1933 Act Registration No. 33-82056
1940 Act Registration No. 811-8662
As filed with the Securities and Exchange Commission on
August 28, 1998.
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 7 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 8 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 September 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 of
each of its five series 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 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Item No. Caption Location
Part A
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Prospectus Summary - Financial Highlights
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 Purchase and Redemption 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
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
Fund - Custodian, Transfer Agent and
Independent Auditors for the Fund,
Sub-Advisers
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.
AAL VARIABLE PRODUCT SERIES FUND, INC.
Prospectus
September 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
September 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 without charge by writing the Fund at the AAL Variable
Products Service Center, 4321 North Ballard Road, Appleton, Wisconsin, 54919 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
Year 2000 Disclosure
Custodian, Transfer Agent and Independent Auditors
Shareholder Inquiries
Appendix: Bond 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 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.
<TABLE>
<CAPTION>
Primary Primary Primary
Objective Investments Risks
<S> <C> <C> <C>
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
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 Investments
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:
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;
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;
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;
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. Neither the Federal Deposit Insurance
Corporation (FDIC) nor any other government agency insures or 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 our 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.
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.35%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.35%
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been _________0.10% and the total
Portfolio expense would have been _____0.45%for the period from December 31,
1997, to June 30, 1998.
Expense Example
The following expense example shows the cumulative expenses that you would incur
on a $1000 investment and an annual return of 5% compounded annually for the
years shown:
Period Expenses
After 1 year $ 4
After 3 years 12
After 5 years 20
After 10 years 45
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
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 auditors' 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>
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Money Market Portfolio
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (a) 1996 1997
<S> <C> <C> <C>
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 (b) 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 (c) 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets (c)(d) 5.71% 5.10% 5.24%
Portfolio turnover rate N/A N/A N/A
(a) From commencement of operations on June 14, 1995.
(b) 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. (c) Calculated on an annualized basis.
(d) 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%
</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 6,300 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 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.
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.35%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.35
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.11% and the total Portfolio
expense would have been 0.46%for the period from December 31, 1997, to June 30,
1998.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 4
After 3 years 12
After 5 years 20
After 10 years 45
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
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 auditors'
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>
<CAPTION>
Bond Portfolio
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (a) 1996 1997
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $10.23 $10.23
Income from Investment Operations:
Net investment income 0.34 0.63 0.64
Net realized and unrealized gains (losses) on investments
Total from Investment Operations 0.34 0.63 0.64
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 0.00 0.00 0.00
Net asset value: end of period $10.00 $10.23 $10.23
Total return (b) 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 (c) 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets (c)(d) 6.54% 6.51% 6.55%
Portfolio turnover rate 6.51% 11.65% 18.41%
(a) From commencement of operations on June 14, 1995.
(b) 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. (c) Calculated on an annualized basis.
(d) 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%
</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. 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
Reginald L. Pfeifer, CFA, has managed the Balanced Portfolio since June 1,
1998. Mr. Pfeifer is Director of Securities and has been employed by us since
1990.
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.
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.33%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.33%
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.11% and the total Portfolio
expense would have been 0.44% for the period from December 31, 1997, to June 30,
1998.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 3
After 3 years 11
After 5 years 19
After 10 years 43
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
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
auditors' 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>
<CAPTION>
Balanced Portfolio
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (a) 1996 1997
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $10.92 $10.91
Income from Investment Operations:
Net investment income 0.22 0.41 0.46
Net realized and unrealized gains (losses) on investments
Total from Investment Operations 0.22 0.41 0.46
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 0.00 -0.01 0.00
Net asset value: end of period $10.00 $10.91 $10.91
Total return (b) 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 (c) 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets (c)(d) 4.07% 3.89% 3.62%
Portfolio turnover rate 2.29% 5.43% 6.86%
Average commission rate paid (e) $0.0400 $0.0400 $0.0400
(a) From commencement of operations on June 14, 1995.
(b) 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. (c) Calculated on an annualized basis.
(d) 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%
(e) 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 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 Index. The Large Company Stock
Portfolio will strive to hold all of the stocks included in the S&P 500 Index
from time to time. The Portfolio will hold each stock in proportion to its
weighting in the S&P 500 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 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. 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. 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.
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.33%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.33%
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.08% and the total Portfolio
expense would have been 0.41% for the period from December 31, 1997, to June 30,
1998.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 3
After 3 years 11
After 5 years 19
After 10 years 43
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
Financial Highlights
The following Financial Highlights table covers the Large Company Stock
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 auditors' 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>
<CAPTION>
Large Company Stock Portfolio
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (a) 1996 1997
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $11.51 $11.49
Income from Investment Operations:
Net investment income 0.11 0.23 0.23
Net realized and unrealized gains (losses) on investments
Total from Investment Operations 0.11 0.23 0.23
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 -0.01 -0.02 -0.02
Net asset value: end of period $9.99 $11.49 $11.47
Total return (b) 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 (c) 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets (c)(d) 2.27% 1.97% 1.48%
Portfolio turnover rate 0.47% 1.77% 1.00%
Average commission rate paid (e) $0.0400 $0.0400 $0.0400
(a) From commencement of operations on June 14, 1995.
(b) 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. (c) Calculated on an annualized basis.
