1933 Act Registration No. 33-82056
1940 Act Registration No. 811-8662
As filed with the Securities and Exchange Commission on
April 22, 1999.
- --------------------------------------------------------------------------------
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. 9 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 10 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 on May 1, 1999 pursuant to paragraph (b)
60 days after filing pursuant to paragraph (a)(1)
on May 1, 1999 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.
April 20, 1999
Page 1
AAL VARIABLE PRODUCT SERIES FUND, INC.
Prospectus
May 1, 1999
AAL Variable Product Money Market Portfolio
The portfolio strives for maximum current income, while maintaining liquidity
and a constant net asset value of $1.00 per share, by investing in high-quality,
short-term money market instruments.
AAL Variable Product Bond Portfolio
The portfolio strives for investment results similar to the total return of the
Lehman Brothers Aggregate Bond Index by investing primarily in bonds and other
debt securities included in the index.
AAL Variable Product Balanced Portfolio
The portfolio seeks capital growth and income by investing in a mix of common
stocks, bonds and money market instruments. Securities are selected consistent
with the policies of the Large Company Stock, Bond and Money Market Portfolios.
AAL Variable Product Large Company Stock Portfolio
The portfolio strives for investment results that approximate the performance of
the S&P 500 Index, by investing primarily in common stocks of the index.
AAL Variable Product Small Company Stock Portfolio
The portfolio strives for capital growth that approximates the performance of
the S&P SmallCap 600 Index, by investing primarily in common stocks of the
index.
AAL Variable Product International Stock Portfolio
The portfolio strives for long-term capital growth by investing primarily in
foreign stocks.
AAL Variable Product High Yield Bond Portfolio
The portfolio strives for high current income and secondarily capital growth by
investing primarily in high-risk, high-yield bonds commonly referred to as "junk
bonds."
This Fund prospectus provides information that you ought to know before
investing. Please keep the prospectus for future reference. If you have
questions or want any additional material, call us at (800)225-5225 or 734-5721
locally. The telecommunications device for the deaf (TDD) number is
(800)735-9644.
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed on the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Table of Contents
Page
Risk/Return Information; Investment Objectives and Strategies
Organization
Money Market Portfolio
Bond Portfolio
Balanced Portfolio
Large Company Stock Portfolio
Small Company Stock Portfolio
International Stock Portfolio
High Yield Bond Portfolio
Management of the Fund
The Adviser
Sub-Advisers
Adviser Fees
Portfolio Managers
Performance Information
Yields and Total Returns
Index Information
Pricing of Fund Shares
Tax Matters
Financial Highlights
<PAGE>
RISK/RETURN INFORMATION; INVESTMENT OBJECTIVES AND STRATEGIES
Organization
The AAL Variable Product Series Fund, Inc. (the Fund) is a mutual fund.
Shares of the Fund are sold to the AAL Variable Annuity Account I, the AAL
Variable Life Account I and other retirement plans. Shares of the Fund may also
be sold to other separate accounts in the future. Shares are not sold to the
public or members directly. This Fund prospectus describes the goals and risks
of seven portfolios. We cannot assure you that the portfolios will meet their
investment goals. You bear all the investment risk for the performance of the
portfolios. The share price will vary with the performance of the portfolios
(except the Money Market Portfolio that attempts to maintain a stable $1.00 per
share).
We are Aid Association for Lutherans (AAL). We advise the Fund and
issue certificates for the AAL Variable Annuity and AAL Universal Life. We are
also the transfer agent for the fund shares and the sponsor of the savings plan.
[Sidebar: The Variable Accounts]
We offer the AAL Variable Annuity Certificates and AAL Variable Life
Insurance Certificates (the certificates) to our members and employees. We offer
the certificates through one of two separate accounts: AAL Variable Annuity
Account I and AAL Variable Life Account I (the variable accounts). Each variable
account is divided into subaccounts. Your 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 that you allocate. In turn, the subaccounts invest in
shares of one of the corresponding portfolios of the Fund. Please refer to the
account prospectus for more information on how to invest in a certificate.
[Sidebar: The Aid Association for Lutherans Savings Plan]
We also sponsor the Aid Association for Lutherans Savings Plan, a 401(k)
plan for our employees (plan participants). Plan participants have the option,
among other investment elections, to direct that all or a portion of the assets
in their savings plan accounts be invested in certain of the portfolios. You
should refer to your savings plan documents for more information on your
investment choices and how to invest in the portfolios.
Due to differences in tax treatment and other considerations, a conflict
could arise between the interests of certificate owners and the interest of plan
participants with respect to their investments in the portfolios. The Board of
Directors will monitor events in order to identify the existence of any material
irreconcilable conflicts and to determine what action, if any, should be taken
in response to any such conflicts. The Fund may in the future elect to make
shares of the portfolios available to other separate accounts for variable
products established by AAL, variable product separate accounts established by
other insurance companies and/or qualified employee retirement plans of other
companies. Such additional participants could increase the possibility that a
conflict might arise.
If you are a certificate owner or plan participant, you do not directly
own the shares of the Fund, but certain voting privileges pass to you. The SEC
does not supervise the variable accounts or any retirement plan.
AAL Variable Product Money Market Portfolio
Investment Objective
The portfolio strives for maximum current income, while maintaining
liquidity and a constant net asset value of $1.00 per share, by investing in
high-quality, short-term money market instruments.
[Sidebar: The Money Market Portfolio]
The portfolio is a mutual fund, not a savings account. It consists of a pool of
investments that are professionally managed. You should not consider an
investment in the portfolio 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. We cannot guarantee that the portfolio will achieve it goal.
Investment Strategies
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.
To the extent possible, we try to maintain a $1.00 share price for the
portfolio. We invest only in high-quality, dollar-denominated, short-term debt
securities, such as:
o obligations issued or guaranteed by the U.S. government or its agencies;
o certificates of deposit, bankers acceptances and similar obligations of
U.S. or foreign banks or similar savings institutions;
o commercial paper;
o corporate obligations including those with variable rates.
Portfolio turnover (the number of times we buy or sell entire positions in
a security) will be high for the portfolio due to the short duration of
securities, which require replacement by new issues.
Primary Risks
Although we strive to maintain a $1.00 price per share, it is possible
to lose money by investing in the portfolio. The portfolio is subject to
interest rate risk, which means the yield of the portfolio may go down as
maturing securities are replaced with new lower yielding securities. The
portfolio is also subject to credit risk, which means that a security might be
downgraded or default while the portfolio holds it. If this occurs, this could
lower the yield or reduce the principal.
Past Performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed. The bar chart
depicts the change in performance from year-to-year during the period indicated.
The table compares the portfolio's average annual returns for the period
indicated to a broad-based securities market index. The returns in the bar chart
and table do not reflect charges and expenses imposed on certificate holders by
the variable accounts, such as the mortality and expense risk charge. Those
charges and expenses reduce the returns received by certificate holders as
compared to the returns presented in the bar chart and table below. As with all
investments, past performance is not a guarantee of future results.
Total Return as of December 31 [shown as bar chart]
- ------------------------------------- --------------------- --------------------
5.23% 5.33% 5.31%
- ------------------------------------- --------------------- --------------------
- ------------------------------------- --------------------- --------------------
1996 1997 1998
- ------------------------------------- --------------------- --------------------
- ------------------------------------- --------------------- --------------------
Best Quarter: Q3 1997 1.36%
- ------------------------------------- --------------------- --------------------
- ------------------------------------- --------------------- --------------------
Worst Quarter: Q1 1997 1.20%
- ------------------------------------- --------------------- --------------------
Average Annual Total Return as of December 31, 1998
- ------------------------------------- --------------------- --------------------
1 Year Inception (6/14/95)
- ------------------------------------- --------------------- --------------------
- ------------------------------------- --------------------- --------------------
Money Market Portfolio 5.31% 5.33%
- ------------------------------------- --------------------- --------------------
- ------------------------------------- --------------------- --------------------
Salomon Brothers Short-Term Index(1) 4.55% 4.89%
- ------------------------------------- --------------------- --------------------
- ------
(1) An index composed of 1-month Treasury Bills.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.35%
Distribution (12b-1) Fees None
Other Expenses 0.09%
Total Annual Portfolio Operating Expenses(1) 0.44%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.35%.
Expense Example
- --------------------- ---------------------- ----------------------- -----------
1 Year 3 Years 5 Years 10 Years
- --------------------- ---------------------- ----------------------- -----------
- --------------------- ---------------------- ----------------------- -----------
$ 45 $ 141 $ 246 $ 555
- --------------------- ---------------------- ----------------------- -----------
This example shows how much you could pay over time using a
hypothetical $10,000 investment and an annual return of 5% compounded annually
for the years shown. You should use the expense example for comparison only. It
does not represent the portfolio's actual expenses and returns, either past or
future. Actual expenses and returns may be greater or less than those shown.
AAL Variable Product Bond Portfolio
Investment Objective
The portfolio strives for investment results similar to the total
return of the Lehman Brothers Aggregate Bond Index by investing primarily in
bonds and other debt securities included in the index.
Investment Strategies
For this portfolio we invest in a representative sample of fixed income
and mortgage-backed securities included in the Lehman Brothers Aggregate Bond
Index (Lehman Bond Index), an unmanaged, broad-based bond index. It is not
possible for us to invest in and manage all 6,300 issues that make up the Lehman
Bond Index, however, we consider this portfolio to be "indexed" (track the
performance of the index). We invest in four classes of investment grade,
fixed-income securities for this portfolio. We strive to invest 80% or more of
the portfolio's total assets in securities in the Lehman Bond Index. For
inclusion in the portfolio, the security must:
o have a maturity of no less than one year;
o have at least $100 million par amount outstanding;
o be rated as investment grade quality;
o have a fixed rate;
o be dollar-denominated and nonconvertible; and
o be publicly issued.
[Sidebar]
As of December 31, 1998, these four classes represented the following
proportions of the portfolio's long-term market value:
Percent of Total
U.S. Treasury & Government Agency 76.6%
Corporate 20.4
Other Government 2.4
Asset-Backed 0.6
====
Total 100%
Fixed-income securities are securities that pay a fixed rate of return
until they mature. When they mature, the principal amount is paid back. Such an
investment provides the security of a fixed income stream but does not protect
against the erosion affect of inflation. These fixed-income securities make up
the bulk of the portfolio. We may also invest in mortgage-backed securities.
These are securities that are "backed" by real property that has a mortgage.
This type of investment pays principal and interest on a monthly basis. At the
end of the life of the mortgage, the entire principal is repaid and no more
interest is due. For this portfolio, we may select securities issued by business
or the government. We will invest in the securities of a particular agency only
when we determine that there is a minimal credit risk. Even though some
securities are guaranteed by the U.S. government, it only guarantees the timely
payment of principal and interest, the U.S. government does not guarantee the
market value.
We try to keep the portfolio fully invested, allowing for some
liquidity for purchases and sales. Typically, we will invest no more than 5% of
the portfolio in money market instruments. Although we try to match the
performance of the Lehman Bond Index, there are many factors that can impact the
portfolio's performance differently than that of the index. Some factors include
timing of purchases and sales of shares, cost of acquiring a particular security
and the portfolio management fee. Although the portfolio attempts to approximate
the Lehman Bond Index, we cannot guarantee that the portfolio will achieve such
results. We do not expect portfolio turnover to be more that 50% a year. 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.
Primary Risks
The primary risks for this portfolio are interest rate risk and credit
risk. Interest rate risk is the risk that bond income levels do not keep track
with inflation. In times of inflation, lower yielding bonds become worth less,
relatively. This affect would reduce the overall return of the portfolio.
However, the reverse is true if interest levels are low. There is also credit
risk, the risk that an issuer may no longer be able to pay its debt. This can
happen due to poor business performance or a downturn in the economy. When a
security is subject to credit risk, its value tends to decline, which in turn
would cause a corresponding decline in the net asset value of the portfolio.
Although it is possible for the value of the portfolio to decline, the price per
share of this portfolio is somewhat more stable than a stock portfolio.
Past Performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed. The bar chart
depicts the change in performance from year-to-year during the period indicated.
The table compares the portfolio's average annual returns for the period
indicated to a broad-based securities market index. The returns in the bar chart
and table do not reflect charges and expenses imposed on certificate holders by
the variable accounts, such as the mortality and expense risk charge. Those
charges and expenses reduce the returns received by certificate holders as
compared to the returns presented in the bar chart and table below. As with all
investments, past performance is not a guarantee of future results.
Total Return as of December 31[shown as bar chart]
- ------------------------------------- ---------------------- -------------------
3.10% 9.37% 8.59%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
1996 1997 1998
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Best Quarter: Q3 1998 4.42%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Worst Quarter: Q1 1996 (1.82)%
- ------------------------------------- ---------------------- -------------------
Average Annual Total Return as of December 31, 1998
- ------------------------------------- ---------------------- -------------------
1 Year Inception (6/14/95)
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Bond Portfolio 8.59% 7.56%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Lehman Bond Index(1) 8.67% 7.93%
- ------------------------------------- ---------------------- -------------------
- ------
(1) The Lehman Bond Index is a broad-based bond index comprised of U.S. debt
securities.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.35%
Distribution (12b-1) Fees None
Other Expenses 0.13
Total Annual Portfolio Operating Expenses(1) 0.48%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.35%.
Expense Example
- ------------------------ ---------------------- ---------------------- ---------
1 Year 3 Years 5 Years 10 Years
- ------------------------ ---------------------- ---------------------- ---------
- ------------------------ ---------------------- ---------------------- ---------
$ 49 $ 154 $ 269 $ 604
- ------------------------ ---------------------- ---------------------- ---------
This example shows how much you could pay over time using a
hypothetical $10,000 investment and an annual return of 5% compounded annually
for the years shown. You should use the expense example for comparison only. It
does not represent the portfolio's actual expenses and returns, either past or
future. Actual expenses and returns may be greater or less than those shown.
AAL Variable Product Balanced Portfolio
Investment Objective
The portfolio seeks capital growth and income by investing in a mix of
common stocks, bonds and money market instruments. Securities are selected
consistent with the policies of the Large Company Stock, Bond and Money Market
Portfolios.
Investment Strategy
The portfolio selects securities consistent with the policies of the
Large Company Stock, Bond and Money Market Portfolios. Since the equity and bond
portfolios of the Balanced Portfolio are indexed, we consider this portfolio to
be indexed. We select common stocks from the same pool of stocks that make up
the Large Company Stock Portfolio, weighting those stocks proportionately to the
weightings in the Large Company Stock Portfolio. For debt securities, the
portfolio generally selects securities from the same pool of securities that
make up the Bond Portfolio, however, some debt securities may not be the same as
are in the Bond Portfolio but we will select them in accordance with that
portfolio's objectives. In similar fashion, we will select money market
instruments consistent with the Money Market Portfolio, however, the Balanced
Portfolio will not always hold the same issues as the Money Market Portfolio.
We establish our asset allocation mix by forecasting the expected
return of each asset class over short-term and long-term time horizons, and
consider the variability of the anticipated returns based on historical results
as well as expected risks and returns. Since stock and bond markets tend to
fluctuate independently of each other, the decline in one market may be offset
by the rise of the other. As a result of the asset class mix, the portfolio is
more diversified and is subject to less risk than in investing exclusively in
stocks or bonds alone. Overall, we try to maintain higher weighting in those
asset classes we expect to provide the highest returns over a set time horizon.
In a general decline in one market, we may increase our weighting in one or both
of the other asset classes. Despite our attempts to ease the affect of any
market downturn, you may still lose money. We strive to keep the annual turnover
rate at below 50%.
The portfolio invests in the following three asset classes within the
ranges given:
minimum maximum
o common stocks 35% 75%
o debt securities 25 50
o money market instruments 0 40
[Sidebar]
Current Weighting of Assets
As of December 31, 1998, we weighted the investments in the classes as
follows:
percent weighted
o common stocks 55%
o debt securities 35
o money market instruments 10
--
total 100%
Primary Risks
There are four primary types of risk to which the Balanced Portfolio is
subject: financial risk, market risk, interest rate risk and credit risk.
Financial risk 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 is more universal, the value of the portfolio's shares tend to go up and
down, to some degree with the market. 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 move with these
cycles, however they could increase and decrease more than the stock market in
general, as measured by the S&P 500. Interest rate risk is the risk that bond
income levels do not keep track with inflation. In times of inflation, lower
yielding bonds are valued less than before. This affect could reduce the overall
return of the portfolio. However, the reverse is true if interest levels are
low. Finally, credit risk is the risk that an issuer of a security may no longer
be able to pay its debt. This can happen due to poor business performance or a
downturn in the economy. When a security is subject to credit risk, its value
tends to decline, which in turn, would cause a corresponding decline in the net
asset value of the portfolio. You could lose money investing in the portfolio,
the share price may vary significantly over time.
Past Performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed. The bar chart
depicts the change in performance from year-to-year during the period indicated.
The table compares the portfolio's average annual returns for the period
indicated to a broad-based securities market index. The returns in the bar chart
and table do not reflect charges and expenses imposed on certificate holders by
the variable accounts, such as the mortality and expense risk charge. Those
charges and expenses reduce the returns received by certificate holders as
compared to the returns presented in the bar chart and table below. As with all
investments, past performance is not a guarantee of future results.Total Return
as of December 31[shown as bar chart]
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
13.65% 21.71% 19.27%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
1996 1997 1998
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Best Quarter: Q4 1998 11.60%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Worst Quarter: Q3 1998 (3.82)%
- ------------------------------------- ---------------------- -------------------
Average Annual Total Return as of December 31, 1998
- ------------------------------------- ---------------------- -------------------
1 Year Inception (6/14/95)
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Balanced Portfolio 19.27% 18.71%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
S&P 500 Index(1) 28.57% 28.73%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Lehman Bond Index(1) 8.67% 7.93%
- ------------------------------------- ---------------------- -------------------
- ------
(1) The S&P 500 Index and the Lehman Bond Index are included for a combined
comparison of the equity and debt portions of the portfolio. The S&P 500
Index is a well-known, unmanaged index comprised of 500 widely-held common
stocks. The Lehman Bond Index is a broad-based bond index comprised of U.S.
debt securities.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.33%
Distribution (12b-1) Fees None
Other Expenses 0.06
Total Annual Portfolio Operating Expenses(2) 0.39%
- ------
(2) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.33%.
Expense Example
- ----------------------- ----------------------- ----------------------- --------
1 Year 3 Years 5 Years 10 Years
- ----------------------- ----------------------- ----------------------- --------
- ----------------------- ----------------------- ----------------------- --------
$ 40 $ 125 $ 219 $ 493
- ----------------------- ----------------------- ----------------------- --------
This example shows how much you could pay over time using a
hypothetical $10,000 investment and an annual return of 5% compounded annually
for the years shown. You should use the expense example for comparison only. It
does not represent the portfolio's actual expenses and returns, either past or
future. Actual expenses and returns may be greater or less than those shown.
