on the basis of
valuations furnished by pricing services approved by the Directors, which
determine valuations for normal, institutional-size trading units of such
securities using methods based on market transactions for comparable securities
and various relationships between securities which are generally recognized by
institutional traders.
Generally, trading in U.S. government securities and other fixed income
securities is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
determining the NAV of a Portfolio's shares are computed as of such times.
Occasionally, events affecting the value of such securities may occur between
such times and the close of the New York Stock Exchange, which events will not
be reflected in the computation of a Portfolio's NAV. If events materially
affecting the value of the Fund's securities occur during such a period, then
these securities will be valued at their fair value as determined in good faith
by the Directors.
GENERAL
The Fund's Articles and Bylaws permit its Directors to issue up to 2 billion
shares of common stock on a full or fractional share basis, and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in a Portfolio. Each share
represents an interest in a Portfolio proportionately equal to the interest of
each other share. If the Fund were to liquidate, all shareholders of a Portfolio
would share pro rata in its net assets available for distribution to
shareholders. If they deem it advisable and in the best interests of
shareholders, the Board may create additional classes of shares which may differ
from each other only as to dividends or, as is the case with the Portfolios,
have separate assets and liabilities (in which case any such class would have a
designation including the word "series").
Income and operating expenses are generally allocated to the Portfolio in which
the related assets are held. In the event that there are any assets, income,
liabilities, or expenses which are not readily identifiable as belonging to any
particular Portfolio, the Directors will allocate them among any one or more of
the Portfolios in such manner and on such basis as the Directors, in their sole
discretion, deem fair and equitable.
FINANCIAL STATEMENTS
The following audited financial statements and footnotes thereto for each
Portfolio of the AAL Variable Product Series Fund, Inc. (other than the AAL
Variable Product International Stock Portfolio and the AAL Variable Product High
Yield Bond Portfolio, each of which is first offering its shares through this
Statement of Additional Information and related Prospectus, and for which no
historical financial information therefore is available) and the Report of the
Independent Public Auditors thereon are incorporated herein by reference from
the December 31, 1997 Annual Report of the AAL Variable Annuity Account I:
1. Schedules of Investments as of December 31, 1997.
2. Statement of Assets and Liabilities as of December 31, 1997.
3. Statement of Operations for the Year Ended December 31, 1997.
4. Statement of Changes in Net Assets for the Years Ended December 31,
1997 and 1996.
5. Notes to Financial Statements.
A copy of said Annual Report may be obtained free of charge by writing to Aid
Association for Lutherans at 4321 North Ballard Road, Appleton, Wisconsin 54919
or by telephone at 800-225-5225 or 734-5721 locally.
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Part A. The audited financial highlights of the AAL Variable Product Series
Fund, Inc. ("Fund" or "Registrant") are included in Part A of this Form N-1A
Registration Statement.
Part B. The audited financial statements for the Fund for year ended December
31, 1998 are incorporated by reference in Part B of this Registration Statement.
The financial statements are::
Schedules of Investments as of December 31, 1997 Statement of Assets and
Liabilities as of December 31, 1997 Statement of Operations for the year
ended December 31, 1997
Statement of Changes in Net Assets for the years ended December 31, 1997
and 1996 Notes to Financial Statements Report of Independent Auditors
(b) Exhibits:
The Exhibit Index following the signature page of this Amendment is incorporated
by reference.
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Number Incorporated by Reference (1) Filed Herewith
Name of Exhibit
1 Articles Supplementary of the AAL Variable Product Series Fund, X
Inc. (the "Fund")
2 Bylaws of the Fund Post-Effective Amendment
#2 dated April 18, 1997
3 Not applicable
4 Not applicable
5(a) Second Amendment to Investment Advisory Agreement between Aid X
Association for Lutherans ("AAL") and the Fund dated December
11, 1997
5(b) Sub-Advisory Agreement between the Fund and AAL Capital X
Management Corporation (AAL CMC) for the High Yield Bond
Portfolio dated February 12, 1998
5(c) Sub-Advisory Agreement between the Fund and Oechsle X
International Advisors L.P. for the International Stock
Portfolio dated February 12, 1998
6 Amended and Restated Participation between AAL and the Fund as X
of December 11, 1997
7 Not applicable
8 Form of Custodian Agreement between the Fund and Citibank N.A. X
9(a) Form of Transfer Agency Letter of Amendment dated November 19, 1997 X
9(b) Trade Name/Service Mark Licensing Agreement between the Fund and Post-Effective
AAL dated September 27, 1994 Amendment
#2 dated April 18, 1997
10 Opinion and Consent of In-house Counsel as to the legality of Post-Effective Amendment
shares of the Fund #2 dated April 18, 1997
11 Consent of Independent Auditors X
12 Not applicable
13 Stock Subscription Agreement between the Fund and AAL dated X
December 11, 1997
14 Not applicable
15 Not applicable
16 Schedules for computations of performance quotations Post-Effective Amendment
#2 dated April 29, 1996
17 Financial Data Schedule filed as Exhibit 27
18 Not applicable X
19 Powers of Attorney Post-Effective Amendment
#4 dated April 18, 1997
27 Financial Data Schedule X
</TABLE>
(1) Documents incorporated by reference are incorporated from the
identified previously filed amendments to this Registration Statement.
Item 25. Persons Controlled by or under Common Control with Registrant
AAL 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. AAL 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) AALCMC, a Delaware corporation that is a registered
broker-dealer; and (c) North Meadows Investment Ltd., a Wisconsin corporation
organized for the purpose of holding and investing in real estate; (d) 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.
Item 26. Number of Holders of Securities.
As of January 31, 1998 the Fund had the following number of shareholders of
record:
Title of Class Number of Record Holders
- -------------- ------------------------
Large Company Stock Portfolio 1
Small Company Stock Portfolio 1
Bond Portfolio 2
Balanced Portfolio 1
Money Market Portfolio 1
International Stock Portfolio 0
High Yield Bond Portfolio 0
Item 27. Indemnification.
Section E, subsection (viii) of Article SEVENTH of Registrant's Articles of
Incorporation states as follows:
"(E) (viii) Indemnification and Limitation of Liability. To the fullest
extent permitted by Maryland and Federal law, as amended or interpreted, no
Director or officer of the Corporation shall be personally liable to the
Corporation or the holders of shares of its series or classes for money damages
and each Director and officer shall be indemnified by the Corporation; provided,
however, that nothing herein shall be deemed to protect any Director or officer
of the Corporation against any liability to the Corporation or the holders of
shares of its series or classes to which such Director or officer would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office."