(d) 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%
(e) 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, although 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. 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.
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.35%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.35%
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.10% and the total Portfolio
expense would have been 0.45%.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 4
After 3 years 12
After 5 years 20
After 10 years 45
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
Financial Highlights
The following Financial Highlights table covers the Small Company Stock
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 auditors' 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>
<CAPTION>
Small Company Stock Portfolio
Period Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 (a) 1996 1997
<S> <C> <C> <C>
Net asset value: beginning of period $10.00 $10.99 $10.68
Income from Investment Operations:
Net investment income 0.08 0.12 0.11
Net realized and unrealized gains (losses) on investments
Total from Investment Operations 0.08 0.12 0.11
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 0.00 -0.31 -0.71
Net asset value: end of period $10.00 $10.68 $9.97
Total return (b) 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 (c) 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets (c)(d) 1.43% 1.14% 0.81%
Portfolio turnover rate 2.85% 20.14% 29.65%
Average commission rate paid (e) $0.0400 $0.0400 $0.0400
(a) From commencement of operations on June 14, 1995.
(b) 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. (c) Calculated on an annualized basis.
(d) 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%
(e) 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;
(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
as well as short-term money market instruments; 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 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 entered into an agreement with Oechsle International Advisors, L.P.
(Oechsle, LP), in accordance with the requirements of the Investment Company Act
of 1940. In the agreement, Oechsle LP has agreed to serve as Sub-Adviser to the
International Stock Portfolio from the beginning of its inception of March 2,
1998. Oechsle, LP is a Delaware limited partnership with principal offices at
One International Place, Boston, Massachusetts 02110. The general partner of
Oechsle, LP is Oechsle Group, L.P., also a limited partnership. Oechsle, L.P.
has been registered as an investment adviser since 1986. As of April 30, 1998,
Oechsle manages over $12 billion in assets.
Oechsle, LP is currently changing its business structure. As part of the
change, Oechsle, LP will be reorganized into Oechsle International Advisors,
LLC, (Oechsle LLC), a Delaware limited liability company, which will continue
the business that Oechsle, LP conducted prior to that time. Oechsle expects the
completion of the reorganization, subject to several conditions, around October
1, 1998.
In connection with this reorganization, (1) the seven general partners
of Oechsle Group, L.P. will approximately double their current collective
ownership interest in Oechsle, (2) Dresdner Bank AG, indirectly Oechsle, LP's
largest limited partner, will sell all of its interests in Oechsle, LP and (3)
Fleet Financial Group, Inc. will acquire approximately a 35% interest (on a
fully diluted basis) in Oechsle that does not include voting securities.
Oechsle Group, LLC, a Delaware limited liability company, will be the
Member Manager of Oechsle LLC and will own approximately a 44% interest in
Oechsle LLC. The seven current general partners of Oechsle Group, LP will
collectively own approximately an 89% interest in Oechsle Group LLC. The
management, policies and control of Oechsle LLC will, subject to certain
limitations, be vested exclusively in Oechsle Group LLC. Day-to-day management
of Oechsle LLC will be exercised by the Management Committee of Oechsle Group
LLC, which will consist of: S. Dewey Keesler, Jr., L. Sean Roche, Stephen P.
Langer, Warren Walker and Andrew S. Parlin.
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 2, 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 0.54%
Next $30 million 0.45%
Over $50 million 0.36%
Expense Summaries and Example
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.80%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.80%
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.67% and the total Portfolio
expense would have been 1.47%for the period from December 31, 1997, to June 30,
1998.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 8
After 3 years 26
After 5 years 45
After 10 years 101
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
Financial Highlights
The following Financial Highlights table covers the International Stock
Portfolio for the period from March 2, 1998 to June 30, 1998 (the date
operations commenced). This information appeared in the June 30, 1998
Semi-Annual Report of the AAL Variable Product Series Fund, Inc. which was not
audited. You should read the Financial Highlights together with the Fund's
financial statements and notes which are included in the Semi-Annual Report. You
can get the Semi-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.
International Stock Portfolio
Period Ended
June 30,
1998 (a)
Net asset value: beginning of period $10.00
Income from Investment Operations:
Net investment income 0.08
Net realized and unrealized gains (losses) on investments 0.87
Total from Investment Operations 0.95
Less Distributions:
From investment income -
From realized gains -
Total Distributions 0.00
Net increase (decrease) in net asset value 0.95
Net asset value: end of period $10.95
Total return (b) 9.50%
Net assets, end of period (in thousands) $13,158
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c) 0.80%
Ratio of net investment income to average net assets (c) (d) 2.46%
Portfolio turnover rate 20.76%
Average commission rate paid (e) $0.0347
(a) From commencement of operations on March 2, 1998
(b) 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. The Portfolio is reported as
period-to-date cumulative total returns.
(c) Calculated on an annualized basis.
(d) Without reimbursements the above ratios, on an annualized basis,
would have been:
Ratio of expenses to average net assets 1.47%
Ratio of net investment income to average net assets 1.79%
(e) Amount shown reflects the average brokerage commission paid on each
share of stock traded by the Portfolio during the period presented.
