AAL VARIABLE PRODUCT SERIES FUND, INC.
PROSPECTUS
MAY 1, 2000
As Revised May 5, 2000
As Further Revised July 7, 2000
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 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 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
(920)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
Small Company Stock Portfolio
International Stock Portfolio
Large Company Stock Portfolio
High Yield 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
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 Annuity Account II, 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.
"We" refers to Aid Association for Lutherans (AAL) or AAL Capital
Management Corporation (AAL CMC). AAL CMC advises the Fund and AAL issues
certificates for the AAL Flexible Premium Deferred Variable Annuity, the AAL
Single Premium Immediate Variable Annuity and the AAL Universal Life. AAL is
also the transfer agent for the Fund shares and the sponsor of the savings plan
described below.
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 selections, 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 Fund 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.
<PAGE>
AAL VARIABLE PRODUCT SMALL COMPANY STOCK PORTFOLIO
This portfolio is not available until October 16, 2000.
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.
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.
The value of the portfolio's investments may increase and decrease substantially
more than the stock market, as generally measured by a market benchmark index,
usually the S&P 500 Index. As a result, you have a greater risk of losing money
in this portfolio.
PAST PERFORMANCE
The following chart and table provide some indication of the risks of
investing in the portfolio by illustrating how the portfolio has performed. The
bar chart depicts the performance from year-to-year for the years indicated. The
table compares the portfolio's average annual returns for the periods indicated
to a broad-based securities market index. 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% 12.19%
1996 1997 1998 1999
Best Quarter: Q4 1998 17.60%
Worst Quarter: Q3 1998 (20.77)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (6/14/95)
Small Company Stock Portfolio 12.19% 14.38%
S&P SmallCap 600 Index* 12.40% 15.75%
* 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
following tables.
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 0.06%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 0.41%%
* 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
------------------ ----------------- ----------------- ---------------
------------------ ----------------- ----------------- ---------------
$43 $135 $235 $529
------------------ ----------------- ----------------- ---------------
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
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.
PAST PERFORMANCE
The following chart and table provide some indication of the risks of
investing in the portfolio by illustrating how the portfolio has performed. The
bar chart depicts the performance for the calendar year ended December 31, 1999.
The table compares the portfolio's average annual returns for the periods
indicated to a broad-based securities market index. As with all investments,
past performance is not a guarantee of future results.
TOTAL RETURN AS OF DECEMBER 31[SHOWN AS BAR CHART]
41.50%
1999
Best Quarter: Q4 1999 23.88%
Worst Quarter: Q3 1998 (14.25)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (3/2/98)
International Portfolio 41.50% 27.56%
EAFE(R)Index* 26.96% 18.70%
* The Morgan Stanley Capital International Europe, Australasia, Far East Index
(EAFE(R) Index) is a stock index designed to measure the investment returns of
the developed countries outside North America. The EAFE(R) Index currently
includes stocks from 21 countries.
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
following tables.
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 0.33%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 1.13%
* 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
-------------------- --------------------- ------------------- ----------------
-------------------- --------------------- ------------------- ----------------
$117 $366 $634 $1,401
-------------------- --------------------- ------------------- ----------------
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
Index.
PAST PERFORMANCE
The following chart and table provide some indication of the risks of
investing in the portfolio by illustrating how the portfolio has performed. The
bar chart depicts the performance from year-to-year for the years indicated. The
table compares the portfolio's average annual returns for the periods 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. 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% 20.52%
1996 1997 1998 1999
Best Quarter: Q4 1998 21.28%
Worst Quarter: Q3 1998 (9.83)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (6/14/95)
Large Company Stock Portfolio 20.52% 26.59%
S&P 500 Index* 21.04% 27.00%
* 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
following tables. Note that the expenses shown in the tables are only at the
portfolio level.
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 0.32%
Distribution (12b-1) Fees None
Other Expenses 0.03%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 0.35%
* We agreed to pay on behalf of the portfolio, or reimburse the portfolio, all
expenses in excess of management fees. Therefore, net fees at the portfolio
level were 0.32%.
