1933 Act Registration No. 33-82056
1940 Act Registration No. 811-8662
As filed with the Securities and Exchange Commission on
April 20, 2000.
- --------------------------------------------------------------------------------
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. 10 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 11 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, 2000 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.
AAL VARIABLE PRODUCT SERIES FUND, INC.
PROSPECTUS
MAY 1, 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 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 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."
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 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.
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
Balanced Portfolio
High Yield Portfolio
Bond Portfolio
Money Market 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 (except the Money Market Portfolio that
attempts to maintain a stable $1.00 per share).
"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 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 three separate accounts: AAL Variable Annuity
Account I, AAL Variable Annuity Account II 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.
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
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. 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% 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. Note that the expenses shown in the tables are only at the
portfolio level. If you own the AAL Flexible Premium Deferred Variable Annuity,
the AAL Single Premium Immediate 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 0.06%
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. 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 following bar chart and table. 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. Note that the expenses shown in the following tables are only
at the portfolio level. If you own the AAL Flexible Premium Deferred Variable
Annuity, the AAL Single Premium Immediate 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 0.33%
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. 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 following bar
chart and table. 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. If you own the AAL Flexible Premium Deferred Variable Annuity,
the AAL Single Premium Immediate 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 0.32%
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 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 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 effect 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
Common Stocks 35% 75%
Debt Securities 25% 50%
Money Market Instruments 0% 40%
[Sidebar]
Current Weighting of Assets
As of December 31, 1999, we weighted the investments in the classes as
follows:
percent weighted
o common stocks 55.5%
o debt securities 34.2%
o money market instruments 10.3%
-----
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 Index. 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 effect 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 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. 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 following bar chart and table. 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% 11.00%
1996 1997 1998 1999
Best Quarter: Q4 1998 11.60%
Worst Quarter: Q3 1998 (3.82)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (6/14/95)
Balanced Portfolio 11.00% 16.97%
S&P 500 Index* 21.04% 27.00%
Lehman Bond Index* (0.82)% 5.94%
* 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 Flexible Premium Deferred Variable Annuity,
the AAL Single Premium Immediate 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 0.32%
Distribution (12b-1) Fees None
Other Expenses 0.04
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES* 0.36%
* 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
- --------------------- ------------------ ----------------- -------------------
- --------------------- ------------------ ----------------- -------------------
$38 $118 $207 $466
- --------------------- ------------------ ----------------- -------------------
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. 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 following bar chart and table. 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. If you own the AAL Flexible Premium Deferred Variable
Annuity, the AAL Single Premium Immediate 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 0.10%
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.
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, 1999, these four classes represented the following
proportions of the portfolio's long-term market value:
Percent of Total
U.S. Treasury & Government Agency 74.8%%
Corporate 21.3%
Other Government 2.6%
Asset-Backed 1.3%
====
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 effect 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 than 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 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. 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% (1.35)%
1996 1997 1998 1999
Best Quarter: Q3 1998 4.42%
Worst Quarter: Q1 1996 (1.82)%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (6/14/95)
Bond Portfolio (1.35)% 5.54%
Lehman Bond Index* (0.82)% 5.94%
* 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 Flexible Premium Deferred Variable Annuity,
the AAL Single Premium Immediate 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* 0.44%
* 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
- ------------------- --------------------- -------------------- -----------------
- ------------------- --------------------- -------------------- -----------------
$46 $144 $252 $567
- ------------------- --------------------- -------------------- -----------------
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 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 its 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; and
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 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. 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% 4.94%
1996 1997 1998 1999
Best Quarter: Q4 1995 1.37%
Worst Quarter: Q2 1999 1.14%
AVERAGE ANNUAL TOTAL RETURN AS OF DECEMBER 31, 1999
1 Year Inception (6/14/95)
Money Market Portfolio 4.94% 5.24%
Salomon Brothers Short-Term Index* 4.44% 4.79%
* An index composed of 1-month Treasury Bills.
The 7-day yield for the period ended 12/31/99 for the AAL Variable Product Money
Market Portfolio was 5.66%.
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 Flexible Premium Deferred Variable Annuity,
the AAL Single Premium Immediate 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 0.06%
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.
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.
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 19998 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%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Balanced 0.32%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
High Yield 0.40%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Bond 0.35%
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
Money Market 0.35%
- ------------------------- ----------------------------------------
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.
Balanced Reginald L. Pfeifer, CFA. Has been the portfolio manager since June 1, 1998. Mr.
Vice President - Fixed Pfeifer is also the portfolio manager of the mortgage-backed
Income 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.
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.
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.
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.
</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, Large
Company Stock and Bond) 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.
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. 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.
<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 (B) 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 (c) 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 (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
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 (c) 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 (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
(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
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
* 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>
- ---------------------------------------------------------------------------------
- --------------------------------------------------- ------------- ---------------
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 (B) 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 (c) 0.80% 0.80%
- --------------------------------------------------- ------------- ---------------
- --------------------------------------------------- ------------- ---------------
Ratio of net investment income to average net 0.74% 1.25%
assets (c)
- --------------------------------------------------- ------------- ---------------
- --------------------------------------------------- ------------- ---------------
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(c) 1.13% 1.30%
- --------------------------------------------------- ------------ ----------------
- --------------------------------------------------- ------------ ----------------
Ratio of net investment income to average net 0.41% 0.75%
assets(c)
- --------------------------------------------------- ------------ ----------------
- ---------------------------------------------------------------------------------
(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.
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
(c) 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 (B) 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 (c) 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 (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
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 (c) 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 (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
(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.
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT BALANCED 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 $15.97 $14.05 $11.96 $10.92 $10.00
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
INCOME FROM INVESTMENT OPERATIONS:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income 0.53 0.50 0.46 0.41 0.22
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized and unrealized gains (losses) on 1.19 2.17 2.09 1.05 0.92
investments
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL FROM INVESTMENT OPERATIONS 1.72 2.67 2.55 1.46 1.14
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
LESS DISTRIBUTIONS FROM:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income (0.53) (0.50) (0.46) (0.41) (0.21)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized gains (0.44) (0.25) - (0.01) (0.01)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL DISTRIBUTIONS (0.97) (0.75) (0.46) (0.42) (0.22)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net increase (decrease) in net asset value 0.75 1.92 2.09 1.04 0.92
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: END OF PERIOD $16.72 $15.97 $14.05 $11.96 $10.92
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL RETURN (B) 11.00% 19.27% 21.71% 13.65% 11.46%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net assets, end of period (in thousands) $777,646 $545,337 $306,501 $126,518 $28,759
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (c) 0.32% 0.33% 0.35% 0.35% 0.35%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 3.26% 3.38% 3.62% 3.89% 4.07%
assets (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Portfolio turnover rate 16.91% 21.39% 6.86% 5.43% 2.29%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
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 (c) 0.36% 0.39% 0.43% 0.60% 1.15%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 3.22% 3.32% 3.53% 3.65% 3.27%
assets (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
(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.
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
<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 (B) (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 (c) 0.40% 0.40%
- --------------------------------------------------- ------------ ---------------
- --------------------------------------------------- ------------ ---------------
Ratio of net investment income to average net 10.70% 9.54%
assets (c)
- --------------------------------------------------- ------------ ---------------
- --------------------------------------------------- ------------ ---------------
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 (c) 0.50% 0.54%
- --------------------------------------------------- ------------ ---------------
- --------------------------------------------------- ------------ ---------------
Ratio of net investment income to average net 10.61% 9.40%
assets (c)
- --------------------------------------------------- ------------ ---------------
- --------------------------------------------------------------------------------
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(c) Calculated on an annualized basis.
- --------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT BOND 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 $10.36 $10.15 $9.90 $10.23 $10.00
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
INCOME FROM INVESTMENT OPERATIONS:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income 0.62 0.64 0.64 0.63 0.34
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized and unrealized gains (losses) on (0.76) 0.21 0.25 (0.33) 0.23
investments
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL FROM INVESTMENT OPERATIONS (0.14) 0.85 0.89 0.30 0.57
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
LESS DISTRIBUTIONS FROM:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net investment income (0.62) (0.64) (0.64) (0.63) (0.34)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net realized gains - - - - -
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL DISTRIBUTIONS (0.62) (0.64) (0.64) (0.63) (0.34)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net increase (decrease) in net asset value (0.76) 0.21 0.25 (0.33) 0.23
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
NET ASSET VALUE: END OF PERIOD $9.60 $10.36 $10.15 $9.90 $10.23
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
TOTAL RETURN (B) (1.35)% 8.59% 9.37% 3.10% 5.80%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Net assets, end of period (in thousands) $56,361 $42,207 $26,710 $17,666 $9,363
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
RATIOS AND SUPPLEMENTAL DATA:
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of expenses to average net assets (c) 0.35% 0.35% 0.35% 0.35% 0.35%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 6.33% 6.26% 6.55% 6.51% 6.54%
assets (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Portfolio turnover rate 19.50% 18.29% 18.41% 11.65% 6.51%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
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 (c) 0.44% 0.48% 0.52% 0.68% 1.25%
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
Ratio of net investment income to average net 6.23% 6.13% 6.38% 6.18% 5.64%
assets (c)
- --------------------------------------------------- ------------ ------------ ------------- ------------ -------------
- ----------------------------------------------------------------------------------------------------------------------
(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.
- ----------------------------------------------------------------------------------------------------------------------
<PAGE>
- ----------------------------------------------------------------------------------------------------------------------
AAL VARIABLE PRODUCT MONEY MARKET PORTFOLIO
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FINANCIAL HIGHLIGHTS
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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
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NET ASSET VALUE: BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
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INCOME FROM INVESTMENT OPERATIONS:
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Net investment income 0.05 0.05 0.05 0.05 0.03
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Net realized and unrealized gains (losses) on - - - -
investments
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TOTAL FROM INVESTMENT OPERATIONS 0.05 0.05 0.05 0.05 0.03
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LESS DISTRIBUTIONS FROM:
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Net investment income (0.05) (0.05) (0.05) (0.05) (0.03)
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Net realized gains - - - - -
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TOTAL DISTRIBUTIONS (0.05) (0.05) (0.05) (0.05) (0.03)
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Net increase (decrease) in net asset value - - - - -
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NET ASSET VALUE: END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
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TOTAL RETURN (B) 4.94% 5.31% 5.33% 5.23% 3.02%
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Net assets, end of period (in thousands) $46,494 $33,571 $25,460 $17,125 $7,045
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RATIOS AND SUPPLEMENTAL DATA:
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Ratio of expenses to average net assets (c) 0.35% 0.35% 0.35% 0.35% 0.35%
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Ratio of net investment income to average net 4.85% 5.20% 5.24% 5.10% 5.71%
assets (c)
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Portfolio turnover rate N/A N/A N/A N/A N/A
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If the Portfolio had paid all of its expenses without the adviser's voluntary
expense reimbursement, the ratios would be as follows:
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Ratio of expenses to average net assets (c) 0.41% 0.44% 0.46% 0.65% 1.40%
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Ratio of net investment income to average net 4.79% 5.11% 5.13% 4.80% 4.66%
assets (c)
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(a) From commencement of operations on June 14, 1995.
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(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.
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(c) Calculated on an annualized basis.
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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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
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OFFICERS
Robert G. Same - President
James H. Abitz - Vice President
Woodrow E. Eno - Vice President
Charles D. Gariboldi - Treasurer
Frederick D. Kelsven - Secretary
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INVESTMENT ADVISER & DISTRIBUTOR AAL Capital Management Corporation
222 West College Avenue
Appleton, WI 54919-0007
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TRANSFER AGENT Aid Association for Lutherans
4321 North Ballard Road
Appleton, WI 54919-0001
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SUB-ADVISER (INTERNATIONAL STOCK PORTFOLIO) Oechsle International Advisors LLC
One International Place
Boston, MA 02110
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CUSTODIAN Citibank, N.A.
111 Wall Street
New York, NY 10043
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LEGAL COUNSEL Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee, WI 53202
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INDEPENDENT AUDITORS Ernst & Young LLP
111 East Kilbourn Avenue
Milwaukee, WI 53202
PricewaterhouseCoopers LLP
Suite 1500
100 East Wisconsin Avenue
Milwaukee, WI 53202
As of March 14, 2000,
PricewaterhouseCoopers LLP
replaced Ernst &Young LLP
as Independent Accountant
to the AAL Variable Product
Series Fund, Inc.