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;
variable;
convertible bonds;
zero coupon bonds;
pay-in-kind bonds;
floating rate interest debt obligations;
deferred interest debt obligations;
structured debt obligations;
asset-backed debt obligations; and
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 conditions and trends; management's abilities.
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.
The monthly weighted average composition of the Portfolio for the period
ended on July 31, 1998, was:
Percentage of
Portfolio
Investment Grade
- --------------------- -----------------
- --------------------- -----------------
BB 26%
- --------------------- -----------------
- --------------------- -----------------
B 70
- --------------------- -----------------
- --------------------- -----------------
CCC 3
- --------------------- -----------------
- --------------------- -----------------
CC -
- --------------------- -----------------
- --------------------- -----------------
C -
- --------------------- -----------------
- --------------------- -----------------
D -
- --------------------- -----------------
- --------------------- -----------------
Non-rated 1
- --------------------- -----------------
- --------------------- -----------------
Total 100%
- --------------------- -----------------
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 Universal Life Products. 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 2, 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.
Expense Summaries and Examples
The following expense summaries and example should help you to
understand the various recurring and non-recurring costs and expenses you may
directly or indirectly incur with your investment in the Portfolio. The expense
summaries show the expenses at the Portfolio level only. If you own the AAL
Variable Annuity or the AAL Variable Universal Life Product, you would incur
additional expenses at the Variable Account level such as the Mortality and
Expense Risk charge. Please refer to the appropriate Variable Account Prospectus
for more information on those expenses.
Shareholder Transaction Expenses:
Sales charge imposed on purchases None
Sales charge imposed on reinvested dividends None
Deferred sales charge None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses:
Management Fee 0.40%
12b-1 fee -
Other Expenses -
Total Portfolio Operating Expenses 0.40
We agreed to pay on behalf of the Portfolio or reimburse the Portfolio
all expenses in excess of management fees. Without such payment or
reimbursement, other expenses would have been 0.17% and the total Portfolio
expense would have been 0.57%for the period from December 31, 1997, to June 30,
1998.
Expense Example
The following expense example shows the cumulative expenses that you
would incur on a $1000 investment and an annual return of 5% compounded annually
for the years shown:
Period Expenses
After 1 year $ 4
After 3 years 13
After 5 years 23
After 10 years 52
You should use the expense example for comparison purposes only. It does
not represent the Portfolio's actual expenses and returns, either past or
future. Actual expenses mat be greater or less than those shown.
Financial Highlights
The following Financial Highlights table covers the High Yield Bond
Portfolio for the period from March 2, 1998 to June 30, 1998. This information
appeared in the June 30, 1998 Semi-Annual Report of the AAL Variable Product
Series Fund, Inc. which was not audited. Your should read the Financial
Highlights together with the Fund's financial statements and notes which are
included in the Semi-Annual report. You can get the Semi-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.
High Yield Bond Portfolio
Period Ended
June 30,
1998 (a)
Net asset value: beginning of period $10.00
Income from Investment Operations:
Net investment income 0.29
Net realized and unrealized gains (losses) on investments -0.07
Total from Investment Operations 0.22
Less Distributions:
From investment income (0.29)
From realized gains -
Total Distributions (0.29)
Net increase (decrease) in net asset value (0.07)
Net asset value: end of period $9.93
Total return (b) 2.19%
Net assets, end of period (in thousands) $24,526
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c) 0.40%
Ratio of net investment income to average net assets (c) (d) 9.10%
Portfolio turnover rate 12.36%
(a) From commencement of operations on March 2, 1998
(b) 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. The Portfolio is reported as
period-to-date cumulative total returns.
(c) Calculated on an annualized basis.
(d) Without reimbursements the above ratios, on an annualized basis,
would have been:
Ratio of expenses to average net assets 0.57%
Ratio of net investment income to average net assets 8.93%
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 Money Market, Bond, Balanced and High Yield Bond 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
Nationally Recognized Statistical Rating Organization, 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). Mortgage-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, 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 Money Market, Bond, Balanced,
International Stock, High Yield Bond and 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 Money Market and Balanced (money market instruments
portion) 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: 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:
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
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 U.S.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, Merrill Lynch High Yield Master
Index 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 30-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' performances, 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 (equity and bond portions), 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>
<CAPTION>
Average Annual Total Returns(1)
For Periods Ended December 31, 1997
1 Year 5 Years 10 Years Best Year for Index Worst Year for Index
<S> <C> <C> <C> <C> <C>
Bond 9.37% n/a n/a
Lehman Bond Index* 9.65 7.48% 9.18% 32.62% (2.92)%
Large Company Stock 32.59 n/a n/a
S&P 500 Index** 33.36 20.24 18.05 53.99 (43.34)
Small Company Stock 25.37 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 in 1923 as the 233 Composite Index.
***S&P SmallCap 600 Index began 10/31/94.
+Wilshire Small Cap Index began 9/28/92.
</TABLE>
- ----------
(1) Total returns do not reflect the expenses and contingent deferred sales
charges that apply at the Variable Account level. Inclusion of these expenses
will reduce the total returns.
It is important for you to note the extraordinary performance of
equities in recent years and put these shortterm returns into the context of
historical norms. Along with sharp up-swings, we can expect some down-swings in
the shortterm. But over the longterm, 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 an unmanaged,
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:
[SHOWN 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.