AAL Variable Product Large Company Stock Portfolio
Investment Objective
The portfolio strives for investment results that approximate the
performance of the S&P 500 Index, by investing primarily in common stocks of the
index.
Investment Strategies
We select stocks through the use of computer models instead of using
traditional analysis to duplicate the S&P 500 Index. We select stocks that make
up the S&P 500 Index in proportion to their weighting in the index. We try to
hold all of the stocks that make up the index, however there may be variations
and delays from time to time due to periodic changes to the index. We expect
portfolio turnover of no more than 50% per year.
To the extent possible, the portfolio will be 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. The
portfolio has expenses that an index does not have, so the portfolio will not be
able to match the performance of its index exactly. We will try to manage the
portfolio to reduce such effects.
We may also invest to some degree in money market instruments. We do not expect
them to exceed 3% of the portfolio's assets. For defensive purposes, we may
invest up to 20% of the portfolio's net assets, in securities of foreign
issuers. These temporary defensive measures may cause the portfolio not to
achieve its investment objective. Stocks have historically performed better as
an asset class than bonds. Although there is a greater potential for reward,
there are also greater risks. Although we will attempt to follow the performance
of the S&P 500 Index, we cannot guarantee these results. You could lose money
investing in this portfolio.
Primary Risks
There are two primary types of risk to which this portfolio is subject:
financial risk and market risk. Financial risk 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 is more universal, the value of the
portfolio's shares tend to go up and down, to some degree with the market. 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 move with these cycles however they could increase
and decrease more than the stock market in general, as measured by the S&P 500.
Past Performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed. The bar chart
depicts the change in performance from year-to-year during the period indicated.
The table compares the portfolio's average annual returns for the period
indicated to a broad-based securities market index. Although the portfolio
strives for investment returns similar to the S&P 500 Index, such returns will
usually be lower because the portfolio has expenses that an index does not. The
returns in the bar chart and table do not reflect charges and expenses imposed
on certificate holders by the variable accounts, such as the mortality and
expense risk charge. Those charges and expenses reduce the returns received by
certificate holders as compared to the returns presented in the bar chart and
table below. As with all investments, past performance is not a guarantee of
future results.
Total Return as of December 31[shown as bar chart]
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
22.47% 32.59% 28.36%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
1996 1997 1998
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Best Quarter: Q4 1998 21.28%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Worst Quarter: Q3 1998 (9.83)
- ------------------------------------- ---------------------- -------------------
Average Annual Total Return as of December 31, 1998
- ------------------------------------- ---------------------- -------------------
1 Year Inception (6/14/95)
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Large Company Stock Portfolio 28.36% 28.35%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
S&P 500 Index(1) 28.57% 28.73%
- ------------------------------------- ---------------------- -------------------
- ------
(1) The S&P 500 Index is a well-known, unmanaged index comprised of 500
widely-held common stocks.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.33%
Distribution (12b-1) Fees None
Other Expenses 0.05
Total Annual Portfolio Operating Expenses(1) 0.38%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.33%.
Expense Example
- ------------------------ --------------------- ---------------------- ----------
1 Year 3 Years 5 Years 10 Years
- ------------------------ --------------------- ---------------------- ----------
- ------------------------ --------------------- ---------------------- ----------
$ 39 $ 122 $ 213 $ 480
- ------------------------ --------------------- ---------------------- ----------
This example shows how much you could pay over time using a hypothitical $10,000
investment and an annual return of 5% compounded annually for the years shown.
You should use the expense example for comparison only. It does not represent
the portfolio's actual expenses and returns, either past or future. Actual
expenses and returns may be greater or less than those shown.
AAL Variable Product Small Company Stock Portfolio
Investment Objective
The portfolio strives for capital growth that approximates the
performance of the S&P SmallCap 600 Index, by investing primarily in common
stocks of the index.
Investment Strategies
This portfolio is indexed against the S&P SmallCap 600 Index by holding
the stocks that make up the index in proportion to their weighting in the index.
We select stocks through the use of computer models instead of using traditional
analysis to duplicate the index. We try to hold all of the stocks that make up
the index, however there may be variations and delays from time to time due to
periodic changes made to the index. We expect portfolio turnover of no more than
50% per year.
To the extent possible, the portfolio should be 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. Since the portfolio has expenses that an index does not have, the
performance will not match the index exactly. We will try to manage the
portfolio to reduce such effects.
We may also invest to some degree in money market instruments. We do
not expect them to exceed 3% of the portfolio's assets. For defensive purposes,
we may invest up to 20% of the portfolio's net assets, in securities of foreign
issuers. These temporary defensive measures may cause the portfolio not to
achieve its investment objective. Small company stocks are considerably more
risky than large company stocks since small companies are less mature and don't
have access to financial resources that a large company would have. While the
risks are greater so is the potential for greater reward. Although we will
attempt to follow the performance of the S&P SmallCap 600 Index, we cannot
guarantee these results. You could lose money by investing in the portfolio.
March 1, 1998, the portfolio's objective was to approximate the performance of
Wilshire Small Cap Index. Shareholders approved the change based on the Board of
Directors' recommendation that the S&P SmallCap 600 Index better represents the
performance of small cap stocks generally, and because this index reports
performance information on a daily basis.
Primary Risks
There are two primary types of risk to which this portfolio is subject:
financial risk and market risk. Financial risk is the possibility that an
individual company may not perform well and, as a result, the value of that
company's security may decline. Financial risk is more pronounced in the
securities of small, less established companies that make up the bulk of the
portfolio. Market risk is the risk that the value of the portfolio's shares go
up and down, to some degree, with the market. Stocks of these companies present
a greater risk of losing value than stocks of larger, more established
companies. 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:
o less certain growth prospects of small firms; o lower degree of liquidity in
the markets for such stocks; and o greater sensitivity of small companies to
changing economic conditions.
As a result, the value of the portfolio's investments may increase and decrease
substantially more than the stock market in general, as measured by the S&P 500.
As a result, you have a greater risk of losing money in this portfolio.
Past Performance
The chart and table below provide some indication of the risks of investing in
the portfolio by illustrating how the portfolio has performed. The bar chart
depicts the change in performance from year-to-year during the period indicated.
The table compares the portfolio's average annual returns for the period
indicated to a broad-based securities market index. The returns in the bar chart
and table do not reflect charges and expenses imposed on certificate holders by
the variable accounts, such as the mortality and expense risk charge. Those
charges and expenses reduce the returns received by certificate holders as
compared to the returns presented in the bar chart and table below. As with all
investments, past performance is not a guarantee of future results. Although the
portfolio strives for investment returns similar to the S&P SmallCap 600 Index,
such returns will always be lower because the portfolio has expenses that an
index does not.
Total Return as of December 31[shown as bar chart]
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
18.19% 25.37% 0.14%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
1996 1997 1998
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Best Quarter: Q4 1998 17.60%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Worst Quarter: Q3 1998 (20.77)%
- ------------------------------------- ---------------------- -------------------
Average Annual Total Return as of December 31, 1998
- ------------------------------------- ---------------------- -------------------
1 Year Inception (6/14/95)
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
Small Company Stock Portfolio 0.14% 15.00%
- ------------------------------------- ---------------------- -------------------
- ------------------------------------- ---------------------- -------------------
S&P SmallCap 600 Index(1) (1.33)% 16.69%
- ------------------------------------- ---------------------- -------------------
- ------
(1) The S&P SmallCap 600 Index is an unmanaged index comprised of 600 small cap
domestic stocks.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.35%
Distribution (12b-1) Fees None
Other Expenses 0.08
Total Annual Portfolio Operating Expenses(1) 0.43%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.35%.
Expense Example
- ---------------------- ---------------------- ----------------------- ----------
1 Year 3 Years 5 Years 10 Years
- ---------------------- ---------------------- ----------------------- ----------
- ---------------------- ---------------------- ----------------------- ----------
$ 44 $ 138 $ 241 $ 542
- ---------------------- ---------------------- ----------------------- ----------
This example shows how much you could pay over time using a
hypothetical $10,000 investment and an annual return of 5% compounded annually
for the years shown. You should use the expense example for comparison only. It
does not represent the portfolio's actual expenses and returns, either past or
future. Actual expenses and returns may be greater or less than those shown.
AAL Variable Product International Stock Portfolio
Investment Objectives
The portfolio strives for long-term capital growth by investing
primarily in foreign stocks.
Investment Strategies
The sub-adviser invests at least 65% of total assets in foreign stocks and
convertible foreign securities of at least three different countries. It may
invest the balance of total assets in U.S. or additional foreign stocks and up
to 20% of total assets in debt securities or money market instruments. Debt
securities may include unrated securities and lower-rated debt, commonly
referred to as "junk bonds." We do not place any restrictions on the debt
ratings of securities the sub-adviser acquires or, the portion of the
portfolio's assets we may invest in a particular rating category. The portfolio
may temporarily invest up to 100% of its total assets in cash, short-term money
market obligations and investment grade fixed-income securities when the
sub-adviser believes that anticipated adverse market, economic, political or
other circumstances expose the portfolio to a risk of loss. These temporary
defensive measures may cause the portfolio not to achieve its investment
objective.
We focus on stocks primarily trading in the United Kingdom, Western
Europe, Australia, Far East, Latin America and Canada. Many of these markets are
mature, while others are emerging (for example, Indonesia and Argentina). We do
not have any limits on the extent to which we can invest in either mature or
emerging markets. We may invest up to 100% of total assets in emerging markets.
You could lose money by investing in this portfolio. For defensive purposes, we
may invest in money market instruments.
[Sidebar: What is a Foreign Security?]
A foreign security is any non-U.S. Security that is issued by a company
of a particular country. We consider a company to be from 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)
gets at least 50% of its income from operations or sales in that country.
[Sidebar: Emerging Markets]
A country in the beginning stages of developing its economy is an emerging
country market. Developing countries have less diverse economic structures and
less stable political systems than those of developed countries. As a result,
markets of developing countries may be more volatile than the markets of more
mature economies.
Primary Risks
The primary risk is foreign investment risk, which includes currency,
liquidity and increased price volatility risks. Since foreign securities are
often paid for in currencies of foreign countries, the portfolio is subject to
currency exchange rate fluctuations affecting the value of these securities.
This means that the value of securities could increase or decrease in part due
to the discrepancies between U.S. and foreign currencies. Liquidity risk is the
ability to sell a security relatively quickly for a price that most closely
reflects the actual value of the security. In the case of foreign securities,
some securities are less liquid because foreign markets are not as sophisticated
or efficient. Developing countries have economic structures and political
systems that are not as mature or stable as those of developed countries. 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. There
is the possibility that a foreign security may lose some or all of its value.
[Sidebar: Euro Conversion]
A new European Currency, the Euro, was introduced on January 1, 1999. The
consequences of the Euro conversion for foreign exchange rates, interest rates
and the value of European securities eligible for purchase by a portfolio are
yet to be seen. It is possible that such consequences may adversely affect the
value and/or increase the volatility of securities held by the portfolio.
Past Performance
The portfolio commenced operations on March 2, 1998. Because the portfolio has
been in operation for less than a full year, we have not included any
performance information.
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.80%
Distribution (12b-1) Fees None
Other Expenses 0.50
Total Annual Portfolio Operating Expenses(1) 1.30%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.80%.
Expense Example
- ------------------------ ----------------------- ---------------------- --------
1 Year 3 Years 5 Years 10 Years
- ------------------------ ----------------------- ---------------------- --------
- ------------------------ ----------------------- ---------------------- --------
$ 132 $ 412 $ 713 $ 1568
- ------------------------ ----------------------- ---------------------- --------
This example shows how much you could pay over time using a
hypothetical $10,000 investment and an annual return of 5% compounded annually
for the years shown. You should use the expense example for comparison only. It
does not represent the portfolio's actual expenses and returns, either past or
future. Actual expenses and returns may be greater or less than those shown.
AAL Variable Product High Yield Bond Portfolio
Investment Objective
The portfolio strives for high current income and secondarily capital
growth by investing primarily in high-risk, high-yield bonds commonly referred
to as "junk bonds."
Investment Strategies
Usually, the sub-adviser invests at least 65% of the portfolio's total
assets in high-yield bonds. 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. The
portfolio may temporarily invest up to 100% of its total assets in cash,
short-term money market obligations and investment grade fixed-income securities
when adverse market, economic, political or other circumstances expose the
portfolio to a risk of loss. These temporary defensive measures may cause the
portfolio not to achieve its investment objective.
In evaluating the quality of a particular high-yield bond for purchase
by the portfolio, we do not rely exclusively on credit ratings. In appropriate
circumstances, we perform our own credit analysis. We consider the issuer's:
o financial resources; o debt maturity schedules;
o operating history; o borrowing requirements; and
o sensitivity to economic conditions and trends; o management's abilities.
o 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 are 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.
We expect that portfolio turnover typically will not exceed 100%.
[Sidebar: Junk Bonds]
High-yield bonds have a higher yield to compensate for the greater risk that the
issuer might not make its interest and principal payments. Most bonds are rated
by national ratings agencies according to the issuer's ability to maintain
interest payments and repay the principal amount at the time the bonds come due.
High-yield bonds are speculative and, therefore, typically considered below
investment-grade by these ratings agencies. High yield bonds include:
o fixed rate bonds; o floating rate interest debt obligations;
o variable rate bonds; o deferred interest debt obligations;
o convertible bonds; o structured debt obligations;
o zero coupon bonds; o asset-backed debt obligations; and
o pay-in-kind bonds; o mortgage-backed debt obligations.
Primary Risks
There are three primary risks the portfolio is subject to: credit risk,
interest rate risk and market risk. The primary risk of investing in the
high-yield sector is the credit risk. All bonds are subject to credit risk but
particularly high-yield bonds, which have greater risks of default than higher
rated bonds. There is not as much protection of interest and principal payments
with a high-yield bond as there is with a lower yielding, higher rated bond. In
fact, some of the bonds in the portfolio may already be in default. The market
value of high-yield bonds tends to be more sensitive to economic conditions than
are higher rated securities. This can happen due to poor business performance or
a downturn in the economy. Interest rate risk is the risk that bond income
levels do not keep track with inflation. In times of inflation, a bond's yield
may become worth less over time. This affect could reduce the overall return of
the portfolio. However, the reverse is true if interest levels are low.
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.
All of the mentioned risks may negatively impact the value of a
security, which in turn, could cause a corresponding decline in the net asset
value of the portfolio. You could lose money by investing in this portfolio.
Past Performance
The portfolio commenced operations on March 2, 1998. Because the portfolio has
been in operation for less than a full year, we have
Fees and Expenses of the Portfolio
Like any investor you pay certain fees and expenses related to your
investments. Annual fund and operating expenses are paid from portfolio assets
so they directly impact the share price. These expenses are outlined in the
tables below. Note that the expenses shown in the tables below are only at the
portfolio level. 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 account prospectus for more information on expenses associated with
these variable products.
Shareholder Fees (fees paid
directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None
Redemption fee None
Exchange Fee None
Annual Portfolio Operating Expenses (expenses that are deducted from portfolio
assets):
Management Fees 0.40%
Distribution (12b-1) Fees None
Other Expenses 0.14
Total Annual Portfolio Operating Expenses(1) 0.54%
- ------
(1) We agreed to pay on behalf of the portfolio, or reimburse the portfolio,
all expenses in excess of management fees. Therefore, net fees at the
portfolio level were 0.40%.
Expense Example
- ---------------------- ---------------------- ---------------------- -----------
1 Year 3 Years 5 Years 10 Years
- ---------------------- ---------------------- ---------------------- -----------
- ---------------------- ---------------------- ---------------------- -----------
$ 55 $ 173 $ 302 $ 677
- ---------------------- ---------------------- ---------------------- -----------
This example shows how much you could pay over time using a hypothetical $10,000
investment and an annual return of 5% compounded annually for the years shown.
You should use the expense example for comparison only. It does not represent
the portfolio's actual expenses and returns, either past or future. Actual
expenses and returns may be greater or less than those shown.
MANAGEMENT OF THE FUND
The Adviser
AAL, the leader in fraternalism, brings Lutheran people together to
pursue quality living through financial security, volunteer action and help for
others. As of December 31, 1998, we have approximately 1.7 million members and
we are the world's largest fraternal benefit society in terms of assets and
individual life insurance in force, currently over $85 billion. Membership is
open to Lutherans and their families. Members of AAL participate in social,
service, educational, benevolent and other projects every year through branches.
We have more than 10,000 branches in all 50 states. Our principal address is
4321 North Ballard Road, Appleton, Wisconsin 54919-0001.
We were founded in 1902 as a non-stock, non-profit corporation. Our
principal business is selling insurance and other financial products to our
members. These insurance products include: life, disability income, long-term
care and Medicare supplement insurance and annuities. We offer mutual fund
services and credit union services through our affiliates, AAL Capital
Management Corporation and the AAL Member Credit Union, respectively. These
companies are affiliates of ours.
We have extensive investment management experience. Currently, we manage
over $ 26.8 billion in assets. We provide investment advisory services to the
Fund. We manage the investment and reinvestment of the Fund's assets and
supervise the Fund's daily business affairs subject to the supervision of the
Fund's Board of Directors. We provide the Fund with the personnel and facilities
necessary to manage the Fund. We formulate and implement a continuous investment
program for the portfolios consistent with each portfolio's investment
objectives, policies and restrictions. We reimburse the Fund for most of its
operating except for its management fees. AAL expects to continue this
reimbursement through December 31, 1999. AAL may withdraw this undertaking on
30-days' written notice to the Fund.
Sub-Advisers
International Stock Portfolio
Oechsle International Advisors, LLC (Oechsle LLC) is the sub-adviser to
the International Stock Portfolio. Oechsle LLC is a Delaware limited liability
company and a registered investment adviser. It has served as sub-adviser to the
portfolio since it commenced operation on March 2, 1998. Oechsle LLC makes the
day-to-day investment decisions for the portfolio under our direction and
control. Oechsle LLC 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. Oechsle, LLC has principal offices at One
International Place, Boston, Massachusetts 02110. As of December 31, 1998,
Oechsle managed over $ 12.4 billion in assets.
High Yield Bond Portfolio
AAL Capital Management Corporation (AAL CMC) is the sub-adviser to the
High Yield Bond Portfolio. AAL CMC is a Delaware Corporation and a registered
investment adviser. In addition to being the sub-adviser, AAL CMC is also the
distributor of the AAL Variable Annuity and AAL Variable Universal Life
Products. AAL CMC 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. AAL CMC is an affiliate of ours. AAL CMC
has principal offices at 222 West College Avenue, Appleton, Wisconsin
54919-0007. As of December 31, 1998, AAL CMC managed over $ 5.9 billion in
assets.