Moreover, Article X of the By-Laws further provides:
"Section 10.01. Indemnification: The Corporation shall indemnify any
individual ("Indemnitee") who is a present or former Director, officer,
employee, or agent of the Corporation, or who is or has been serving at the
request of the Corporation as a director, officer, partner, trustee, employee,
or agent of another corporation, partnership, joint venture, trust or other
enterprise, who, by reason of his service in that capacity, was, is, or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(hereinafter collectively referred to as a "Proceeding") against any judgments,
penalties, fines, settlements, and reasonable expenses (including attorneys'
fees) incurred by such Indemnitee in connection with any Proceeding, to the
fullest extent that such indemnification may be lawful under the Maryland
General Corporation Law. Subject to any applicable limitations and requirements
set forth in the Corporation's Articles of Incorporation and in these By-Laws,
any payment of indemnification or advance of expenses, as provided below, shall
be made in accordance with the procedures set forth in the Maryland General
Corporation Law. [MGCL, Section 2-418(b)]
Notwithstanding the foregoing, nothing herein shall protect or purport to
protect any Indemnitee against any liability to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office (such
conduct hereinafter referred to as "Disabling Conduct"). [Investment Company
Act, Section 17(h)]
Anything in this Article X to the contrary notwithstanding, no
indemnification shall be made by the Corporation to any Indemnitee unless:
(a) there is a final decision on the merits by a court or other body
before whom the Proceeding was brought that the Indemnitee was not
liable by reason of Disabling Conduct; or
(b) in the absence of such a decision, there is a reasonable
determination, based upon a review of the facts, that the
Indemnitee was not liable by reason of Disabling Conduct, which
determination shall be made by:
(i) the vote of a majority of a quorum of Directors who are
neither "interested persons" of the Corporation as defined in
Section 2(a)(19) of the Investment Company Act, nor parties
to the Proceeding; or
(ii) an independent legal counsel in a Written opinion. [MGCL,
Section 2-418(e)]
Section 10.02. Advance Payment of Expenses: The Corporation shall pay any
reasonable expenses so incurred by such Indemnitee in defending a Proceeding in
advance of the final disposition thereof to the fullest extent that such advance
payment may be lawful under the Maryland General Corporation Law. [MGCL, Section
2-418(f)]
Anything in this Article X to the contrary notwithstanding, any advance
of expenses by the Corporation to any Indemnitee shall be made only upon receipt
of: (a) a written affirmation by the Indemnitee of his good faith that the
requisite standard of conduct necessary for indemnification under the Maryland
General Corporation Law has been met and (b) a written undertaking by such
Indemnitee to repay the advance if it is ultimately determined that such
standard of conduct has not been met, and if one of the following conditions is
met:
(a) the Indemnitee provides a security for his undertaking; or
(b) the Corporation shall be insured against losses arising by reason
of any lawful advances; or
(c) there is a determination, based on a review of readily available
facts, that there is reason to believe that the Indemnitee will
ultimately be found entitled to indemnification, which
determination shall be made by:
(i) a majority of a quorum of Directors who are neither
"interested persons" of the Corporation as defined in Section
2(a)(19) of the Investment Company Act, nor parties to the
Proceeding; or
(ii) an independent legal counsel in a written opinion.
Section 10.03. Insurance of Officers, Directors, Employees, and Agents:
To the fullest extent permitted by applicable Maryland law and by Section 17(h)
of the Investment Company Act, as from time to time amended, the Corporation may
purchase and maintain insurance on behalf of any person who is or was a
Director, officer, employee, or agent of the Corporation, or who is or was
serving at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, against any liability assessed against him and
incurred by him in or arising out of his position, whether or not the
Corporation would have the power to indemnify him against such liability. [MGCL,
Section 2-418(k)]
Pursuant to a resolution, dated February 7, 1996, the Board of Directors
of AAL resolved that AAL would indemnify the Fund in an amount not to exceed the
total sum of five million dollars ($5,000,000), in the event the Fund advances
or indemnifies the expenses of any officer or director of the Fund for defense
litigation costs, or if the Fund incurs or pays any expenses, judgments, fines
or settlements incurred by a director or officer of the Fund for any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative. However, in no event would AAL provide
indemnification for any director's or officer's liability which arises from such
person's willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's position.
Section 2(d) of the Investment Advisory Agreement between AAL and the
Fund provides that the Fund will indemnify the Adviser (and its officers,
directors, agents, employees and controlling persons, shareholders and any other
person or entity affiliated with the Adviser) from any liability arising from
the Advisers' conduct under the Agreement, to the extent permitted under the
Fund's Articles and By-Laws and applicable law; provided that said indemnity
does not extend to liabilities resulting from the indemnitee's willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
under the Agreement.
Pursuant to Section 7.1 of the Participation Agreement AAL agrees to
indemnify the Fund and its directors, officers and controlling persons against
certain liabilities. Pursuant to Section 7.2 of said Participation Agreement,
the Fund agrees to indemnify AAL and its directors, officers, employees and
control persons, some of whom are also directors, officers or affiliated persons
of the Fund, against certain liabilities. Section 7.1 and 7.2 are incorporated
by reference into this response to Item 27.
Section 14 of the Transfer Agency Agreement between AAL and Fund
provides, in part, that the Fund shall indemnify AAL from loss resulting from
any claim in connection with the performance of the duties under the Agreement;
provided, however, that the indemnification shall not apply to AAL's actions or
omissions in cases of AAL's gross negligence, bad faith or willful misfeasance
in the performance of its duties, or that of AAL's officers, agents and
employees in the performance of the Agreement.
Section 8 of the Administrative Services Agreement provides, in part,
that AAL Capital Management Corporation ("AALCMC") (and its officers, directors,
employees, and any person performing certain functions on behalf of the Fund at
the direction or request of AALCMC) shall not be liable for any error of
judgment, mistake of law, or loss suffered by AAL or the Fund, in connection
with matters to which the Administrative Services Agreement relates, except for
loss resulting from willful misfeasance, bad faith, or negligence in the
performance of the duties on behalf of AAL or the Fund, or from reckless
disregard of the duties under the Administrative Services 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 that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a Director, 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 in connection with the securities being
registered, registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28. Business and Other Connections of Investment Adviser.
Aid Association for Lutherans (the "Adviser") is the investment adviser of the
Registrant. Information as to the business, profession, vocation or employment
of a substantial nature of the Adviser and its directors and officers is
provided in Registrant's Statement of Additional Information, and the Form ADV
filed by the Adviser under the Investment Advisers Act of 1940, both of which
are hereby incorporated by reference.
We hired Oechsle International Advisors, L.P. (Oechsle), a Delaware limited
partnership, with principal offices at One International Place, Boston,
Massachusetts, 02110, as the Sub-adviser to the Portfolio. The general partner
of Oechsle is Oechsle Group, L.P., and the managing general partner of Oechsle
Group, L.P. is Walter Oechsle. Oechsle currently manages approximately $9.967
billion in assets. Oechsle began serving as sub-adviser to the Portfolio at its
inception on March 1, 1998.
Oechsle makes the day-to-day investment decisions for the Portfolio under our
direction and control. Oechsle determines which securities to purchase and sell,
arranges the purchases and sales, and gives other help in formulating and
implementing the investment program for the Portfolio.
We have also hired AAL Capital Management Corporation (AALCMC) to provide
portfolio management services for the High Yield Bond Portfolio. AALCMC is a
registered investment adviser and is an affiliate of ours. In addition to being
the sub-adviser, AALCMC is also the distributor of the AAL Variable Annuity and
AAL Variable Life Insurance Certificates. Under our Sub-Advisory Agreement,
AALCMC determines which securities to purchase and sell, arranges the purchases
and sales, and gives other help in formulating and implementing the investment
program for the Portfolio.
Item 29. Principal Underwriters.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 30. Location of Accounts and Records.
The accounts, books and other documents required to be maintained by registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and the rules
promulgated thereunder are in the possession of the Registrant and Registrant's
Custodian, as follows: the documents required to be maintained by paragraphs
(4), (5), (6), (7), (9), (10) and (11) of Rule 31a-l(b) will be maintained by
the Registrant, and all other records will be maintained by the Custodian.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) The Registrant undertakes to furnish to each person to whom a prospectus
is delivered, upon request and without charge, a copy of Registrant's
most recent annual report to shareholders.
<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 26th day of
February, 1998.
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/ Steven A. Weber
--------------------------------
Steven A. Weber
President
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/ Steven A. Weber President February 26, 1998
- -------------------------------- (Principal Executive Officer)
Steven A. Weber
/s/ Carl J. Rudolph Treasurer February 26, 1998
- -------------------------------- (Principal Accounting
Carl J. Rudolph Financial Officer)
All of the Board of Directors:
Gregory F. Campbell Ronald G. Anderson
Richard L. Gady John O. Gilbert
D.W. Russler Steven A. Weber
Lawrence M. Woods
Steven A. Weber, by signing his name hereto, does hereby sign this
document on behalf of himself and each of the other above-named Directors of AAL
Variable Product Series Fund, Inc. pursuant to the powers of attorney duly
executed by such persons.