Performance of the Lehman Bond Index
The table below shows annual total returns for the Lehman Bond Index for
the past 15 years. Each annual total return shows the change in value and
assumes the reinvestment of all interest paid by the bonds held in the Index.
You can see the volatility of bond prices from year to year. The returns do not
take into account any tax consequences, brokerage fees or other fees that a
Portfolio would incur.
Historical Annual Total Rates of Return for the Lehman Bond Index
[shown as graph]
<TABLE>
<CAPTION>
Year Return Year Return Year Return
- ----- ------ ----- ------ ---- ------
<S> <C> <C> <C> <C> <C>
1997 9.7% 1992 7.4% 1987 2.8%
1996 3.6 1991 16.0 1986 15.3
1995 18.5 1990 9.0 1985 22.1
1994 (2.9) 1989 14.5 1984 15.2
1993 9.0 1988 7.9 1983 8.4
</TABLE>
Lehman Bond Index historical annualized compound rates of return for the
past five-year, 10-year and 15-year periods were 7.3%, 9.1% and 10.2%
respectively. These compound rates of return are greater than historical returns
measured over longer periods of time based on Ibbotson Associates data. For
example, during the 72-year period from 1926 through 1997, Ibbotson Associates
indicates the compound rate of return has been 5.3% per year on
intermediate-term government bonds and 5.7% per year on long-term corporate
bonds. If the Bond Portfolio had existed during the same period and achieved the
same returns as the index, the returns would have been reduced by the Adviser
fee and other costs from the administration of the Portfolio. These average
returns reflect past performance of bonds, you should not expect such
performance to be representative of the return which may be generated by the
Lehman Bond Index or any of the Portfolios in the future. S&P 500 and S&P
SmallCap 600 Indexes
Standard & Poor's Corporation (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 Composite Stock Price Index (S&P
500 Index). The S&P 500 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 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 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 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 periodically make additions and deletions of stock to its indexes. Selection
of a stock for inclusion in either S&P index in no way implies an opinion by S&P
as to its attractiveness as an investment. Standard & Poor's only relationship
to the Fund is the licensing of the Standard & Poor's marks, the S&P 500 Index
and the S&P SmallCap 600 Index. These indexes are determined, composed and
calculated by Standard & Poor's 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. Standard & Poor's 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.
Performance of the S&P 500 Index
The table below shows annual total returns for the S&P 500 Index for
each of the past 50 years. You can see the volatility of stock prices from year
to year. Each annual total return shows the change in value and assumes the
reinvestment of all dividends paid by the stocks held in the Index. The returns
do not take into account any tax consequences, brokerage fees or other fees that
a Portfolio would incur.
Historical Annual Rates of Return for the S&P 500 Index
[shown as graph]
- ---------------------------------------------------------------------------
Year Return Year Return Year Return
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1997 33.4% 1980 32.4% 1963 22.8%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1996 23.1% 1979 18.4% 1962 -8.7%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1995 37.4% 1978 6.6% 1961 26.9%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1994 1.3% 1977 -7.2% 1960 0.5%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1993 10.0% 1976 23.8% 1959 12.0%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1992 7.7% 1975 37.2% 1958 43.4%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1991 30.6% 1974 -26.5% 1957 -10.8%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1990 -3.2% 1973 -14.7% 1956 6.6%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1989 31.5% 1972 19.0% 1955 31.6%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1988 16.8% 1971 14.3% 1954 52.6%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1987 5.2% 1970 4.0% 1953 -1.0%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1986 18.5% 1969 -8.5% 1952 18.4%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1985 32.2% 1968 11.1% 1951 24.0%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1984 6.3% 1967 24.0% 1950 31.7%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1983 22.5% 1966 -10.1% 1949 18.8%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1982 21.4% 1965 12.5% 1948 5.5%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
1981 -4.9% 1964 16.5%
- ---------------------------------------------------------------------------
S&P 500 Index historical annualized compounded rates of return for the
past 5-year, 10-year and 15-year periods were 20.2%, 18.1% and 17.5%,
respectively. These compound rates of return are greater than historical returns
measured over longer periods of time based on Ibbotson Associates data. For
example, during the 72-year period from 1926 through 1997, Ibbotson Associates
indicates the compound rate of return on the S&P 500 Index was 11.0% per year.
If the Large Company Stock Portfolio had existed during the same period and
achieved the same returns as the index, the returns would have been reduced by
the Adviser fee and other costs from the administration of the Portfolio. These
average returns reflect past performance of stocks, you should not expect such
performance to be representative of the return which may be generated by the S&P
500 Index or any of the Portfolios in the future. 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
AAL is the Adviser to the Fund. AAL has extensive investment management
experience. Currently, AAL manages over $18 billion in assets for its insurance
portfolios in addition to the $1 billion 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 our affiliates, AALCMC 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 (over $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. AALCMC (a whollyowned subsidiary of AAL) has agreed to act as
sub-adviser for the High Yield Bond Portfolio. AALCMC also sells, distributes
and advises The AAL Mutual Funds. The principal office for AALCMC is 222 West
College Avenue, Appleton, Wisconsin, 54919-0007. Oechsle has agreed to act as
sub-adviser for the International Stock Portfolio. The principal office 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
(AALCMC) to perform certain administrative services including portfolio
accounting, expense accrual, valuation and financial reporting, and tax
accounting services for each Portfolio. We pay AALCMC 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 AALCMC.