Adviser Fees
We receive an investment management fee for each portfolio of the Fund.
The fee is a daily charge equal to the annual rate of a percent of average daily
net assets of each portfolio. We agreed to pay on behalf of each portfolio, or
reimburse each portfolio, all expenses in excess of management fees. The adviser
fees paid by the portfolios for 1998 are set forth in the table below. We pay
the sub-advisers out of the adviser fees that we receive from the portfolios.
- ------------------------- ----------------------------------------
Portfolio % of Average Net
Assets for the year
ended 12/31/98
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Money Market 0.35%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Bond 0.35%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Balanced 0.33%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Large Company 0.33%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Small Company 0.35%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
The International Stock and High Yield Bond Portfolios have been in
operation for less than one year, and therefore no full year information is
available. However, under the terms of our advisory contract for the High Yield
Bond Portfolio and the International Stock Portfolio, we charge a fee of 0.40%
and 0.80%, respectively, of average daily net assets. From this amount, we pay
the sub-adviser fees. We pay AAL CMC a fee of 0.25% of the High Yield Bond
Portfolio's average daily net assets. For the International Stock Portfolio, we
pay Oechsle LLC the following agreed upon amounts based on that portfolio's
average daily net assets:
Total Assets Annual Fee
First $20 million 0.54%
Next $30 million 0.45%
Over $50 million 0.36%
Portfolio Managers
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------- ---------------------------- ----------------------------------------------------------------
Portfolio Portfolio Manager(s) Experience
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
Money Market Alan D. Onstad, CFA Has been the portfolio manager since the portfolio commenced
Assistant Vice President operations on June 14, 1995. Mr. Onstad has also been the
of Securities. portfolio manager of the utility portfolio of AAL's general
account, and for the money market portfolio of the AAL Savings
Plan since 1985. Mr. Onstad has been employed by us since
1973.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
Bond R. Jerry Has been the portfolio manager since the portfolio commenced
Scheel operations on June 14, 1995. Mr. Scheel is also the portfolio
Second Vice President of manager of the industrial portfolio of AAL's general account.
Securities He has served in this role since the 1970's. Mr. Scheel has
been employed by us since 1971.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
Balanced Reginald L. Pfeifer, CFA. Has been the portfolio manager since June 1, 1998. Mr.
Director of Securities Pfeifer is also the portfolio manager of the mortgage-backed
and asset-backed securities portfolios of AAL's general
account. He has served in this role since 1990. Mr. Pfeifer
has been employed by us since 1990.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
Large Company Stock David J. Schnarsky, CFA Has been the portfolio manager since the portfolio commenced
Assistant Vice President operations on June 14, 1995. Mr. Schnarsky has also served as the
portfolio manager of the equity portfolio of AAL's general
account and for the AAL Savings Plan since 1991. Mr.
Schnarsky has been employed by us since 1991.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
Small Company Stock Brian J. Flanagan, CFA Has been the portfolio manager since
Assistant Portfolio March 1, 1997. Mr. Flanagan has served in a number of
Manager investment roles with us. Since 1998, Mr. Flanagan has also
been assisting in the portfolio management of the AAL Mid
Cap Stock Fund. From 1996 to 1998, he served first as analyst
and later as portfolio manager for the small cap portfolio
of the AAL Savings Plan. From 1994 to 1995, Mr. Flanagan was
the analyst for the fixed-income portfolio for the plan.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
International Stock Kathleen Harris Managing the portfolio since it commenced operation on March
Portfolio Manager 2, 1998. Both Ms. Harris and Mr. Roche are employees of
Oechsle, LLC, the sub-adviser. Ms. Harris has been a
Sean Roche portfolio manager at Oechsle since January 1995. Prior to
Portfolio Manager 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.
- ------------------------- ---------------------------- ----------------------------------------------------------------
- ------------------------- ---------------------------- ----------------------------------------------------------------
High Yield Bond Dave Carroll, CFA Managing the High Yield Bond Portfolio since the portfolio
Portfolio Manager commenced operation 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.
- ------------------------- ---------------------------- ----------------------------------------------------------------
</TABLE>
PERFORMANCE INFORMATION
From time to time, we calculate and advertise performance information
for different 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 (Bond, Large Company Stock and
Small Company Stock) 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.
[Sidebar: Performance Figures for Variable Products]
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. By excluding applicable
expenses in performance quotations, it may look as though the performance of
your interest in the portfolio is higher than it really is. You should keep in
mind the effect of charges and expenses when comparing the portfolios'
performances to those of other mutual funds. Please review carefully the yield
and total return figures for the relevant subaccounts that accompany the yields
and total returns quoted for the portfolios.
Yields and Total Returns
Yield and total return quotations reflect the performance of a
hypothetical investment during a specified period. These returns are based on
historical performance and do not in any way indicate future performance. The
yield of a portfolio refers to the income made by an investment over a 30-day
period (a seven-day period for the Money Market Portfolio) expressed as a
percentage. 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. We
annualize the yield and show it as a percentage. This means that we assume the
income is earned for each 30-day period for twelve periods then we express this
as a percentage. 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 portfolio expenses is deducted during a specified period of time. We
calculate total returns for one-, five- and 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.
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 as the securities in their respective index
or a representative sample of securities in their index. The other portfolios
(Money Market, International Stock and High Yield Bond) are actively managed;
the portfolios' managers use their own discretion to determine whether to
include a security in a portfolio. We may compare some of these actively managed
portfolios to benchmark indexes to give you a perspective on the portfolios'
performance.
S&P 500 and S&P SmallCap 600 Indexes
Standard & Poor's (Standard & Poor's or S&P) compiles several
broad-based indexes used as benchmarks for tracking certain types of markets.
The most widely known index is the S&P 500 Composite Stock Price Index (S&P 500
Index). The S&P 500 Index consists of 500 stocks chosen for market size,
liquidity, and industry group representation. It is a market-value weighted
index (stock price times number of shares outstanding), with each stock's weight
in the index proportionate to its market value. Most of the largest 500
companies listed on U.S. stock exchanges are included in the index. The
companies whose stocks are included in this index tend to be the leading
companies in leading industries within the U.S. economy. 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.
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 using the index for comparison purposes for our
Small Company Stock Portfolio.
Both the S&P 500 and the S&P SmallCap 600 Indexes are comprised of U.S.
equity stocks. S&P periodically makes 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.
[sidebar: Year 2000 Concerns]
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. In addition, it is possible that the Year 2000 issues could
affect the issuers whose securities are held by the Fund or could affect
worldwide markets or economies, and thereby affect the value of those
securities.
PRICING OF FUND SHARES
Once each day that we are open for business, we determine the Net Asset
Value (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 1999, AAL will be closed for business
on the Monday following July 4th, the Friday following Thanksgiving, the day
before Christmas, and the Monday following 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 dividing the total of each portfolio's
assets, less all liabilities, by the total number of outstanding shares of that
portfolio. We value securities owned by the portfolio 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.
TAX MATTERS
Since you do not own shares of the Fund directly, any transaction
relating to either your variable product or savings plan results in tax
consequences at that level. Please refer to the tax discussion in the applicable
Account prospectus or your savings plan documents for more information.
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
portfolios' financial performance for the period of the portfolios' operations.
Certain information reflects financial results for a single share. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the portfolio assuming reinvestment of all dividends
and distributions. This information has been derived from financial statements
audited by Ernst & Young LLP, whose report, along with the portfolio's financial
statements, are included in the annual report. We will provide you with an
annual report upon request. [each portfolio's table on its own page]
AAL Variable Product Money Market Portfolio
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Ended Year Ended Year Ended Year Ended
12/31/1995 (a) 12/31/96 12/31/97 12/31/98
Net asset value: beginning of period $1.00 $1.00 $1.00 $1.00
Income from Investment Operations:
Net investment income 0.03 0.05 0.05 0.05
Net realized and unrealized gains (losses)
on investments - - - -
Total from Investment Operations 0.03 0.05 0.05 0.05
Less Distributions:
From investment income (0.03) (0.05) (0.05) (0.05)
From realized gains - - -
Total Distributions (0.03) (0.05) (0.05) (0.05)
Net increase (decrease) in net asset value - - - -
Net asset value: end of period $1.00 $1.00 $1.00 $1.00
Total return (b) 3.02% 5.23% 5.33% 5.31%
Net assets, end of period (in thousands) $7,045 $17,125 $25,460 $33,571
Ratios and Supplemental Data:
Ratio of expenses to average net assets 0.35% 0.35% 0.35% 0.35%
(c)(d)
Ratio of net investment income to average net 5.71% 5.10% 5.24% 5.20%
assets (c)(d)
Portfolio turnover rate N/A 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% 0.44%
Ratio of net investment income to 4.66% 4.80% 5.13% 5.11%
average net assets
</TABLE>
<PAGE>
AAL Variable Product Bond Portfolio
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Ended Year Ended Year Ended Year Ended
12/31/95 (a) 12/31/96 12/31/97 12/31/98
Net asset value: beginning of period $10.00 $10.23 $9.90 $10.15
Income from Investment Operations:
Net investment income 0.34 0.63 0.64 0.64
Net realized and unrealized gains (losses) on
investments 0.23 (0.33) 0.25 0.21
Total from Investment Operations 0.57 0.30 0.89 0.85
Less Distributions:
From investment income (0.34) (0.63) (0.64) (0.64)
From realized gains - - -
Total Distributions (0.34) (0.63) (0.64) (0.64)
Net increase (decrease) in net asset value 0.23 (0.33) 0.25 0.21
Net asset value: end of period $ 10.23 $ 9.90 $ 10.15 $ 10.36
Total return (b) 5.80% 3.10% 9.37% 8.59%
Net assets, end of period (in thousands) $9,363 $17,666 $26,710 $42,207
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.35% 0.35% 0.35% 0.35%
Ratio of net investment income to average net assets 6.54% 6.51% 6.55% 6.26%
(c)(d)
Portfolio turnover rate 6.51% 11.65% 18.41% 18.29%
(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% 0.48%
Ratio of net investment income to average net 5.64% 6.18% 6.38% 6.13%
assets
</TABLE>
<PAGE>
AAL Variable Product Balanced Portfolio
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Ended Year Ended Year Ended Year Ended
12/31/95 (a) 12/31/96 12/31/97 12/31/98
Net asset value: beginning of period $10.00 $10.92 $ 11.96 $ 14.05
Income from Investment Operations:
Net investment income 0.22 0.41 0.46 0.50
Net realized and unrealized gains (losses) on
investments 0.92 1.05 2.09 2.17
Total from Investment Operations 1.14 1.46 2.55 2.67
Less Distributions:
From investment income (0.21) (0.41) (0.46) (0.50)
From realized gains (0.01) (0.01) - (0.25)
Total Distributions (0.22) (0.42) (0.46) (0.75)
Net increase (decrease) in net asset value 0.92 1.04 2.09 1.92
Net asset value: end of period $ 10.92 $11.96 $ 14.05 $ 15.97
Total return (b) 11.46% 13.65% 21.71% 19.27%
Net assets, end of period (in thousands) $28,759 $126,518 $306,501 $545,337
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.35% 0.35% 0.35% 0.33%
Ratio of net investment income to average net assets 4.07% 3.89% 3.62% 3.38%
(c)(d)
Portfolio turnover rate 2.29% 5.43% 6.86% 21.39%
(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% 0.39%
Ratio of net investment income to average net assets 3.27% 3.65% 3.53% 3.32%
</TABLE>
<PAGE>
AAL Variable Product Large Company Stock Portfolio
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Ended Year Ended Year Ended Year Ended
12/31/95 (a) 12/31/96 12/31/97 12/31/98
Net asset value: beginning of period $10.00 $11.51 $13.83 $ 18.06
Income from Investment Operations:
Net investment income 0.11 0.23 0.23 0.24
Net realized and unrealized gains (losses) on
investments 1.52 2.34 4.25 4.85
Total from Investment Operations 1.63 2.57 4.48 5.09
Less Distributions:
From investment income (0.11) (0.23) (0.23) (0.24)
From realized gains (0.01) (0.02) (0.02) (0.01)
Total Distributions (0.12) (0.25) (0.25) (0.25)
Net increase (decrease) in net asset value 1.51 2.32 4.23 4.84
Net asset value: end of period $11.51 $13.83 $18.06 $ 22.90
Total return (b) 16.39% 22.47% 32.59% 28.36%
Net assets, end of period (in thousands) $23,138 $120,089 $318,475 $572,361
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.35% 0.35% 0.35% 0.33%
Ratio of net investment income to average net assets 2.27% 1.97% 1.48% 1.20%
(c)(d)
Portfolio turnover rate 0.47% 1.77% 1.00% 1.49%
(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% 0.38%
Ratio of net investment income to average net 1.37% 1.69% 1.39% 1.15%
assets
</TABLE>
<PAGE>
AAL Variable Product Small Company Stock Portfolio
Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Period Ended Year Ended Year Ended Year Ended
12/31/95 (a) 12/31/96 12/31/97 12/31/98
Net asset value: beginning of period $10.00 $10.99 $12.54 $14.88
Income from Investment Operations:
Net investment income 0.08 0.12 0.11 0.08
Net realized and unrealized gains (losses) on
investments 0.99 1.86 3.05 (0.13)
Total from Investment Operations 1.07 1.98 3.16 (0.05)
Less Distributions:
From investment income (0.07) (0.12) (0.11) (0.08)
From realized gains (0.01) (0.31) (0.71) (2.35)
Total Distributions (0.08) (0.43) (0.82) (2.43)
Net increase (decrease) in net asset value 0.99 1.55 2.34 (2.48)
Net asset value: end of period $10.99 $12.54 $14.88 $ 12.40
Total return (b) 10.70% 18.19% 25.37% 0.14%
Net assets, end of period (in thousands) $15,666 $70,209 $152,928 $198,321
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.35% 0.35% 0.35% 0.35%
Ratio of net investment income to average net 1.43% 1.14% 0.81% 0.55%
assets (c)(d)
Portfolio turnover rate 2.85% 20.14% 29.65% 103.70%
(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% 0.43%
Ratio of net investment income to 0.41% 0.74% 0.71% 0.47%
average net assets
</TABLE>
<PAGE>
AAL Variable Product International Stock Portfolio
Financial Highlights
Period Ended
12/31/98 (a)
Net asset value: beginning of period $10.00
Income from Investment Operations:
Net investment income 0.09
Net realized and unrealized gains (losses) on 0.96
investments
Total from Investment Operations 1.05
Less Distributions:
From investment income -
From realized gains -
Total Distributions 0
Net increase (decrease) in net asset value 1.05
Net asset value: end of period $ 11.05
Total return (b) 10.41%
Net assets, end of period (in thousands) $15,595
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.80%
Ratio of net investment income to average net
assets (c) (d) 1.25%
Portfolio turnover rate 32.66%
(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 1.30%
Ratio of net investment income to average net 0.75%
assets
<PAGE>
AAL Variable Product High Yield Bond Portfolio
Financial Highlights
Period Ended
12/31/98 (a)
Net asset value: beginning of period $10.00
Income from Investment Operations:
Net investment income 0.74
Net realized and unrealized gains (losses) on investments (1.05)
Total from Investment Operations (0.31)
Less Distributions:
From investment income (0.74)
From realized gains -
Total Distributions (0.74)
Net increase (decrease) in net asset value (1.05)
Net asset value: end of period $ 8.95
Total return (b) (3.25)%
Net assets, end of period (in thousands) 27,965
Ratios and Supplemental Data:
Ratio of expenses to average net assets (c)(d) 0.40%
Ratio of net investment income to average net assets (c) (d) 9.54%
Portfolio turnover rate 25.43%
(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 0.54%
Ratio of net investment income to average net assets 9.40%
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------- ---------------------------------------------------
Board of Directors John O. Gilbert - Chairman of the Board
Ronald G. Anderson
F. Gregory Campbell
Richard L. Gady
Walter S. Rugland
Edward Smeds
Lawrence M. Woods
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Officers Walter S. Rugland - President
Daniel L. Shinnick - Vice President
Jeffrey R. Kargus - Treasurer
James H. Abitz - Assistant Treasurer
Steven J. Fredricks - Secretary
Woodrow E. Eno - Assistant Secretary
Robert G. Same - Assistant Secretary
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Investment Adviser & Transfer Agent Aid Association for Lutherans
4321 North Ballard Road
Appleton, WI 54919-0001
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Sub-Adviser (International Stock Portfolio) Oechsle International Advisors LLC
One International Place
Boston, MA 02110
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Sub-Adviser (High Yield Bond Portfolio & AAL Capital Management Corporation
Distributor 222 West College Avenue
Appleton, WI 54919-0007
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Custodian Citibank, N.A.
111 Wall Street
New York, NY 10043
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Legal Counsel Quarles & Brady
411 East Wisconsin Avenue
Milwaukee, WI 53202
- -------------------------------------------- ---------------------------------------------------
- -------------------------------------------- ---------------------------------------------------
Independent Auditors Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, WI 53202
- -------------------------------------------- ---------------------------------------------------
</TABLE>
<PAGE>
[Back Cover Page]
ADDITIONAL INFORMATION
You can get the following Fund and account information free upon request:
Annual/Semi-Annual Report
Contains financial highlights, a list of securities holdings
and a discussion of market conditions and their effects on
the portfolios.
Statement of Additional Information (SAI)
Describes in more detail the policies and associated risks
of the Fund and applicable account. This prospectus
incorporates the SAI by reference (legally considers the SAI
to be part of the prospectus).
How to get more information:
For variable products:
By telephone
800-225-5225
By mail
AAL Variable Products Service Center
4321 North Ballard Road
Appleton, WI 54919-0001
By e-mail
[email protected]
You can get copies of the prospectus, SAI and annual report
by visiting the SEC's public reference room or by sending a
request with a fee to the SEC's Public Reference Section (by
phone 800/732-0330 or website www.sec.gov) , Washington, DC
20549-6009
SEC file number: 811-8662
[AAL Logo] [AAL Capital Management Corporation Logo]
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
4321 North Ballard Road
Appleton, Wisconsin 54919
(800) 225-5225
or (920) 734-5721
Statement of Additional Information
Dated May 1, 1999
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 May
1, 1999. The terms used in this SAI that are not otherwise defined 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 AAL Variable Product Series Fund, Inc. 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 to two separate accounts and retirement plans. 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 SAI describes the following
portfolios:
AAL Variable Product Money Market Portfolio
The portfolio strives for maximum current income, while maintaining
liquidity and a constant net asset value of $1.00 per share, by investing in
high-quality, short-term money market instruments.