/s/ Steven A. Weber February 26, 1998
- --------------------------------
Steven A. Weber
Attorney-in-Fact
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
INDEX TO EXHIBITS
Exhibit Number
Name of Exhibit
1 Articles Supplementary of the AAL Variable Product Series Fund, Inc.
(the "Fund")
5(a) Second Amendment to Investment Advisory Agreement between Aid
Association for Lutherans ("AAL") and the Fund dated December 11, 1997
5(b) Sub-Advisory Agreement between the Fund and AAL Capital Management
Corporation (AAL CMC) for the High Yield Bond Portfolio dated February
12, 1998
5(c) Sub-Advisory Agreement between the Fund and Oechsle International
Advisors L.P. for the International Stock Portfolio dated February 12,
1998
6 Amended and Restated Participation between AAL and the Fund as of
December 11, 1997
8 Form of Custodian Agreement between the Fund and Citibank N.A.
9(a) Form of Transfer Agency Letter of Amendment dated November 19, 1997
11 Consent of Independent Auditors
13 Stock Subscription Agreement between the Fund and AAL dated December
11, 1997
27 Financial Data Schedule
AAL Variable Product Series Fund, Inc.
Articles Supplementary
The Board of Directors of AAL Variable Product Series Fund, Inc., a
corporation organized and existing under the laws of the State of Maryland, by
Resolution adopted on November 19, 1997, by a majority of the Directors of said
corporation, has established and designated:
100,000,000 shares of its previously authorized but unissued common
stock, 1/10 of 1 cents ($.001) par value per share, as an additional
series to be known as the AAL Variable Product International Stock
Portfolio;
100,000,000 shares of its previously authorized but unissued common
stock, 1/10 of 1 cents ($.001) par value per share, as an additional
series to be known as the AAL Variable Product High Yield Bond
Portfolio.
Shares of such series shall have the preferences, rights, voting powers,
restrictions, limitations as to dividends, qualifications and other conditions
of redemption as set forth in Section 5 of AAL Variable Product Series Fund,
Inc.'s Articles of Incorporation. With the addition of this series, the
presently designated series of shares of AAL Variable Product Series Fund,
Inc.'s common stock consist of the following:
Series Number of Shares
AAL Variable Product Money Market Portfolio 100,000,000
AAL Variable Product Large Company Stock Portfolio 100,000,000
AAL Variable Product Bond Portfolio 100,000,000
AAL Variable Product Small Company Stock Portfolio 100,000,000
AAL Variable Product Balanced Portfolio 100,000,000
AAL Variable Product International Stock Portfolio 100,000,000
AAL Variable Product High Yield Bond Portfolio 100,000,000
This action does not alter the number of authorized shares of AAL
Variable Product Series Fund, Inc., which consists of two billion shares, par
value $0.001 per share. The Board of Directors has taken this action pursuant to
the powers conferred upon it under Section 5(B) of AAL Variable Product Series
Fund, Inc, Articles of Incorporation and Section 2.208 of the Maryland General
Corporation Law.
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/ Steven A. Weber
--------------------------------
Steven A. Weber, President
Attest:
By: /s/ Mark J. Mahoney
-------------------------------
Mark J. Mahoney, Secretary
STATE OF WISCONSIN )
) SS
COUNTY OF OUTAGAMIE )
On this 11th day of December, 1997, before me a Notary Public for the
State and County set forth above, personally came Steven A. Weber, as President
of AAL Variable Product Series Fund, Inc., and Mark J. Mahoney, as Secretary of
AAL Variable Product Series Fund, Inc., and in their said capacities each
acknowledged the foregoing Articles Supplementary to be the act and deed of said
corporation and further acknowledged that, to the best of their knowledge, the
matters and facts set forth are true in all material respects under the
penalties of perjury.
IN WITNESS WHEREOF, I have the signed below in my own hand and attached
my official seal on the day and year set forth above.
(Notary Seal) /s/ Gretchen J. Wilcox
---------------------------
Notary Public
My Commission expires on
April 2, 2000
AMENDMENT
TO
INVESTMENT ADVISORY AGREEMENT
The Investment Advisory Agreement between AAL Variable Products Series Fund,
Inc. and Aid Association for Lutherans, effective September 27, 1994, is hereby
amended, effective November 19, 1997, as follows:
Exhibit A attached to the Investment Advisory Agreement is modified to
add the AAL Variable Product International Stock Portfolio and the AAL
Variable Product High Yield Bond Portfolio. An amended Exhibit A, March
1, 1998, is attached hereto.
IN WINESS WHEREOF the parties hereto have caused this Amendment to be signed by
the respective Officers effective as of December 11, 1997.
Attest: AAL VATIABLE PRODUCT SERIES FUND, INC.
By: /s/ Mark J. Mahoney By: /s/ Steven A. Weber
--------------------------- ---------------------------
Mark J. Mahoney, Secretary Steven A. Weber, President
ATTEST: AID ASSOCIATION FOR LUTHERANS
By: /s/ Woodrow E. Eno By: /s/ John O. Gilbert
--------------------------- ---------------------------
Woodrow E. Eno, Senior Vice John O. Gilbert, President and Chief
President, General Counsel Executive Officer
and Secretary
<PAGE>
EXHIBIT A
TO THE AAL VARIABLE PRODUCT SERIES FUND, INC. INVESTMENT ADVISORY AGREEMENT
(Dated September 27, 1994), amended February 28, 1996.
1. The AAL Variable Product Money Market Portfolio
The management fee for this Portfolio, calculated in accordance with
section 6 of the AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
2. The AAL Variable Product Large Company Stock Portfolio
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
3. The AAL Variable Product Bond Portfolio
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
4. The AAL Variable Product Small Company Stock Portfolio
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual reate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
5. The AAL Variable Product Balanced Portfolio
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
6. The AAL Variable Product International Stock Portfolio (effective
March 1, 1998)
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.80 of 1% on the average daily net
assets.
7. The AAL Variable Product High Yield Bond Portfolio (effective March 1,
1998)
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.40 of 1% on the average daily net
assets.
THE AAL VARIABLE PRODUCT SERIES FUND,INC.
SUB-ADVISORY AGREEMENT FOR
THE AAL VARIABLE PRODUCT HIGH YIELD BOND PORTFOLIO
WITH
AAL CAPITAL MANAGEMENT CORPORATION
AGREEMENT made this 12th day of February 1998, by and among THE AAL
VARIABLE PRODUCT SERIES FUND, INC. (the "Fund"), a Maryland corporation, AID
ASSOCIATION FOR LUTHERANS (the "Adviser"), a Wisconsin corporation, and AAL
CAPITAL MANAGEMENT CORPORATION (the "Sub-Adviser"), a Delaware corporation.
WITNESSETH:
In consideration of the mutual promises and agreements herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and among the parties hereto as follows:
1. In General
The Sub-Adviser agrees, as more fully set forth herein, to act as
Sub-Adviser to the Fund with respect to the investment and reinvestment of the
assets of the Fund's series of shares described as The AAL Variable Product High
Yield Bond Portfolio (the "High Yield Bond Portfolio"). It is understood that
the Fund may create one or more additional Fund series from time to time and
that this Agreement may be amended by the mutual written agreement of the
parties to include such additional Portfolio(s) under the terms to this
Agreement.
<PAGE>
2. Duties and Obligations of the Sub-Adviser with Respect to
Investment of Assets of The High Yield Bond Portfolio
(a) Subject to the succeeding provisions of this section and subject to
the oversight and review of the Adviser and the direction and control of the
Board of Directors ("Directors") of the Fund, the Sub-Adviser, as agent and
attorney-in-fact with respect to the Fund, is authorized, in its discretion and
within prior consultation with the Fund to:
(i) Buy, sell, exchange, convert, lend and otherwise trade in
any stocks, bonds and any other securities or assets;
(ii) Place orders and negotiate the commissions (if any) for
the execution of transactions in securities or other assets with or through such
brokers, dealers, underwriters or issuers as the Sub-Adviser may select;
including brokers and dealers that may be affiliates of the Sub-Adviser, and
(iii) Provide the Adviser and the Directors with such reports
as may reasonably be requested in connection with the discharge of the foregoing
responsibilities and the discharge of the Adviser's responsibilities under the
Investment Advisory Agreement with the Fund and those of AAL Capital Management
Corporation (the "Distributor") under the Primary Underwriting Agreement with
the AAL.