Our agreement with AALCMC 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.
Oechsle, LP is currently changing its business structure. See
International Stock Portfolio - Sub Adviser. Under provisions of the 1940 Act,
our sub-advisory agreement with Oechsle, LP will terminate automatically upon
the completion of that reorganization transaction. At a special meeting held on
August 14, 1998, shareholders of the International Stock Portfolio approved a
new sub-advisory agreement that will take effect upon the completion of Oechsle,
LP's reorganization. This new sub-advisory agreement is substantively identical
to the current sub-advisory agreement , including with respect to the services
to be provided, the management personnel that will be responsible for the
day-to-day investment decisions of the International Stock Portfolio, and the
sub-advisory fees to be paid by AAL for those services.
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 Eastern Time. 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, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. If one of these holidays falls on a Saturday or Sunday, the Exchange
will be closed on the preceding Friday or the following Monday, respectively. 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 their 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 the Bond, Balanced, Large Company Stock, Small Company Stock and High
Yield Bond Portfolios. We will declare and reinvest dividends annually on the
International Stock Portfolio. 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 make a capital gain distribution, if any, 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.
Year 2000 Disclosure
Year 2000 is approaching and we are addressing potential problems that
could affect our systems and the systems of the Fund's other service providers,
such as custodians, telephone companies, etc. If systems are not year-2000
compliant, systems cannot distinguish the year 2000 from the year 1900 because
of the way the software encodes and calculates dates. In 1995, we formed a
project team to review our systems as well as those of the Fund's other service
providers to address the year 2000 problem. We believe that we have devoted and
will continue to devote the appropriate amount of resources necessary to prepare
our systems so that services provided to AAL will continue without material
disruption across the pending change in the millennium. Despite our best
efforts, we cannot assure that this will be sufficient to avoid any adverse
impact on the Fund.
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, 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 as set forth in their
report thereon incorporated by reference elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm 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 Products Service Center, 4321 North Ballard
Road, Appleton, Wisconsin, 54919-0001, or 800-225-5225 by telephone .
<PAGE>
APPENDIX: BOND 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); and 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 short-term, risk-free
U.S. Treasury 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]
<TABLE>
<CAPTION>
<S> <C>
Board of Directors John O. Gilbert - Chairman of the Board
Ronald G. Anderson
F. Gregory Campbell
Richard L. Gady
D.W. Russler
Steven A. Weber
Lawrence M. Woods
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Officers Steven A. Weber - President
Daniel L. Shinnick - Vice President
Carl J. Rudolph - Treasurer
James H. Abitz - Assistant Treasurer
Kathleen A. Brost - Secretary
Woodrow E. Eno - Assistant Secretary
Robert G. Same - Assistant Secretary
Joseph F. Wreschnig - Assistant Secretary
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Investment Adviser & Transfer Agent Aid Association for Lutherans
4321 North Ballard Road Appleton, WI 54919-0001
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Sub-Adviser (International Stock Portfolio) Oechsle International Advisors LP
One International Place Boston, MA 02110
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Sub-Adviser (High Yield Bond Portfolio & AAL Capital Management Corporation
Distributor 222 West College Avenue Appleton, WI 54919-0007
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Custodian Citibank, N.A.
111 Wall Street New York, NY 10043
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Legal Counsel Quarles & Brady
411 East Wisconsin Avenue Milwaukee WI 53202
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Independent Auditors Ernst & Young LLP
111 East Kilbourn Avenue Milwaukee, WI 53202
Service Center AAL Variable Products Service Center
4321 North Ballard Road Appleton, WI 54919-0001
800-CALL AAL
</TABLE>
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
4321 North Ballard Road
Appleton, Wisconsin 54919
(920) 734-5721
Statement of Additional Information
Dated September 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.(the "Fund"), dated
September 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
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
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.
<PAGE>
Statement of Additional Information
Table of Contents
Page
Introduction 3
Voting Privileges 3
Investment Techniques 3
The S&P 500 Index 10
The S&P SmallCap 600 Index 10
Disclaimers & Limitations Of Liabilities Of Standard & Poor's 11
Options And Futures 11
Investment Restrictions 17
Purchases And Redemptions 19
Management Of The Fund 20
Sub-Advisers 23
Portfolio Transactions 26
Dividends And Distributions 28
Calculation Of Yield And Total 28
Return 30
Pricing Considerations 31
General 31
Financial Statements 31
<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 objectives:
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 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
Bond and High Yield Bond Portfolios and the bond component of the Balanced
Portfolio may invest in debt securities of foreign issuers that are payable in
U.S. dollars. The Money Market Portfolio and the money market component of the
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 International Stock Portfolio
The International Stock Portfolio normally invests at least 65% of its total
assets in foreign securities primarily trading in at least three different
countries, not including the U.S. Foreign investments 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 Portfolio 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 Portfolio'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 Portfolio 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 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 International Stock Portfolio may
invest in sponsored and unsponsored ADRS.