AAL Variable Product Bond Portfolio
The portfolio strives for investment results similar to the total
return of the Lehman Bond Index by investing primarily in bonds and other debt
securities included in the index.
AAL Variable Product Balanced Portfolio
The portfolio seeks capital growth and income by investing in a mix of
common stocks, bonds and money market instruments. Securities are selected
consistent with the policies of the Large Company Stock, Bond and Money Market
Portfolios.
AAL Variable Product Large Company Stock Portfolio
The portfolio strives for investment results that approximate the
performance of the S&P 500 Index, by investing primarily in common stocks of the
index.
AAL Variable Product Small Company Stock Portfolio
The portfolio strives for capital growth that approximates the
performance of the S&P SmallCap 600 Index, by investing primarily in common
stocks of the index.
AAL Variable Product International Stock Portfolio
The portfolio strives for long-term capital growth by investing
primarily in foreign stocks.
AAL Variable Product High Yield Bond Portfolio
The portfolio strives for high current income and secondarily capital
growth by investing primarily in high-risk, high-yield bonds commonly referred
to as "junk bonds."
Statement of Additional Information
Table of Contents
Page
Description of the Fund
Investment Policies
Investment Strategies and Risks
Foreign Securities and Risks
Options and Futures
Temporary Defensive Purposes
Portfolio Turnover
Management of the Fund
Compensation of Directors
Investment Advisory and Other Services
Advisory Fees
Portfolio Transactions
Description of Shares
Purchase, Redemption and Pricing of Shares
Net Asset Value
Taxation of the Fund
Calculation of Performance Data
The S&P 500 Index
The Standard & Poor's SmallCap 600 Index
Disclaimers and Limitations of Liabilities of Standard & Poor's
Calculation of Performance Data
Financial Statements
Appendix: Bond Ratings
<PAGE>
DESCRIPTION OF THE FUND
The the Fund is registered with the SEC as an open-end diversified
management investment company. The Fund was incorporated in the state of
Maryland on June 14, 1994. The Fund currently consists of seven portfolios, each
of which represents a separate series of shares of beneficial interest in the
Fund. The Fund is the investment vehicle available to two separate accounts (the
AAL Variable Annuity Account I and the AAL Variable Life Account I) and certain
corporate sponsored retirement accounts. 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
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 the appropriate account prospectus for more
information concerning your rights as a certificate owner.
The SEC does not supervise the management or investment practices or
policies of the variable accounts.
We organized the Fund as a Maryland business corporation on June 14, 1994.
The Fund may issue up to two billion shares of common stock, $.001 par value, in
one or more series (portfolios) as the Directors may authorize. Currently, the
Directors have authorized seven portfolios that bear the designation of the
names of the respective portfolios. The Directors may, in the future, authorize
the issuance of more series of shares. Each share of a portfolio is entitled to
participate on a pro rata basis in any dividend or other distribution declared
by the Directors 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.
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 Directors 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.
INVESTMENT POLICIES
In addition to those policies mentioned in the Fund prospectus, the
portfolios are subject to certain investment restrictions A portfolio may not:
o 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
o 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.
Additionally, 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.
INVESTMENT STRATEGIES AND RISKS
The portfolios may use the following applicable techniques in pursuit
of their investment objectives:
Lending Portfolio Securities
Subject to restriction (4) under Investment Policies, 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 that 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.
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.
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.
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. 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. Generally, we will not pay for when-issued securities or
start earning interest until we have received the underlying securities for the
portfolios. 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.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.
Privately Issued Securities
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.
Illiquid and Restricted Securities
Except for the Money Market portfolio, 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. 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.
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.
Structured Securities
The International Stock and the High Yield Bond Portfolios 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.
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.
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.
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. Supply and demand as well as economic
monetary policies influence interest rates. 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 duration.
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.
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 (NRSRO), such as BBB or
better by Duff and Phelps Credit Rating Co. (Duff & Phelps) and Standard &
Poor's Corporation (Standard & Poor's) or Baa or better by Moody's Investors
Services, Inc. (Moody's). Securities rated in the fourth highest category, such
as BBB by Duff & Phelps or Standard & Poor's or Baa by Moody's, are considered
medium grade bonds and are more sensitive to economic changes and have
speculative characteristics. If a bond in a portfolio has lost its rating or has
its rating reduced, we do not have to sell the security, but we will consider
the lost or reduced rating in determining whether that portfolio should continue
to hold the bond.
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. For a description of certain ratings
applied by rating services to debt securities, please refer of the Appendix to
this SAI.
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.
Mortgage-Backed Securities
For the Bond, Balanced and High Yield Bond Portfolios, 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 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, prepayments of mortgages
underlying mortgage-backed securities tend to accelerate. Payments are amortized
and consist of a portion paying interest and a portion paying principal. In some
cases prepayments are made where additional payments are applied to the
principal to reduce the time of the loan. 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.
Collateralized Mortgage-Backed Securities
The Bond, Balanced and High Yield Bond Portfolios may invest in
commercial mortgage-backed securities that include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property. The
market for commercial mortgage-backed securities developed more recently and in
terms of total outstanding principal amount of issues are relatively small
compared to the market for residential single-family mortgage-backed securities.
Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage
loans. These risks reflect the effects of local and other economic conditions on
real estate markets, the ability of tenants to make loan payments, and the
ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other
types of mortgage-related or asset-back securities.
Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities
The Bond, Balanced, and High Yield Bond Portfolios may invest in
mortgage-backed securities, including Collateralized Mortgage Obligations (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.
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 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.
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, commercial mortgage-backed securities 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 reduce our ability to
maintain positions in high-yielding, mortgage-backed securities and reinvest the
principal at comparable yields.
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.
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.
FOREIGN SECURITIES AND RISKS
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.
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. 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, Hungary, 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.
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.
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 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 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.
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:
o the purchase and sale of forward foreign currency exchange contracts
(agreements to exchange one currency for another at a future date);
o options on foreign currencies;
o currency futures contracts; or
o options on currency futures contracts.
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.
Risks of Investing in Foreign Securities
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.
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. Obtaining and enforcing judgments, when necessary, in foreign
countries may be more difficult and expensive than in the U.S.
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. 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.
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.
OPTIONS AND FUTURES
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:
o to maintain cash reserves while simulating full investment;
o to facilitate trading;
o to reduce transaction costs; or
o 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.
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.
Options On Foreign Stock Indexes
For 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
the sub-adviser'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.
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.
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.
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.
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.
PORTFOLIO TURNOVER
We expect all of the 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.
In 1998, the Small Company Stock Portfolio had a portfolio turnover of
103.7% up from 29.65% the previous year. The reason for the significant increase
was the change from tracking the Wilshire Small Cap Index to the S&P SmallCap
600 Index. In order to track the new index, several of the portfolio's positions
had to be sold, new issues had to be purchased, and others had to be adjusted in
size.
For more information on transaction expenses and taxes, please refer to
the sections in this SAI entitled Portfolio Transactions, Dividends,
Distributions and Taxes, and Performance Information.
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. Our affiliates, AAL Capital Management
Corporation (AAL CMC) offers mutual fund services 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. 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, 1999.
Board of Directors and Executive Officers
The Directors and executive officers of the Fund and their principal
occupations during the past five years are described below. Unless otherwise
specified, the business address of all Directors and officers is 4321 North
Ballard Road, Appleton, WI 54919-0001:
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Address and Age Position with the Fund Principal Occupation
John O. Gilbert dob 8/30/42 Director* President and Chief
Executive Officer
Aid Association for Lutherans
Ronald G. Anderson dob 10/2/48 Director* President and Chief Executive Officer, AAL
Capital Management Corporation; Senior Vice
President, Aid Association for Lutherans
Richard L. Gady dob 2/28/43 One Director Vice President
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
Edward W. Smeds dob 2/15/36 Director Retired; President of Customer Service and
6814 Pelican Bay Blvd. Operations, Kraft Foods (food and
Naples, FL 34108 agriculture)
Lawrence M. Woods dob 4/14/32 Director Retired; formerly
524 Sunset Drive Executive Vice President and Director
Worland, WY 82401 Mobil Oil Corporation
President and Executive Vice President and Chief
Walter S. Rugland dob 5/18/37 Director* Operating Officer,
Aid Association for Lutherans
Robert G. Same dob 7/25/45 Assistant Secretary Vice President, Chief Compliance Officer
and Deputy Counsel, Aid Association for
Lutherans
Jeffrey R. Kargus dob 9/26/54 Treasurer Assistant Vice President and Assistant
Controller,
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
Steven J. Fredricks dob 7/25/70 Secretary Attorney III
Securities and Investment Law,
Aid Association for Lutherans
</TABLE>
- -------
* Denotes Directors who are "interested persons" of the Fund, as defined in
the Investment Company Act of 1940.
Compensation
The following table shows the compensation paid to the Directors* of
the Fund for the year ended December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total Compensation
From Fund and AAL
Pension or Fund Complex**
Retirement Benefits Paid to Directors
Aggregate Accrued As Part of Estimated Annual
Compensation Fund Expenses Benefits Upon
Name, Position from Fund Retirement
John O. Gilbert, -0- -0- -0- -0-
Director
Richard L. Gady, $5,000 -0- -0- $30,000
Director
F. Gregory Campbell, $5,000 -0- -0- $30,000
Director
D.W. Russler, $5,000 -0- -0- $30,000
Director
Lawrence M. Woods, $5,000 -0- -0- $30,000
Director
Steven A. Weber, -0- -0- -0- -0-
Director
Ronald G. Anderson -0- -0- -0- -0-
Director
</TABLE>
- ---------------------------
* 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.
Principal Holders of Securities
As of March 31, 1999, 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.
<TABLE>
<CAPTION>
AAL Ownership for Its Own AAL Ownership through
Account Separate Accounts or through
the AAL Savings Plan
<S> <C> <C>
Money Market Portfolio 0.00% 100%
Bond Portfolio 0.00 100%
Balanced Portfolio 0.00 100%
Large Company Stock Portfolio 0.00 100%
Small Company Stock Portfolio 0.00 100%
International Stock Portfolio 58.15 41.85
High Yield Portfolio 57.95 42.05
</TABLE>
To the knowledge of the Fund, no certificate owner beneficially owns
five percent or more of any portfolio.
As of March 31, 1999, the Directors and officers of the Fund as a group
owned beneficially less than 1% of the outstanding shares of any portfolio.
INVESTMENT ADVISORY AND OTHER SERVICES
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 November 9,. 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 receives an investment advisory fee as compensation for providing
services to the Fund. The fee for the Money Market, Bond, Balanced, Large
Company Stock and Small Company Stock Portfolios, 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. The advisory fee for the International Stock Portfolio is
a daily charge equal to an annual rate of .80% of the average daily net assets
of the Portfolio. From this amount the sub-adviser is paid 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%
The advisory fee for the High Yield Bond Portfolio is a daily charge
equal to an annual rate of 0.40% of the average daily net assets of the
Portfolio. The sub-adviser is paid an annual fee of 0.25% of average daily net
assets from our advisory fee as compensation for its services.
AAL received the following investment advisory fees:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Money Market Portfolio $43,414 $74,988 $101,533
Bond Portfolio 48,124 73,743 111,756
Balanced Portfolio 257,782 721,800 1,403,423
Large Company Stock Portfolio 221,856 754,142 1,454,419
Small Company Stock Portfolio 139,625 383,123 628,572
International Stock Portfolio N/A N/A 85,674
High Yield Bond Portfolio N/A N/A 79,906
</TABLE>
Currently, there are no service agreements in place between the Fund
and any other party. However, until December 31, 1998, there was an
administrative services agreement between AAL and AAL CMC for AAL CMC to provide
administrative services to the Fund. Such services were paid for by AAL on
behalf of the Fund. AAL paid the following for administrative services to AAL
CMC.
1996 $175,000
---------------- ----------------------
---------------- ----------------------
1997 175,000
---------------- ----------------------
---------------- ----------------------
1998 250,000
---------------- ----------------------
Sub-Advisers
AAL has also engaged two sub-advisers, each with its own distinct
contract with AAL. AAL CMC (a wholly owned subsidiary of AAL) has agreed to act
as sub-adviser for the High Yield Bond Portfolio. AAL CMC also sells,
distributes and advises The AAL Mutual Funds. The principal office for AAL CMC
is 222 West College Avenue, Appleton, Wisconsin, 54919-0007. Oechsle
International Advisors LLC ("Oechsle LLC") has agreed to act as sub-adviser for
the International Stock Portfolio. The principal office for Oechsle LLC is One
International Place, Boston, Massachusetts, 02210. According to the terms of the
agreements with each of the sub-advisers, they are subject to AAL's 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.
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, 1998, AAL CMC managed
about $5.9 billion. AAL indirectly owns all the outstanding stock in AAL Capital
Management Corporation.
We entered into a sub-advisory agreement with Oechsle LLC in accordance
with the requirements of the Investment Company Act of 1940. Oechsle LLC serves
as sub-adviser to the International Stock Portfolio . Oechsle, LLC is a Delaware
limited liability company . Oechsle, LLC has been registered as an investment
adviser since 1986. As of December 31, 1998, Oechsle manages over $12.4 billion
in assets.
Under its sub-advisory agreement with the adviser, Oechsle LLC
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 with information concerning relevant economic and political
developments. Oechsle LLC 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.
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.
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 of 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 that 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.
Commissions
Brokerage commissions paid by each of the portfolios listed below were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Portfolio Name Year Ended 1996 Year Ended 1997 Year Ended 1998
Money Market N/A N/A $N/A
Bond N/A N/A N/A
Balanced $121,832 $ 50,053 $90,386
Large Company Stock 80,143 103,198 107,240
Small Company Stock 45,929 152,305 506,871
International Stock N/A N/A 42,711
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, 1998 through
December 31, 1998. As of December 31, 1998, the market value of each portfolio's
aggregate holdings of each broker's securities was as follows:
Percent of Aggregate
Dollar Amount of
Transaction
Balanced Portfolio
Market Value
Broker Name
Merrill Lynch & Co. $714,225
Charles Schwab Corp. 678,464
Morgan StanleyDean Witter, Dicover 1,242,145
& Co.
Bear Sterns & Co. 127,075
Lehman Brothers Holdings, Inc. 154,219
Large Company Stock Portfolio
Market Value
Broker Name
Merrill Lynch & Co. $1,361,700
Morgan StanleyDean Witter, Dicover 2,351,875
& Co.
Charles Schwab Corp. 1,293,717
Lehman Brothers Holdings, Inc. 290,813
Bear Sterns & Co. 239,200
Small Company Stock Portfolio
Market Value
Broker Name
Dain Rauscher Corp. $212,400
E Trade Group, Inc. 1,464,252
Jefferies Group, Inc. 600,463
Legg Mason, Inc. 997,375
Raymond James Financial, Inc. 584,106
VOTING PRIVILEGES
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.
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"). Shareholders are entitled to one vote for each share held with
proportionate voting for fractional shares. 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.
PURCHASE, REDEMPTION AND PRICING 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 and to certain retirement plans. 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 or applicable retirement plan
instructions. 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. 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.
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 1999, AAL will be closed for business on the Friday following
Thanksgiving and the business day after Christmas. On those days, we will not
redeem any shares notwithstanding the fact that the New York Stock Exchange will
be open.
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.
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,
these securities will be valued at their fair value as determined in good faith
by the Directors.
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 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.
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.
TAXATION OF THE FUND
We intend to have each portfolio of the Fund 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 if you own a certificate.
The tax status of your investment in the Fund depends upon the features of your
certificate, if applicable. See the applicable 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 less estimated expenses [including the Advisory Fee])and all net
realized short-term and long-term capital gains if any, earned during the year..
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 portfolio, 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.
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 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 of certificates, please refer
to "Federal Tax Status" in the applicable Account prospectus.
CALCULATION OF PERFORMANCE DATA
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 Year Ended December 31, Period from Inception(1)
1998 to December 31, 1998
Money Market 5.31% 5.33%
Bond 8.59 7.56
Balanced 19.27 18.71
Large Company Stock 28.36 28.35
Small Company Stock 0.14 15.00
International Stock 10.41 10.41
High Yield Bond (3.25) (3.25)
- ------
(1) The first five portfolios began operation on June 14, 1995, the last two on
March 2, 1998.
Except for the Money Market, International Stock and the High Yield
Bond Portfolios, the total return figures provided for each portfolio are
provided on an annualized basis for the period indicated. Additionally, these
values reflect the deduction of an 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 December 31, 1998, the current yield for
the Bond Portfolio was 5.16%, the Balanced Portfolio was 3.31% and the High
Yield Bond Portfolio was 11.50%.
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 December 31, 1998, the Current and Effective
Yields of the Money Market Portfolio were 4.99% and 5.11%, 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.
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. 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 1998, range from $ 487
million to $ 345.8 billion. The median capitalization was $ 7.75 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.
FINANCIAL STATEMENTS
The following audited financial statements and footnotes thereto for
each portfolio of the AAL Variable Product Series Fund, Inc., and the Report of
the Independent Auditors thereon are incorporated by reference from the Annual
Report of the AAL Variable Product Series Fund, Inc., AAL Variable Annuity
Account I, and AAL Variable Life Account I:
1. Schedules of Investments as of December 31, 1998.
2. Statement of Assets and Liabilities as of December 31, 1998.
3. Statement of Operations for the Year Ended December 31, 1998.
4. Statement of Changes in Net Assets for the Years Ended December 31, 1998,
and 1997.
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.
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>
PART C. OTHER INFORMATION
Item 23. 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
a Articles Supplementary of the AAL Variable Product Series Fund, Post-Effective Amendment #6
Inc. (the "Fund") dated February 27, 1998
b Bylaws of the Fund Post-Effective Amendment #4
dated April 18, 1997
c Not applicable
d(i) Second Amendment to Investment Advisory Agreement between Aid Post-Effective Amendment #6
Association for Lutherans ("AAL") and the Fund dated December dated February 27, 1998
11, 1997
d(ii) Sub-Advisory Agreement between the Fund and AAL Capital Post-Effective Amendment #6
Management Corporation (AAL CMC) February 27, 1998
for the High Yield Bond dated Portfolio dated
February 12, 1998
d(iii) Form of Sub-Advisory Agreement between the Fund and Oechsle Post-Effective Amendment #7
International Advisors LLC for the International Stock Portfolio dated August 28, 1998
e(i) Amended and Restated Participation Agreement between AAL, the X
Separate Accounts, and the Fund dated 3/15/99
e(ii) Participation Agreement between AAL, AAL Savings Plan, and the X
Fund dated 3/15/99
f Not applicable
g Form of Custodian Agreement between the Fund and Citibank Post-Effective Amendment #6
N.A. dated February 27, 1998
h(i) Second Amendment to the Transfer Agency Agreement between the X
Fund and AAL dated 3/15/99
h(ii) Second Amendment to the Trade Name/Service Mark Licensing X
Agreement between the Fund and AAL dated 3/15/99
i Opinion and Consent of In-house Counsel as to the legality of Post-Effective Amendment #4
shares of the Fund dated April 18, 1997
j Consent of Independent Auditors X
k Not applicable
l Stock Subscription Agreement between the Fund and AAL dated Post-Effective Amendment #6
December 11, 1997 dated February 27, 1998
m Not applicable
n Financial Data Schedule X
o Not applicable
</TABLE>
- ------
(1) Documents incorporated by reference are incorporated from the identified
previously filed amendments to this Registration Statement.