Written procedures with respect to (i), (ii) and (iii) above may be set
forth as agreed to among the Fund, the Adviser and Sub-Adviser.
(b) Any investment purchases or sales made by the Sub-Adviser under
this section shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the Investment Company Act of
1940 (the "Act") and of any rules or regulations in force thereunder; (2) any
other applicable provisions of law; (3) the provisions of the Articles of
Incorporation and By-Laws of the Fund as amended from time to time; (4) any
policies and determinations of the Directors of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its Registration Statement
under the Act, or as amended by the shareholders of the Fund; provided that
copies of the items referred to in clauses (3), (4) and (5) shall have been
furnished to the Sub-Adviser.
(c) The Sub-Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties ("disabling conduct") hereunder on the part of the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) the Sub-Adviser shall not be subject to liability to the Fund or to
any shareholder of the Fund for any act or omission in the course of, or
connected with rendering services hereunder, including without limitation, any
error of judgment or mistake of law or for any loss suffered by any of them in
connection with the matters to which this Agreement relates, except to the
extent specified in Section 36 (b) of the Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services. Except for such disabling conduct, the Fund shall indemnify the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) against any liability arising from the Sub-Adviser's conduct under
this Agreement to the extent permitted by the Articles of Incorporation and
applicable law.
(d) Nothing in this Agreement shall prevent the Sub-Adviser or any
"affiliated person" (as defined in the Act) of the Sub-Adviser from acting as
investment adviser or manager for any other person, firm or corporation and
shall not in any way limit or restrict the Sub-Adviser or any such affiliated
person from buying, selling or trading any securities for its or their own
accounts or for the accounts of others for whom it or they may be acting,
provided, however, that the Sub-Adviser expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement. It is agreed
that the Sub-Adviser shall have no responsibility or liability for the accuracy
or completeness of the Fund's Registration Statement under the Act and the
Securities Act of 1933 except for information supplied by the Sub-Adviser for
inclusion therein. The Sub-Adviser shall be deemed to be an independent
contractor and, unless otherwise expressly provided or authorized, have no
authority to act or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
(e) In connection with its duties to arrange for the purchase and sale
of the High Yield Bond Portfolio's securities and other assets, the Sub-Adviser
shall follow the principles set forth in any investment advisory agreement in
effect from time to time between the Fund and the Adviser, provided that a copy
of any such agreement shall have been provided to the Sub-Adviser. The
Sub-Adviser will promptly communicate to the Adviser and to the officers and the
Directors of the Fund such information relating to portfolio transactions as
they may reasonably request.
(f) The Sub-Adviser shall be responsible for 13F reporting for the
securities held by the High Yield Bond Portfolio.
3. Allocation of Expenses
The Sub-Adviser agrees that it will furnish the Fund, at the
Sub-Adviser's expense, with all office space, facilities, equipment, and
clerical personnel necessary for carrying out its duties under this Agreement.
4. Certain Records
Any records required to be maintained and preserved pursuant to the
provisions of Rule 31a-1 and Rule 31a-2 under the Act that are prepared or
maintained by the Sub-Adviser on behalf of the Fund are the property of the Fund
and will be surrendered promptly to the Fund or Adviser on request.
5. Reference to the Sub-Adviser
Neither the Fund, the Adviser or any affiliate or agent thereof shall
make reference to or use the name of the Sub-Adviser or any of its affiliates in
any advertising or promotional materials without the prior approval of the
Sub-Adviser, which approval shall not be unreasonably withheld.
6. Compensation of the Sub-Adviser
The Adviser agrees to pay the Sub-Adviser and the Sub-Adviser agrees to
accept as full compensation for all services rendered by the Sub-Adviser as
such, a management fee, payable quarterly in arrears and computed on the average
daily net asset value of the High Yield Bond Portfolio at rates shown on Exhibit
A attached hereto.
7. Duration and Termination
(a) This Agreement shall go into effect for the High Yield Bond
Portfolio on March 1, 1998, and shall, unless terminated as hereinafter
provided, continue in effect thereafter from year to year, but only so long as
such continuance is specifically approved at least annually by a majority of the
Fund's Directors, or by the vote of the holders of a "majority" (as defined in
the Act) of the outstanding voting securities of the Fund, with respect to the
High Yield Bond Portfolio, and, in either case, a majority of the Directors who
are not parties to this Agreement or "interested persons" (as defined in the
Act) of any such party cast in person at a meeting called for the purpose of
voting on such approval.
(b) This Agreement may be terminated by the Sub-Adviser at any time
without penalty upon giving the Fund and the Adviser sixty (60) days' written
notice (which notice may be waived by the Fund and Adviser) and may be
terminated by the Fund or the Adviser at any time without penalty upon giving
the Sub-Adviser sixty (60) days' written notice (which notice may be waived by
the Sub-Adviser), provided that such termination by the Fund shall be directed
or approved by the vote of a majority of all of the Directors in office at the
time or by the vote of the holders of a majority (as defined in the Act) of the
voting securities of the Fund, with respect to the High Yield Bond Portfolio, or
with respect to any Fund by the vote of a majority of the outstanding shares of
such Fund. This Agreement shall automatically terminate in the event of its
"assignment" (as defined in the Act). This Agreement will also terminate in the
event that the Investment Advisory Agreement is terminated.
8. Agreement Binding Only On Fund Property
The Sub-Adviser understands that the obligations of this Agreement are
not binding upon any shareholder of the Fund personally, but bind only the
Fund's property; the Sub-Adviser represents that it has notice of the provisions
of the Fund's Articles of Incorporation disclaiming shareholder liability for
acts or obligations of the Fund.
9. Action By Individual Portfolio
The provisions of this Agreement and any amendments hereto with respect
to a Portfolio may be approved by the shareholders of that Portfolio and become
effective with respect to the assets of that Portfolio without the necessity of
approval thereof by shareholders of any other Portfolio. The Adviser represents
that the holders of a majority (as defined in the "Act") of the High Yield Bond
Portfolio, will approve the entry into this Agreement on behalf of the
Portfolio.
10. Notices
(a) The Sub-Adviser agrees to promptly notify the Adviser of the
occurrence of any of the following events:
(1) any change in any of the Sub-Adviser's officers or
portfolio managers;
(2) the Sub-Adviser fails to be registered as an
investment adviser under the Advisers Act or under
the laws of any jurisdiction in which the Sub-Adviser
is required to be registered as an investment adviser
in order to perform its obligations under this
Agreement;
(3) the Sub-Adviser is the subject of any action, suit,
proceeding, inquiry or investigation at law or in
equity, before any court, public board or body,
involving the affairs of the High Yield Bond
Portfolio, or
(4) any change in ownership or control of the Sub-Adviser.
(b) Any notice given hereunder shall be in writing and may be served by
being sent by telex, facsimile or other electronic transmission, or sent by
registered mail or by courier to the address set forth below for the party for
which it is intended. A notice served by mail shall be deemed served seven days
after mailing and in the case of telex, facsimile or other electronic
transmission, twelve hours after dispatch thereof. Addresses for notice may be
changed by written notice to the other party.
The Adviser
John O. Gilbert, President and Chief Executive Officer
AID ASSOCIATION FOR LUTHERANS
4321 North Ballard Road
Appleton, WI 54919-0001
Fax (920) 730-3746
The Sub-Adviser
Robert G. Same, Executive Vice President
AAL Capital Management Corporation
222 West College Avenue
Appleton, WI 54919
Fax (920) 730-3783
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their seals to
be hereunto affixed, all as of the day and year first above written.
ATTEST: THE AAL VARIABLE PRODUCT
SERIES FUND, INC.