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</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]
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, 2000
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, 2000. 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 Financial Statements of each portfolio and the
independent accountant's report thereof, are incorporated by reference into this
Statement of Additional Information from the Fund's Annual Report to
Shareholders (see "Financial Statements").
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, the AAL Variable Annuity Account
II 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 Capital Management Corporation (AAL CMC) serves as the
investment adviser to the Fund. AAL CMC 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 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 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 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."
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 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.
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 Fund is registered with the SEC as an open-end diversified
management investment company. The Fund is a Maryland Business Corporation which
we incorporated 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 three
separate accounts (the AAL Variable Annuity Account I, the AAL Variable Annuity
Account II and the AAL Variable Life Account I) and certain corporate sponsored
retirement accounts. We establisheded the 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.
The Fund may issue up to two billion shares of common stock, $.001 par
value, in one or more series (portfolios) as the Board of 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 and High Yield Bond 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 ("33 Act") 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 33
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 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 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 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.
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, officers of AAL CMC 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 AND AAL
AAL CMC is the adviser to the Fund. AAL CMC and its parent, AAL, have
extensive investment management experience. Currently, AAL manages over $20
billion in assets for its insurance portfolios. 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. In addition to the advisory services it provides to
the Fund, AAL CMC also serves as investment adviser to The AAL Mutual Funds and
provides mutual fund administrative services and distribution services. The AAL
Member Credit Union, another AAL affiliate, 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 CMC has entered into an Investment Advisory Agreement with the Fund.
Pursuant to this agreement, AAL CMC 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 CMC provides the Fund with
the personnel and facilities necessary to manage the Fund. AAL CMC formulates
and implements a continuous investment program for the portfolios consistent
with each portfolio's investment objectives, policies and restrictions.
Generally, AAL CMC 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 CMC, including:
interest and taxes; brokerage commissions; insurance premiums; compensation and
expenses for those Directors who are not affiliated with AAL CMC; 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 CMC may withdraw this
undertaking on 30-days' written notice to the Fund. AAL CMC 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, 2000.
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
Woodrow E. Eno d/o/b 4/5/46 Director* Senior Vice President, Secretary and
Vice General Counsel, Aid Association for
President Lutherans; Chairman of the Board for AAL
Capital Management Corporation
Richard L. Gady dob 2/28/43 Director Vice President
One Con Agra Drive Public Affairs and Chief Economist
Omaha, NE 68102-5001 ConAgra, Inc. (agribusiness)
F. Gregory Campbell dob 12/16/39 Director President
2001 Alford Park Drive Carthage College
Kenosha, WI 53140
John H. Pender Trustee Retired; formerly Senior Vice-President
d/o/b 5/25/30 And Chief Investment Officer,
1056 S. Manzanita Ave. Aid Association for Lutherans
Palm Springs, CA 92264
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
Robert G. Same dob 7/25/45 President Vice President, Chief Compliance Officer
and Deputy Counsel, Aid Association for
Lutherans; President AAL Capital Management
Corporation
James H. Abitz dob 5/27/45 Vice President Vice President, Investments
Aid Association for Lutherans;
Senior Vice President
AAL Capital Management Corporation
Charles D. Gariboldi Treasurer Assistant Vice-President, Fund Accounting,
d/o/b 12/31/59 Aid Association for Lutherans
Joseph R. Mauel Assistant Treasurer Director, Fund Accounting
d/o/b 11/26/59
Todd J. Kelly Assistant Treasurer Manager of Mutual Fund Accounting, Aid
d/o/b 8/15/69 Association for Lutherans
Frederick D. Kelsven Secretary Assistant General Counsel, Aid Association
d/o/b 2/9/47 for Lutherans; Vice-President and Chief
Compliance Officer, Aetna Retirement
Services (financial services); Director of
Compliance, Nationwide Financial Services
(financial services)
Steven J. Fredricks dob 7/25/70 Assistant Secretary Assistant General Counsel
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, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT BENEFITS TOTAL COMPENSATION
ACCRUED AS PART OF ESTIMATED ANNUAL FROM FUND AND AAL
AGGREGATE FUND EXPENSES BENEFITS UPON FUND COMPLEX**
NAME, POSITION COMPENSATION RETIREMENT PAID TO DIRECTORS
FROM FUND
John O. Gilbert, -0- -0- -0- -0-
Director
Woodrow E. Eno, -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
John H. Pender, $5,000 -0- -0- $30,000
Director
Edward W. Smeds, $5,000 -0- -0- $30,000
Director
Lawrence M. Woods, $5,000 -0- -0- $30,000
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, 2000, 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>
<S> <C> <C>
AAL Ownership for Its Own AAL Ownership through
Account Separate Accounts or through
the AAL Savings Plan
Small Company Stock Portfolio 0.00 100%
International Stock Portfolio 22.98 77.02
Large Company Stock Portfolio 0.00 100%
Balanced Portfolio 0.00 100%
High Yield Portfolio 44.79 55.21
Bond Portfolio 0.00 100%
Money Market Portfolio 0.00% 100%
</TABLE>
To the knowledge of the Fund, no certificate owner beneficially owns
five percent or more of any portfolio.
As of March 31, 2000, 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.
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 December 3, 1999. 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 CMC 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 table below shows the amount of the advisory fees that each
portfolio paid to the adviser for the past three years.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ------------------- -----------------
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
Small Company Stock Portfolio 684,092 628,572 383,123
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
International Stock Portfolio 199,082 85,674 N/A
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
Large Company Stock Portfolio 2,264,468 1,454,419 754,142
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
Balanced Portfolio 2,115,998 1,403,423 721,800
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
High Yield Bond Portfolio 125,283 79,906 N/A
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
Bond Portfolio 176,714 111,756 73,743
- ------------------------------------ ----------------- ------------------- --------------------
- ------------------------------------ ----------------- ------------------- --------------------
Money Market Portfolio 138,690 $101,533 $74,988
- ------------------------------------ ----------------- ------------------- --------------------
</TABLE>
Currently, there are no service agreements in place between the Fund and
any other party
SUB-ADVISER
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 pursuant to the terms of the
sub-advisory agreement. Oechsle, LLC is a Delaware limited liability company.
Oechsle, LLC has been registered as an investment adviser since 1986. As of
December 31, 1999, Oechsle manages over $19.0 billion in assets.
Under the sub-advisory agreement, 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 provides 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.
CODE OF ETHICS
Rule 17j-1 promulgated under Section 17(j) of the Investment Company
Act of 1940 makes it illegal for persons associated with the Fund, the adviser
or sub-adviser, who have knowledge of portfolio securities trades that the Fund
makes or intends to make, to use that information in a manner that benefits that
person and/or harms the Fund. To protect the Fund against such conduct, the
Fund, the adviser and sub-adviser have adopted codes of ethics in accordance
with requirements established under Rule 17j-1. The code of ethics do not
prohibit persons who have knowledge of the Fund's portfolio securities trades
from investing in the same securities; however, the codes of ethics establish
time frames, prior approval procedures and reporting requirements designed to
assure that persons who have knowledge of the Funds' portfolio securities trades
cannot use that information in a manner which is detrimental to the Fund and/or
which benefits them.
PORTFOLIO TRANSACTIONS
We (and, with respect to the International Stock Portfolio, Oechsle LLC)
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, we seek the
best combination of price and execution.
In determining which brokers and dealers provide best price and
execution, we look 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, we 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. We
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 us. We 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.
We 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
we 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 we exercise investment discretion..
COMMISSIONS
Brokerage commissions paid by each of the portfolios listed below were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PORTFOLIO NAME YEAR ENDED 1999 YEAR ENDED 1998 YEAR ENDED 1997
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
Small Company Stock 148,898 506,871* 152,305
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
International Stock 85,118 42,711 N/A
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
Large Company Stock 129,900 107,240 103,198
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
Balanced 102,645 $90,386 $ 50,053
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
High Yield Bond N/A N/A N/A
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
Bond N/A N/A N/A
- ---------------------------- --------------------- --------------------- ---------------------
- ---------------------------- --------------------- --------------------- ---------------------
Money Market N/A $N/A N/A
- ---------------------------- --------------------- --------------------- ---------------------
</TABLE>
* In 1998, the Small Company Stock Portfolio had a high portfolio turnover rate
due to a change in the index the portfolio tracked. This change in tracking
indices resulted in increased brokerage transactions and consequently, increase
commissions.
Certain of the portfolios acquired securities of their regular brokers
or dealers or their parents, during the period from January 1, 1999 through
December 31, 2000. As of December 31, 1999, the market value of each portfolio's
aggregate holdings of each broker's securities was as follows:
BALANCED PORTFOLIO
MARKET VALUE
BROKER NAME
Merrill Lynch & Co. $1,085,500
Charles Schwab Corp. 1,103,281
Morgan StanleyDean Witter, Dicover 2,797,186
& Co.
Bear Sterns & Co. 178,610
Lehman Brothers Holdings, Inc. 355,687
Paine Webber Group, Inc. 194,063
J.P. Morgan & Company, Inc. 345,150
LARGE COMPANY STOCK PORTFOLIO
MARKET VALUE
BROKER NAME
Merrill Lynch & Co. $2,196,050
Morgan StanleyDean Witter, Dicover 5,642,194
& Co.
Charles Schwab Corp. 2,227,669
Lehman Brothers Holdings, Inc. 728,312
Bear Sterns & Co. 360,425
Paine Webber Group, Inc. 392,006
J.P. Morgan & Company, Inc. 1,557,488
SMALL COMPANY STOCK PORTFOLIO
MARKET VALUE
BROKER NAME
Dain Rauscher Corp. $348,750
Jefferies Group, Inc. 314,600
Raymond James Financial, Inc. $529,791
VOTING PRIVILEGES
Under Maryland law, the Fund is not required to hold annual shareholder
meetings. 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 the AAL Variable Annuity
Account I, the AAL Variable Account II 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 the AAL Variable
Annuity Account I, the AAL Variable Account II 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 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.On days, when AAL is closed, 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 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.
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)
1999 TO DECEMBER 31, 1999
Small Company Stock 12.19% 14.38%
International Stock 41.50% 27.56%
Large Company Stock 20.52% 26.59%
Balanced 11.00% 16.97%
High Yield Bond (4.45)% (4.19)%
Bond (1.35)% 5.54%
Money Market 4.94% 5.24%
(1) The Small Company, Large Company, Balanced, Bond, and Money Market
portfolios began operations on June 14, 1995, the International and High
Yield portfolios began operations 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, 1999, the current yield for
the Bond Portfolio was 6.47%, the Balanced Portfolio was 3.34% and the High
Yield Bond Portfolio was 10.50%.
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]-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, 1999, the Current and Effective
Yields of the Money Market Portfolio were 5.66% and 5.82%, 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 March 31, 2000, range from $ 316
million to $ 553 billion. The median capitalization was $ 7.78 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, AAL Variable Annuity Account II and AAL Variable Life Account I:
1. Schedules of Investments as of December 31, 1999.
2. Statement of Assets and Liabilities as of December 31, 1999.
3. Statement of Operations for the Year Ended December 31, 1999.
4. Statement of Changes in Net Assets for the Years Ended December 31, 1999,
and 1998.
5. Notes to Financial Statements.
A copy of the 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.
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> <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) Investment Advisory Agreement between AAL Capital Management
Corporation ("AAL CMC") and the Fund dated January 1, 2000
X
d(ii) Sub-Advisory Agreement between the Fund, AAL CMC, and Oechsle
International Advisors LLC for the International Stock Portfolio
dated January 1, 2000 X
e(i) Amended and Restated Participation Agreement between AAL, AAL X
CMC, the Separate Accounts, and the Fund dated January 1, 2000
e(ii) Amended and Restated Participation Agreement between AAL, AAL X
CMC, AAL Savings Plan, and the Fund dated January 1, 2000
f Not applicable
g Form of Custodian Agreement between the Fund and Citibank N.A. Post-Effective Amendment #6
dated February 27, 1998
h Not Applicable
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 Not applicable
o Not applicable
p(i) Code of Ethics for AAL Capital Management Corporation X
p(ii) Code of Ethics for Sub-Adviser, Oechsle International Advisors X
LLC
q Powers of Attorney for all Directors Post-Effective Amendment #8
February 9, 1999
r Transmittal Letter from Counsel X
</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) AAL Capital Management Corporation (AAL CMC), 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 AAL Trust Co., FSB North Meadows Investment
subsidiaries of Corporation (Federal charter) Ltd.