Item 24. 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 adviser and
broker-dealer; and (c) North Meadows Investment Ltd., a Wisconsin corporation
organized for the purpose of holding and investing in real estate; (d) AAL Trust
Company, FSB, a federally chartered bank. Financial statements of AAL are filed
on a consolidated basis with regard to each of the foregoing entities.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
-------------------------------
Parent Company AAL
(Wisconsin corp.)
Holding Company AAL Holdings, Inc.
(Delaware corp.)
-------------------------------
------------------------------ ------------------------------- ----------------------------
Wholly-owned AAL Capital Management Corp. AAL Trust Co., FSB North Meadows Investment
subsidiaries of (Delaware corp.) (Federal charter) Ltd.
AAL Holdings, Inc. (Wisconsin corp.)
------------------------------ ------------------------------- ----------------------------
</TABLE>
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 26. Business and Other Connections of Investment Adviser.
AAL (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.
The Adviser entered into a sub-advisory agreement with Oechsle
International Advisors, LLC (Oechsle, LLC), in accordance with the requirements
of the Investment Company Act of 1940. Oechsle LLC has served as Sub-adviser to
the International Stock Portfolio since it commenced operations on March 2,
1998. Oechsle, LLC is a Delaware limited liability company with principal
offices at One International Place, Boston, Massachusetts 02110. Oechsle, LLC
has been registered as an investment adviser since 1986. As of March 31, 1999,
Oechsle manages over $12.8 billion in assets.
Oechsle Group, LLC, a Delaware limited liability company, is the Member
Manager of Oechsle LLC and owns approximately a 44% interest in Oechsle LLC. The
management, policies and control of Oechsle LLC is vested, subject to certain
limitations, exclusively in Oechsle Group LLC. Day-to-day management of Oechsle
LLC will be exercised by the Management Committee of Oechsle Group LLC, which
consists of . S. Dewey Keesler, Jr., L. Sean Roche, Stephen P. Langer, Warren
Walker and Andrew S. Parlin.
Oechsle LLC makes the day-to-day investment decisions for the Portfolio
under our direction and control. Oechsle LLC 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 27. Principal Underwriters.
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 28. 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 Fund and Fund'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 Fund, and all
other records will be maintained by the Custodian. The address for the Fund is
4321 North Ballard Road, Appleton, Wisconsin 54919-0001. The address for the
custodian is: Citibank, N.A., 111 Wall Street, New York, New York 10043.
Item 29. Management Services.
Not applicable.
Item 30. Undertakings.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Fund certifies that it meets all
of the requirements for effectiveness of this amended registration statement
under rule 485(b) under the Securities Act of 1933 and has duly caused this
amended registration statement to be signed on its behalf by the undersigned,
duly authorized, in the City of Appleton and State of Wisconsin on the day 22,
April 1999.
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/ Walter S. Rugland
-----------------------------------
Walter S. Rugland
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/ Walter S. Rugland President April 22, 1999
- --------------------------- (Principal Executive Officer)
Walter S. Rugland
/s/ Jeffrey R. Kargus Treasurer April 22, 1999
- --------------------------- (Principal Accounting
Jeffrey R. Kargus Financial Officer)
The following members of the Board of Directors:
Gregory F. Campbell Ronald G. Anderson
Richard L. Gady
Edward W. Smeds
Lawrence M. Woods
John O. Gilbert, 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/ John O. Gilbert April 22, 1999
- ---------------------------
John O. Gilbert
Attorney-in-Fact
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
INDEX TO EXHIBITS
Exhibit Number
Name of Exhibit
e(i) Amended and Restated Participation Agreement between AAL, the Separate
Accounts, and the Fund dated 3/15/99
e(ii) Participation Agreement between AAL, AAL savings Plan and the Fund dated
3/15/99
h(i) Second Amendment to the Transfer Agency Agreement between the Fund and
AAL dated 3/15/99
h(ii) Second Amendment to the Trade Name/Service Mark Licensing Agreement
between the Fund and AAL dated 3/15/99
j Consent of Independent Auditors
n Financial Data Schedule
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
AAL VARIABLE ANNUITY ACCOUNT I
AND
AAL VARIABLE ANNUITY ACCOUNT II
AND
AAL VARIABLE LIFE ACCOUNT I
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED SEPTEMBER 27, 1994, AMENDED DECEMBER 11, 1997
AND AS AMENDED MARCH 15, 1999
TABLE OF CONTENTS
Page
1. Sale of FUND Shares......................................................4
2. Representations and Warranties...........................................5
3. Prospectus and Proxy Statements: Voting..................................6
4. Sales Material and Information...........................................7
5. Fees and Expenses........................................................8
6. Diversification..........................................................8
7. Monitoring of Material Irreconcilable Conflicts..........................9
8. Indemnification..........................................................11
9. Term and Termination of This Agreement...................................14
10. Notices..................................................................16
11. Miscellaneous............................................................16
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 15th day of
March, 1999, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and on behalf of AAL VARIABLE ANNUITY ACCOUNT I, AAL VARIABLE ANNUITY
ACCOUNT II, and AAL VARIABLE LIFE ACCOUNT I (the "ACCOUNTS"), and AAL VARIABLE
PRODUCT SERIES FUND, INC. (the "FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as sponsor and depositor of the
ACCOUNTS and as investment adviser of the FUND registered under the Investment
Advisers Act of 1940;
WHEREAS, the ACCOUNTS are legally segregated asset accounts of AAL,
established pursuant to the laws of the State of Wisconsin, and currently
consists of seven subaccounts (the "Subaccounts"), for the purpose of funding
certain variable universal life insurance contracts and variable annuity
contracts (collectively the "Certificates");
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions (the Board of Directors currently has
designated seven such Portfolios);
WHEREAS, to the extent permitted by applicable insurance, tax and other
laws and regulations, AAL intends to purchase shares in the FUND on behalf of
the ACCOUNTS to fund the Certificates or on its own behalf for related purposes,
and the FUND is authorized to sell such shares to the ACCOUNTS and to AAL at net
asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL, dated the twenty-seventh day of September, 1994, as amended, wherein AAL
has agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code");
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
1. Sale of FUND Shares
1.1 The Certificates funded through the ACCOUNTS will provide for the
allocation of net amounts among certain Subaccounts for investment in
such shares of the Portfolios as may be offered from time to time in
the prospectus of the ACCOUNTS for the Certificates. The selection of
the particular Subaccount is to be made by the Certificate owner, and
such selection may be changed in accordance with the terms of the
Certificates.
1.2 The FUND will sell to AAL those shares of each available Portfolio
that AAL orders based on transactions under Certificates, effecting
such orders on a daily basis at the Portfolio's net asset value per
share next computed as provided in the FUND prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to sell
shares of any Portfolio to AAL, or suspend or terminate the offering
of shares of any Portfolio, if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole
discretion of the Board, acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of the FUND.
1.4 The FUND agrees that its shares will be sold only to: (a) AAL, on its
own behalf and on behalf of separate accounts that it establishes from
time to time and maintains to fund variable annuity contracts and
variable life insurance contracts of AAL, including the ACCOUNTS; (b)
other life insurance companies, whether affiliated or unaffiliated
with AAL, on behalf of separate accounts funding variable annuity
contracts and variable life insurance contracts of such other
insurance companies; and (c) qualified pension or retirement plans,
whether for the benefit of employees of AAL and/or its affiliates or
for the benefit of unaffiliated entities ("Qualified Plans"). AAL
separate accounts (including the ACCOUNTS) and separate accounts of
other life insurance companies eligible to purchase shares of the FUND
are referred to in this Agreement as "Separate Accounts." No shares of
any Portfolio will be sold to the general public or to any life
insurance company (on its own behalf, as opposed to a Separate Account
maintained by such other insurance company) other than AAL.
1.5 The FUND will redeem for cash from AAL those full or fractional shares
of each Portfolio that AAL requests based on transactions under
Certificates, effecting such requests on a daily basis at the
Portfolio's net asset value per share next computed as provided in the
FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry only.
Stock certificates will not be issued to AAL. Shares ordered from the
FUND will be recorded in an appropriate title for AAL.
1.7 The FUND shall furnish notice promptly to AAL of any income, dividends
or capital gain distributions payable on the shares of any Portfolio.
AAL hereby elects to receive all such income, dividends and capital
gain distributions as are payable on FUND shares in additional shares
of that Portfolio. AAL reserves the right to revoke this election and
to receive all such income, dividends and capital gain distributions
in cash. The FUND shall notify AAL of the number of shares so issued
as payment of such income, dividends and distributions.
1.8 The FUND shall make the net asset value per share for each Portfolio
available to AAL on a daily basis, as soon as reasonably practical
after the net asset value per share is calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the Certificates, or delete, combine, or modify
existing Portfolios. The shares of any additional Portfolio may be
made available to the ACCOUNTS by the FUND, pursuant to the terms of
this Agreement, and any applicable reference to any Portfolio, the
FUND or its shares herein shall include a reference to any such
Portfolio.
2. Representations and Warranties
2.1 AAL represents and warrants that interests in the ACCOUNTS under the
Certificates are or will be registered under the 1933 Act to the
extent required by the 1933 Act, that the Certificates will be issued
and sold in compliance in all material respects with all applicable
federal and state laws and that the sale of the Certificates will
comply in all material respects with state insurance and federal
securities law suitability requirements. AAL further represents and
warrants that it is a fraternal benefit society organized under the
laws of the State of Wisconsin and engaged in the writing of life
insurance, annuity contracts, and other insurance products; that it
has legally and validly established its ACCOUNTS as segregated asset
accounts under Wisconsin insurance law; and that it has registered or
will register the ACCOUNTS as unit investment trusts in accordance
with the provisions of the 1940 Act to serve as segregated investment
accounts for the Certificates, to the extent required by the 1940 Act.
2.2 AAL represents and warrants that any interests in the ACCOUNTS being
offered for sale under the Certificates are or will be registered
under the 1933 Act to the extent required by the 1933 Act, that the
Certificates will be issued and sold in compliance in all material
respects with all applicable federal and state laws, and that the sale
of the Certificates will comply in all material respects with state
insurance law, and federal securities laws, including the rules of the
National Association of Securities Dealers, Inc. ("NASD").
2.3 The FUND represents and warrants that its shares sold pursuant to this
Agreement are or will be registered under the 1933 Act to the extent
required by the 1933 Act, duly authorized for issuance and sold in
compliance with the laws of the state of Maryland and all applicable
federal securities laws and that the FUND is or will be registered
under the 1940 Act to the extent required by the 1940 Act. The FUND
will amend the registration statement for its shares under the 1933
Act, as well as its registration statement under the 1940 Act, as
required in order to effect the continuous offering of its shares. The
FUND will register or qualify the shares for sale in accordance with
the laws of the various states only if and to the extent deemed
advisable by the FUND.
2.4 AAL represents and warrants that its Certificates are currently
treated as annuity contracts and universal life insurance contracts
under applicable provisions of the Code and that it will make every
effort to maintain such treatment.
2.5 The FUND makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses) complies
with the insurance laws or regulations of the various states. On the
request of any state insurance department, the FUND agrees to provide
and furnish to the department any information or reports in connection
with the FUND's operations or services that will allow the insurance
department to determine if the variable product operations of AAL are
being conducted in a manner consistent with state laws. The FUND
intends to comply with the insurance laws of any relevant state
regarding any Portfolio's investment objectives, policies and
restrictions to the extent that AAL advises the FUND, in writing, of
such laws or any change in such laws, provided the FUND's Board of
Directors and/or shareholders approve such changes as required by the
1940 Act.
2.6 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of the
Code and that the investments of each of its Portfolios will comply
with the diversification requirements of Section 817(h) of the Code
and the regulations thereunder, and that it will notify AAL
immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
3. Prospectus and Proxy Statements: Voting
3.1 The FUND will provide such documentation (including a final copy of
any new prospectus, statement of additional information ("SAI"), or
supplement) and other assistance as is reasonably necessary in order
for AAL or its designee to timely distribute the current FUND
prospectus, SAI and any supplement thereto, or, in the alternative, to
have the prospectus of the ACCOUNTS for the Certificates and the
FUND's prospectus printed together in one document once each year (or
more frequently if the prospectus for the FUND is amended) (such FUND
prospectus printing to be at the FUND's expense, as provided in
Section 5.1).
3.2 The FUND will provide such documentation (including a final copy of
any proxy material, report to shareholders, and other communication to
shareholders) and other assistance as is reasonably necessary for AAL
or its designee to timely distribute the proxy material, report to
shareholders, and other communication (such printing and distribution
to be the FUND's expense, as provided in Section 5.1).
3.3 If, and to the extent required by law, AAL shall, at AAL's expense, as
provided in Section 5.2:
(a) solicit voting instructions from Certificate owners;
(b) vote Portfolio shares in accordance with instructions received
from Certificate owners;
(c) vote Portfolio shares for which no instructions have been
received, as well as Portfolio shares attributable to AAL other
than under Certificates, in the same proportion as shares of such
Portfolio for which instructions have been received, so long as
and to the extent that the SEC continues to interpret the 1940
Act to require pass-through voting privileges. AAL reserves the
right to vote Portfolio shares held in any segregated asset
accounts or in general accounts in its own right, to the extent
permitted by law.
3.4 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the FUND
solely upon the authorization of its Board and/or shareholders as
required by the 1940 Act.
4. Sales Material and Information
4.1 AAL or its designee will furnish, or will cause to be furnished, to
the FUND or its designee, each piece of sales literature or other
promotional material in which the FUND or AAL is named, at least
fifteen (15) days prior to its intended use. No such material will be
used if the FUND or its designee objects to such intended use within
fifteen (15) days after receipt of such material.
4.2 AAL will not give any information or make any representation or
statement, or cause such information to be given or representation to
be made, on behalf of the FUND or concerning any Portfolio in
connection with the sale of the Certificates other than the
information or representations contained in the registration
statement, prospectus, and SAI for FUND shares, as such registration
statement, prospectus, and SAI may be amended or supplemented from
time to time, or in reports or proxy materials for the FUND, or in
sales literature or other promotional material approved by the FUND or
its designee, except with the permission of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be furnished,
to AAL or its designee, each piece of sales literature or other
promotional material of the FUND in which AAL and/or its ACCOUNTS is
named, at least fifteen (15) days prior to its intended use. No such
material will be used if AAL or its designee objects to such intended
use within fifteen (15) days after receipt of such material.
4.4 The FUND will not give any information or make any representations or
statements, or cause such information to be given or representations
to be made, on behalf of AAL or concerning AAL, its ACCOUNTS or its
Certificates other than the information or representations contained
in a registration statement or prospectus for such ACCOUNTS, as such
registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for the ACCOUNTS that are
in the public domain or approved by AAL for distribution to owners, or
in sales literature or other promotional material approved by AAL or
its designee, except with the permission of AAL or its designee .
4.5 The FUND will provide to AAL one complete copy of all registration
statements, prospectuses, SAI's, reports, proxy material, sales
literature and other promotional material, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the FUND or its shares, contemporaneously
with the filing of such document with the SEC or other regulatory
authorities.
4.6 AAL will provide to the FUND one complete copy of all registration
statements, prospectuses, SAI's, reports, solicitations for voting
instructions, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the ACCOUNTS or its
Certificates, contemporaneously with the filing of such document with
the SEC or other regulatory authorities.
5. Fees and Expenses
5.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below, each
Portfolio will bear all of its operating expenses that are not
specifically assumed by AAL, including the following: (i) interest and
taxes (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses for those Directors who are not "interested"
persons under Section 2(a)(19) of the Act; (v) independent legal and
audit expenses; (vi) fees and expenses of the FUND's custodian,
shareholder servicing or transfer agent and accounting services agent;
(vii) expenses incident to the issuance of its shares, including stock
certificates and issuance of shares on the payment of, or reinvestment
of dividends; (viii) fees and expenses incident to the registration
under Federal or state securities laws of the FUND or its shares; (ix)
FUND or portfolio organizational expenses; (x) FUND expenses of
preparing, printing and mailing reports and notices, proxy material
and prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii) dues
or assessments of or contributions to the Investment Company Institute
or any successor or other industry association; (xiii) such
non-recurring expenses as may arise, including litigation affecting
the FUND and the legal obligations which the FUND may have to
indemnify its officers and Directors with respect thereto; and (xiv)
cost of daily valuation of each of the Portfolio's securities and net
asset value per share.
5.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will bear the expenses of printing and
distributing to its Certificate owners the FUND proxy materials, proxy
cards and voting instruction forms (collectively "proxy information"),
tabulating the results of proxy solicitations to its Certificate
owners, printing and distributing to its Certificate owners the FUND
prospectus, SAI, supplement, proxy material, report to shareholders,
and other communication to shareholders, and any expenses associated
with administration of its Certificates.
6. Diversification
6.1 The Portfolios will at all times invest money from the Certificates in
such a manner as to ensure that the Certificates will be treated as
variable life insurance contracts and variable annuity contracts under
the Code and the regulations thereunder insofar as such investment is
required for such treatment. Without limiting the scope of the
foregoing, the Portfolios will at all times comply with Section 817(h)
of the Code and Treasury Regulations Section 1.817-5 relating to the
diversification requirements for variable annuity, endowment, or life
insurance contracts and any amendments or other modifications to such
Section or Regulations.
6.2 The FUND shall furnish to AAL on a regular basis reports of all of the
investments of each Portfolio in a form sufficient to permit AAL to
determine whether each Portfolio is in compliance with the
diversification requirements of Section 817(h) of the Code and the
Regulations thereunder and shall take immediate action, on learning
through its own monitoring, or on advice from AAL, that any Portfolio
is not in compliance with such requirements, to return to compliance
with such requirements.
6.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with AAL in any effort to correct
such diversification failure under procedures established by the
Internal Revenue Service, including those set forth in Revenue
Procedure 92-25.