/s/ Mark J. Mahoney /s/ Steven A. Weber
- --------------------------------- ---------------------------------
Mark J. Mahoney, Secretary Steven A. Weber, President
ATTEST: AID ASSOCIATION FOR
LUTHERANS
/s/ Woodrow E. Eno /s/ John O. Gilbert
- --------------------------------- ---------------------------------
Woodrow E. Eno, Senior Vice John O. Gilbert, President
President, General Counsel and and Chief Executive Officer
Secretary
ATTEST: AAL CAPITAL MANAGEMENT
CORPORATION
/s/ Joseph F. Wreschnig /s/ Robert G. Same
- --------------------------------- ---------------------------------
Joseph F. Wreschnig, Asst. Robert G. Same, Executive Vice
Secretary President and Chief Operating
Officer
<PAGE>
EXHIBIT A
TO
THE AAL VARIABLE PRODUCT SERIES FUND
SUB-ADVISORY AGREEMENT
(Dated February 12, 1998)
1. The AAL Variable Product High Yield Bond Portfolio (effective March 1, 1998)
The management fee for this Portfolio, payable to the Sub-Adviser by
the Adviser, calculated in accordance with paragraph 6 of The AAL Variable
Product Series Fund Sub-Advisory Agreement, shall be at the annual rate of :
.25 of 1% of the Portfolio's average daily net assets.
THE AAL VARIABLE PRODUCT SERIES FUND, INC.
SUB-ADVISORY AGREEMENT FOR THE
THE AAL VARIABLE PRODUCT INTERNATIONAL STOCK PORTFOLIO
WITH
OECHSLE INTERNATIONAL ADVISERS L. P.
AGREEMENT made this 12th day of February, 1998, by and among THE AAL VARIABLE
PRODUCT SERIES FUND, INC. (the "Fund"), a Maryland corporation, AID ASSOCIATION
FOR LUTHERANS (the "Adviser"), a Wisconsin corporation and OECHSLE INTERNATIONAL
ADVISORS L.P. (the "Sub-Adviser"), a Delaware limited partnership.
WITNESSETH:
In consideration of the mutual promises and agreements herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and among the parties hereto as follows:
1. In General
The Sub-Adviser agrees, as more fully set forth herein, to act as
Sub-Adviser to the Fund with respect to the investment and reinvestment of the
assets of the Fund's series of shares described as The AAL Variable Product
International Stock Portfolio (the "International Stock Portfolio"). It is
understood that the Fund may create one or more additional Fund series from time
to time and that this Agreement may be amended by the mutual written agreement
of the parties to include such additional Portfolio(s) under the terms to this
Agreement.
2. Duties and Obligations of the Sub-Adviser with Respect to
Investment of Assets of The International Stock Portfolio
(a) Subject to the succeeding provisions of this section and subject to
the oversight and review of the Adviser and the direction and control of the
Board of Directors ("Directors") of the Fund, the Sub-Adviser, as agent and
attorney-in-fact with respect to the Fund, is authorized, in its discretion and
within prior consultation with the Fund to:
(i) Buy, sell, exchange, convert, lend and otherwise trade in
any stocks, bonds, currencies, and any other securities or assets;
(ii) Place orders and negotiate the commissions (if any) for
the execution of transactions in securities or other assets with or through such
brokers, dealers, underwriters or issuers as the Sub-Adviser may select;
including brokers and dealers that may be affiliates of the Sub-Adviser, and
(iii) Enter into and execute agreements on behalf of the Fund,
relating to the acquisition or disposition of investment assets and the
execution of portfolio transactions, including foreign exchange contracts and
other transactional agreements. Nothing contained herein, however, shall be
deemed to authorize the Sub-Adviser to take or receive physical possession of
any cash or securities held for the Fund, it being intended that sole
responsibility for safekeeping thereof and the consummation of all such
purchases, sales, deliveries, and investments made pursuant to Sub-Adviser's
direction shall rest upon the Fund's Custodian.
<PAGE>
(iv) Provide the Adviser and the Directors with such reports
as may reasonably be requested in connection with the discharge of the foregoing
responsibilities and the discharge of the Adviser's responsibilities under the
Investment Advisory Agreement with the Fund and those of AAL Capital Management
Corporation (the "Distributor") under the Primary Underwriting Agreement with
the Fund.
Written procedures with respect to (i), (ii) and (iii) above may be set
forth as agreed to among the Fund, the Adviser and Sub-Adviser.
(b) Any investment purchases or sales made by the Sub-Adviser under
this section shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the Investment Company Act of
1940 (the "Act") and of any rules or regulations in force thereunder; (2) any
other applicable provisions of law; (3) the provisions of the Articles of
Incorporation and By-Laws of the Fund as amended from time to time; (4) any
policies and determinations of the Board of Directors of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its Registration Statement
under the Act, or as amended by the shareholders of the Fund; provided that
copies of the items referred to in clauses (3), (4) and (5) shall have been
furnished to the Sub-Adviser.
(c) The Sub-Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties ("disabling conduct") hereunder on the part of the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) the Sub-Adviser shall not be subject to liability to the Fund or to
any shareholder of the Fund for any act or omission in the course of, or
connected with rendering services hereunder, including without limitation, any
error of judgment or mistake of law or for any loss suffered by any of them in
connection with the matters to which this Agreement relates, except to the
extent specified in Section 36 (b) of the Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services. Except for such disabling conduct, the Fund shall indemnify the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) against any liability arising from the Sub-Adviser's conduct under
this Agreement to the extent permitted by the Articles of Incorporation and
applicable law.
(d) Nothing in this Agreement shall prevent the Sub-Adviser or any
"affiliated person" (as defined in the Act) of the Sub-Adviser from acting as
investment adviser or manager for any other person, firm or corporation and
shall not in any way limit or restrict the Sub-Adviser or any such affiliated
person from buying, selling or trading any securities for its or their own
accounts or for the accounts of others for whom it or they may be acting,
provided, however, that the Sub-Adviser expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement. It is agreed
that the Sub-Adviser shall have no responsibility or liability for the accuracy
or completeness of the Fund's Registration Statement under the Act and the
Securities Act of 1933 except for information supplied by the Sub-Adviser for
inclusion therein. The Sub-Adviser shall be deemed to be an independent
contractor and, unless otherwise expressly provided or authorized, have no
authority to act or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
(e) In connection with its duties to arrange for the purchase and sale
of the International Stock Portfolio's securities and other assets, the
Sub-Adviser shall follow the principles set forth in any investment advisory
agreement in effect from time to time between the Fund and the Adviser, provided
that a copy of any such agreement shall have been provided to the Sub-Adviser.
The Sub-Adviser will promptly communicate to the Adviser and to the officers and
the Directors of the Fund such information relating to portfolio transactions as
they may reasonably request.
(f) The Sub-Adviser may place orders both as to sales and purchases of
assets directly through any broker or dealer it chooses. Brokers or dealers may
be selected who provide brokerage and/or research services to the Fund and/or
other accounts over which the Sub-Adviser or its affiliates exercise investment
discretion. Brokers or dealers who execute portfolio transactions on behalf of
the Fund may receive commissions which are in excess of the amount of
commissions which other brokers or dealers would have charged for effecting such
transactions. In order to cause the Fund to pay such higher commissions, the
Sub-Adviser must determine in good faith that such commissions are reasonable in
relation to the value of the brokerage and/or research services provided by such
executing brokers or dealers viewed in terms of a particular transaction or the
Sub-Adviser's overall responsibilities to the Fund or its other discretionary
client accounts.
(g) On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients, the
Sub-Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased in order to obtain the best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Fund and to
such clients.
The Sub-Adviser may purchase or sell for the Fund, pursuant to the
Fund's Rule 10f-3 Procedures, any security (including securities of the same
class as those underwritten or other securities of the same or related issuer)
for which any affiliate of Sub-Adviser acts as (1) an underwriter (either as
lead underwriter or syndicate member), both during the pendency of any
underwriting or selling syndicate and thereafter, or (2) a market maker,
provided that such security is purchased from a non-affiliated party.
(h) The Sub-Adviser shall be responsible for 13F reporting for the
securities held by the International Stock Portfolio.
3. Allocation of Expenses
During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund.
The Sub-Adviser agrees that it will furnish the Fund, at the
Sub-Adviser's expense, with all office space, facilities, equipment, and
clerical personnel necessary for carrying out its duties under this Agreement.