AAL Holdings, Inc. (Delaware corp.) (Wisconsin corp.)
------------------------------ ------------------------------- ----------------------------
</TABLE>
ITEM 25. 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.
In addition, Section 3 of the Investment Advisory Agreement between the
Fund and AAL CMC contains a provision in which the Fund and AAL CMC mutually
agree to indemnify and hold the other party (including its officers, agents, and
employees) harmless for any and all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the other party arising out of their
performance under the Agreement, unless such liability is incurred as a result
of the party's gross negligence, bad faith, or willful misfeasance or reckless
disregard of its obligations and duties under the Agreement.
Section 8 of the Participation Agreement between AAL, the Accounts and
the Fund contains a provision in which the Fund and AAL mutually agree to
indemnify and hold the other party (including its Officers, agents, and
employees) harmless for any and all loss, cost damage and expense, including
reasonable attorney's fees, incurred by the other party arising out of their
performance under the Agreement, unless such liability is incurred as a result
of the party's gross negligence, bad faith, or willful misfeasance or reckless
disregard of its obligations and duties under the Agreement.
Section 8 of the Participation Agreement between AAL, the AAL Savings
Plan, AAL CMC and the Fund contains a provision in which the Fund and AAL
mutually agree to indemnify and hold the other party (including its Officers,
agents, and employees) harmless for any and all loss, cost damage and expense,
including reasonable attorney's fees, incurred by the other party arising out of
their performance under the Agreement, unless such liability is incurred as a
result of the party's gross negligence, bad faith, or willful misfeasance or
reckless disregard of its obligations and duties under the Agreement.
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 CMC (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 20,
April 2000.
AAL VARIABLE PRODUCT SERIES FUND, INC.
By: /s/ Robert G. Same
-----------------------------------
Robert G. Same
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/ Robert G. Same President April 20, 2000
- ---------------------------- (Principal Executive Officer)
Robert G. Same
/s/ Charles D. Gariboldi Treasurer April 20, 2000
- ---------------------------- (Principal Accounting
Charles D. Gariboldi Financial Officer)
The following members of the Board of Directors:
Gregory F. Campbell Richard L. Gady Edward W. Smeds
Woodrow E. Eno John H. Pender 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 20, 2000
- ----------------------------
John O. Gilbert
Attorney-in-Fact
<PAGE>
AAL VARIABLE PRODUCT SERIES FUND, INC.
INDEX TO EXHIBITS
EXHIBIT NUMBER
NAME OF EXHIBIT
d(i) Investment Advisory Agreement between AAL CMC and the Fund dated January 1,
2000
d(ii)Sub-Advisory Agreement between the Fund, AAL CMC, and Oechsle International
Advisors LLC for the International Stock Portfolio dated January 1, 2000
e(i) Amended and Restated Participation Agreement between AAL, AAL CMC, the
Separate Accounts, and the Fund dated January 1, 2000
e(ii)Amended and Restated Participation Agreement between AAL, AAL CMC, AAL
savings Plan and the Fund dated January 1, 2000
j Consent of Independent Auditors
p(i) Code of Ethics for AAL Capital Management Corporation
p(ii)Code of Ethics for Sub-Adviser, Oechsle International Advisors LLC
r Transmittal Letter from Counsel
INVESTMENT ADVISORY AGREEMENT
BY AND BETWEEN
AAL VARIABLE PRODUCT SERIES FUND, INC.
AND
AAL CAPITAL MANAGEMENT CORPORATION
DATED
JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
1. IN GENERAL..............................................................4
2. DUTIES AND OBLIGATIONS OF THE ADVISER WITH RESPECT TO
MANAGEMENT OF THE FUND..................................................4
3. STANDARD OF CARE AND INDEMNIFICATION....................................7
4. BROKER-DEALER RELATIONSHIPS.............................................8
5. ALLOCATION OF EXPENSES..................................................9
6. COMPENSATION OF THE ADVISER............................................10
7. DURATION AND TERMINATION...............................................11
8. EXHIBITS...............................................................12
9. AMENDMENTS.............................................................12
10. STATE LAW..............................................................12
EXHIBIT A.....................................................................14
<PAGE>
INVESTMENT ADVISORY AGREEMENT
This INVESTMENT ADVISORY AGREEMENT made and entered into this 1st day of
January, 2000, by and between the AAL VARIABLE PRODUCT SERIES FUND, INC. (the
"FUND"), a Maryland corporation, and AAL Capital Management Corporation ("AAL
CMC"), a Delaware corporation (the "ADVISER").
RECITALS:
The FUND is an open-end management investment company registered with the
Securities and Exchange Commission under the Investment Company Act of 1940 (the
"Act"). The FUND is a series type investment company, with each series having
its own investment objectives, policies and restrictions. The Fund intends to
appoint AAL CMC as Investment Adviser to the Fund.
AAL CMC is registered with the Securities and Exchange Commission as an
Investment Adviser under the Investment Advisers Act of 1940. AAL CMC is a
wholly-owned, indirect subsidiary of AAL.
Until the date of this Amended and Restated Agreement, Aid Association
for Lutherans ("AAL"), a fraternal benefit society which is under common control
with AAL CMC, served as investment adviser to the Fund. Effective on January 1,
2000, AAL will complete a restructuring in which all of the investment advisory
functions it performed will be consolidated with the investment advisory
functions and operations of AAL CMC, and AAL CMC, as the successor to those
advisory functions of AAL, will assume all of the duties and obligations of AAL
in its capacity as Adviser to the Fund. Accordingly, the parties hereto have
agreed to amend and restate, in the form set forth herein, the investment
advisory agreement pursuant to which AAL provided such advisory services to the
Fund (the "Predecessor Agreement"). The parties acknowledge that the terms and
conditions of this Amended and Restated Agreement are substantively identical to
the terms and conditions of the Predecessor Agreement, except that this Amended
and Restated Agreement identifies AAL CMC as the Adviser of the Fund in lieu of
AAL.
WITNESSETH:
In consideration of the mutual promises and agreements herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and between the parties hereto as follows:
1. IN GENERAL
The FUND hereby appoints the ADVISER to act as investment adviser to the
FUND with respect to its series of shares described on Exhibit A attached
hereto, which may be amended from time to time. Each series is referred to
herein individually as a "Portfolio" and collectively as the "Portfolios." The
ADVISER agrees, all as more fully set forth herein, to provide professional
investment management with respect to the investment of the assets of each
Portfolio and to supervise and arrange the purchase and sale of securities and
other assets held in each Portfolio and generally administer the affairs of the
FUND. The ADVISER may engage, at the ADVISER's cost and under the ADVISER's
supervision, on behalf of the FUND or any Portfolio, the services of a
Sub-Adviser, or an agent to perform certain administrative services, subject to
any limitations imposed by the Act.
2. DUTIES AND OBLIGATIONS OF THE ADVISER WITH RESPECT TO MANAGEMENT OF THE
FUND
(a) Subject to the succeeding provisions of this section and subject to
the direction and control of the Board of Directors of the FUND, the
ADVISER, as agent and attorney-in-fact with respect to the FUND, is
authorized, in its discretion and without prior consultation with the
FUND to:
(i) Buy, sell, exchange, convert for the FUND's use, lend and
otherwise trade in any stocks, bonds and any other securities or
assets; and
(ii) Place orders and negotiate the commissions (if any) for the
execution of transactions in securities or other assets with or
through such brokers, dealers, underwriters or issuers as the
ADVISER may select;
(iii) Formulate programs, obtain necessary information, and
periodically report to the FUND's Board of Directors.
(b) Any investment purchases or sales made by the ADVISER shall at all
times conform to, and be in accordance with, any requirements imposed by:
(i) the provisions of the Act and of any rules or regulations in
force thereunder; (ii) the provisions of the Internal Revenue Code;
(iii) any other applicable provisions of law; (iv) the provisions
of the Articles of Incorporation and By-Laws of the FUND as amended
from time to time; (v) any policies and determinations of the Board
of Directors of the FUND; and (vi) the fundamental policies of the
FUND, as reflected in its Registration Statement under the Act, or
as amended by the shareholders of the FUND.
(c) The ADVISER shall also administer the affairs of the FUND and, in
connection therewith, shall be responsible for: (i) maintaining the
FUND's books and records, including all financial, accounting, corporate
and other records required by and in accordance with applicable law
(other than financial or accounting books and records maintained by the
FUND's custodian or transfer agent) which books and records shall be the
property of the FUND and shall be surrendered by the ADVISER promptly on
the request of the FUND, without charge except for the ADVISER's direct
expenses; (ii) overseeing the FUND's insurance relationships; (iii)
preparing for the FUND (or assisting counsel and/or auditors in the
preparation of) all required tax returns, proxy statements and reports to
the FUND's shareholders and Directors and reports to and other filings
with the Securities and Exchange Commission, and any other governmental
agency including any filings necessary to maintain the registrations and
qualifications of the Fund and its shares under federal and state law
(the FUND agreeing to supply or cause to be supplied to the ADVISER all
necessary financial and other information in connection with the
foregoing); (iv) preparing such applications and reports as may be
necessary to register or maintain the FUND's registration and/or the
registration of the shares of the FUND under the securities or "Blue Sky"
laws of the various states selected by the FUND's distributor (the
Portfolio or Portfolios agreeing to pay all filing fees or other similar
fees in connection therewith); (v) responding to all inquiries or other
communications of shareholders, if any, which are directed to the
ADVISER, or referring the inquiry for response, if any such inquiry or
communication is more properly to be responded to by other parties, such
as the FUND's custodian, or other person or agent of the ADVISER, and
overseeing its response thereto; (vi) overseeing all relationships
between the FUND and its persons and agents, including any custodian(s),
transfer agent(s), dividend disbursing agent, independent auditor and
independent legal counsel, including assistance in selection of such
persons and agents, the negotiation of agreements and the supervision of
the performance of such agreements; (vii) authorizing and directing any
of the ADVISER's Directors, officers and employees who may be elected as
Directors or officers of the FUND to serve in the capacities in which
they are elected; and (viii), providing the services of individuals
competent to perform all of the FUND'S executive, administrative,
compliance and clerical functions that are not performed by or through
employees or other persons or agents engaged by the FUND; and (ix)
calculating the daily net asset value and the net asset value per share
for each of the FUND's Portfolios. All services to be furnished by the
ADVISER under this Agreement may be furnished through the medium of any
Directors, officers, employees or agents of the ADVISER .
(d) Nothing in this Agreement shall prevent the ADVISER or any
"affiliated person" (as defined in the Act) of the ADVISER from acting as
investment adviser or manager and/or principal underwriter for any other
person, firm or corporation and shall not in any way limit or restrict
the ADVISER or any such affiliated person from buying, selling or trading
any securities for its or their own accounts or the accounts of others
for whom it or they may be acting, provided, however, that the ADVISER
expressly represents that it will undertake no activities which, in its
judgment, will adversely affect the performance of its obligations to the
FUND under this Agreement.
(e) It is agreed that the ADVISER shall have no responsibility or
liability for the accuracy or completeness of the FUND's Registration
Statement under the Act or the Securities Act of 1933 except for
information supplied by the ADVISER for inclusion therein.
(f) The ADVISER shall act as an independent contractor for the purposes
herein and, unless otherwise expressly provided or authorized, shall have
no authority to act for or represent the FUND in any way or otherwise be
deemed an agent of the FUND.
(g) The ADVISER shall have the authority to make combined purchases and
sales of securities for the Portfolios, the ADVISER's own accounts, or
for its other clients. If various entities desire to buy or sell
securities at about the same time, the ADVISER may allocate the
transactions at an average price and as nearly as practicable on a
pro-rata basis in proportion to the amounts desired to be purchased or
sold by each entity.
3. STANDARD OF CARE AND INDEMNIFICATION
ADVISER 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 ADVISER shall indemnify and hold 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, harmless
from all loss, cost, damage, and expense, including reasonable attorneys' fees,
incurred by the FUND as a result of ADVISER'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.
Notwithstanding the preceding language, ADVISER shall indemnify and hold 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,
harmless from all loss, cost, damage, and expense, including reasonable
attorneys' fees incurred by the FUND as a result of the failure at any time of
any Portfolio of the FUND (i) to operate as a regulated investment company in
compliance with Subchapter M of the Code and the regulations thereunder, or (ii)
to comply the investment diversification rules of Section 817(h) of the Code and
the regulations thereunder.