In addition to ADRs, The 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
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
U.S.currency to foreign currency and foreign currency to U.S.currency as well as
convert foreign currency to other foreign currencies. A Portfolio 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 Portfolio 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
Portfolio's 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 Portfolio'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
Portfolio'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 International Stock and High Yield Bond Portfolios invest in high yield,
high risk bonds, with The 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 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 Portfolio 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 Bond, Balanced and High Yield Bond Portfolios
The Bond, Balanced, 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 International Stock And High Yield Bond Portfolios
The 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 Portfolios 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 Money Market Portfolio
Commercial paper and other securities in which the 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 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 Small Company Stock Portfolio may purchase
an equivalent to SPDRs if available and under the same circumstances.
THE S&P 500 INDEX
The S&P 500 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 , 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 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 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 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 consequential 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 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 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 Portfolio 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 Portfolio 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 Portfolio will engage in stock index options transactions that
are determined to be consistent with its efforts to control risk.
When the Portfolio writes an option on a stock index, the Portfolio will
establish a segregated account with its custodian or with a foreign
sub-custodian in which the Portfolio 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 Index
Future would be the instrument used to gain S&P 500 Index exposure in the Large
Company Stock Portfolio. The Russell 2000 Index future would be the instrument
used to gain small- capitalization market exposure in the Small Company Stock
Portfolio. The Russell 2000 Index futures contract 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 Portfolio 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.
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 a Portfolio reserves
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 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 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 Portfolios' 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, Martin Luther King, Jr. Day, Presidents' Day, , Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. If one of
these holidays falls on a Saturday or Sunday, the Exchange will be closed on the
preceding Friday or the following Monday, respectively. 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.
Money Market Portfolio--Amortized Cost Valuation
The 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 an 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>
Name, Address and Age Position with the Fund Principal Occupation
<S> <C> <C>
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 and Chief Executive Officer, AAL
Capital Management Corporation; Senior Vice
President and Chief Financial Officer, Aid
Association for Lutherans
Richard L. Gady
dob 2/28/43 Director Vice President
One Con Agra Drive Public Affairs and Chief Economist
Omaha, NE 68102-5001 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,AAL Capital
Management Corporation; Chief Compliance
Officer and Deputy Counsel, Aid Association
for Lutherans
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;
Senior Vice President
AAL Capital Management Corporation
Woodrow E. Eno
dob 4/5/46 Assistant Secretary Senior Vice President, Secretary and
General Counsel
Aid Association for Lutherans
Daniel L. Shinnick
dob 4/12/59 Vice President Vice President, Annuity Solutions
Aid Association for Lutherans
Joseph F. Wreschnig
dob 6/30/50 Assistant Secretary Assistant Vice President, Fund and Adviser
Administration,
AAL Capital Management Corporation
Kathleen A. Brost
dob 9/2/61 Secretary Staff Attorney
Insurance and Variable Products Law
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>
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
<S> <C> <C> <C> <C>
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>
<CAPTION>
June 14, 1995
(commencement of
Operations) through Year ended Year ended
December 31, 1995 December 31, 1996 December 31, 1997
----------------- ----------------- -----------------
<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 Portfolio 26,916 221,856 754,142
Small Company Stock Portfolio 17,641 139,625 383,123
International Stock Portfolio N/A N/A N/A
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. However it is anticipated
that the Administrator will receive $40,000 per year (pro rated this year from
March 2, 1998) for the International Stock Portfolio.
SUB-ADVISERS
AAL Capital Management Corporation, a Delaware corporation organized in 1986, is
the Sub-Adviser for the 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 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 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 60- 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.
We entered into an agreement with Oechsle International Advisors, LP (Oechsle,
LP), in accordance with the requirements of the Investment Company Act of 1940.
In the agreement, Oechsle LP has agreed to serve as Sub-adviser to the
International Stock Portfolio beginning at its inception, March 2, 1998.
Oechsle, LP is a Delaware limited partnership with principal offices at One
International Place, Boston, Massachusetts 02110. Oechsle, LP has been
registered as an investment adviser since 1986. As of April 30, 1998, Oechsle
manages over $12 billion in assets.
Oechsle, LP is currently changing its business structure. As part of the change,
Oechsle, LP will be reorganized into Oechsle International Advisors, LLC,
(Oechsle LLC), a Delaware limited liability company, which will continue the
business that Oechsle, LP conducted prior to that time. Oechsle expects the
completion of the reorganization, subject to several conditions, around October
1, 1998.
The reorganization and resulting ownership structure of Oechsle are described in
detail in the Fund's Prospectus.
Under its sub-advisory agreement with the Adviser, Oechsle determines which
securities and other investments will be purchased, retained or sold for the
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 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
60- 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 providing
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, 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 July 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.
Money Market Portfolio 0.00%
Bond Portfolio 0.00
Balanced Portfolio 0.00
Large Company Stock Portfolio 0.00
Small Company Stock Portfolio 0.00
International Stock Portfolio 79.39
High Yield Portfolio 78.36
As of July 31, 1998, the AAL Variable Annuity Account I and AAL Variable Life
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.