Expense Example
-------------------- ------------------- -------------------- -----------------
1 Year 3 Years 5 Years 10 Years
-------------------- ------------------- -------------------- -----------------
-------------------- ------------------- -------------------- -----------------
$37 $115 $201 $453
-------------------- ------------------- -------------------- -----------------
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 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 conditions 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 payment-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 following chart and table provide some indication of the risks of
investing in the portfolio by illustrating how the portfolio has performed. The
bar chart depicts the performance for the calendar year ended December 31, 1999.
The table compares the portfolio's average annual returns for the periods
indicated to a broad-based securities market index. As with all investments,
past performance is not a guarantee of future results.
TOTAL RETURN AS OF DECEMBER 31[SHOWN AS BAR CHART]
(4.45)%
1999
Best Quarter: Q4 1998 2.11%
Worst Quarter: Q3 1998 (7.28)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (3/2/98)
High Yield Bond Portfolio (4.45)% (4.19)%
Merrill Lynch High Yield Master Index* 1.57% 1.86%
* The Merrill Lynch High Yield Master Index(R) is an unmanaged index composed of
over 900 "cash pay" high-yield bonds representative of the high-yield market as
a whole.
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
following tables. Note that the expenses shown in the following tables are only
at the portfolio level.
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 0.10%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 0.50%
* 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
--------------------- -------------------- -------------------- ---------------
--------------------- -------------------- -------------------- ---------------
$52 $164 $286 $642
--------------------- -------------------- -------------------- ---------------
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
Effective January 1, 2000, in connection with AAL's restructuring and
the consolidation of its advisory functions, AAL Capital Management Corporation
(AAL CMC) became the Investment Adviser to the AAL Variable Product Series Fund,
Inc. AAL CMC is a Delaware Corporation and a registered investment adviser. In
addition to being the Investment Adviser, AAL CMC is also the distributor of the
AAL Flexible Premium Deferred Variable Annuity, the AAL Single Premium Immediate
Variable Annuity, and AAL Variable Universal Life Products. Pursuant to the
investment advisory agreement, AAL CMC determines which securities to purchase
and sell, arranges the purchases and sales and helps formulate the investment
program for the portfolios. AAL CMC implements the investment program for the
portfolios consistent with each portfolio's investment objectives, policies and
restrictions. The Fund's Board of Directors supervises the investment management
service that AAL CMC provides to the Fund. AAL CMC has principal offices at 222
West College Avenue, Appleton, Wisconsin 54919-0007. As of December 31, 1999,
AAL CMC managed over $7.4 billion in assets. AAL CMC is a wholly-owned
subsidiary of AAL.
AAL is a non-profit, non-stock, membership organization licensed to do
business as a fraternal benefit society in all states. AAL has approximately 1.7
million members and is one of the world's largest fraternal benefit societies in
terms of assets and life insurance in force. AAL ranks in the top two percent of
all life insurers in the United States in terms of ordinary life insurance
(nearly $88 billion in force). Membership is open to Lutherans and their
families who serve or are associated with Lutherans or Lutheran organizations,
but who are not Lutheran. AAL offers life, health, and disability income
insurance and fixed annuities to its members, and all members are part of one of
approximately 10,000 local AAL branches throughout the United States. AAL's
principal address is 4321 North Ballard Road, Appleton, Wisconsin 54919-0001.
SUB-ADVISER
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, 1999,
Oechsle managed over $19.0 billion in assets.
High Yield Bond Portfolio
Pacific Investment Management Company (PIMCO) is the sub-adviser to the High
Yield Bond Portolio. PIMCO is a registered investment adviser and is located
at 840 Newport Center Drive, Newport Beach, California, 92660. Organized in
1971, PIMCO provides investment management and advisory services to private
accounts of institutional and individual clients and to mutual funds. As of
June 30, 2000, PIMCO had over $199 billion in assets under management. On
July 1, 2000, PIMCO began managing the day-to-day investment of portfolio
assets under our direction and control. At that time, Benjamin L. Trosky became
the portfolio manager of the High Yield Bond Portfolio, replacing David G.