The FUND shall indemnify and hold ADVISER 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 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 ADVISER 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 ADVISER 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 Agreement
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.
4. BROKER-DEALER RELATIONSHIPS
In connection with its duties set forth in Section 2(a)(ii) of this
Agreement to arrange for the purchase and sale of securities and other assets
held by each Portfolio by placing purchase and sale orders for the Portfolio,
the ADVISER shall select such broker-dealers ("brokers") as shall, in the
ADVISER's judgment, implement the policy of the FUND to achieve "best
execution," i.e., prompt and efficient execution at the most favorable net
price. In making such selection, the ADVISER is authorized to consider the
reliability, integrity and financial condition of the broker. The ADVISER is
also authorized to consider whether the broker provides brokerage and/or
research services to the FUND and/or other accounts of the ADVISER, which
services are to provide lawful and appropriate assistance to the ADVISER in the
performance of its decision-making responsibilities. The commissions paid to
such brokers may be higher than another broker would have charged if a good
faith determination is made by the ADVISER that the commission is reasonable in
relation to the services provided, viewed in terms of either that particular
transaction or the ADVISER's overall responsibilities as to the accounts as to
which it exercises investment discretion. The ADVISER shall use its judgment in
determining that the amount of commissions paid are reasonable in relation to
the value of brokerage and/or research services provided and need not place or
attempt to place a specific dollar value on such services or on the portion of
commission rates reflecting such services. To demonstrate that such
determinations are in good faith, and to show the overall reasonableness of
commissions paid, the ADVISER shall be prepared to show that commissions paid
(i) were for purposes contemplated by this Agreement; and (ii) were within a
reasonable range as compared to the rates charged by qualified brokers to other
institutional investors as such rates may become known from available
information. The FUND recognizes that, on any particular transaction, a higher
than usual commission may be paid due to the difficulty of the transaction in
question. The ADVISER is also authorized to consider as a factor in the
selection of brokers to execute brokerage and principal transactions, subject to
the requirements of "best execution," as defined above, sales by brokers of the
variable products resulting in sales of FUND shares.
5. ALLOCATION OF EXPENSES
The ADVISER agrees that it will furnish the FUND, at the ADVISER's
expense, with all office space, facilities, equipment and clerical personnel
necessary for carrying out its duties under this Agreement. The ADVISER will
also pay all compensation of all Directors, officers and employees of the FUND
who are affiliated persons of the ADVISER. All costs and expenses not expressly
assumed by the ADVISER under this Agreement shall be paid by the FUND,
including, but not limited to (i) interest and taxes; (ii) brokerage
commissions; (iii) insurance premiums; (iv) compensation and expenses of its
Directors other than those affiliated with the ADVISER; (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.
Notwithstanding the foregoing, the ADVISER agrees to 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. The ADVISER may withdraw this undertaking
upon 30 days' written notice to the Fund.
6. COMPENSATION OF THE ADVISER
(a) The FUND agrees to pay the ADVISER and the ADVISER agrees to accept
as full compensation for all services rendered by the ADVISER as such, an
annual management fee, payable monthly and computed on the average daily
net asset value of each Portfolio as shown on "Exhibit A" attached
hereto. The annual management fee will be prorated for any month during
which this Agreement is in effect for only a portion of the month.
(b) 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, and extraordinary expenses) 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 FUND so that at no time will there be any accrued, but unpaid,
liability under this expense limitation.
The fees payable to the ADVISER by the FUND or a Portfolio
hereunder shall be reduced by any tender offer solicitation fees or
similar payments received by the ADVISER, or any affiliated person of the
ADVISER, in connection with the tender of securities held by the
Portfolio (less any direct expenses incurred by the ADVISER, or any
affiliated person of the ADVISER, in connection with obtaining such fees
or payments). The ADVISER shall use its best efforts to recapture all
available tender offer solicitation fees and similar payments in
connection with the tenders of the securities held by a Portfolio,
provided, however, that neither the ADVISER, nor any affiliated person of
the ADVISER, shall be required to register as a broker-dealer for this
purpose. The ADVISER shall advise the FUND's Board of Directors of any
fees or payments of whatever type that it may be possible for the
ADVISER, or an affiliated person of the ADVISER, to receive in connection
with the purchase or sale of securities held by a Portfolio. The fees
payable to the ADVISER by a Portfolio hereunder shall be reduced by any
such fees or payments received, less any direct expenses incurred by the
ADVISER or any affiliate of the ADVISER in obtaining such fees.
7. DURATION AND TERMINATION
(a) Unless sooner terminated as hereinafter provided, this Agreement
shall continue in effect as to each Portfolio until December 31, 2000 and
thereafter from year to year, but only so long as such continuance beyond
such date is specifically approved at least annually by the, Fund's Board
of Directors, including the vote of a majority of the Directors who are
not parties to this Agreement or "interested persons" (as defined in the
Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval, or with respect to any Portfolio by
the votes of a "majority" (as defined in the Act) of the outstanding
voting shares of that Portfolio.
(b) This Agreement may be terminated by the ADVISER at any time without
penalty upon giving the FUND sixty (60) days' written notice (which
notice may be waived by the FUND) and may be terminated by the FUND at
any time without penalty upon giving the ADVISER sixty (60) days' written
notice (which notice may be waived by the ADVISER ), provided that such
termination by the FUND shall be directed or approved by the vote of a
majority of all of its Directors in office at the time, or with respect
to any Portfolio, by the vote of a "majority" (as defined in the Act) of
the outstanding voting shares of that Portfolio. This Agreement shall
automatically terminate in the event of its "assignment" (as defined in
the Act).
(c) The FUND hereby agrees that if (i) the ADVISER ceases to act as
investment adviser to the FUND and (ii) the ADVISER notifies the FUND
that, in the ADVISER's judgment, continued use of the FUND's present name
would create confusion in the context of the ADVISER 's business or that
of Aid Association for Lutherans or its subsidiaries and/or affiliates,
the FUND will use its best efforts to change its name in order to delete
the abbreviation "AAL" from its name and will discontinue use of the name
or any sales literature or advertising materials in which the "AAL" name
is used as soon as possible, in no event exceeding 30 days from the date
ADVISER ceases to act as investment adviser to the FUND or so notifies
the FUND.
8. EXHIBITS
The document entitled "Exhibit A" to the AAL Variable Product Series
Fund, Inc. Investment Advisory Agreement, attached hereto, is added to and
incorporated herein.
9. AMENDMENTS
This Agreement may be amended at any time by mutual consent of the
parties in accordance with the Act, provided that the amendment shall have been
approved, in accordance with the Act, with respect to any Portfolio by the vote
of a "majority" (as defined by the Act) of the outstanding voting shares of that
Portfolio.
10. STATE LAW
This Agreement shall be governed in all respects in accordance with the
laws of the State of Wisconsin.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this INVESTMENT
ADVISORY AGREEMENT to be executed by duly authorized persons and their seals to
be hereunto affixed, all as of the day and year first above written.
AAL VARIABLE PRODUCT SERIES FUND, INC. AAL CAPITAL MANAGEMENT CORPORATION
By: /s/Robert G. Same By: /s/Robert G. Same
------------------------------- ------------------------------
Robert G. Same Robert G. Same
President President
Attest: Attest:
/s/Fred D. Kelsven /s/Fred D. Kelsven
- -------------------------------- ---------------------------------
Fred D. Kelsven Fred D. Kelsven
Secretary Secretary
<PAGE>
EXHIBIT A
To the AAL Variable Product Series Fund, Inc. INVESTMENT ADVISORY AGREEMENT
dated January 1, 2000
1. THE AAL VARIABLE PRODUCT MONEY MARKET PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
paragraph 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
2. THE AAL VARIABLE PRODUCT BOND PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
3. THE AAL VARIABLE PRODUCT HIGH YIELD BOND PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.40 of 1% on the average daily net
assets.
4. THE AAL VARIABLE PRODUCT BALANCED PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
5. THE AAL VARIABLE PRODUCT LARGE COMPANY STOCK PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
6. THE AAL VARIABLE PRODUCT INTERNATIONAL STOCK PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.80 of 1% on the average daily net
assets.
7. THE AAL VARIABLE PRODUCT SMALL COMPANY STOCK PORTFOLIO
The management fee for this Portfolio, calculated in accordance with
section 6 of The AAL Variable Product Series Fund, Inc. Investment Advisory
Agreement, shall be at the annual rate of 0.35 of 1% on the first $250 million
of average daily net assets and 0.30 of 1% on average daily net assets over $250
million.
AMENDED AND RESTATED
SUB-ADVISORY AGREEMENT
BY AND BETWEEN
AAL VARIABLE PRODUCT SERIES FUND, INC.,
AND
AAL CAPITAL MANAGEMENT CORPORATION
AND
OECHSLE INTERNATIONAL ADVISERS LLC
DATED JANUARY 1, 2000
<PAGE>
AGREEMENT made this 1st day of January 2000, by and among the AAL
VARIABLE PRODUCT SERIES FUND, INC. (the "Fund"), a Maryland corporation, AAL
CAPITAL MANAGEMENT COPORATION (the "Adviser", "AAL CMC"), a Delaware corporation
and OECHSLE INTERNATIONAL ADVISORS LLC (the "Sub-Adviser"), a Delaware limited
liability company.
RECITAL:
Until the date of this Amended and Restated Agreement, Aid
Association for Lutherans ("AAL"), a fraternal benefit society which is under
common control with the Adviser, served as investment adviser to the Fund.
Effective on January 1, 2000, AAL will complete a restructuring in which all of
the investment advisory functions it performs will be consolidated with the
investment advisory functions and operations of AAL CMC, and AAL CMC, as the
successor to those advisory functions of AAL, will assume all of the duties and
obligations of AAL in its capacity as Adviser to the Fund. Accordingly, the
parties hereto have a agreed to amend and restate, in the form set forth herein,
the subadvisory agreement pursuant to which AAL and the Subadviser heretofore
have provided such advisory services to the Fund (the "Predecessor Agreement").
The parties acknowledge that the terms and conditions of this Amended and
Restated Agreement are substantively identical to the terms and conditions of
the Predecessor Agreement, except that this Amended and Restated Agreement
identifies AAL CMC as the Adviser of the Fund in lieu of AAL.
WITNESSETH:
In consideration of the mutual promises and agreements herein contained
and other good and valuable consideration, the receipt of which is hereby
acknowledged, it is hereby agreed by and among the parties hereto as follows:
1. In General
The Sub-Adviser agrees, as more fully set forth herein, to act as
Sub-Adviser to the Fund with respect to the investment and reinvestment of the
assets of the Fund's series of shares described as the AAL Variable Product
International Stock Portfolio (the "International Stock Portfolio"). It is
understood that the Fund may create one or more additional Fund series from time
to time and that this Agreement may be amended by the mutual written agreement
of the parties to include such additional Portfolio(s) under the terms to this
Agreement.
2. Duties and Obligations of the Sub-Adviser with Respect to
Investment of Assets of the International Stock Portfolio
(a) Subject to the succeeding provisions of this section and subject to
the oversight and review of the Adviser and the direction and control of the
Board of Directors ("Directors") of the Fund, the Sub-Adviser, as agent and
attorney-in-fact with respect to the Fund, is authorized, in its discretion and
without prior consultation with the Fund to:
(i) Buy, sell, exchange, convert, lend and otherwise trade in
any stocks, bonds, currencies, and any other securities or assets;
(ii) Place orders and negotiate the commissions (if any) for
the execution of transactions in securities or other assets with or through such
brokers, dealers, underwriters or issuers as the Sub-Adviser may select;
including brokers and dealers that may be affiliates of the Sub-Adviser, and
(iii) Enter into and execute agreements on behalf of the Fund,
relating to the acquisition or disposition of investment assets and the
execution of portfolio transactions, including foreign exchange contracts and
other transactional agreements. Nothing contained herein, however, shall be
deemed to authorize the Sub-Adviser to take or receive physical possession of
any cash or securities held for the Fund, it being intended that sole
responsibility for safekeeping thereof and the consummation of all such
purchases, sales, deliveries, and investments made pursuant to Sub-Adviser's
direction shall rest upon the Fund's Custodian.