Money Market Portfolio 100.00%
Bond Portfolio 100.00
Balanced Portfolio 100.00
Large Company Stock Portfolio 100.00
Small Company Stock Portfolio 100.00
International Stock Portfolio 20.61
High Yield Bond Portfolio 21.64
As of July 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
Fund's' 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>
<CAPTION>
June 14, 1995
(commencement of
Portfolio Name Year Ended 1997 Year Ended 1996 operations) to
December 31, 1995
<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:
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 Portfolio's 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 gains
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 Bond, Balanced, Large Company Stock, Small Company Stock and High
Yield Bond Portfolios expect to pay any income dividends monthly. The
International Stock Portfolio expects to pay dividends annually. The 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 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 Portfolio such as this, the portion thereof
during which the Portfolio 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 Period from Inception(1)
Year Ended June 30, 1998 to June 30, 1998
Money Market 5.44% 5.35%
Bond 10.37 7.31
Balanced 20.43 19.33
Large Company Stock 29.34 29.89
Small Company Stock 19.27 20.45
International Stock N/A 6.81
High Yield Bond N/A 31.79
- ----------
(1) The first five Portfolios began operation on Jue 14, 1995, the last two on
March 2, 1998.
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 0.35% 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 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 30-day period ended July 31, 1998, the current yield for the Bond
Portfolio was 5.39%, the Balanced Portfolio was 3.21% and the High Yield Bond
Portfolio was 9.42%.
Calculation of Yield -- Money Market Portfolio
The 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-- 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 July 31, 1998, the Current and Effective Yields of the
Money Market Portfolio were 5.26% and 5.40%, 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 a 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 Portfolio'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
International Stock Portfolio and the High Yield Bond Portfolio, each of which
first offered its shares through the Statement of Additional Information and
related Prospectus dated March 1, 1998), and the Report of the Independent
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, 1997 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, Post-Effective Amendment
Inc. (the "Fund") #6 dated February 27, 1998
2 Bylaws of the Fund Post-Effective Amendment
#4 dated April 18, 1997
3 Not applicable
4 Not applicable
5(a) Second Amendment to Investment Advisory Agreement between Aid Post-Effective Amendment
Association for Lutherans ("AAL") and the Fund dated December #6 dated February 27, 1998
11, 1997
5(b) Sub-Advisory Agreement between the Fund and AAL Capital
Post-Effective Amendment Management Corporation (AAL CMC) for
the High Yield Bond #6 dated February 27, 1998 Portfolio dated
February 12, 1998
5(c) Form of Sub-Advisory Agreement between the Fund and Oechsle X
International Advisors LP for the International Stock Portfolio
6 Amended and Restated Participation between AAL and the Fund as Post-Effective Amendment
of December 11, 1997 #6 dated February 27, 1998
7 Not applicable
8 Form of Custodian Agreement between the Fund and Citibank N.A. Post-Effective Amendment
#6 dated February 27, 1998
9(a) Form of Transfer Agency Letter of Amendment Post-Effective Amendment
#6 dated February 27, 1998
9(b) First Amendment to the Trade Name/Service Mark Licensing X
Agreement between the Fund and AAL dated March 1, 1998
10 Opinion and Consent of In-house Counsel as to the legality of Post-Effective Amendment
shares of the Fund #4 dated April 18, 1997
11 Consent of Independent Auditors X
12 Not applicable
13 Stock Subscription Agreement between the Fund and AAL dated Post-Effective Amendment
December 11, 1997 #6 dated February 27, 1998
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
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 1
Balanced Portfolio 1
Money Market Portfolio 1
International Stock Portfolio 2
High Yield Bond Portfolio 2
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 entered into an agreement with Oechsle International Advisors, L.P.
(Oechsle, LP), in accordance with the requirements of the Investment Company Act
of 1940. In the agreement, Oechsle LP has agreed to serve as Sub-adviser to the
International Stock Portfolio beginning at its inception, March 2, 1998.
Oechsle, LP is a Delaware limited partnership with principal offices at One
International Place, Boston, Massachusetts 02110. The general partner of
Oechsle, LP is Oechsle Group, L.P., also a limited partnership. Oechsle, L.P.
has been registered as an investment adviser since 1986. As of April 30, 1998,
Oechsle manages over $12 billion in assets.
Oechsle, LP is currently changing its business structure. As part of
the change, Oechsle, LP will be reorganized into Oechsle International Advisors,
LLC, (Oechsle LLC), a Delaware limited liability company, which will continue
the business that Oechsle, LP conducted prior to that time. Oechsle expects the
completion of the reorganization, subject to several conditions, around October
1, 1998.
Pursuant to an agreement dated May 1998, (1) the seven general partners
of Oechsle Group, L.P. will approximately double their current collective
ownership interest in Oechsle, (2) Dresdner Bank AG, indirectly Oechsle, LP's
largest limited partner, will sell all of its interests in Oechsle, LP, and (3)
Fleet Financial Group, Inc. will acquire approximately a 35% interest (on a
fully diluted basis) in Oechsle that does not include voting securities.
Oechsle Group, LLC, a Delaware limited liability company, will be the
Member Manager of Oechsle LLC and will own approximately a 44% interest in
Oechsle LLC. The seven current general partners of Oechsle Group, LP will
collectively own approximately an 89% interest in Oechsle Group LLC. The
management, policies and control of Oechsle LLC will, subject to certain
limitations, be vested exclusively in Oechsle Group LLC. Day-to-day management
of Oechsle LLC will be exercised by the Management Committee of Oechsle Group
LLC, which will consist of . S. Dewey Keesler, Jr., L. Sean Roche, Stephen P.