7. Monitoring for Material Irreconcilable Conflicts
7.1 The FUND's Board of Directors will monitor the FUND for the existence
of any material irreconcilable conflict between and among the
interests of the certificateholders of the Separate Accounts
(including the ACCOUNTS) investing in the FUND and the participants of
any of the Qualified Plans investing in the FUND. A material
irreconcilable conflict may arise for a variety of reasons, including:
(a) action by any state insurance regulatory authority; (b) a change
in applicable federal or state insurance, tax or securities laws or
regulations, or a public ruling , private letter ruling, no-action or
interpretive letter, or any similar action by insurance, tax or
securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the
investment of the FUND are being managed; (e) a difference in voting
instructions given by the Separate Accounts vis-a-vis voting
instructions provided by the trustees of the Qualified Plans; (f) a
decision by AAL or another life insurance company to disregard the
voting instructions of Certificate owners in one or more Separate
Accounts; or (g) if applicable, a decision by the trustee of a
Qualified Plan to disregard the voting instructions of the
participants of such Qualified Plan. A determination by the FUND's
Board that a material irreconcilable conflict exists will be a final
determination.
7.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, AAL (on behalf of the ACCOUNTS) shall,
at its expense and to the extent reasonably practicable (as determined
by a majority of the disinterested directors of the FUND), take
whatever steps are necessary to remedy or eliminate the material
irreconcilable conflict. Such steps could include: (a) withdrawing the
assets allocable to some or all of the ACCOUNTS from the FUND or any
Portfolio of the FUND and reinvesting such assets in a different
investment medium, including another portfolio of the FUND; (b)
submitting the question as to whether such segregation should be
implemented to a vote of all affected Certificate owners and, as
appropriate, segregating the assets of any appropriate (i.e., variable
annuity Certificate owners or variable life insurance Certificate
owners of one or more of AAL and any other insurance companies with
Separate Accounts investing in the FUND) that votes in favor of such
segregation, or offering to the affected Certificate owners the option
of making such change; or (c) establishing a new registered management
investment company or managed separate account. If a material
irreconcilable conflict arises because of a decision by AAL to
disregard voting instructions of owners of Certificates in one or more
of the ACCOUNTS, and that decision represents a minority position or
would preclude a majority vote with respect to the vote being taken by
shareholders of the FUND, then AAL shall, at the election and
direction of the FUND's Board, withdraw each affected ACCOUNT's
investment in the FUND (but no charge or penalty shall be imposed as a
result of such withdrawal).
7.3 AAL is responsible, to the extent permitted by applicable law, for
taking remedial action on behalf of the affected ACCOUNT(s) in the
event that the FUND's Board determines a material irreconcilable
conflict exists. AAL will take remedial action only as it pertains to
assets of the affected ACCOUNT(s) and in accordance with its fiduciary
responsibility to Certificate owners in such affected ACCOUNT(s). AAL,
as the sponsor of the affected ACCOUNT(s), will be responsible for the
cost of any such remedial action. For the purpose of this Section, a
majority of the disinterested members of the FUND's Board will
determine whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event shall the FUND, or AAL
in its capacity as advisor to the FUND, be required to establish a
Portfolio or new funding medium for any Certificate or any ACCOUNT.
Nor, in its capacity as sponsor of any ACCOUNT, shall AAL be required
to establish a new funding medium for any Certificate or any ACCOUNT
if any offer to do so has been declined by a vote of a majority of the
Certificate owners materially and adversely affected by the material
irreconcilable conflict.
7.4 The FUND promptly shall notify AAL in writing of any determination by
the FUND's Board as to the existence of a material irreconcilable
conflict and its implications
7.5 All reports of potential or existing conflicts received by the FUND's
Board and all Board actions with regard to or determining the
existence of a conflict of interest, notifying AAL of a conflict, and
determining whether any proposed action adequately remedies a
conflict, will be properly recorded in the minutes of the FUND's Board
or other appropriate records, and such minutes or other records will
be made available to the SEC upon request.
7.6 The FUND will disclose in its prospectus that (a) shares of the FUND
may be offered to Separate Accounts and Qualified Plans; (b) material
irreconcilable conflicts may arise between the interest of various
certificateholders investing in the Separate Accounts and the
interests of participants in the Qualified Plans investing in the
FUND; and (c) the FUND's Board will monitor events in order to
identify the existence of any material conflict and determine what
action, if any, should be taken in response to such material
irreconcilable conflict.
7.7 No less than annually, AAL will submit to the FUND's Board such
reports, materials and data as the Board may reasonably request so
that the Board may carry out fully its obligations under this Section.
Such reports, materials and data will be submitted more frequently if
deemed appropriate by the FUND's Board. In any event, AAL will
promptly notify the FUND's Board in writing if it becomes aware of any
facts or circumstances that could give rise to a material
irreconcilable conflict between the interests of various Certificate
owners in the ACCOUNTS and the interests of Qualified Plan
participants investing in the FUND. All reports submitted to the
FUND's Board under this Section 7.7 shall include all information
reasonably necessary for the Board to consider the conflict issues
raised. In this regard, AAL promptly shall notify the FUND's Board
whenever AAL has determined to disregard voting instructions of the
Certificate owners of any ACCOUNT(s) on any matter submitted to a vote
of shareholders of the FUND.
8. Indemnification
8.1 Indemnification By AAL
(a) AAL will indemnify and hold harmless the FUND and each of its
Directors, officers, and employees and each person, if any, who
controls the FUND within the meaning of Section 15 of the 1933
Act (collectively, the "Indemnified Parties" for purposes of this
Section 8.1) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of AAL) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, and
which:
(i) arise out of or are based upon any failure by AAL to perform
the duties or assume the general business responsibilities
of AAL with respect to the design, drafting, state
approvals, issuance, servicing and administration of the
Certificates, or the establishment and maintenance of the
ACCOUNTS; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement, prospectus, or SAI for the
Certificates, or the ACCOUNTS, or contained in the
Certificates or sales literature for the Certificates (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this Agreement to indemnify
will not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made
in reliance upon and in conformity with information
furnished in writing to AAL by or on behalf of the FUND for
use in the registration statement, prospectus, or SAI for
the Certificates or the ACCOUNTS or in the Certificates or
sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the
Certificates or FUND shares; or
(iii)arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the FUND not supplied by AAL, or persons
under its control) or wrongful conduct of AAL or persons
under its control, or failure to supervise persons under
AAL's control or entities or individuals with which AAL
contracts, with respect to the sale or distribution of the
Certificates or FUND shares; or
(iv) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished in
writing to the FUND by or on behalf of AAL; or
(v) arise out of or result from any failure by AAL to provide
the services and furnish the materials contemplated by this
Agreement; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by AAL in this Agreement
or arise out of or result from any other material breach of
this Agreement by AAL, as limited by and in accordance with
the provisions of Sections 8.1(b). and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the FUND,
whichever is applicable.
(c) AAL will not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified AAL in writing within
a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been
served upon such Indemnified Party (or after such Indemnified
Party shall have received notice of such service on any
designated agent), but failure to notify AAL of any such claim
will not relieve AAL from any liability that it may have to the
Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any
such action is brought against the Indemnified Parties, AAL shall
be entitled to participate, at its own expense, in the defense
thereof. AAL also will be entitled to assume the defense thereof,
with counsel satisfactory to the party named in the action. After
notice from AAL to such party of AAL's election to assume the
defense thereof, the Indemnified Party will bear the fees and
expenses of any additional counsel retained by it, and AAL will
not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently
in connection with the defense thereof other than reasonable
costs of investigation.
(d) The Indemnified Party will promptly notify AAL of the
commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification By the FUND
(a) The FUND will indemnify and hold harmless AAL and each of its
directors, officers and employees and each person, if any, who
controls AAL within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of FUND) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect to
the sale of shares of the FUND to AAL; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the sales literature for the FUND and/or the Certificates,
or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify will not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished in writing to the FUND by or on behalf of AAL for
use in the registration statement, prospectus, or SAI for
use in the sales literature or otherwise for use in
connection with the sale of Portfolio shares; or
(iii)arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the FUND not supplied by the FUND, or
persons under its control) or wrongful conduct of the FUND
or persons under its control, or failure to supervise
persons under the FUND's control or entities or individuals
with which the FUND contracts, with respect to the sale or
distribution of the Certificates or FUND shares; or
(iv) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the omission
or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading if such a statement or
omission was made in reliance upon information furnished in
writing to AAL by or on behalf of AAL; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials contemplated
by this Agreement; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other material
breach of this Agreement by the FUND, except to the extent
provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the
FUND, whichever is applicable.
(c) The FUND will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the FUND in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall
have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the FUND of any such
claim will not relieve the FUND from any liability that it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties,
the FUND shall be entitled to participate, at its own expense, in
the defense thereof. The FUND also will be entitled to assume the
defense thereof, with counsel satisfactory to the party named in
the action. After notice from the FUND to such party of the
FUND's election to assume the defense thereof, the Indemnified
Party will bear the fees and expenses of any additional counsel
retained by it, and the FUND will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. Term and Termination Of This Agreement
9.1 This Agreement will terminate:
(a) as to any party hereto, at the option of that party, upon prior
written notice to the other party as provided in Section 9.3
herein; or
(b) at the option of the FUND in the event that formal administrative
proceedings are instituted against AAL by the NASD, the SEC, any
state securities or insurance commissioner or any other
regulatory body regarding AAL's duties under this Agreement or
related to the sale of the Certificates, the operation of the
ACCOUNTS, or the purchase of FUND shares, provided, however, that
the FUND determines, in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of AAL to perform its
obligations under this Agreement; or
(c) at the option of AAL in the event that formal administrative
proceedings are instituted against the FUND by the NASD, the SEC,
or any state securities or insurance commission or any other
regulatory body, regarding the FUND's duties under this Agreement
or related to the sale of FUND shares or the operation of the
FUND, provided, however, that AAL determines, in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability
of the FUND to perform its obligations under this Agreement; or
(d) at the option of AAL with respect to the ACCOUNTS, upon requisite
authority to substitute the shares of another investment company
for shares of the FUND in accordance with the terms of the
Certificates or in accordance with the ACCOUNTS investment policy
or standards of conduct; or
(e) at the option of AAL, in the event any of the FUND's shares are
not registered, issued, or sold in accordance with applicable
federal and any state law or such law precludes the use of such
shares as the underlying investment media of the Certificates
issued or to be issued by AAL; or
(f) at the option of AAL, if the FUND fails to meet the requirements
specified in Sections 2.3 or 2.6 hereof; or
(g) at the option of the FUND, if the investments of the ACCOUNTS
fail to satisfy the diversification requirements of the Code and
the regulations thereunder, or
(h) at the option of AAL, if the FUND dissolves or becomes otherwise
unable to sell shares to fund the ACCOUNTS.
9.2 It is understood and agreed that the right of any party hereto to terminate
this Agreement pursuant to Section 9.1(a) may be exercised for any reason
or for no reason.
9.3 Notice Requirement for Termination
No termination of this Agreement will be effective unless and until the party
terminating this Agreement gives prior written notice to the other party to this
Agreement of its intent to terminate, and such notice shall set forth the basis
for such termination. Furthermore,
(a) in the event that any termination is based upon the provisions of
Section 9.1(a) hereof, such prior written notice shall be given
at least one hundred eighty (180) days in advance of the
effective date of termination as required by such provision;
(b) in the event that any termination is based upon the provisions of
Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least ninety (90) days in advance of the
effective date of termination;
(c) in the event that any termination is based upon the provisions of
Section 9.1(d) hereof, AAL will give at least sixty (60) days
prior written notice to the FUND of the date of any proposed
action to substitute FUND shares, including the filing of any
applicable exemptive application under the 1940 Act relating to
the ACCOUNTS; and AAL will provide the FUND with a copy of any
such exemptive application; and
(d) in the event that any termination is based upon the provisions of
Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof, such
prior written notice shall be given as soon as possible within
twenty-four (24) hours after the terminating party learns of the
event causing termination to be required.
9.4 Partial Termination
It is also understood that this Agreement may be terminated with regard to a
specific Portfolio or Portfolios of the FUND, or the entire FUND at the
discretion of the terminating party. Notwithstanding any termination of this
Agreement, the FUND, or any Portfolio, provided its shares are then available
for sale to any persons, shall at the option of AAL, continue to make available
additional shares of the FUND pursuant to the terms and conditions of this
Agreement, for all Certificates in effect on the effective date of termination
of this Agreement (hereinafter referred to as "Existing Certificates").
Specifically, without limitation, the owners of the Existing Certificates shall
be permitted to transfer or reallocate investments under the Certificates,
redeem investments in the FUND and/or invest in the FUND upon the making of
additional purchase payments under the Existing Certificates.
10. Notices
Any notice will be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to AAL: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Woodrow E. Eno
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Steven A. Weber
11. Miscellaneous
11.1 This Agreement will be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Maryland, where
the sale of any FUND share shall be deemed to have been made;
provided, however, that if such laws or any of the provisions of this
Agreement conflict with applicable Provisions of the 1940 Act, the
latter shall control.
11.2 If any provision of this Agreement will be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement will not be effected thereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the 15th day of March, 1999.
AID ASSOCIATION FOR LUTHERANS and
AAL VARIABLE ANNUITY ACCOUNT I,
AAL VARIABLE ANNUITY ACCOUNT II and
AAL VARIABLE LIFE ACCOUNT I
By: /s/John O. Gilbert
-------------------------------------
John O. Gilbert
President and Chief Executive Officer
By: /s/Woodrow E. Eno
-------------------------------------
Woodrow E. Eno
Senior Vice President,
Secretary and General Counsel
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/Walter S. Rugland
-------------------------------------
Walter S. Rugland
President
By: /s/Steven Fredricks
-------------------------------------
Steven Fredricks
Secretary
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
THE AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED MARCH 15, 1999
<PAGE>
TABLE OF CONTENTS
Page
1. Sale of FUND Shares.......................................................3
2. Representations and Warranties............................................4
3. Prospectus and Proxy Statements: Voting...................................5
4. Sales Material and Information............................................5
5. Monitoring of Material Irreconcilable Conflicts...........................6
6. Fees and Expenses.........................................................7
7. Diversification...........................................................8
8. Indemnification...........................................................9
9. Term and Termination of This Agreement...................................12
10. Notices..................................................................13
11. Miscellaneous............................................................13
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 15th day
of March, 1999, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and as plan sponsor of the Aid Association for Lutherans Savings Plan and
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN (the "PLAN"), and AAL VARIABLE
PRODUCT SERIES FUND, INC. (the "FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as plan sponsor of the PLAN and as
investment adviser of the FUND registered under the Investment Advisers Act of
1940;
WHEREAS, the PLAN is a qualified retirement plan established under Section
401(k) of the Internal Revenue Code by AAL for the benefit of its employees and
the employees of its subsidiaries and affiliates;
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions (the Board of Directors currently has
designated seven such Portfolios);
WHEREAS, to the extent permitted by applicable insurance, tax, ERISA, and
other laws and regulations, the PLAN intends to purchase shares in the FUND on
behalf of the PLAN's participants, and the FUND is authorized to sell such
shares to the PLAN at net asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL, dated the twenty-seventh day of September, 1994, as amended, wherein AAL
has agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code");
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
1. Sale of FUND Shares
1.1 The PLAN will provide for the allocation of net amounts among certain
Portfolios as may be offered from time to time in the PLAN's document.
The selection of the particular Portfolio is to be made by the Plan
Participant, and such selection may be changed in accordance with the
terms of the PLAN's document.
1.2 The FUND will sell to the PLAN those shares of each available
Portfolio that the PLAN administrator or its delegate orders based on
authorizations from its participants, effecting such orders on a daily
basis at the Portfolio's net asset value per share next computed as
provided in the FUND prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to sell
shares of any Portfolio to the PLAN, or suspend or terminate the
offering of shares of any Portfolio, if such action is required by law
or by regulatory authorities having jurisdiction or is, in the sole
discretion of the Board, acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws,
necessary in the best interests of the shareholders of the FUND.
1.4 The FUND agrees that its shares will be sold only to: AAL, on its own
behalf and on behalf of separate accounts that it maintains to fund
variable annuity contracts and variable life insurance contracts of
AAL; (b) other life insurance companies; whether affiliated or
unaffiliated with AAL, on behalf of separate accounts funding variable
annuity contracts and variable life insurance contracts of such other
insurance companies; (c) the PLAN; and (d) other qualified pension or
retirement plans. AAL separate accounts and separate accounts of other
life insurance companies eligible to purchase shares of the FUND are
referred to in this Agreement as "Separate Accounts," and the PLAN and
other qualified pension and or retirement plans eligible to purchase
shares of the FUND are referred to together in this Agreement as
"Qualified Plans." No shares of any Portfolio will be sold to the
general public or to any life insurance company on its own behalf (as
opposed to a Separate Account it maintains) other than AAL.
1.5 The FUND will redeem for cash from the PLAN those full or fractional
shares of each Portfolio that the PLAN requests based on transactions
of the PLAN's participants, effecting such requests on a daily basis
at the Portfolio's net asset value per share next computed as provided
in the FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry only.
Stock certificates will not be issued to the PLAN. Shares ordered from
the FUND will be recorded in an appropriate title for the PLAN.
1.7 The FUND shall furnish notice promptly to the PLAN administrator or
its delegate of any income, dividends or capital gain distributions
payable on the shares of any Portfolio. The PLAN hereby elects to
receive all such income, dividends and capital gain distributions as
are payable on FUND shares in additional shares of that Portfolio. The
PLAN reserves the right to revoke this election and to receive all
such income, dividends and capital gain distributions in cash. The
FUND shall notify the PLAN administrator or its delegate of the number
of shares so issued as payment of such income, dividends and
distributions.
1.8 The FUND shall make the net asset value per share for each applicable
Portfolio available to PLAN on a daily basis, as soon as reasonably
practical after the net asset value per share is calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the PLAN, or delete, combine, or modify existing
Portfolios. The shares of any additional Portfolio may be made
available to the PLAN by the FUND, pursuant to the terms of this
Agreement, and any applicable reference to any Portfolio, the FUND or
its shares herein shall include a reference to any such Portfolio.
2. Representations and Warranties
2.1 AAL represents and warrants that it is a fraternal benefit society
organized under the laws of the State of Wisconsin and engaged in the
writing of life insurance, annuity contracts, and other insurance
products; that it has legally and validly established its PLAN as a
qualified retirement plan under section 401(k) of the Internal Revenue
Code of 1986, as amended. AAL has applied for and received a valid
determination letter from the Internal Revenue Service for the PLAN.
The PLAN complies with the Employee Retirement Income Security Act of
1974 and all relevant federal and state statutory provisions.