(iv) Provide the Adviser and the Directors with such reports
as may reasonably be requested in connection with the discharge of the foregoing
responsibilities and the discharge of the Adviser's responsibilities under the
Investment Advisory Agreement with the Fund and those of AAL Capital Management
Corporation (the "Distributor") under the Primary Underwriting Agreement with
the Fund.
Written procedures with respect to (i), (ii) and (iii) above may be set
forth as agreed to among the Fund, the Adviser and Sub-Adviser.
(b) Any investment purchases or sales made by the Sub-Adviser under
this section shall at all times conform to, and be in accordance with, any
requirements imposed by: (1) the provisions of the Investment Company Act of
1940 (the "Act") and of any rules or regulations in force thereunder; (2) any
other applicable provisions of law; (3) the provisions of the Articles of
Incorporation and By-Laws of the Fund as amended from time to time; (4) any
policies and determinations of the Board of Directors of the Fund; and (5) the
fundamental policies of the Fund, as reflected in its Registration Statement
under the Act, or as amended by the shareholders of the Fund; provided that
copies of the items referred to in clauses (3), (4) and (5) shall have been
furnished to the Sub-Adviser.
(c) The Sub-Adviser shall give the Fund the benefit of its best
judgment and effort in rendering services hereunder. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties ("disabling conduct") hereunder on the part of the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) the Sub-Adviser shall not be subject to liability to the Fund or to
any shareholder of the Fund for any act or omission in the course of, or
connected with rendering services hereunder, including without limitation, any
error of judgment or mistake of law or for any loss suffered by any of them in
connection with the matters to which this Agreement relates, except to the
extent specified in Section 36 (b) of the Act concerning loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services. Except for such disabling conduct, the Fund shall indemnify the
Sub-Adviser (and its officers, directors, agents, employees, controlling
persons, shareholders and any other person or entity affiliated with the
Sub-Adviser) against any liability arising from the Sub-Adviser's conduct under
this Agreement to the extent permitted by the Articles of Incorporation and
applicable law.
(d) Nothing in this Agreement shall prevent the Sub-Adviser or any
"affiliated person" (as defined in the Act) of the Sub-Adviser from acting as
investment adviser or manager for any other person, firm or corporation and
shall not in any way limit or restrict the Sub-Adviser or any such affiliated
person from buying, selling or trading any securities for its or their own
accounts or for the accounts of others for whom it or they may be acting,
provided, however, that the Sub-Adviser expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Fund under this Agreement. It is agreed
that the Sub-Adviser shall have no responsibility or liability for the accuracy
or completeness of the Fund's Registration Statement under the Act and the
Securities Act of 1933 except for information supplied by the Sub-Adviser for
inclusion therein. The Sub-Adviser shall be deemed to be an independent
contractor and, unless otherwise expressly provided or authorized, have no
authority to act or represent the Fund in any way or otherwise be deemed an
agent of the Fund.
(e) In connection with its duties to arrange for the purchase and sale
of the International Stock Portfolio's securities and other assets, the
Sub-Adviser shall follow the principles set forth in any investment advisory
agreement in effect from time to time between the Fund and the Adviser, provided
that a copy of any such agreement shall have been provided to the Sub-Adviser.
The Sub-Adviser will promptly communicate to the Adviser and to the officers and
the Directors of the Fund such information relating to portfolio transactions as
they may reasonably request.
(f) The Sub-Adviser may place orders both as to sales and purchases of
assets directly through any broker or dealer it chooses. Brokers or dealers may
be selected who provide brokerage and/or research services to the Fund and/or
other accounts over which the Sub-Adviser or its affiliates exercise investment
discretion. Brokers or dealers who execute portfolio transactions on behalf of
the Fund may receive commissions which are in excess of the amount of
commissions which other brokers or dealers would have charged for effecting such
transactions. In order to cause the Fund to pay such higher commissions, the
Sub-Adviser must determine in good faith that such commissions are reasonable in
relation to the value of the brokerage and/or research services provided by such
executing brokers or dealers viewed in terms of a particular transaction or the
Sub-Adviser's overall responsibilities to the Fund or its other discretionary
client accounts.
(g) On occasions when the Sub-Adviser deems the purchase or sale of a
security to be in the best interest of the Fund as well as other clients, the
Sub-Adviser, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be sold or purchased in order to obtain the best
execution and lower brokerage commissions, if any. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
most equitable and consistent with its fiduciary obligations to the Fund and to
such clients.
The Sub-Adviser may purchase or sell for the Fund, pursuant to the
Fund's Rule 10f-3 Procedures, any security (including securities of the same
class as those underwritten or other securities of the same or related issuer)
for which any affiliate of Sub-Adviser acts as (1) an underwriter (either as
lead underwriter or syndicate member), both during the pendency of any
underwriting or selling syndicate and thereafter, or (2) a market maker,
provided that such security is purchased from a non-affiliated party.
(h) The Sub-Adviser shall be responsible for 13F reporting for the
securities held by the International Stock Portfolio.
3. Allocation of Expenses
During the term of this Agreement, the Sub-Adviser will pay all
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities, and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund.
The Sub-Adviser agrees that it will furnish the Fund, at the
Sub-Adviser's expense, with all office space, facilities, equipment, and
clerical personnel necessary for carrying out its duties under this Agreement.
4. Certain Records
Any records required to be maintained and preserved pursuant to the
provisions of Rule 31a-1 and Rule 31a-2 under the Act that are prepared or
maintained by the Sub-Adviser on behalf of the Fund are the property of the Fund
and will be surrendered promptly to the Fund or Adviser on request.
5. Reference to the Sub-Adviser
Neither the Fund, the Adviser or any affiliate or agent thereof shall
make reference to or use the name of the Sub-Adviser or any of its affiliates in
any advertising or promotional materials without the prior approval of the
Sub-Adviser, which approval shall not be unreasonably withheld.
6. Compensation of the Sub-Adviser
The Adviser agrees to pay the Sub-Adviser and the Sub-Adviser agrees to
accept as full compensation for all services rendered by the Sub-Adviser as
such, a management fee, payable quarterly in arrears and computed on the average
daily net asset value of the International Stock Portfolio at rates shown on
Exhibit A attached hereto.
7. Duration and Termination
(a) This Agreement shall go into effect for the International Stock
Portfolio on January 1, 2000, and shall, unless terminated as hereinafter
provided, continue in effect thereafter from year to year, but only so long as
such continuance is specifically approved at least annually by a majority of the
Fund's Board of Directors, or by the vote of the holders of a "majority" (as
defined in the Act) of the outstanding voting securities of the Fund, with
respect to the International Stock Portfolio, and, in either case, a majority of
the Directors who are not parties to this Agreement or "interested persons" (as
defined in the Act) of any such party cast in person at a meeting called for the
purpose of voting on such approval.
(b) This Agreement may be terminated by the Sub-Adviser at any time
without penalty upon giving the Fund and the Adviser sixty (60) days' written
notice (which notice may be waived by the Fund and Adviser) and may be
terminated by the Fund or the Adviser at any time without penalty upon giving
the Sub-Adviser sixty (60) days' written notice (which notice may be waived by
the Sub-Adviser), provided that such termination by the Fund shall be directed
or approved by the vote of a majority of all of the Directors in office at the
time or by the vote of the holders of a majority (as defined in the Act) of the
voting securities of the Fund, with respect to the International Stock
Portfolio, or with respect to any Fund by the vote of a majority of the
outstanding shares of such Fund. This Agreement shall automatically terminate in
the event of its "assignment" (as defined in the Act). This Agreement will also
terminate in the event that the Investment Advisory Agreement is terminated.
8. Agreement Binding Only On Fund Property
The Sub-Adviser understands that the obligations of this Agreement are
not binding upon any shareholder of the Fund personally, but bind only the
Fund's property; the Sub-Adviser represents that it has notice of the provisions
of the Fund's Articles of Incorporation disclaiming shareholder liability for
acts or obligations of the Fund.
9. Action By Individual Portfolio
The provisions of this Agreement and any amendments hereto with respect
to a Portfolio may be approved by the shareholders of that Portfolio and become
effective with respect to the assets of that Portfolio without the necessity of
approval thereof by shareholders of any other Portfolio.
10. Notices
(a) The Sub-Adviser agrees to promptly notify the Adviser of the
occurrence of any of the following events:
(i) any change in any of the Sub-Adviser's partners or portfolio
managers;
(ii) the Sub-Adviser fails to be registered as an investment
adviser under the Advisers Act or under the laws of any
jurisdiction in which the Sub-Adviser is required to be
registered as an investment adviser in order to perform its
obligations under this Agreement;
(iii)the Sub-Adviser is the subject of any action, suit,
proceeding, inquiry or investigation at law or in equity,
before any court, public board or body, involving the
affairs of the International Stock Portfolio, or
(iv) any change in ownership or control, or partnership
membership of the Sub-Adviser.
(b) Any notice given hereunder shall be in writing and may be
served by being sent by telex, facsimile or other electronic transmission, or
sent by registered mail or by courier to the address set forth below for the
party for which it is intended. A notice served by mail shall be deemed served
seven days after mailing and in the case of telex, facsimile or other electronic
transmission, twelve hours after confirmed receipt thereof. Addresses for notice
may be changed by written notice to the other party.
The Adviser The Sub-Adviser
----------- ---------------
Robert G. Same, President Stephen Langer
AAL Capital Management Corporation Oechsle International Advisors, LLC
222 West College Avenue One International Place
Appleton, WI 54919-0007 Boston, MA 02110
Fax (920) 380-5044 Fax (617) 330-8620
The Fund
Frederick D. Kelsven, Secretary
AAL Variable Product Series Fund, Inc.
4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Fax (920) 830-6615
11. Amendments
No provisions of this agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing.
12. Form ADV
The Adviser acknowledges receipt of the Sub-Adviser's Part II,
Form ADV at least 48 hours in advance of signing this Agreement.
13. Forum
The laws of the State of Wisconsin shall govern this Agreement.
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule, or otherwise, the
remainder of this Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have caused the foregoing
instrument to be executed by their duly authorized officers and their seals to
be hereunto affixed, all as of the day and year first above written.
AAL VARIABLE PRODUCT SERIES FUND, INC. AAL CAPITAL MANAGEMENT CORPORATION
By: /s/Robert G. Same By: /s/Robert G. Same
------------------------------- -------------------------------
Robert G. Same Robert G. Same
President President
Attest: /s/Fred D. Kelsven Attest: /s/Fred D. Kelsven
--------------------------- ---------------------------
Fred D. Kelsven Fred D. Kelsven
Secretary Secretary
OECHSLE INTERNATIONAL ADVISORS, LLC
By: Oechsle Group, LLC
/s/L. Sean Roche
-------------------------------
L. Sean Roche
Managing Principal
Attest: /s/Robert E. O'Hare
---------------------------
Robert E. O'Hare
<PAGE>
EXHIBIT A
TO
THE AAL VARIABLE PRODUCT SERIES FUND
SUB-ADVISORY AGREEMENT
(Dated January 1, 2000)
The AAL Variable Product International Stock Portfolio
The management fee for this Portfolio, payable to the Sub-Adviser by
the Adviser, calculated in accordance with paragraph 6 of the AAL Variable
Product Series Fund, Inc. Sub-Advisory Agreement, shall be at the annual rate
of:
0.54 of 1% of the Portfolio's average daily net assets of $20 million
or less; 0.45 of 1% of the Portfolio's average daily net assets between
$20 million and $50 million; 0.36 of 1% of the Portfolio's average
daily net assets over $50 million.
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
AAL VARIABLE ANNUITY ACCOUNT I
AND
AAL VARIABLE ANNUITY ACCOUNT II
AND
AAL VARIABLE LIFE ACCOUNT I
AND
AAL CAPITAL MANAGEMENT CORPORATION
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
1. SALE OF FUND SHARES......................................................4
2. REPRESENTATIONS AND WARRANTIES...........................................5
3. PROSPECTUS AND PROXY STATEMENTS: VOTING..................................6
4. SALES MATERIAL AND INFORMATION...........................................6
5. FEES AND EXPENSES........................................................7
6. DIVERSIFICATION..........................................................8
7. MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS.........................8
9. TERM AND TERMINATION OF THIS AGREEMENT..................................13
10. NOTICES.................................................................15
11. MISCELLANEOUS...........................................................16
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 1st day
of January, 2000, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and on behalf of AAL VARIABLE ANNUITY ACCOUNT I, AAL VARIABLE ANNUITY
ACCOUNT II, and AAL VARIABLE LIFE ACCOUNT I (the "ACCOUNTS"), AAL CAPITAL
MANAGEMENT CORPORATION ("AAL CMC"), and AAL VARIABLE PRODUCT SERIES FUND, INC.