4. Certain Records
Any records required to be maintained and preserved pursuant to the
provisions of Rule 31a-1 and Rule 31a-2 under the Act that are prepared or
maintained by the Sub-Adviser on behalf of the Fund are the property of the Fund
and will be surrendered promptly to the Fund or Adviser on request.
5. Reference to the Sub-Adviser
Neither the Fund, the Adviser or any affiliate or agent thereof shall
make reference to or use the name of the Sub-Adviser or any of its affiliates in
any advertising or promotional materials without the prior approval of the
Sub-Adviser, which approval shall not be unreasonably withheld.
6. Compensation of the Sub-Adviser
The Adviser agrees to pay the Sub-Adviser and the Sub-Adviser agrees to
accept as full compensation for all services rendered by the Sub-Adviser as
such, a management fee, payable quarterly in arrears and computed on the average
daily net asset value of the International Stock Portfolio at rates shown on
Exhibit A attached hereto.
7. Duration and Termination
(a) This Agreement shall go into effect for the International Stock
Portfolio on March 1, 1998, and shall, unless terminated as hereinafter
provided, continue in effect thereafter from year to year, but only so long as
such continuance is specifically approved at least annually by a majority of the
Fund's Board of Directors, or by the vote of the holders of a "majority" (as
defined in the Act) of the outstanding voting securities of the Fund, with
respect to the International Stock Portfolio, and, in either case, a majority of
the Directors who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party cast in person at a meeting called for the
purpose of voting on such approval.
(b) This Agreement may be terminated by the Sub-Adviser at any time
without penalty upon giving the Fund and the Adviser sixty (60) days' written
notice (which notice may be waived by the Fund and Adviser) and may be
terminated by the Fund or the Adviser at any time without penalty upon giving
the Sub-Adviser sixty (60) days' written notice (which notice may be waived by
the Sub-Adviser), provided that such termination by the Fund shall be directed
or approved by the vote of a majority of all of the Directors in office at the
time or by the vote of the holders of a majority (as defined in the Act) of the
voting securities of the Fund, with respect to the International Stock
Portfolio, or with respect to any Fund by the vote of a majority of the
outstanding shares of such Fund. This Agreement shall automatically terminate in
the event of its "assignment" (as defined in the Act). This Agreement will also
terminate in the event that the Investment Advisory Agreement is terminated.
8. Agreement Binding Only On Fund Property
The Sub-Adviser understands that the obligations of this Agreement are
not binding upon any shareholder of the Fund personally, but bind only the
Fund's property; the Sub-Adviser represents that it has notice of the provisions
of the Fund's Articles of Incorporation disclaiming shareholder liability for
acts or obligations of the Fund.
9. Action By Individual Portfolio
The provisions of this Agreement and any amendments hereto with respect
to a Portfolio may be approved by the shareholders of that Portfolio and become
effective with respect to the assets of that Portfolio without the necessity of
approval thereof by shareholders of any other Portfolio. The Adviser represents
that the holders of a majority (as defined in the "Act") of the International
Stock Portfolio, will approve the entry into this Agreement on behalf of the
Portfolio.
10. Notices
(a) The Sub-Adviser agrees to promptly notify the Adviser of the
occurrence of any of the following events:
(1) any change in any of the Sub-Adviser's partners or
portfolio managers;
(2) the Sub-Adviser fails to be registered as an
investment adviser under the Advisers Act or under
the laws of any jurisdiction in which the Sub-Adviser
is required to be registered as an investment adviser
in order to perform its obligations under this
Agreement;
(3) the Sub-Adviser is the subject of any action, suit,
proceeding, inquiry or investigation at law or in
equity, before any court, public board or body,
involving the affairs of the International Stock
Portfolio, or
(4) any change in ownership or control, or
partnership membership of the Sub-Adviser.
(b) Any notice given hereunder shall be in writing and may be served by
being sent by telex, facsimile or other electronic transmission, or sent by
registered mail or by courier to the address set forth below for the party for
which it is intended. A notice served by mail shall be deemed served seven days
after mailing and in the case of telex, facsimile or other electronic
transmission, twelve hours after confirmed receipt thereof. Addresses for notice
may be changed by written notice to the other party.
<PAGE>
The Adviser
John Gilbert, President and Chief Executive Officer
AID ASSOCIATION FOR LUTHERANS
4321 North Ballard Road
Appleton, WI 54919-0001
Fax (920) 730-3746
The Sub-Adviser
Stephen Langer
Oechsle International Advisers, L.P.
One International Place
Boston, MA 02110
Fax (617) 330-8620
No provisions of this agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
both parties.
The Adviser acknowledges receipt of the Sub-Adviser's Part II,
Form ADV at least 48 hours in advance of signing this Agreement.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect. If any provision of this
Agreement shall be held or made invalid by a court decision, statute, rule, or
otherwise, the remainder of this Agreement shall not be affected thereby.
This Agreement shall be governed by the laws of the State of
Wisconsin.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their seals to
be hereunto affixed, all as of the day and year first above written.
ATTEST: THE AAL VARIABLE PRODUCT
SERIES FUND, INC.
/s/ Mark J. Mahoney /s/ Steven A. Weber
- ---------------------------- ----------------------------
Mark J. Mahoney, Secretary Steven A. Weber, President
ATTEST: AID ASSOCIATION FOR
LUTHERANS
/s/ Woodrow E. Eno /s/ John O. Gilbert
- ---------------------------- ----------------------------
Woodrow E. Eno, Senior Vice John O. Gilbert, President and
President, General Counsel Chief Executive Officer
and Secretary
ATTEST: OECHSLE INTERNATIONAL
ADVISERS, L.P.
/s/ Rachel Gutierrez By: Oechsle Group, L.P.
- ---------------------------- its general partner
Rachel Gutierrez
By: /s/ L. S. Roche
----------------------------
L. S. Roche
General Partner
Date: 2/13/98
<PAGE>
EXHIBIT A
TO
THE AAL VARIABLE PRODUCT SERIES FUND
SUB-ADVISORY AGREEMENT
(Dated February 12, 1998)
1. The AAL Variable Product International Stock Portfolio (effective March 1,
1998)
The management fee for this Portfolio, payable to the Sub-Adviser by
the Adviser, calculated in accordance with paragraph 6 of The AAL Variable
Product Series Fund Sub-Advisory Agreement, shall be at the annual rate of :
.54 of 1% of the Portfolio's average daily net assets of $20 million
or less;
.45 of 1% of the Portfolio's average daily net assets between $20
million and $50 million;
.36 of 1% of the Portfolio's average daily net assets over $50
million.
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND BETWEEN
AID ASSOCIATION FOR LUTHERANS
AND
AAL VARIABLE ANNUITY ACCOUNT I
AND
AAL VARIABLE LIFE ACCOUNT I
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED SEPTEMBER 27, 1994, AS AMENDED DECEMBER 11, 1997
<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. Indemnification..................................................... 8
8. Term and Termination Of This Agreement.............................. 12
9. Notices............................................................. 13
10. Miscellaneous....................................................... 14
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 11th
day of December, 1997, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on
its own behalf and on behalf of AAL VARIABLE ANNUITY ACCOUNT I and AAL VARIABLE
LIFE ACCOUNT I (the "ACCOUNTS"), 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 and as investment adviser of the FUND registered under the
Investment Advisers Act of 1940;
WHEREAS, the ACCOUNTS are legally segregated asset accounts of AAL,
established pursuant to the laws of the State of Wisconsin, and currently
consists of five 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 (the Board of Directors
currently has designated seven such Portfolios);
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, dated the twenty-seventh day of September, 1994, wherein AAL 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");
<PAGE>
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 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 AAL. No shares
of any Portfolio will be sold to the general public or to any life
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 consistant 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 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, SAIs, 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, SAIs, 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 at all times invest money from the Certificates
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. Indemnification
7.1 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 7.1) 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 7.1(b).
and 7.1(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.
7.2 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 7.2) 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 7.2(b) and 7.2(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.