Langer, Warren Walker and Andrew S. Parlin.
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 27th day of August
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 August 27, 1998
- -------------------------- (Principal Executive Officer)
Steven A. Weber
/s/ Carl J. Rudolph Treasurer August 27, 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
- -------------------------- August 27, 1998
Steven A. Weber
Attorney-in-Fact
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
INDEX TO EXHIBITS
Exhibit Number
Name of Exhibit
5(c) Form of Sub-Advisory Agreement between the Fund and Oechsle
International Advisors LP for the International Stock Portfolio
9(b) First Amendment to the Trade Name/Service Mark Licensing
Agreement between the Fund and AAL dated March 4, 1998
11 Consent of Independent Auditors
27 Financial Data Schedule
Exhibit 5(c)
THE AAL VARIABLE PRODUCT SERIES FUND, INC.
SUB-ADVISORY AGREEMENT FOR THE
THE AAL VARIABLE PRODUCT INTERNATIONAL STOCK PORTFOLIO
WITH
OECHSLE INTERNATIONAL ADVISORS, LLC
AGREEMENT made this 1st day of September, 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, LLC (the "Sub-Adviser"), a Delaware limited liability 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
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
with 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 the 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 the 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 the date the transfer of ownership between Oechsle International
Advisors, L.P. and Oechsle International Advisors, LLC takes place, 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 members 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 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 Advisors, LLC
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.
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.
- ---------------------- ---------------------------
Kathleen A. Brost, Secretary Steven A. Weber, President
ATTEST: AID ASSOCIATION FOR
LUTHERANS
- ---------------------- ---------------------------
Woodrow E. Eno, Senior Vice John O. Gilbert, President and
President, General Counsel Chief Executive Officer
and Secretary
ATTEST: OECHSLE INTERNATIONAL
ADVISORS, LLC by its Managing
Member, OECHSLE GROUP, LLC
- ----------------------- ----------------------------
L. Sean Roche, Member Manager
<PAGE>
EXHIBIT A
TO
THE AAL VARIABLE PRODUCT SERIES FUND
SUB-ADVISORY AGREEMENT
(Dated September 1, 1998)
1. The AAL Variable Product International Stock Portfolio
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.
Exhibit 9(b)
AMENDMENT
TO
TRADE NAME/SERVICE MARK LICENSING AGREEMENT
BY AND BETWEEN
AID ASSOCIATION FOR LUTHERANS
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.
The Trade Name/Service Mark Licensing Agreement between Aid Association for
Lutherans and AAL Variable Product Series Fund, Inc. dated September 27, 1994,
is hereby amended, effective March 4, 1998 as follows:
The RECITALS section is hereby amended to read as follows:
RECITALS
LICENSOR has used the trade name/service mark "AAL" for the
marketing of insurance, mutual fund, fraternal and other related services
since 1917, and the name is associated with and represents LICENSOR and
the quality of services it provides, and all the goodwill associated with
it. LICENSOR has a valid federal service mark for said name, registered
with The United States Patent & Trademark Office, encompassing the
services offered by LICENSEE. LICENSOR will have the non-exclusive right
to use and license others to use such trade name/service mark for mutual
fund services marketed only to AAL Variable Annuity Account I, AAL
Variable Life Insurance Account I, AAL and/or AAL Benefit Members (or
those eligible for membership), and employees and their immediate
families of AAL, its subsidiaries and affiliates.
Consideration for this agreement shall be $1.00 in United States
currency, receipt of which by LICENSOR shall be acknowledged by the
signing of this agreement, and the mutual promises herein.
Nothing in this agreement shall be construed in any way to create a
partnership, agency or subsidiary relationship between the parties
involved herein.
LICENSEE desires to obtain a license, under the terms and
conditions provided herein, to utilize said trade name/service mark in
association with the marketing, servicing and provision of only the
services agreed to in this licensing agreement, only to AAL Variable
Annuity Account I, AAL Variable Life Insurance Account I, AAL, AAL
benefit members and employees and their immediate families of AAL, its
subsidiaries and affiliates.
LICENSOR is willing to grant a limited license to LICENSEE to use
such trade name/service mark under the terms and conditions provided
herein.
In WITNESS WHEREOF the parties hereto have caused this Amendment to be signed by
the respective Officers effective as of March 4, 1998.
ATTEST: AAL VARIABLE PRODUCT SERIES
FUND, INC.
By: /s/ Kathleen A. Brost By: /s/ Steven A. Weber
--------------------------- ----------------------------
Kathleen A. Brost 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
President, General Counsel and Chief Executive Officer
and Secretary
Exhibit 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights," "Custodian, Transfer Agent and Independent Auditors" and
"Independent Auditors," and to the incorporation by reference of our report
dated January 30, 1998, with respect to AAL Variable Product Series Fund, Inc.
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. 7 to the
Registration Statement under the Securities Act of 1933 (File No. 33-82056) and
in this Amendment No. 8 to the Registration Statement under the Investment
Company Act of 1940 (File No. 811-8662).
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
August 25, 1998
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