(the "FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as sponsor and depositor of the
ACCOUNTS;
WHEREAS, the ACCOUNTS are legally segregated asset accounts of AAL,
established pursuant to the laws of the State of Wisconsin, with several
subaccounts (the "Subaccounts"), for the purpose of funding certain variable
universal life insurance contracts and variable annuity contracts (collectively
the "Certificates");
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions;
WHEREAS, to the extent permitted by applicable insurance, tax and other
laws and regulations, AAL intends to purchase shares in the FUND on behalf of
the ACCOUNTS to fund the Certificates or on its own behalf for related purposes,
and the FUND is authorized to sell such shares to the ACCOUNTS and to AAL at net
asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL CMC, dated the 1st day of January, 2000, as amended, wherein AAL CMC has
agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code"), as amended;
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
<PAGE>
1. SALE OF FUND SHARES
1.1 The Certificates funded through the ACCOUNTS will provide for the
allocation of net amounts among certain Subaccounts for investment
in such shares of the Portfolios as may be offered from time to
time in the prospectus of the ACCOUNTS for the Certificates. The
selection of the particular Subaccount is to be made by the
Certificate owner, and such selection may be changed in accordance
with the terms of the Certificates.
1.2 The FUND will sell to AAL those shares of each available Portfolio
that AAL orders based on transactions under Certificates,
effecting such orders on a daily basis at the Portfolio's net
asset value per share next computed as provided in the FUND
prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to
sell shares of any Portfolio to AAL, or suspend or terminate the
offering of shares of any Portfolio, if such action is required by
law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board, acting in good faith and in light of
their fiduciary duties under federal and any applicable state
laws, necessary in the best interests of the shareholders of the
FUND.
1.4 The FUND agrees that its shares will be sold only to: (a) AAL, on
its own behalf and on behalf of separate accounts that it
establishes from time to time and maintains to fund variable
annuity contracts and variable life insurance contracts of AAL,
including the ACCOUNTS; (b) other life insurance companies,
whether affiliated or unaffiliated with AAL, on behalf of separate
accounts funding variable annuity contracts and variable life
insurance contracts of such other insurance companies; and (c)
qualified pension or retirement plans, whether for the benefit of
employees of AAL and/or its affiliates or for the benefit of
unaffiliated entities ("Qualified Plans"). AAL separate accounts
(including the ACCOUNTS) and separate accounts of other life
insurance companies eligible to purchase shares of the FUND are
referred to in this Agreement as "Separate Accounts." No shares of
any Portfolio will be sold to the general public or to any life
insurance company (on its own behalf, as opposed to a Separate
Account maintained by such other insurance company) other than
AAL.
1.5 The FUND will redeem for cash from AAL those full or fractional
shares of each Portfolio that AAL requests based on transactions
under Certificates, effecting such requests on a daily basis at
the Portfolio's net asset value per share next computed as
provided in the FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry
only. Stock certificates will not be issued to AAL. Shares ordered
from the FUND will be recorded in an appropriate title for AAL.
1.7 The FUND shall furnish notice promptly to AAL of any income,
dividends or capital gain distributions payable on the shares of
any Portfolio. AAL hereby elects to receive all such income,
dividends and capital gain distributions as are payable on FUND
shares in additional shares of that Portfolio. AAL reserves the
right to revoke this election and to receive all such income,
dividends and capital gain distributions in cash. The FUND shall
notify AAL of the number of shares so issued as payment of such
income, dividends and distributions.
1.8 The FUND shall make the net asset value per share for each
Portfolio available to AAL on a daily basis, as soon as reasonably
practical after the net asset value per share is calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the Certificates, or delete, combine, or modify
existing Portfolios. The shares of any additional Portfolio may be
made available to the ACCOUNTS by the FUND, pursuant to the terms
of this Agreement, and any applicable reference to any Portfolio,
the FUND or its shares herein shall include a reference to any
such Portfolio.
2. REPRESENTATIONS AND WARRANTIES
2.1 AAL represents and warrants that interests in the ACCOUNTS under
the Certificates are or will be registered under the 1933 Act to
the extent required by the 1933 Act, that the Certificates will be
issued and sold in compliance in all material respects with all
applicable federal and state laws and that the sale of the
Certificates will comply in all material respects with state
insurance and federal securities law suitability requirements. AAL
further represents and warrants that it is a fraternal benefit
society organized under the laws of the State of Wisconsin and
engaged in the writing of life insurance, annuity contracts, and
other insurance products; that it has legally and validly
established its ACCOUNTS as segregated asset accounts under
Wisconsin insurance law; and that it has registered or will
register the ACCOUNTS as unit investment trusts in accordance with
the provisions of the 1940 Act to serve as segregated investment
accounts for the Certificates, to the extent required by the 1940
Act.
2.2 AAL represents and warrants that any interests in the ACCOUNTS
being offered for sale under the Certificates are or will be
registered under the 1933 Act to the extent required by the 1933
Act, that the Certificates will be issued and sold in compliance
in all material respects with all applicable federal and state
laws, and that the sale of the Certificates will comply in all
material respects with state insurance law, and federal securities
laws, including the rules of the National Association of
Securities Dealers, Inc. ("NASD").
2.3 The FUND represents and warrants that its shares sold pursuant to
this Agreement are or will be registered under the 1933 Act to the
extent required by the 1933 Act, duly authorized for issuance and
sold in compliance with the laws of the state of Maryland and all
applicable federal securities laws and that the FUND is or will be
registered under the 1940 Act to the extent required by the 1940
Act. The FUND will amend the registration statement for its shares
under the 1933 Act, as well as its registration statement under
the 1940 Act, as required in order to effect the continuous
offering of its shares. The FUND will register or qualify the
shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the FUND.
2.4 AAL represents and warrants that its Certificates are currently
treated as annuity contracts and universal life insurance
contracts under applicable provisions of the Code and that it will
make every effort to maintain such treatment.
2.5 The FUND makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses)
complies with the insurance laws or regulations of the various
states. On the request of any state insurance department, the FUND
agrees to provide and furnish to the department any information or
reports in connection with the FUND's operations or services that
will allow the insurance department to determine if the variable
product operations of AAL are being conducted in a manner
consistent with state laws. The FUND intends to comply with the
insurance laws of any relevant state regarding any Portfolio's
investment objectives, policies and restrictions to the extent
that AAL CMC advises the FUND, in writing, of such laws or any
change in such laws, provided the FUND's Board of Directors and/or
shareholders approve such changes as required by the 1940 Act.
2.6 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of
the Code and that the investments of each of its Portfolios will
comply with the diversification requirements of Section 817(h) of
the Code and the regulations thereunder, and that it will notify
AAL immediately upon having a reasonable basis for believing that
it has ceased to so qualify or that it might not so qualify in the
future.
3. PROSPECTUS AND PROXY STATEMENTS: VOTING
3.1 The FUND will provide such documentation (including a final copy
of any new prospectus, statement of additional information
("SAI"), or supplement) and other assistance as is reasonably
necessary in order for AAL or its designee to timely distribute
the current FUND prospectus, SAI and any supplement thereto, or,
in the alternative, to have the prospectus of the ACCOUNTS for the
Certificates and the FUND's prospectus printed together in one
document once each year (or more frequently if the prospectus for
the FUND is amended) (such FUND prospectus printing to be at the
FUND's expense, as provided in Section 5.1).
3.2 The FUND will provide such documentation (including a final copy
of any proxy material, report to shareholders, and other
communication to shareholders) and other assistance as is
reasonably necessary for AAL or its designee to timely distribute
the proxy material, report to shareholders, and other
communication (such printing and distribution to be the FUND's
expense, as provided in Section 5.1).
3.3 If, and to the extent required by law, AAL shall, at AAL's
expense, as provided in Section 5.2:
(a) solicit voting instructions from Certificate owners;
(b) vote Portfolio shares in accordance with instructions
received from Certificate owners;
(c) vote Portfolio shares for which no instructions have been
received, as well as Portfolio shares attributable to AAL
other than under Certificates, in the same proportion as
shares of such Portfolio for which instructions have been
received, so long as and to the extent that the SEC continues
to interpret the 1940 Act to require pass-through voting
privileges. AAL reserves the right to vote Portfolio shares
held in any segregated asset accounts or in general accounts
in its own right, to the extent permitted by law.
3.4 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the
FUND solely upon the authorization of its Board and/or
shareholders as required by the 1940 Act.
4. SALES MATERIAL AND INFORMATION
4.1 AAL or its designee will furnish, or will cause to be furnished,
to the FUND or its designee, each piece of sales literature or
other promotional material in which the FUND or AAL is named, at
least fifteen (15) days prior to its intended use. No such
material will be used if the FUND or its designee objects to such
intended use within fifteen (15) days after receipt of such
material.
4.2 AAL will not give any information or make any representation or
statement, or cause such information to be given or representation
to be made, on behalf of the FUND or concerning any Portfolio in
connection with the sale of the Certificates other than the
information or representations contained in the registration
statement, prospectus, and SAI for FUND shares, as such
registration statement, prospectus, and SAI may be amended or
supplemented from time to time, or in reports or proxy materials
for the FUND, or in sales literature or other promotional material
approved by the FUND or its designee, except with the permission
of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be
furnished, to AAL or its designee, each piece of sales literature
or other promotional material of the FUND in which AAL and/or its
ACCOUNTS is named, at least fifteen (15) days prior to its
intended use. No such material will be used if AAL or its designee
objects to such intended use within fifteen (15) days after
receipt of such material.
4.4 The FUND will not give any information or make any representations
or statements, or cause such information to be given or
representations to be made, on behalf of AAL or concerning AAL,
its ACCOUNTS or its Certificates other than the information or
representations contained in a registration statement or
prospectus for such ACCOUNTS, as such registration statement and
prospectus may be amended or supplemented from time to time, or in
published reports for the ACCOUNTS that are in the public domain
or approved by AAL for distribution to owners, or in sales
literature or other promotional material approved by AAL or its
designee, except with the permission of AAL or its designee .
4.5 The FUND will provide to AAL one complete copy of all registration
statements, prospectuses, SAI's, reports, proxy material, sales
literature and other promotional material, applications for
exemptions, requests for no-action letters, and all amendments to
any of the above, that relate to the FUND or its shares,
contemporaneously with the filing of such document with the SEC or
other regulatory authorities.
4.6 AAL will provide to the FUND one complete copy of all registration
statements, prospectuses, SAI's, reports, solicitations for voting
instructions, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the ACCOUNTS or
its Certificates, contemporaneously with the filing of such
document with the SEC or other regulatory authorities.
5. FEES AND EXPENSES
5.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below,
each Portfolio will bear all of its operating expenses that are
not specifically assumed by AAL, including the following: (i)
interest and taxes (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses for those Directors who
are not "interested" persons under Section 2(a)(19) of the Act;
(v) independent legal and audit expenses; (vi) fees and expenses
of the FUND's custodian, shareholder servicing or transfer agent
and accounting services agent; (vii) expenses incident to the
issuance of its shares, including stock certificates and issuance
of shares on the payment of, or reinvestment of dividends; (viii)
fees and expenses incident to the registration under Federal or
state securities laws of the FUND or its shares; (ix) FUND or
portfolio organizational expenses; (x) FUND expenses of preparing,
printing and mailing reports and notices, proxy material and
prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii)
dues or assessments of or contributions to the Investment Company
Institute or any successor or other industry association; (xiii)
such non-recurring expenses as may arise, including litigation
affecting the FUND and the legal obligations which the FUND may
have to indemnify its officers and Directors with respect thereto;
and (xiv) cost of daily valuation of each of the Portfolio's
securities and net asset value per share.
5.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will bear the expenses of printing and
distributing to its Certificate owners the FUND proxy materials,
proxy cards and voting instruction forms (collectively "proxy
information"), tabulating the results of proxy solicitations to
its Certificate owners, printing and distributing to its
Certificate owners the FUND prospectus, SAI, supplement, proxy
material, report to shareholders, and other communication to
shareholders, and any expenses associated with administration of
its Certificates.