Carroll. Mr. Trosky is a Managing Director of PIMCO. He joined PIMCO as a
Portfolio Manager in 1990, and has managed fixed income accounts for various
institutional clients and mutual funds since that time.
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 1999 are set forth in the table below. We pay a
sub-advisory fee to Oechsle LLC out of the adviser fees that we receive from the
International Stock Portfolio.
------------------------- ----------------------------------------
PORTFOLIO % OF AVERAGE NET
ASSETS FOR THE YEAR
ENDED 12/31/99
Small Company 0.35%
------------------------- ----------------------------------------
------------------------- ----------------------------------------
International 0.80%
------------------------- ----------------------------------------
------------------------- ----------------------------------------
Large Company 0.32%
------------------------- ----------------------------------------
------------------------- ----------------------------------------
High Yield 0.40%
------------------------- ----------------------------------------
------------------------- ----------------------------------------
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
Small Company Stock Brian J. Flanagan, CFA Has been the portfolio manager since March 1, 1997. Mr.
Assistant Portfolio Flanagan has served in a number of investment roles with us.
Manager 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.
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.
High Yield Bond Benjamin L. Trosky Mr. Trosky has been the portfolio manager since July 1, 2000,
Portfolio Manager when PIMCO began sub-advising the portfolio. Mr. Trosky is a
Managing Director of PIMCO. He joined PIMCO as a Portfolio
Manager in 1990, and has managed fixed income accounts for
various institutional clients and mutual funds since that time.
Previous to July 1, 2000, Dave Carroll was the portfolio manager.
</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 (Small Company Stock and Large
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.
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
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 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. Two portfolios are considered to be indexed
portfolios: 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 (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. The product is not sponsored, endorsed, sold or promoted by Standard &
Poor's. Standard & Poor's makes no representation regarding the advisability of
investing in the product. See the Statement of Additional Information for
additional disclaimers and limitations of liabilities on behalf of S&P.
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 or AAL. The Exchange is regularly
closed on Saturdays and Sundays and on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. If one of these holidays falls on a Saturday or
Sunday, the Exchange will be closed on the preceding Friday or the following
Monday, respectively. Some of the Portfolios hold securities that traded
primarily on foreign exchanges. These exchanges may trade on weekends or other
days when the portfolios do not price their shares. Accordingly, it is possible
that the value of a portfolio's shares may change at times when those shares may
not be purchased or redeemed.
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. 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 your savings plan results in tax consequences at that level. Please refer to
the tax discussion in 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.
<PAGE>
[each portfolio's table on its own page]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT SMALL COMPANY STOCK PORTFOLIO
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Year Ended Year Ended Year Year Ended Period Ended
12/31/99 12/31/98 Ended 12/31/96 12/31/95 (a)
12/31/97
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: BEGINNING OF PERIOD $12.40 $14.88 $12.54 $10.99 $10.00
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
INCOME FROM INVESTMENT OPERATIONS:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income 0.06 0.08 0.11 0.12 0.08
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized and unrealized gains (losses) on 1.43 (0.13) 3.05 1.86 0.99
investments
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL FROM INVESTMENT OPERATIONS 1.49 (0.05) 3.16 1.98 1.07
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
LESS DISTRIBUTIONS FROM:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income (0.06) (0.08) (0.11) (0.12) (0.07)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized gains (0.63) (2.35) (0.71) (0.31) (0.01)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL DISTRIBUTIONS (0.69) (2.43) (0.82) (0.43) (0.08)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net increase (decrease) in net asset value 0.80 (2.48) 2.34 1.55 0.99
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: END OF PERIOD $13.20 $12.40 $14.88 $12.54 $10.99
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL RETURN 12.19% 0.14% 25.37% 18.19% 10.70%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net assets, end of period (in thousands) $225,952 $198,321 $152,928 $70,209 $15,666
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35% 0.35% 0.35%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 0.49% 0.55% 0.81% 1.14% 1.43%
assets (b)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Portfolio turnover rate 30.51% 103.70%* 29.65% 20.14% 2.85%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
----------------------------------------------------------------------------------------------------------------------
If the Portfolio had paid all of its expenses without the adviser's voluntary
expense reimbursement, the ratios would be as follows:
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (b) 0.41% 0.43% 0.45% 0.75% 1.37%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 0.44% 0.47% 0.71% 0.74% 0.41%
assets (b)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
----------------------------------------------------------------------------------------------------------------------
(a) From commencement of operations on June 14, 1995.