2.2 The FUND represents and warrants that its shares sold pursuant to this
Agreement are or will be registered under the 1933 Act to the extent
required by the 1933 Act, duly authorized for issuance and sold in
compliance with the laws of the state of Maryland and all applicable
federal securities laws and that the FUND is or will be registered
under the 1940 Act to the extent required by the 1940 Act. The FUND
will amend the registration statement for its shares under the 1933
Act, as well as its registration statement under the 1940 Act, as
required in order to effect the continuous offering of its shares. The
FUND will register or qualify the shares for sale in accordance with
the laws of the various states only if and to the extent deemed
advisable by the FUND.
2.3 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of the
Code and that the investments of each of its Portfolios will comply
with the diversification requirements of Section 817(h) of the Code
and the regulations thereunder, and that it will notify the PLAN
immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
3. Prospectus and Proxy Statements: Voting
3.1 The FUND will provide the PLAN administrator or its delegate with
current FUND prospectus, statement of additional information and any
supplement thereto in a manner so as to allow the PLAN administrator
or its delegate to timely distribute the current FUND prospectus, SAI
and any supplement thereto, to each current and prospective PLAN
participant.
3.2 The FUND will provide a final copy of any proxy material, report to
shareholders, and other communication to shareholders to the PLAN
administrator or its delegate in a timely manner.
3.3 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the FUND
solely upon the authorization of its Board and/or shareholders as
required by the 1940 Act.
3.4 The PLAN will vote Portfolio shares in accordance with the terms of
the PLAN documents.
4. Sales Material and Information
4.1 The PLAN administrator or its delegate will furnish, or will cause to
be furnished, to the FUND or its designee, each piece of sales
literature or other promotional material in which the FUND, or the
PLAN is named, at least fifteen (15) days prior to its intended use.
No such material will be used if the FUND or its designee objects to
such intended use within fifteen (15) days after receipt of such
material.
4.2 The PLAN will not give any information or make any representation or
statement, or cause such information to be given or representation to
be made, on behalf of the FUND or concerning any Portfolio in
connection with the sale of FUND shares other than the information or
representations contained in the registration statement, prospectus,
and SAI for FUND shares, as such registration statement, prospectus,
and SAI may be amended or supplemented from time to time, or in
reports or proxy materials for the FUND, or in sales literature or
other promotional material approved by the FUND or its designee,
except with the permission of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be furnished,
to the PLAN administrator or its delegate, each piece of sales
literature or other promotional material of the FUND in which the PLAN
is named, at least fifteen (15) days prior to its intended use. No
such material will be used if the PLAN administrator or its delegate
objects to such intended use within fifteen (15) days after receipt of
such material.
4.4 The FUND will not give any information or make any representations or
statements, or cause such information to be given or representations
to be made, on behalf of or concerning the PLAN other than the
information or representations contained in a registration statement
or prospectus, as such registration statement and prospectus may be
amended or supplemented from time to time, or in published reports for
the PLAN that are in the public domain or approved by the PLAN
administrator or its delegate for distribution to PLAN Participants,
or in sales literature or other promotional material approved by the
PLAN administrator or its delegate, except with the permission of the
PLAN administrator or its delegate.
4.5 The FUND will provide to the PLAN one complete copy of all
registration statements, prospectuses, SAI's, reports, proxy material,
sales literature and other promotional material, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the FUND or its shares, contemporaneously
with the filing of such document with the SEC or other regulatory
authorities.
4.6 The PLAN will provide to the FUND one complete copy of all reports,
sales literature and other promotional material, applications for
exemptions, requests for no-action letters, and all amendments to any
of the above, that relate to the PLAN and the FUND, contemporaneously
with the filing of such document with the SEC, IRS or other regulatory
authorities.
5. Monitoring of Material Irreconcilable Conflicts
5.1 The FUND's Board of Directors will monitor the FUND for the existence
of any materials irreconcilable conflict between and among the
interests of the Certificateholders of the Separate Accounts investing
in the FUND and the participants of the PLAN, and any other Qualified
Plans investing in the FUND. A material irreconcilable conflict may
arise for a variety of reasons, including: (a) action by any state
insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public
ruling, private letter ruling, no-action or interpretive letter, or
any similar action by insurance, tax or securities regulatory
authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investment of the
FUND are being managed; (e) a difference in voting instructions given
by variable annuity Certificateholders and variable universal life
Certificateholders of the Separate Accounts vis-a-vis voting
instructions provided by the trustees of the Qualified Plans; (f) a
decision by AAL or another life insurance company to disregard the
voting instructions of Certificateholders in one or more of the
Separate Accounts; or (g) if applicable, a decision by the trustee of
a Qualified Plan to disregard the voting instructions of the
participants of such Qualified Plan. A determination by the FUND's
Board that a material irreconcilable conflict exists will be a final
determination.
5.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, the PLAN shall, at its expense and to
the extent reasonably practicable (as determined by a majority of the
disinterested directors of the FUND), take whatever steps are
necessary to remedy or eliminate the material irreconcilable conflict.
Such steps could include withdrawing the assets allocable to the PLAN
from the FUND or any Portfolio of the FUND (but no charge or penalty
shall be imposed as a result of withdrawal) and reinvesting such
assets in a different investment medium, which could include another
Portfolio of the FUND.
5.3 The PLAN is responsible, to the extent permitted by applicable law,
for taking remedial action in the event that the FUND's Board
determines a material irreconcilable conflict exists. The PLAN will
take remedial action only as it pertains to PLAN assets and in
accordance with its fiduciary responsibility to the PLAN participants.
The PLAN will be responsible for the cost of any such remedial action.
For the purposes of this Section, a majority of the disinterested
members of the FUND's Board will determine whether or not any proposed
action adequately remedies any material irreconcilable conflict. In no
event shall the FUND or AAL be required to establish a new Portfolio
or new funding medium for any variable annuity or variable universal
life contract. The PLAN will not be required by this Section to
establish a new funding medium if (a) a majority of its participants
materially and adversely affected by the irreconcilable material
conflict vote to decline such offer or (b) pursuant to the PLAN's
documents and applicable law, the PLAN makes such decision without a
vote of its participants.
5.4 The FUND's Board determination of the existence of a material
irreconcilable conflict and its implications will be made known
promptly and in writing to the PLAN administrator.
5.5 All reports of potential or existing conflicts received by the FUND's
Board and all Board actions with regard to, or determining the
existence of, a conflict of interest, notifying the PLAN of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of the
FUND's Board or other appropriate records, and such minutes or other
records will be made available to the SEC upon request.
5.6 The FUND will disclose in its prospectus that (a) shares of the FUND
may be offered to both Separate Accounts and to Qualified Plans; (b)
material irreconcilable conflicts may arise between the interest of
various Certificateholders investing in the Separate Accounts and the
interests of Qualified Plans participants investing in the FUND; and
(c) the FUND's Board will monitor events in order to identify the
existence of any material conflict and determine what action, if any,
should be taken in response to such material irreconcilable conflict.
5.7 No less than annually, the PLAN will submit to the FUND's Board such
reports, materials and data as the Board may reasonably request so
that the Board may carry out fully its obligations under this Section.
Such reports, materials and data will be submitted more frequently if
deemed appropriate by the FUND's Board. In any event, the PLAN
promptly will notify the FUND's Board in writing if it becomes aware
of any facts or circumstances that could give rise to a material
irreconcilable conflict between the interests of various
Certificateholders in the Separate Accounts and the interests of the
Qualified Plan participants investing in the FUND. All reports
submitted to the FUND's Board under this Section 5.7 shall include all
information reasonably necessary for the Board to consider the
conflict issues raised. In this regard, if the PLAN documents ever
permit pass-through voting to plan participants, the PLAN promptly
shall notify the FUND's Board whenever the PLAN trustee has determined
to disregard PLAN participant voting instructions on any matter
submitted to a vote of shareholders of the FUND.
6. Fees and Expenses
6.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below, each
Portfolio will bear all of its operating expenses that are not
specifically assumed by AAL, including the following: (i) interest and
taxes (ii) brokerage commissions; (iii) insurance premiums; (iv)
compensation and expenses for those Directors who are not "interested"
persons under Section 2(a)(19) of the Act; (v) independent legal and
audit expenses; (vi) fees and expenses of the FUND's custodian,
shareholder servicing or transfer agent and accounting services agent;
(vii) expenses incident to the issuance of its shares, including stock
certificates and issuance of shares on the payment of, or reinvestment
of dividends; (viii) fees and expenses incident to the registration
under Federal or state securities laws of the FUND or its shares; (ix)
FUND or portfolio organizational expenses; (x) FUND expenses of
preparing, printing and mailing reports and notices, proxy material
and prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii) dues
or assessments of or contributions to the Investment Company Institute
or any successor or other industry association; (xiii) such
non-recurring expenses as may arise, including litigation affecting
the FUND and the legal obligations which the FUND may have to
indemnify its officers and Directors with respect thereto; and (xiv)
cost of daily valuation of each of the Portfolio's securities and net
asset value per share.
6.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will pay for all expenses for the printing
and distribution to the PLAN administrator or its delegate the FUND
proxy materials, proxy cards and voting instructions forms
(collectively "proxy information"), tabulating the results of proxy
solicitations, printing and distributing to the PLAN administrator or
its delegate the FUND prospectus, SAI, supplements, proxy materials,
report to shareholders and other communication to shareholders.
6.3 The PLAN will pay all expenses incident to the PLAN's performance
under this Agreement. In addition, the PLAN will bear any expenses
associated with administration of the PLAN.
7. Diversification
7.1 The Portfolios will at all times invest money from the PLAN in
accordance with the terms of the FUND's prospectus and the PLAN
document. Without limiting the scope of the foregoing, the Portfolios
will at all times comply with Section 817(h) of the Code and Treasury
Regulations Section 1.817-5 relating to the diversification
requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations.
7.2 The FUND shall furnish to the PLAN, on a regular basis, reports of all
of the investments of each Portfolio in a form sufficient to permit
the PLAN to determine whether each Portfolio is in compliance with the
diversification requirements of Section 817(h) of the Code and the
Regulations thereunder and shall take immediate action, on learning
through its own monitoring, or on advice from AAL or the PLAN, that
any Portfolio is not in compliance with such requirements, to return
to compliance with such requirements.
7.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with the PLAN in any effort to
correct such diversification failure under procedures established by
the Internal Revenue Service, including those set forth in Revenue
Procedure 92-25.
8. Indemnification
8.1 Indemnification by AAL, as PLAN Sponsor
(a) AAL, as PLAN sponsor, will indemnify and hold harmless the FUND
and each of its Directors, officers, and employees and each
person, if any, who controls the FUND (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against
any and all losses, claims, damages, liabilities (including
amounts paid in settlement with the written consent of AAL and
the PLAN), or litigation (including legal and other expenses), to
which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, and which:
(i) arise out of or are based upon any failure by the PLAN or
AAL to perform the duties or assume the general business
responsibilities of the PLAN with respect to the design,
drafting, federal approvals, issuance, servicing and
administration of the PLAN, or the establishment and
maintenance of the PLAN; or
(ii)arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the registration statement, prospectus, or SAI regarding the
PLAN, or contained in the sales literature for the PLAN (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this Agreement to indemnify
will not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made
in reliance upon and in conformity with information
furnished in writing to AAL or the PLAN by or on behalf of
the FUND for use in the registration statement, prospectus,
or SAI for the PLAN or in the PLAN or sales literature (or
any amendment or supplement) or otherwise for use in
connection with the sale of the FUND shares to PLAN
participants; or
(iii)arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the FUND not supplied by the PLAN, or
persons under its control), or wrongful conduct of the PLAN
or persons under its control, or failure to supervise
persons under AAL's or the PLAN's control or entities or
individuals with which the PLAN contracts, with respect to
the sale or distribution of the FUND shares to PLAN
participants; or
(iv)arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature of the FUND or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading if such a statement or omission was made in
reliance upon information furnished in writing to the FUND
by or on behalf of AAL; or
(v) arise out of or result from any failure by AAL or the PLAN
to provide the services and furnish the materials
contemplated by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by AAL: in this
Agreement or arise out of or result from any other material
breach of this Agreement by AAL or the PLAN, as limited by
and in accordance with the provisions of Sections 8.1(b).
and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision with
respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement or to the FUND,
whichever is applicable.
(c) AAL will not be liable under this indemnification provision with
respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the AAL in writing
within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have
been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify AAL of any such
claim will not relieve AAL from any liability that it may have to
the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties,
the AAL and or the PLAN shall be entitled to participate, at its
own expense, in the defense thereof. AAL also will be entitled to
assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from AAL to such party of
the AAL's election to assume the defense thereof, the Indemnified
Party will bear the fees and expenses of any additional counsel
retained by it, and AAL will not be liable to such party under
this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the AAL of the
commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification by the FUND
(a) The FUND will indemnify and hold harmless the PLAN and each of
its directors, officers and employees and each person, if any,
who controls the PLAN (collectively, the "Indemnified Parties"
for purposes of this Section 8.2) against any and all losses,
claims, damages, liabilities (including amounts paid in
settlement with the written consent of FUND) or litigation
(including legal and other expenses) to which the Indemnified
Parties may become subject under any statute, regulation, at
common law or otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect to
the sale of shares of the FUND to the PLAN; or
(ii)arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in
the sales literature for the FUND and/or the Certificates,
or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify will not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished in writing to the FUND by or on behalf of the PLAN
for use in the registration statement, prospectus, or SAI
for use in the sales literature or otherwise for use in
connection with the sale of Portfolio shares; or
(iii)arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI, or
sales literature of the FUND not supplied by the FUND, or
persons under its control) or wrongful conduct of the FUND
or persons under its control, or failure to supervise
persons under the FUND's control or entities or individuals
with which the FUND contracts, with respect to the sale or
distribution of the Certificates or FUND shares; or
(iv)arise out of any untrue statement or alleged untrue statement
of a material fact contained in a registration statement,
prospectus, or sales literature of the FUND or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading if such a statement or omission was made in
reliance upon information furnished in writing to the PLAN
by or on behalf of the PLAN; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials contemplated
by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other material
breach of this Agreement by the FUND, except to the extent
provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such Indemnified
Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the
FUND, whichever is applicable.
(c) The FUND will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the FUND in
writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall
have been served upon such Indemnified Party (or after such
Indemnified Party shall have received notice of such service on
any designated agent), but failure to notify the FUND of any such
claim will not relieve the FUND from any liability that it may
have to the Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision. In
case any such action is brought against the Indemnified Parties,
the FUND shall be entitled to participate, at its own expense, in
the defense thereof. The FUND also will be entitled to assume the
defense thereof, with counsel satisfactory to the party named in
the action. After notice from the FUND to such party of the
FUND's election to assume the defense thereof, the Indemnified
Party will bear the fees and expenses of any additional counsel
retained by it, and the FUND will not be liable to such party
under this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any of
its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. Term and Termination of this Agreement
9.1 This Agreement will Terminate:
(a) as to any party hereto, at the option of that party, upon prior
written notice to the other party as provided in Section 9.3
herein; or
(b) at the option of the FUND in the event that formal administrative
proceedings are instituted against the PLAN by the IRS, DOL or
any other regulatory body regarding the PLAN's duties under this
Agreement or related to the sale of shares to PLAN participants,
the operation of the PLAN, provided, however, that the FUND
determines, in its sole judgment exercised in good faith, that
any such administrative proceedings will have a material adverse
effect upon the ability of the PLAN to perform its obligations
under this Agreement; or
(c) at the option of the PLAN in the event that formal administrative
proceedings are instituted against the FUND by the NASD, the SEC,
or any state securities or insurance commission or any other
regulatory body, regarding the FUND's duties under this Agreement
or related to the sale of FUND shares or the operation of the
FUND, provided, however, that the PLAN determines, in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability
of the FUND to perform its obligations under this Agreement; or
(d) at the option of the PLAN, upon requisite authority to substitute
the shares of another investment company for shares of the FUND
in accordance with the PLAN investment policy or standards of
conduct; or
(e) at the option of the PLAN, in the event any of the FUND's shares
are not registered, issued, or sold in accordance with applicable
federal and any state law or such law precludes the use of such
shares as an investment of the PLAN; or
(f) at the option of the PLAN, if the FUND fails to meet the
requirements specified in Section 2.2 or 2.3 hereof; or
(g) at the option of the FUND, if the investments of the PLAN fail to
satisfy the diversification requirements of the Code and the
regulations thereunder, or
(h) at the option of the PLAN, if the FUND dissolves or becomes
otherwise unable to sell shares to fund the PLAN.
9.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 9.1(a) may be exercised
for any reason or for no reason.
9.3 Notice Requirement for Termination. No termination of this Agreement
will be effective unless and until the party terminating this
Agreement gives prior written notice to the other party to this
Agreement of its intent to terminate, and such notice shall set forth
the basis for such termination. Furthermore,
(a) in the event that any termination is based upon the provisions of
Section 9.1(a) hereof, such prior written notice shall be given
at least sixty (60) days in advance of the effective date of
termination as required by such provision;
(b) in the event that any termination is based upon the provisions of
Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least sixty (60) days in advance of the
effective date of termination;
(c) in the event that any termination is based upon the provisions of
Section 9.1(d) hereof, the PLAN will give at least sixty (60)
days prior written notice to the FUND of the date of any proposed
action to substitute FUND shares, including the filing of any
applicable exemptive application under the 1940 Act relating to
the PLAN; and the PLAN will provide the FUND with a copy of any
such exemptive application; and
(d) in the event that any termination is based upon the provisions of
Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof, such
prior written notice shall be given as soon as possible within
twenty-four (24) hours after the terminating party learns of the
event causing termination to be required.
9.4 Partial Termination. It is also understood that this Agreement may be
terminated with regard to a specific Portfolio or Portfolios of the
FUND, or the entire FUND at the discretion of the terminating party.
Notwithstanding any termination of this Agreement, the FUND, or any
Portfolio, provided its shares are then available for sale to any
persons, shall at the option of the PLAN, continue to make available
additional shares of the FUND pursuant to the terms and conditions of
this Agreement, for all PLAN participants who own FUND shares on the
effective date of termination of this Agreement (hereinafter referred
to as "Existing Shares"). Specifically, without limitation, the owners
of Existing Shares shall be permitted to transfer or reallocate
investments under terms of the PLAN, redeem investments in the FUND
and/or invest in the FUND upon the making of additional purchase
payments under the Existing Shares.
10. Notices
Any notice will be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to AAL or the PLAN: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Marty Myse
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Steven A. Weber
11. Miscellaneous
11.1 This Agreement will be construed and the provisions hereof interpreted
under and in accordance with the laws of the State of Maryland, where the
sale of any FUND share shall be deemed to have been made; provided,
however, that if such laws or any of the provisions of this Agreement
conflict with applicable Provisions of the 1940 Act, the latter shall
control.