6. DIVERSIFICATION
6.1 The Portfolios will be invested in such a manner as to ensure that
the Certificates will be treated as variable life insurance
contracts and variable annuity contracts under the Code and the
regulations thereunder insofar as such investment is required for
such treatment. Without limiting the scope of the foregoing, the
Portfolios will at all times comply with Section 817(h) of the
Code and Treasury Regulations Section 1.817-5 relating to the
diversification requirements for variable annuity, endowment, or
life insurance contracts and any amendments or other modifications
to such Section or Regulations.
6.2 The FUND shall furnish to AAL on a regular basis reports of all of
the investments of each Portfolio in a form sufficient to permit
AAL to determine whether each Portfolio is in compliance with the
diversification requirements of Section 817(h) of the Code and the
Regulations thereunder and shall take immediate action, on
learning through its own monitoring, or on advice from AAL, that
any Portfolio is not in compliance with such requirements, to
return to compliance with such requirements.
6.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with AAL in any effort to
correct such diversification failure under procedures established
by the Internal Revenue Service, including those set forth in
Revenue Procedure 92-25.
7. MONITORING FOR MATERIAL IRRECONCILABLE CONFLICTS
7.1 The FUND's Board of Directors will monitor the FUND for the
existence of any material irreconcilable conflict between and
among the interests of the certificateholders of the Separate
Accounts (including the ACCOUNTS) investing in the FUND and the
participants of any of the Qualified Plans investing in the FUND.
A material irreconcilable conflict may arise for a variety of
reasons, including: (a) action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance,
tax or securities laws or regulations, or a public ruling ,
private letter ruling, no-action or interpretive letter, or any
similar action by insurance, tax or securities regulatory
authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investment of the
FUND are being managed; (e) a difference in voting instructions
given by the Separate Accounts vis-a-vis voting instructions
provided by the trustees of the Qualified Plans; (f) a decision by
AAL or another life insurance company to disregard the voting
instructions of Certificate owners in one or more Separate
Accounts; or (g) if applicable, a decision by the trustee of a
Qualified Plan to disregard the voting instructions of the
participants of such Qualified Plan. A determination by the FUND's
Board that a material irreconcilable conflict exists will be a
final determination.
7.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, AAL (on behalf of the ACCOUNTS)
shall, at its expense and to the extent reasonably practicable (as
determined by a majority of the disinterested directors of the
FUND), take whatever steps are necessary to remedy or eliminate
the material irreconcilable conflict. Such steps could include:
(a) withdrawing the assets allocable to some or all of the
ACCOUNTS from the FUND or any Portfolio of the FUND and
reinvesting such assets in a different investment medium,
including another portfolio of the FUND; (b) submitting the
question as to whether such segregation should be implemented to a
vote of all affected Certificate owners and, as appropriate,
segregating the assets of any appropriate (i.e., variable annuity
Certificate owners or variable life insurance Certificate owners
of one or more of AAL and any other insurance companies with
Separate Accounts investing in the FUND) that votes in favor of
such segregation, or offering to the affected Certificate owners
the option of making such change; or (c) establishing a new
registered management investment company or managed separate
account. If a material irreconcilable conflict arises because of a
decision by AAL to disregard voting instructions of owners of
Certificates in one or more of the ACCOUNTS, and that decision
represents a minority position or would preclude a majority vote
with respect to the vote being taken by shareholders of the FUND,
then AAL shall, at the election and direction of the FUND's Board,
withdraw each affected ACCOUNT's investment in the FUND (but no
charge or penalty shall be imposed as a result of such
withdrawal).
7.3 AAL is responsible, to the extent permitted by applicable law, for
taking remedial action on behalf of the affected ACCOUNT(s) in the
event that the FUND's Board determines a material irreconcilable
conflict exists. AAL will take remedial action only as it pertains
to assets of the affected ACCOUNT(s) and in accordance with its
fiduciary responsibility to Certificate owners in such affected
ACCOUNT(s). AAL, as the sponsor of the affected ACCOUNT(s), will
be responsible for the cost of any such remedial action. For the
purpose of this Section, a majority of the disinterested members
of the FUND's Board will determine whether or not any proposed
action adequately remedies any material irreconcilable conflict.
In no event shall the FUND, or AAL in its capacity as advisor to
the FUND, be required to establish a Portfolio or new funding
medium for any Certificate or any ACCOUNT. Nor, in its capacity as
sponsor of any ACCOUNT, shall AAL be required to establish a new
funding medium for any Certificate or any ACCOUNT if any offer to
do so has been declined by a vote of a majority of the Certificate
owners materially and adversely affected by the material
irreconcilable conflict.
7.4 The FUND promptly shall notify AAL in writing of any determination
by the FUND's Board as to the existence of a material
irreconcilable conflict and its implications
7.5 All reports of potential or existing conflicts received by the
FUND's Board and all Board actions with regard to or determining
the existence of a conflict of interest, notifying AAL of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of
the FUND's Board or other appropriate records, and such minutes or
other records will be made available to the SEC upon request.
7.6 The FUND will disclose in its prospectus that (a) shares of the
FUND may be offered to Separate Accounts and Qualified Plans; (b)
material irreconcilable conflicts may arise between the interest
of various certificateholders investing in the Separate Accounts
and the interests of participants in the Qualified Plans investing
in the FUND; and (c) the FUND's Board will monitor events in order
to identify the existence of any material conflict and determine
what action, if any, should be taken in response to such material
irreconcilable conflict.
7.7 No less than annually, AAL will submit to the FUND's Board such
reports, materials and data as the Board may reasonably request so
that the Board may carry out fully its obligations under this
Section. Such reports, materials and data will be submitted more
frequently if deemed appropriate by the FUND's Board. In any
event, AAL will promptly notify the FUND's Board in writing if it
becomes aware of any facts or circumstances that could give rise
to a material irreconcilable conflict between the interests of
various Certificate owners in the ACCOUNTS and the interests of
Qualified Plan participants investing in the FUND. All reports
submitted to the FUND's Board under this Section 7.7 shall include
all information reasonably necessary for the Board to consider the
conflict issues raised. In this regard, AAL promptly shall notify
the FUND's Board whenever AAL has determined to disregard voting
instructions of the Certificate owners of any ACCOUNT(s) on any
matter submitted to a vote of shareholders of the FUND.
8. INDEMNIFICATION
8.1 Indemnification By AAL
(a) AAL will indemnify and hold harmless the FUND and each of its
Directors, officers, and employees and each person, if any,
who controls the FUND within the meaning of Section 15 of the
1933 Act (collectively, the "Indemnified Parties" for purposes
of this Section 8.1) against any and all losses, claims,
damages, liabilities (including amounts paid in settlement
with the written consent of AAL) or litigation (including
legal and other expenses), to which the Indemnified Parties
may become subject under any statute, regulation, at common
law or otherwise, and which:
(i) arise out of or are based upon any failure by AAL to
perform the duties or assume the general business
responsibilities of AAL with respect to the design,
drafting, state approvals, issuance, servicing and
administration of the Certificates, or the establishment
and maintenance of the ACCOUNTS; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the registration statement, prospectus, or SAI for the
Certificates, or the ACCOUNTS, or contained in the
Certificates or sales literature for the Certificates (or
any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein
not misleading, provided that this Agreement to indemnify
will not apply as to any Indemnified Party if such
statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with
information furnished in writing to AAL by or on behalf of
the FUND for use in the registration statement,
prospectus, or SAI for the Certificates or the ACCOUNTS or
in the Certificates or sales literature (or any amendment
or supplement) or otherwise for use in connection with the
sale of the Certificates or FUND shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by AAL, or
persons under its control) or wrongful conduct of AAL or
persons under its control, or failure to supervise persons
under AAL's control or entities or individuals with which
AAL contracts, with respect to the sale or distribution of
the Certificates or FUND shares; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the FUND by or on behalf of AAL;
or
(v) arise out of or result from any failure by AAL to provide
the services and furnish the materials contemplated
by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by AAL in this
Agreement or arise out of or result from any other
material breach of this Agreement by AAL, as limited by
and in accordance with the provisions of Sections 8.1(b).
and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this
Agreement or to the FUND, whichever is applicable.
(c) AAL will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified AAL in
writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify
AAL of any such claim will not relieve AAL from any liability
that it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, AAL shall be entitled to
participate, at its own expense, in the defense thereof. AAL
also will be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After
notice from AAL to such party of AAL's election to assume the
defense thereof, the Indemnified Party will bear the fees and
expenses of any additional counsel retained by it, and AAL
will not be liable to such party under this Agreement for any
legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other
than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify AAL of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification By the FUND
(a) The FUND will indemnify and hold harmless AAL and each of its
directors, officers and employees and each person, if any, who
controls AAL within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this
Section 8.2) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the
written consent of FUND) or litigation (including legal and
other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or
otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect
to the sale of shares of the FUND to AAL; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the sales literature for the FUND and/or the
Certificates, or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
the FUND by or on behalf of AAL for use in the
registration statement, prospectus, or SAI for use in the
sales literature or otherwise for use in connection with
the sale of Portfolio shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the FUND,
or persons under its control) or wrongful conduct of the
FUND or persons under its control, or failure to supervise
persons under the FUND's control or entities or
individuals with which the FUND contracts, with respect to
the sale or distribution of the Certificates or FUND
shares; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to AAL by or on behalf of AAL; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials
contemplated by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other
material breach of this Agreement by the FUND, except to
the extent provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification
provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the FUND, whichever is
applicable.
(c) The FUND will not be liable under this indemnification
provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have
notified the FUND in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the FUND of any such claim will not relieve
the FUND from any liability that it may have to the
Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified
Parties, the FUND shall be entitled to participate, at its own
expense, in the defense thereof. The FUND also will be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice
from the FUND to such party of the FUND's election to assume
the defense thereof, the Indemnified Party will bear the fees
and expenses of any additional counsel retained by it, and the
FUND will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof
other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. TERM AND TERMINATION OF THIS AGREEMENT
9.1 This Agreement will terminate:
(a) as to any party hereto, at the option of that party, upon
prior written notice to the other party as provided in Section
9.3 herein; or
(b) at the option of the FUND in the event that formal
administrative proceedings are instituted against AAL by the
NASD, the SEC, any state securities or insurance commissioner
or any other regulatory body regarding AAL's duties under this
Agreement or related to the sale of the Certificates, the
operation of the ACCOUNTS, or the purchase of FUND shares,
provided, however, that the FUND determines, in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of AAL to perform its obligations under this
Agreement; or
(c) at the option of AAL in the event that formal administrative
proceedings are instituted against the FUND by the NASD, the
SEC, or any state securities or insurance commission or any
other regulatory body, regarding the FUND's duties under this
Agreement or related to the sale of FUND shares or the
operation of the FUND, provided, however, that AAL determines,
in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the FUND to perform its obligations under
this Agreement; or
(d) at the option of AAL with respect to the ACCOUNTS, upon
requisite authority to substitute the shares of another
investment company for shares of the FUND in accordance with
the terms of the Certificates or in accordance with the
ACCOUNTS investment policy or standards of conduct; or
(e) at the option of AAL, in the event any of the FUND's shares
are not registered, issued, or sold in accordance with
applicable federal and any state law or such law precludes the
use of such shares as the underlying investment media of the
Certificates issued or to be issued by AAL; or
(f) at the option of AAL, if the FUND fails to meet the
requirements specified in Sections 2.3 or 2.6 hereof; or
(g) at the option of the FUND, if the investments of the ACCOUNTS
fail to satisfy the diversification requirements of the Code
and the regulations thereunder, or
(h) at the option of AAL, if the FUND dissolves or becomes
otherwise unable to sell shares to fund the ACCOUNTS.
9.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 9.1(a) may be
exercised for any reason or for no reason.