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(b) Calculated on an annualized basis
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
* Prior to 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.
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
--------------------------------------------------------------------------------
AAL VARIABLE PRODUCT INTERNATIONAL STOCK PORTFOLIO
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
--------------------------------------------------- ------------- ---------------
Year Ended Period Ended
12/31/99 12/31/98 (a)
--------------------------------------------------------------------------------
--------------------------------------------------- ------------- ---------------
INCOME FROM INVESTMENT OPERATIONS:
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net investment income 0.06 0.09
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net realized and unrealized gains (losses) on 4.51 0.96
investments
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
TOTAL FROM INVESTMENT OPERATIONS 4.57 1.05
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
LESS DISTRIBUTIONS FROM:
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net investment income (0.09) -
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net realized gains (0.09) -
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
TOTAL DISTRIBUTIONS (0.18) -
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net increase (decrease) in net asset value 4.39 1.05
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
NET ASSET VALUE: END OF PERIOD $15.44 $11.05
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
TOTAL RETURN 41.50% 10.41%
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Net assets, end of period (in thousands) $44,017 $15,595
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
RATIOS AND SUPPLEMENTAL DATA:
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Ratio of expenses to average net assets (b) 0.80% 0.80%
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Ratio of net investment income to average net 0.74% 1.25%
assets (b)
--------------------------------------------------- ------------- ---------------
--------------------------------------------------- ------------- ---------------
Portfolio turnover rate 45.08% 32.66%
--------------------------------------------------- ------------- ---------------
---------------------------------------------------------------------------------
If the Portfolio had paid all of its expenses without the adviser's voluntary
expense reimbursement, the ratios would be as follows:
---------------------------------------------------------------------------------
--------------------------------------------------- ------------ ----------------
Ratio of expenses to average net assets(b) 1.13% 1.30%
--------------------------------------------------- ------------ ----------------
--------------------------------------------------- ------------ ----------------
Ratio of net investment income to average net 0.41% 0.75%
assets(b)
--------------------------------------------------- ------------ ----------------
---------------------------------------------------------------------------------
(a) From commencement of operations on March 2, 1998.
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
(b) Calculated on an annualized basis.
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT LARGE COMPANY STOCK PORTFOLIO
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Year Ended Year Ended Year Year Ended Period Ended
12/31/99 12/31/98 Ended 12/31/96 12/31/95 (a)
12/31/97
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: BEGINNING OF PERIOD $22.90 $18.06 13.83 $11.51 $10.00
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
INCOME FROM INVESTMENT OPERATIONS:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income 0.25 0.24 0.23 0.23 0.11
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized and unrealized gains (losses) on 4.42 4.85 4.25 2.34 1.52
investments
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL FROM INVESTMENT OPERATIONS 4.67 5.09 4.48 2.57 1.63
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
LESS DISTRIBUTIONS FROM:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income (0.25) (0.24) (0.23) (0.23) (0.11)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized gains (0.22) (0.01) (0.02) (0.02) (0.01)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL DISTRIBUTIONS (0.47) (0.25) (0.25) (0.25) (0.12)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net increase (decrease) in net asset value 4.20 4.84 4.23 2.32 1.51
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: END OF PERIOD $27.10 $22.90 $18.06 $13.83 $11.51
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL RETURN 20.52% 28.36% 32.59% 22.47% 16.39%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net assets, end of period (in thousands) $873,762 $572,361 $318,475 $120,089 $23,138
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (b) 0.32% 0.33% 0.35% 0.35% 0.35%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 1.01% 1.20% 1.48% 1.97% 2.27%
assets (b)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Portfolio turnover rate 2.74% 1.49% 1.00% 1.77% 0.47%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
----------------------------------------------------------------------------------------------------------------------
If the Portfolio had paid all of its expenses without the adviser's voluntary
expense reimbursement, the ratios would be as follows:
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (b) 0.35% 0.38% 0.43% 0.63% 1.26%
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 0.98% 1.15% 1.39% 1.69% 1.37%
assets (b)
--------------------------------------------------- ------------ ------------ ------------- ------------ -------------
----------------------------------------------------------------------------------------------------------------------
(a) From commencement of operations on June 14, 1995.