11.2 If any provision of this Agreement will be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement
will not be effected thereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the 15th day of March, 1999.
AID ASSOCIATION FOR LUTHERANS AID ASSOCIATION FOR LUTHERANS
SAVINGS PLAN
By: /s/ De Hasselbacher By: /s/John O. Gilbert
------------------------------------ ------------------------------
De Hasselbacher John O. Gilbert
Benefit Plans Administrative Officer President and Chief Executive
Officer
By: /s/Woodrow E. Eno
------------------------------
Woodrow E. Eno
Senior Vice-President,
Secretary and General Counsel
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/Walter S. Rugland
------------------------------------
Walter S. Rugland
President
By: /s/Steven J. Fredricks
------------------------------------
Steven J. Fredricks
Secretary
AMENDMENT AND RESTATEMENT
OF
TRANSFER AGENCY AGREEMENT
BY AND AMONG
AAL VARIABLE PRODUCTS SERIES FUND, INC.
AND
AID ASSOCIATION FOR LUTHERANS
DATED SEPTEMBER 27, 1994, AND AS
AMENDED MARCH 15, 1999
TABLE OF CONTENTS
Page
1. Documents.............................................................3
2. Authorized Shares.....................................................4
3. AAL to Issue and Register Shares......................................4
4. Notice of Distribution................................................5
5. Distributions.........................................................5
6. Redemptions and Repurchases...........................................5
7. Processing Transactions...............................................5
8. Tax Returns...........................................................5
9. Book and Records......................................................6
10. Information to be Furnished...........................................7
11. Proxies ........................................................7
12. Compliance with Governmental Rules and Regulations....................7
13. Force Majeure.........................................................7
14. Standard of Care and Indemnification..................................7
15. Further Actions.......................................................8
16. Additional Portfolios.................................................8
17. Assignment and Agents.................................................9
18. Maryland Law to Apply.................................................9
19. Amendment and Termination.............................................9
TRANSFER AGENCY AGREEMENT
The TRANSFER AGENCY AGREEMENT made and entered into as of September 27,
1994 by and among the AAL VARIABLE PRODUCT SERIES FUND, INC. (the "FUND"), a
Maryland corporation, and AID ASSOCIATION FOR LUTHERANS ("AAL"), a fraternal
benefit society founded under the laws of the State of Wisconsin, is hereby
amended and restated as of the 15th day of March, 1999.
WITNESSETH THAT:
WHEREAS, the Fund is a diversified, open-end management investment
company, registered under the Investment Company Act of 1940 as amended ("1940
Act"), and authorized to issue shares of common stock, $.001 par value ("Common
Stock"), in separate series, with each such series representing an interest in a
separate portfolio of securities and other assets; and
WHEREAS, AAL, a fraternal benefit society founded in Wisconsin in 1902
and owned by and operated for its members, is currently licensed to transact
life insurance business in all 50 states and the District of Columbia and
intends to offer variable annuity and variable universal life certificates (the
"Certificates") in states where it has authority to issue variable contracts;
and
WHEREAS, the Fund intends to offer shares of the AAL Variable Product
Large Company Stock Portfolio, the AAL Variable Product Small Company Stock
Portfolio, the AAL Variable Product Bond Portfolio, the AAL Variable Product
Balanced Portfolio, the AAL Variable Product Money Market Portfolio, the AAL
Variable Product International Stock Portfolio and the AAL Variable Product High
Yield Bond Portfolio (such portfolios, together with all other portfolios
subsequently established by the Fund and made subject to this Agreement in
accordance with Section 16 hereof, the "Portfolios"), exclusively to
corresponding subaccounts of the AAL Variable Annuity Account I, AAL Variable
Annuity Account II, AAL Variable Life Account I (each of which funds certain
Certificates issued by AAL), the Aid Association for Lutherans Savings Plan, (a
qualified retirement plan under Section 401(k) of the Internal Revenue Code of
1986, as amended), and directly to AAL (the "Shareholders");
NOW THEREFORE, in consideration of the Fund making its shares available
for investment in connection with certain insurance products and qualified
retirement plans and for other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, but for no other fee or
reimbursement which is not specifically set forth herein, AAL is hereby
appointed Transfer Agent for the shares of the Fund and Dividend Disbursing
Agent for the Fund, and AAL accepts said appointment, subject to the following
terms and conditions:
1. Documents
1.1 In connection with the appointment of AAL as Transfer Agent, the Fund
shall file with AAL the following documents:
a) A certified copy of the Articles of Incorporation of the Fund and
any amendments thereto;
b) A certified copy of the By-Laws of the Fund as amended to date;
c) A copy of the resolution of the Board of Directors of the Fund
authorizing this Agreement; and
d) An opinion of counsel for the Fund with respect to the validity
of the shares of the Fund, the number of shares authorized, the
number of shares allocated to each Portfolio, the status of
redeemed or repurchased shares and the number of shares of each
Portfolio with respect to which a registration statement under
the Securities Act of 1933, as amended ("1933 Act"), has been
filed and is in effect.
1.2 The Fund will also furnish to AAL from time to time the following
documents:
a) Each resolution of the Board of Directors of the Fund authorizing
the original issue of its shares or affecting the status of
redeemed or repurchased shares;
b) Each registration statement filed with the Securities and
Exchange Commission under the 1933 Act or under the 1940 Act and
amendments thereof, orders relating thereto and prospectuses and
statements of additional information (hereinafter collectively
referred to as "prospectus") in effect with respect to the sale
of shares of the Fund;
c) A certified copy of each amendment to the Articles of
Incorporation or the By-Laws of the Fund;
d) Certified copies of each resolution of the Board of Directors
authorizing officers to give instructions to the Transfer Agent;
and
e) Such other documents or opinions which AAL may, in its
discretion, reasonably deem necessary or appropriate in the
proper performance of its duties.
2. Authorized Shares
The Fund certifies to AAL that as of the close of business on the date of
this Agreement, it has authorized a total of 2,000,000,000 (two billion) shares
of its Common Stock, of which 700,000,000 (seven hundred million) shares are
divided equally among the seven Portfolios, and certifies that by virtue of its
Articles of Incorporation and the provisions of the laws of the state of its
incorporation, shares of its Common Stock which are redeemed or re-purchased by
the Fund from the holder will be restored to the status of authorized and
unissued shares.
3. AAL to Issue and Register Shares
AAL shall issue and record the issuance of shares of the Common Stock of
the Fund. AAL shall notify the Fund and its "Custodian" (which term, whenever
used herein, shall mean each Custodian for the one or more Portfolios affected
by the transaction referred to) of every issuance, which notice shall include
the date, Portfolio, number of shares, and dollar amount of the transaction. AAL
shall compute the number of shares issuable in the case of an order for a dollar
amount of shares (or the purchase price in the case of an order for a specific
number of shares) at the net asset value per share for the Portfolio, as
described in the then-current prospectus of the Fund, unless the Board of
Directors of the Fund should otherwise direct.
4. Notice of Distribution
The Fund shall promptly inform AAL of the declaration of any dividend or
distribution on account of its shares, including the amount per share, record
date, date payable and the Portfolio.
5. Distributions
AAL shall act as Dividend Disbursing Agent for the Fund, and, as such, in
accordance with the provisions of the Articles of Incorporation and the
then-current prospectus of the Fund, shall distribute or credit income and
capital gain payments to shareholders. The Fund will notify AAL of and cause the
Custodian to make available to AAL out of the assets of the Fund of the
appropriate Portfolio, the amount of any such payment to be paid out in cash.
AAL shall process the reinvestment of distributions in each Portfolio at the net
asset value per share for that Portfolio next computed after the payment, in
accordance with the then-current prospectus of the Fund. AAL shall notify the
Fund and the Custodian as to the number, Portfolio, dollar amount and date of
issue of shares by reinvestment of each distribution.
6. Redemptions and Repurchases
AAL shall process each redemption or repurchase of shares at the net asset
value per share of that Portfolio, as described in the then-current prospectus
of the Fund, unless the Board of Directors of the Fund should otherwise direct.
Where redemption or repurchase of a dollar amount is required, AAL shall
calculate the number of shares to be redeemed or repurchased so as to provide
the shareholder with the dollar value required, and where a stated number of
shares is required, AAL shall compute the dollar amount of the proceeds. In
either case, AAL shall notify the Fund of the number of shares and the Portfolio
out of which the shares are to be redeemed or repurchased, and the dollar amount
and date of the redemption or repurchase, and shall direct the Fund to make the
required amount of proceeds available to the shareholder out of the assets of
that Portfolio. The Fund shall cause its Custodian to make such proceeds
available not more than seven calendar days after receipt of the redemption or
repurchase request.
7. Processing Transactions
In calculating the number of shares to be issued on purchase or
reinvestment, or redeemed or repurchased, or the amount of the purchase payment
or redemption or repurchase proceeds owed, AAL shall use the net asset value per
share computed by AAL in accordance with the investment advisory agreement
between the Fund and AAL.
The authority of AAL to process purchases, reinvestments, redemptions and
repurchases shall be suspended upon receipt of notification by AAL of the
suspension of the determination of the net asset value of the Portfolios of the
Fund, until such suspension has been lifted.
8. Tax Returns
AAL shall, if necessary, prepare, file with the Internal Revenue Service
and with the appropriate state agencies, and, if required, mail to shareholders
such returns for reporting dividends and distributions paid as are required to
be so filed and mailed under applicable federal and state income tax laws, rules
and regulations.
9. Book and Records
With respect to each Portfolio, AAL shall maintain records showing for each
shareholder's account the following:
a) Names, address and tax identifying numbers;
b) Number of shares of each Portfolio held;
c) Historical information regarding transactions with respect to
each Portfolio, including purchases, redemptions, dividends and
distributions, transfers, and any other transactions, with date
and price for all transactions;
d) Any stop or restraining order placed against the account;
e) Correspondence relating to the current maintenance of the
account;
f) Any information required in order for the AAL to perform the
calculations contemplated or required by this Agreement; and
g) Such other records as the Fund may from time to time reasonably
request, and any other document pertinent to the above, or to
functions that the parties to a transfer agent agreement may
assign to the transfer agent.
Any such records required to be maintained by Rule 31a-1 of the General
Rules and Regulations under the 1940 Act shall be preserved by AAL for the
periods prescribed in Rule 31a-2 of said rules. Such record retention shall be
at the expense of AAL and records may be inspected by the Fund or its designees
at reasonable times, and, upon reasonable request of the Fund, copies of records
shall be provided at AAL expense to the Fund or its designee. AAL may, at its
option at any time, and shall forthwith upon the demand of the Fund, turn over
to the Fund and cease to retain in AAL files, records and documents created and
maintained by AAL pursuant to this Agreement which are no longer needed by AAL
in performance of its services or for its protection. If not so turned over to
the Fund, such records and documents will be retained by AAL for six years from
the year of creation, during the first two of which such documents will be in
readily accessible form. At the end of the six year period, such records and
documents will either be turned over to the Fund, or destroyed in accordance
with the authorization of the Fund.
Any such records required to be maintained by Maryland General Corporation
Law shall be maintained by AAL upon the terms thereunder.
Any such records maintained by AAL pursuant to this Agreement are deemed to
be the property of the Fund and will be promptly surrendered or made available
to the Fund or its designee, without charge, except for reimbursement of
expenses for surrender of such documents, upon request by the Fund or upon
termination of this Agreement.
AAL and the Fund agree that all books, records, information and data
pertaining to the business of the other Party which are exchanged or received
pursuant to the negotiation or the carrying out of this Agreement shall remain
confidential, and shall not be voluntarily disclosed to any other person, except
as may be required by law.
10. Information to be Furnished
AAL shall furnish to the Fund such other information, including statistical
information, as needed to implement the provisions of this Agreement and as may
be agreed upon from time to time.
AAL shall report to the Fund regarding its performance under this Agreement
as may be reasonably requested by the Fund.
The Fund shall furnish to AAL such instructions and other information as
are needed to implement the provisions of this Agreement and as may be agreed
upon from time to time.
11. Proxies
AAL shall mail or otherwise distribute such proxy cards and other material
supplied to it by the Fund in connection with shareholder meetings of the Fund
and shall receive, examine and tabulate returned proxies and voting instructions
and certify the vote of each Portfolio of the Fund.
12. Compliance with Governmental Rules and Regulations
As between the Fund and AAL in its capacity as Transfer Agent, the Fund
assumes full responsibility for the preparation, contents and distribution of
each prospectus of the Fund and for complying with all applicable requirements
of the 1933 Act, the 1940 Act, and any laws, rules and regulations of
governmental authorities having jurisdiction over the Fund, except as may be
specifically provided herein.
13. Force Majeure
AAL shall not be liable for loss of data occurring by reason of
circumstances beyond its control, including but not limited to acts of civil or
military authority, national emergencies, fire, flood or catastrophe, acts of
God, insurrection, war, riots, or failure of transportation, communication or
power supply. AAL shall use its best efforts to minimize the likelihood of such
damage, loss of data, delays or errors resulting from uncontrollable events, and
if such damage, loss of data, delays or errors occur, AAL shall use its best
efforts to mitigate the effects of such occurrence.
14. Standard of Care and Indemnification
AAL shall at all times act in good faith and use its best efforts within
reasonable limits to ensure the accuracy of all services performed under this
Agreement, but assumes no responsibility and shall not be liable for loss or
damage due to errors; provided, that AAL shall indemnify and hold the Fund
harmless from all loss, cost, damage, and expense, including reasonable
attorneys' fees, incurred by the Fund as a result of AAL's gross negligence, bad
faith, or willful misfeasance in the performance of its duties, or by reason of
its reckless disregard of its obligations and duties under this Agreement, or
that of its officers, agents and employees, in the performance of this
Agreement.
The Fund shall indemnify and hold AAL harmless from all loss, cost, damage
and expense, including reasonable attorneys' fees incurred by it resulting from
any claim, demand, action or suit in connection with the performance of its
duties hereunder, or the functions of Transfer and Dividend Disbursing Agent or
as a result of acting upon any instruction reasonably believed by it to have
been properly executed by a duly authorized officer of the Fund, or upon any
information, data, records or documents provided AAL or its agents by computer
tape, telex, CRT data entry or other similar means authorized by the Fund;
provided, that this indemnification shall not apply to actions or omissions of
AAL in cases of its own gross negligence, bad faith or willful misfeasance in
the performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement, or that of its officers, agents and
employees, in the performance of this agreement.
In order that the indemnification provisions contained in this Section 14
shall apply, however, it is understood that if in any case the one party (the
"Indemnitor") may be asked to indemnify or save the other party (the
"Indemnitee") harmless, the Indemnitor shall be fully and promptly advised of
all pertinent facts concerning the matters in question, and it is further
understood that the Indemnitee will use all reasonable care to identify and
notify the Indemnitor promptly concerning any situation which presents or
appears likely to present the probability of such a claim for indemnification
against the Indemnitor. The Indemnitor shall have the option to defend the
Indemnitee against any claim which may be the subject of this indemnification,
and in the event that the Indemnitor so elects, it will so notify the
Indemnitee, and thereupon the Indemnitor shall take over complete defense of the
claim, and the Indemnitee shall in such situations incur no further legal or
other expenses for which it shall seek or be entitled to indemnification under
this paragraph. The Indemnitee shall in no case confess any claim or make any
compromise in any case in which the Indemnitor will be asked to indemnify the
Indemnitee except with the Indemnitor's prior written consent.
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any act or
failure to act hereunder.
15. Further Actions
Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof.
16. Additional Portfolios
In the event that the Fund establishes one or more Portfolios in addition
to the seven Portfolios with respect to which it desires to have AAL render
services as Transfer Agent and Dividend Disbursing Agent under the terms hereof,
it shall so notify AAL in writing, and if AAL agrees in writing to provide such
services, such Portfolio shall become a Portfolio hereunder. AAL shall not
unreasonably withhold approval of such new Portfolio.
17. Assignment and Agents
AAL may not assign this Agreement or delegate any of its responsibilities
hereunder without the express written consent of the Fund. However, AAL may from
time to time employ agents to act on its behalf to perform and carry out its
functions set forth as responsibilities of AAL in this Agreement.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
18. Maryland Law to Apply
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of Maryland.
19. Amendment and Termination
This Agreement may be modified or amended from time to time by written
agreement between the parties hereto. This Agreement may be terminated at any
time by not less than one hundred twenty (120) days' written notice given by one
party to the other.
EXECUTED under seal as of the day and year above written:
AID ASSOCIATION FOR LUTHERANS AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/John O. Gilbert By: /s/Walter S. Rugland
------------------------------ ------------------------------
John O. Gilbert Walter S. Rugland
President and President
Chief Executive Officer
By: /s/Woodrow E. Eno By: /s/Steven J. Fredricks
------------------------------ ------------------------------
Woodrow E. Eno Steven J. Fredricks
Senior Vice President, Secretary
Secretary and General Counsel
1
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,
amended, effective March 4, 1998, is hereby amended, effective March 15, 1999 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 Annuity Account II, AAL Variable Life Account I, any other
separate account(s) that AAL may establish in the future to fund variable
insurance products issued by AAL, the Aid Association for Lutherans
Savings Plan, 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 Annuity Account II, AAL Variable Life
Account I, any other separate account(s) that AAL may establish in the
future to fund variable insurance products issued by AAL, the Aid
Association for Lutherans Savings Plan, AAL and/or, AAL Benefit Members
(or those eligible for membership), 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 this 15th day of March, 1999.
ATTEST: AAL VARIABLE PRODUCT SERIES
FUND, INC.
By: /s/Steven J. Fredricks By: /s/Walter S. Rugland
----------------------------- --------------------------
Steven J. Fredricks Walter S. Rugland
Secretary President
ATTEST: AID ASSOCIATION FOR LUTHERANS
By: /s/Woodrow E. Eno By: /s/John O. Gilbert
------------------------------ --------------------------
Woodrow E. Eno John O. Gilbert
Senior Vice President, President and Chief
General Counsel and Secretary Executive Officer
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Financial
Highlights" and "Independent Auditors" in the Prospectus and "Financial
Statements" in the Statement of Additional Information and to the incorporation
by reference of our report dated January 27, 1999 in the Registration Statement
(Form N-1A) of the AAL Variable Product Series Fund, Inc., filed with the
Securities and Exchange Commission in this Post-Effective Amendment No. 9 to the
Registration Statement under the Securities Act of 1933 (File No. 33-82056) and
this Amendment No. 10 to the Registration Statement under the Investment Company
Act of 1940 (File No. 811-8662).
/s/ ERNST & YOUNG LLP
---------------------------
ERNST & YOUNG LLP
Milwaukee, Wisconsin
April 22, 1999
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