8. Term and Termination Of This Agreement
8.1 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
8.3 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 Section 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.
8.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 8.1(a) may be exercised for
any reason or for no reason.
8.3 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 8.1(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 8.1(b) or Section 8.1(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 8.1(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 8.1(e), Section 8.1(f), or Section 8.1(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.
8.4 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.
9. 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
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Steven A. Weber
10. Miscellaneous
10.1 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.
10.2 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 11th day of
December, 1997.
AID ASSOCIATION FOR LUTHERANS and
AAL VARIABLE ANNUITY ACCOUNT I and
AAL VARIABLE LIFE ACCOUNT I
By: /s/ John O. Gilbert
-------------------------------
John O. Gilbert
President and Chief Executive Officer
By: /s/ Woodrow E. Eno
-------------------------------
Woodrow E. Eno
Senior Vice President
Secretary and General Counsel
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/ Steven A. Weber
-------------------------------
Steven A. Weber
President
By: /s/ Mark J. Mahoney
-------------------------------
Mark J. Mahoney
Secretary
Rider to
CUSTODIAL SERVICES AGREEMENT
(the "Agreement")
dated June 30, 1996 between
Citibank, N.A. as Custodian
and AAL VARIABLE PRODUCT SERIES FUND INC.
The parties to the Agreement agree, effective as of March 1, 1998, to the
modification and/or amendments to the Agreement as follows:
1. The Preamble to the Agreement is hereby amended by deleting in the fourth
line thereof the phrase "State of Delaware" and inserting in lieu thereof
the phrase "State of Maryland". The foregoing shall be effective as of June
30, 1996.
2. Section 4( c ) of the Agreement is hereby amended by adding in the first
line thereof before the term "Clearance Systems" the phrase "Foreign
Custodian (as defined below)".
3. Section 4( c ) of the Agreement is hereby further amended by adding in the
fourth line thereof before the term "Clearance Systems" the following:
"Foreign Custodians' shall mean the Bank's branches, or other Eligible
Foreign Custodian as set forth in Section 6A(A) hereof;"
4. Sections 5(B), 5(C ), 5(F)(ii) and 5(G) are hereby amended by in each such
section inserting after the phrase "Sections 6 or 7" the term "or 6A".
5. Sections 5(D) (ii) and 5(D)(vi)(1)(b) are hereby amended by in each section
deleting the phrase "Section 6 hereof" and replacing it with the phrase
"Sections 6 or 6A hereof."
6. Section 5(D) is hereby further amended by adding the following to the end
thereof:
"The Fund authorizes the Bank from time to time to cause its branch
located in London, England ("Citibank London") to establish a
multicurrency cash account reflecting cash received by any Foreign
Custodian on the Fund's behalf. Citibank London will maintain such cash
account in accordance with the requirements of Section 6A hereof
applicable to an entity.
7. The Custody Agreement is further amended by adding the following new Section
immediately following Section 6:
"6A. AUTHORIZED USE OF FOREIGN CUSTODIANS
(A) Authorization
In carrying out its duties with respect to non-U.S. Securities and foreign
currencies (foreign investments") the Bank shall place and maintain the Fund's
foreign investments with, and use the services of, (I) any branch of the Bank or
(ii) any other person that is an Eligible Foreign Custodian as defined in Rule
17f-5(a)(1) under the Investment Company Act of 1940 (the "1940 Act") selected
by the Bank as provided in Section 6A (collectively a "Foreign Custodian"). The
services of Foreign Custodians shall only be available in the locations listed
on Appendix A, as the same may be amended from time to time.
(B) Foreign Custody Manager
(i) The Fund's Board of Directors (hereinafter "Board") hereby delegates to the
Bank, and the Bank hereby accepts the delegation to it, of the obligation to
serve as the Fund's "Foreign Custody Manager" (as that term is defined in Rule
17f-5(a)(2), as amended from time to time, under the 1940 Act).
(ii) As Foreign Custody Manager, the Bank shall:
1) select Eligible Foreign Custodians as defined in Rule 17f-5(a)(1)
under the 1940 Act, to serve as Foreign Custodians and place and
maintain the Fund's foreign investments with such Foreign Custodians;
2) in selecting a Foreign Custodian, first determine that foreign
investments placed and maintained in the safekeeping of each Eligible
Foreign Custodian shall be subject to reasonable care, based on the
standards applicable to custodians in the relevant market, after having
considered all factors relevant to the safekeeping of such investments,
including, without limitation, those factors set forth in Rule 17f-5(c)
(1)(i)-(iv) under the 1940 Act;
3) enter into written agreements with each Eligible Foreign Custodian
selected by the Bank hereunder;
4) determine that the written contract with each Eligible Foreign
Custodian (or, in the case of an Eligible Foreign Custodian that is a
securities depository or clearing agency such contract [which may be
between the Bank and the securities depository or clearing agency or
between an Eligible Foreign Custodian selected by the Bank and the
securities depository or clearing agency], the rules or established
practices or procedures of the depository, or any combination of the
foregoing) requires that the Eligible Foreign Custodian will provide
reasonable care for the foreign investments, based on the standards
applicable to custodians in the relevant market, and that all such
contacts, rules, practices and procedures satisfy the requirements of
Rule 17f-5(c )(2) under the 1940 Act;
5) provide written reports (x) notifying the Board of the placement of
foreign investments with each Eligible Foreign Custodian, such reports
to be provided at such time as they deem reasonable and appropriate,
but not less than quarterly, and (y) promptly notifying the Board of
the occurrence of any material change in the arrangements with an
Eligible Foreign Custodian;
6) monitor the continued appropriateness of (x) maintaining the foreign
investments with Eligible Foreign Custodian selected hereunder and (y)
the governing contractual arrangements; it being understood, however,
that in the event the Bank shall determine that any Eligible Foreign
Custodian would no longer afford the foreign investments reasonable
care as required of Eligible Foreign Custodians by Rule 17f-5, the Bank
shall promptly so advise the Fund and shall then act in accordance with
the Instructions of the Fund with respect to the disposition of the
affected foreign investments; and
7) exercise such reasonable care, prudence and diligence in serving as
the Foreign Custody Manager as a person having responsibility for the
safekeeping of the Fund's assets would exercise.
(iii) Nothing in this paragraph shall relieve the Bank of any responsibility
otherwise provided in this Agreement for loss or damage suffered by the Fund
from an act of negligence or willful misconduct on the part of the Bank, or any
of its agents or any Foreign Custodian as provided in Section 4 of this
Agreement.
(iv) Nothing in this Agreement shall require the Bank to make any selection on
behalf of the Fund that would entail consideration of any factor reasonably
related to the systemic risk of holding assets in a particular country
including, but not limited to, such country's financial infrastructure and
prevailing settlement practices. The Bank agrees to provide to the Fund such
information relating to such risk as the Fund shall reasonably request from time
to time and such other information as the Bank generally makes available to
customers with regard to such countries and risk.
(C ) Compulsory Depositories
(i) Notwithstanding the provisions of Section 6A(B) above, the Bank shall not
serve as Foreign Custody Manager in respect of any Compulsory Depository, as
defined below. The Bank, through its branches or an Eligible Foreign Custodian
shall be entitled to deposit and maintain the foreign investments in Compulsory
Depositories as the Bank deems prudent and appropriate, unless otherwise
instructed by the Fund or its delegate.
(ii) Prior to depositing the foreign investments in any Compulsory Depository,
the Bank shall notify the Fund that such Depository will be used and provide the
Fund, in respect of such Depository, with current information of the type the
Bank provided to the Fund in the Bank's booklets entitled, "SEC Rule 17f-5
Package". The Bank, upon request, shall make its representatives available to
consult, in good faith, with such of the Fund's delegates as the Fund shall
designate regarding the advisability of depositing the Fund's foreign
investments with any Compulsory Depository.
(iii) The Bank shall provide the Fund with reports regarding Compulsory
Depositories as provided in Section 6A(B)(5) above, and shall provide the Fund
with such other information with regard to any Compulsory Depository as the Fund
shall reasonably request.