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(b) Calculated on an annualized basis.
----------------------------------------------------------------------------------------------------------------------
<PAGE>
----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT HIGH YIELD BOND PORTFOLIO
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------------------------------------------------
--------------------------------------------------- ------------ ---------------
Year Ended Period Ended
12/31/99 12/31/98 (a)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
NET ASSET VALUE: BEGINNING OF PERIOD $8.95 $10.00
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
INCOME FROM INVESTMENT OPERATIONS:
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net investment income 0.89 0.74
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net realized and unrealized gains (losses) on (1.26) (1.05)
investments
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
TOTAL FROM INVESTMENT OPERATIONS (0.37) (0.31)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
LESS DISTRIBUTIONS FROM:
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net investment income (0.89) (0.74)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net realized gains - -
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
TOTAL DISTRIBUTIONS (0.89) (0.74)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net increase (decrease) in net asset value (1.26) (1.05)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
NET ASSET VALUE: END OF PERIOD $7.69 $8.95
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
TOTAL RETURN (4.45)% (3.25)%
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Net assets, end of period (in thousands) $33,163 $27,965
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
RATIOS AND SUPPLEMENTAL DATA:
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Ratio of expenses to average net assets (b) 0.40% 0.40%
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Ratio of net investment income to average net 10.70% 9.54%
assets (b)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Portfolio turnover rate 44.33% 25.43%
--------------------------------------------------- ------------ ---------------
--------------------------------------------------------------------------------
If the Portfolio had paid all of its expenses without the adviser's voluntary
expense reimbursement, the ratios would be as follows:
--------------------------------------------------------------------------------
--------------------------------------------------- ------------ ---------------
Ratio of expenses to average net assets (b) 0.50% 0.54%
--------------------------------------------------- ------------ ---------------
--------------------------------------------------- ------------ ---------------
Ratio of net investment income to average net 10.61% 9.40%
assets (b)
--------------------------------------------------- ------------ ---------------
--------------------------------------------------------------------------------
(a) From commencement of operations on March 2, 1998.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(b) Calculated on an annualized basis.
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
---------------------------------------------------- -----------------------------------------------------------------------
BOARD OF DIRECTORS John O. Gilbert - Chairman of the Board
OF THE FUND F. Gregory Campbell
Woodrow E. Eno
Richard L. Gady
John H. Pender
Edward W. Smeds
Lawrence M. Woods
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
OFFICERS
Robert G. Same - President
James H. Abitz - Vice President
Woodrow E. Eno - Vice President
Charles D. Gariboldi - Treasurer
Frederick D. Kelsven - Secretary
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
INVESTMENT ADVISER AAL Capital Management Corporation
222 West College Avenue
Appleton, WI 54919-0007
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
SUB-ADVISER (INTERNATIONAL STOCK PORTFOLIO) Oechsle International Advisors LLC
One International Place
Boston, MA 02110
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
SUB-ADVISER (HIGH YIELD BOND PORTFOLIO) Pacific Investment Management Company (PIMCO)
840 Newport Center Drive
Newport Beach, CA 92660
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
CUSTODIAN Citibank, N.A.
111 Wall Street
New York, NY 10043
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
LEGAL COUNSEL Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee, WI 53202
---------------------------------------------------- -----------------------------------------------------------------------
---------------------------------------------------- -----------------------------------------------------------------------
INDEPENDENT AUDITORS Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, WI 53202
PricewaterhouseCoopers LLP
Suite 1500
100 East Wisconsin 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 cover
duplication costs, 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]