(iv) A "Compulsory Depository" shall mean a non-U.S. securities depository or
clearing agency the use of which is mandatory (x) by law or regulation (y)
because securities cannot be withdrawn from the depository or clearing agency or
(z) because maintaining securities outside the securities depository or cleaning
agency is not consistent with prevailing local custodial practices.
(D) Segregation and Identification of Assets
The Bank will deposit Property of the Fund with a Foreign Custodian or non-U.S.
depository or clearing agency only in an account which holds exclusively the
assets of customers of the Bank. In the event that the Bank authorizes a Foreign
Custodian to hold any foreign investments placed in its care in a non-U.S.
depository or clearing agency, the Bank will direct such Foreign Custodian to
identify on its books such foreign investments as being held for the account of
the Bank as custodian for its customers.
(E) Instructions to Foreign Custodians
Any Property in a Custody Account deposited by the Bank with a Foreign Custodian
or non-U.S. depository or clearing agency shall be subject only to the
instructions of the Bank or its agents; and any foreign investments held in a in
a non-U.S. depository or clearing agency for the account of a Foreign Custodian
shall be subject only to the instructions of such Foreign Custodian as
subcustodian for the Bank.
(F) Procedures of Foreign Custodians
In utilizing any Foreign Custodian, the Bank warrants that the established
procedures to be followed by each such Foreign Custodian holding Property
pursuant to this Agreement address relevant control issues for such Property and
provide internal controls and procedures that are adequate to provide reasonable
protection of the Property. In addition to, and not in amplification of, the
provisions of Section 4 and the last sentence of Section 6A(C ) of this
Agreement, in utilizing any non-U.S. depository or clearing agency, the Bank
complies with the guidelines of OCR Banking Circular BC - 235 with respect to
such non-U.S. depository or clearing agency and has in place and utilizes its
own internal controls and procedures to assess whether the non-U.S. depository
or clearing agency is appropriately safekeeping the Property.
(G) Applicable Laws
Upon transfer of any Property to a Foreign Custodian or Clearance System, such
Property shall be subject to the applicable laws, regulations, restrictions,
customs, procedures and market practices ("Laws") to which the Foreign Custodian
or Clearance System is subject and as exist in the country to which the Property
is transferred and held. In the event that the Laws change in a way that would
prevent or limit the performance of duties and obligations by a Foreign
Custodian or Clearance System, such duties and obligations shall be superseded,
provided that the Bank shall use its best efforts to provide prior notice
thereof to the Fund and to follow its instructions in connection therewith.
Neither the Bank nor its parent or any other of its branches, subsidiaries or
affiliates shall be liable therefor or for any damages in any way resulting from
the prevented or limited performance, except to the extent such damages arise in
connection with the negligence, willful misconduct or bad faith of the Bank, its
parent, or any other of its branches, subsidiaries or affiliates. The Fund
acknowledges that, as is normally the case with respect to deposits outside the
United States, deposits with Citibank London, and any other entity authorized to
hold Property outside the United States pursuant to this Custody Agreement, are
not insured by the Federal Deposit Insurance Corporation.
8. Section 7 of the Agreement is hereby amended by adding to the end thereof the
phrase "and Foreign Custodians".
All other terms of the Agreement shall remain the same.
CITIBANK, N.A. AAL VARIABLE PRODUCT SERIES FUND INC.
By:__________________________ By: ________________________________
Name:________________________ Name: ______________________________
Title: _________________________ Title: _______________________________
Attest: ________________________ Attest: ______________________________
Date: __________________________ Date: _______________________________
John O. Gilbert
President and Chief Executive Officer
Aid Association for Lutherans
4321 North Ballard Road
Appleton, WI 54919
Dear John:
RE: Transfer Agency Agreement for AAL Variable Products Series Fund, Inc.
Please be advised that the AAL Variable Products Series Fund, Inc. intends on
offering two new portfolios on March 1, 1998. These two new portfolios are:
AAL Variable Products International Portfolio, and
AAL Variable Products High Yield Bond Portfolio.
The AAL Variable Products Series Fund would like AAL to be the transfer agent
and dividend disbursing agent for these portfolios under the terms of the
existing Transfer Agency Agreement dated September 27, 1994. In accordance with
the terms of that agreement, please accept this letter as notification of AAL's
appointment as transfer agent and indicate AAL's acceptance of this appointment
below.
Sincerely,
- ----------------------------
Steven A. Weber
President
November 19, 1997
In accordance with the terms of the Transfer Agency Agreement dated September
27, 1994 between AAL and the AAL Variable Product Series Fund, Inc., AAL hereby
accepts appointment as transfer agent and dividend disbursing agent for the
above named two portfolios.
ATTEST: AID ASSOCIATION FOR LUTHERANS
- ----------------------------------- ----------------------------------
Woodrow E. Eno, Senior Vice President, John O. Gilbert, President and Chief
General Counsel and Secretary Executive Officer
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights" and "Custodian, Transfer Agent and Independent Auditors" and to the
incorporation by reference of our report dated January 30, 1998 in the
Registration Statement (Form N-1A) and its incorporation by reference in the
related Prospectus of AAL Variable Product Series Fund, Inc., filed with the
Securities and Exchange Commission in this Post-Effective Amendment No. 6 to the
Registration Statement under the Securities Act of 1933 (File No. 33-82056) and
in this Amendment No. 7 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-8662).
/s/ ERNST & YOUNG LLP
-------------------------
ERNST & YOUNG LLP
Milwaukee, Wisconsin
February 27, 1998
STOCK SUBSCRIPTION AGREEMENT
Agreement between AAL Variable Product Series Fund, Inc., a Maryland corporation
and open-end investment company (hereinafter the "FUND"), and Aid Association
for Lutherans, a Wisconsin corporation (hereinafter "AAL").
In consideration of the mutual promises set forth herein, and other good and
valuable consideration, the parties agree as follows:
1. The FUND agrees to sell to AAL, and AAL agrees to purchase, shares equal to
the following dollar amount for each portfolio:
AAL Variable Product International Stock Portfolio $10,000,000.00
AAL Variable Product High Yield Bond $20,000,000.00
2. The initial net asset value per share for each of the portfolios will be
$10.00.
3. AAL hereby represents that it is purchasing the shares solely for its
own account and solely for investment purposes without any present
intent of distributing or reselling said shares. AAL further represents
that disposition of said shares will only be by direct redemption to or
repurchase by the FUND.
4. AAL acknowledges that the shares will not have been registered under
any state or federal securities laws at the time of the transaction and
that, therefore, the Fund will be relying on certain exemptions therein
from such registration requirements, including exemptions dependent on
the intent of the undersigned in acquiring the shares.
5. AAL hereby agrees that the FUND shares purchased pursuant to this
Agreement will not be redeemed until the occurrence of either of the
following events: (1) the passage of one year from the date of AAL's
investment; or (2) such time as the total net assets for each portfolio
equal or exceed the amounts specified below:
AAL Variable Product International Stock Portfolio $30,000,000.00
AAL Variable Product High Yield Bond Portfolio $70,000,000.00
AAL further agrees to provide the applicable portfolio with at least 10
days' advance written notice of any intended redemption and agree that
it will work with the portfolio with respect to the amount of such
redemption so as not to place a burden on the portfolio and to
facilitate normal portfolio management of the portfolio.
In witness whereof, the parties hereto have executed this Agreement by their
duly authorized representatives this 11th day of December, 1997.
<PAGE>
Stock Subscription, page 2
AAL VARIABLE PRODUCT SERIES FUND, INC. AID ASSOCIATION FOR LUTHERANS
By: /s/ Steven A. Weber By: /s/ John O. Gilbert
--------------------------- ---------------------------
Steven A. Weber John O. Gilbert
President President and Chief Executive Officer
Attest: /s/ Mark J. Mahoney Attest: /s/ Woodrow E. Eno
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Mark J. Mahoney Woodrow E. Eno, Senior
Vice President, Secretary
General Counsel and Secretary
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