9.3 Notice Requirement for Termination
No termination of this Agreement will be effective unless and
until the party terminating this Agreement gives prior written
notice to the other party to this Agreement of its intent to
terminate, and such notice shall set forth the basis for such
termination. Furthermore,
(a) in the event that any termination is based upon the provisions
of Section 9.1(a) hereof, such prior written notice shall be
given at least one hundred eighty (180) days in advance of the
effective date of termination as required by such provision;
(b) in the event that any termination is based upon the provisions
of Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least ninety (90) days in advance of
the effective date of termination;
(c) in the event that any termination is based upon the provisions
of Section 9.1(d) hereof, AAL will give at least sixty (60)
days prior written notice to the FUND of the date of any
proposed action to substitute FUND shares, including the
filing of any applicable exemptive application under the 1940
Act relating to the ACCOUNTS; and AAL will provide the FUND
with a copy of any such exemptive application; and
(d) in the event that any termination is based upon the provisions
of Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof,
such prior written notice shall be given as soon as possible
within twenty-four (24) hours after the terminating party
learns of the event causing termination to be required.
9.4 Partial Termination
It is also understood that this Agreement may be terminated with
regard to a specific Portfolio or Portfolios of the FUND, or the
entire FUND at the discretion of the terminating party.
Notwithstanding any termination of this Agreement, the FUND, or
any Portfolio, provided its shares are then available for sale to
any persons, shall at the option of AAL, continue to make
available additional shares of the FUND pursuant to the terms and
conditions of this Agreement, for all Certificates in effect on
the effective date of termination of this Agreement (hereinafter
referred to as "Existing Certificates"). Specifically, without
limitation, the owners of the Existing Certificates shall be
permitted to transfer or reallocate investments under the
Certificates, redeem investments in the FUND and/or invest in the
FUND upon the making of additional purchase payments under the
Existing Certificates.
10. NOTICES
Any notice will be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to AAL: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Woodrow E. Eno, Secretary
If to AAL CMC 222 West College Avenue
Appleton, Wisconsin 54919-0007
Attention: Robert G. Same
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Frederick D. Kelsven, Secretary
<PAGE>
11. MISCELLANEOUS
11.1 This Agreement will be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of
Maryland, where the sale of any FUND share shall be deemed to have
been made; provided, however, that if such laws or any of the
provisions of this Agreement conflict with applicable Provisions
of the 1940 Act, the latter shall control.
11.2 If any provision of this Agreement will be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement will not be effected thereby.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the 1st day of January, 2000.
AID ASSOCIATION FOR LUTHERANS,
AAL VARIABLE ANNUITY ACCOUNT I,
AAL VARIABLE ANNUITY ACCOUNT II AAL VARIABLE PRODUCT SERIES FUND, INC.
AND
AAL VARIABLE LIFE ACCOUNT I
By: /s/John O. Gilbert By: /s/Robert G. Same
-------------------------- ---------------------------
John O. Gilbert Robert G. Same
President and President
Chief Executive Officer
By: /s/Woodrow E. Eno By: /s/Frederick D. Kelsven
-------------------------- ---------------------------
Woodrow E. Eno Frederick D. Kelsven
Senior Vice President, Secretary
Secretary and General Counsel
AAL CAPITAL MANAGEMENT CORPORATION
By: /s/Robert G. Same
--------------------------
Robert G. Same
President
By: /s/Frederick D. Kelsven
--------------------------
Frederick D. Kelsven
Secretary
AMENDED AND RESTATED
PARTICIPATION AGREEMENT
BY AND AMONG
AID ASSOCIATION FOR LUTHERANS
AND
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN
AND
AAL CAPITAL MANAGEMENT CORPORATION
AND
AAL VARIABLE PRODUCT SERIES FUND, INC.,
DATED JANUARY 1, 2000
<PAGE>
TABLE OF CONTENTS
Page
1. Sale of FUND Shares.....................................................3
2. Representations and Warranties..........................................4
3. Prospectus and Proxy Statements: Voting.................................5
4. Sales Material and Information..........................................5
5. Monitoring of Material Irreconcilable Conflicts.........................6
6. Fees and Expenses.......................................................7
7. Diversification.........................................................8
8. Indemnification.........................................................9
9. Term and Termination of This Agreement.................................12
10. Notices................................................................13
11. Miscellaneous..........................................................13
<PAGE>
PARTICIPATION AGREEMENT
This PARTICIPATION AGREEMENT, is made and entered into as of this 1st day
of January, 2000, by and among AID ASSOCIATION FOR LUTHERANS ("AAL"), on its own
behalf and as plan sponsor of the Aid Association for Lutherans Savings Plan and
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN (the "PLAN"), AAL CAPITAL MANAGEMENT
CORPORATION ("AAL CMC"), and AAL VARIABLE PRODUCT SERIES FUND, INC. (the
"FUND"), (collectively the "Parties").
WITNESSETH:
WHEREAS, AAL is a fraternal benefit society organized under the laws of the
State of Wisconsin engaged in the writing of life insurance, annuity contracts,
and other insurance products, and serves as plan sponsor of the;
WHEREAS, the PLAN is a qualified retirement plan established under Section
401(k) of the Internal Revenue Code by AAL for the benefit of its employees and
the employees of its subsidiaries and affiliates;
WHEREAS, the FUND, is registered with the Securities and Exchange
Commission (the "SEC"), as a diversified, open-end management investment company
under the Investment Company Act of 1940 (the "1940 Act"), and its shares are
registered with the SEC under the Securities Act of 1933 (the "1933 Act");
WHEREAS, the FUND is a series company, meaning its Board of Directors may
designate various series ("Portfolios") into which the FUND's authorized shares
are to be divided from time to time, with each such Portfolio consisting of a
specific number of the FUND's authorized shares, representing an interest in a
separate portfolio of securities and other assets, and having its own investment
objectives, policies and restrictions;
WHEREAS, to the extent permitted by applicable insurance, tax, ERISA, and
other laws and regulations, the PLAN intends to purchase shares in the FUND on
behalf of the PLAN's participants, and the FUND is authorized to sell such
shares to the PLAN at net asset value;
WHEREAS, the FUND has entered into an Investment Advisory Agreement with
AAL CMC, dated the 1st day of January, 2000, as amended, wherein AAL CMC has
agreed to serve as investment adviser to the FUND, and to accept certain
obligations of the FUND as set forth herein, i.e., to compute the daily net
asset value and the net asset value per share for each Portfolio and to comply
with Subchapter M and Section 817(h) of the Internal Revenue Code of 1986 (the
"Code"), as amended;
NOW, THEREFORE, in consideration of the covenants and mutual promises
contained herein, and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby acknowledged, and intending to be legally
bound hereby, the Parties agree as follows:
1. SALE OF FUND SHARES
1.1 The PLAN will provide for the allocation of net amounts among
certain Portfolios as may be offered from time to time in the
PLAN's document. The selection of the particular Portfolio is to
be made by the Plan Participant, and such selection may be changed
in accordance with the terms of the PLAN's document.
1.2 The FUND will sell to the PLAN those shares of each available
Portfolio that the PLAN administrator or its delegate orders based
on authorizations from its participants, effecting such orders on
a daily basis at the Portfolio's net asset value per share next
computed as provided in the FUND prospectus.
1.3 The Board of Directors of the FUND (the "Board") may refuse to
sell shares of any Portfolio to the PLAN, or suspend or terminate
the offering of shares of any Portfolio, if such action is
required by law or by regulatory authorities having jurisdiction
or is, in the sole discretion of the Board, acting in good faith
and in light of their fiduciary duties under federal and any
applicable state laws, necessary in the best interests of the
shareholders of the FUND.
1.4 The FUND agrees that its shares will be sold only to: (a) AAL, on
its own behalf and on behalf of separate accounts that it
maintains to fund variable annuity contracts and variable life
insurance contracts of AAL; (b) other life insurance companies;
whether affiliated or unaffiliated with AAL, on behalf of separate
accounts funding variable annuity contracts and variable life
insurance contracts of such other insurance companies; (c) the
PLAN; and (d) other qualified pension or retirement plans. AAL
separate accounts and separate accounts of other life insurance
companies eligible to purchase shares of the FUND are referred to
in this Agreement as "Separate Accounts," and the PLAN and other
qualified pension and or retirement plans eligible to purchase
shares of the FUND are referred to together in this Agreement as
"Qualified Plans." No shares of any Portfolio will be sold to the
general public or to any life insurance company on its own behalf
(as opposed to a Separate Account it maintains) other than AAL.
1.5 The FUND will redeem for cash from the PLAN those full or
fractional shares of each Portfolio that the PLAN requests based
on transactions of the PLAN's participants, effecting such
requests on a daily basis at the Portfolio's net asset value per
share next computed as provided in the FUND prospectus.
1.6 Issuance and transfer of the FUND's shares will be by book entry
only. Stock certificates will not be issued to the PLAN. Shares
ordered from the FUND will be recorded in an appropriate title for
the PLAN.
1.7 The FUND shall furnish notice promptly to the PLAN administrator
or its delegate of any income, dividends or capital gain
distributions payable on the shares of any Portfolio. The PLAN
hereby elects to receive all such income, dividends and capital
gain distributions as are payable on FUND shares in additional
shares of that Portfolio. The PLAN reserves the right to revoke
this election and to receive all such income, dividends and
capital gain distributions in cash. The FUND shall notify the PLAN
administrator or its delegate of the number of shares so issued as
payment of such income, dividends and distributions.
1.8 The FUND shall make the net asset value per share for each
applicable Portfolio available to PLAN on a daily basis, as soon
as reasonably practical after the net asset value per share is
calculated.
1.9 The FUND may establish additional Portfolios to provide additional
funding media for the PLAN, or delete, combine, or modify existing
Portfolios. The shares of any additional Portfolio may be made
available to the PLAN by the FUND, pursuant to the terms of this
Agreement, and any applicable reference to any Portfolio, the FUND
or its shares herein shall include a reference to any such
Portfolio.
2. REPRESENTATIONS AND WARRANTIES
2.1 AAL represents and warrants that it is a fraternal benefit society
organized under the laws of the State of Wisconsin and engaged in
the writing of life insurance, annuity contracts, and other
insurance products; that it has legally and validly established
its PLAN as a qualified retirement plan under section 401(k) of
the Internal Revenue Code of 1986, as amended. AAL has applied for
and received a valid determination letter from the Internal
Revenue Service for the PLAN. The PLAN complies with the Employee
Retirement Income Security Act of 1974 and all relevant federal
and state statutory provisions.
2.2 The FUND represents and warrants that its shares sold pursuant to
this Agreement are or will be registered under the 1933 Act to the
extent required by the 1933 Act, duly authorized for issuance and
sold in compliance with the laws of the state of Maryland and all
applicable federal securities laws and that the FUND is or will be
registered under the 1940 Act to the extent required by the 1940
Act. The FUND will amend the registration statement for its shares
under the 1933 Act, as well as its registration statement under
the 1940 Act, as required in order to effect the continuous
offering of its shares. The FUND will register or qualify the
shares for sale in accordance with the laws of the various states
only if and to the extent deemed advisable by the FUND.
2.3 The FUND represents and warrants that each of its Portfolios will
qualify as a regulated investment company under Subchapter M of
the Code and that the investments of each of its Portfolios will
comply with the diversification requirements of Section 817(h) of
the Code and the regulations thereunder, and that it will notify
the PLAN immediately upon having a reasonable basis for believing
that it has ceased to so qualify or that it might not so qualify
in the future.
3. PROSPECTUS AND PROXY STATEMENTS: VOTING
3.1 The FUND will provide the PLAN administrator or its delegate with
current FUND prospectus, statement of additional information and
any supplement thereto in a manner so as to allow the PLAN
administrator or its delegate to timely distribute the current
FUND prospectus, SAI and any supplement thereto, to each current
and prospective PLAN participant.
3.2 The FUND will provide a final copy of any proxy material, report
to shareholders, and other communication to shareholders to the
PLAN administrator or its delegate in a timely manner.
3.3 The FUND reserves the right to take all actions, including but not
limited to the dissolution, merger, and sale of all assets of the
FUND solely upon the authorization of its Board and/or
shareholders as required by the 1940 Act.
3.4 The PLAN will vote Portfolio shares in accordance with the terms
of the PLAN documents.
4. SALES MATERIAL AND INFORMATION
4.1 The PLAN administrator or its delegate will furnish, or will cause
to be furnished, to the FUND or its designee, each piece of sales
literature or other promotional material in which the FUND, or the
PLAN is named, at least fifteen (15) days prior to its intended
use. No such material will be used if the FUND or its designee
objects to such intended use within fifteen (15) days after
receipt of such material.
4.2 The PLAN will not give any information or make any representation
or statement, or cause such information to be given or
representation to be made, on behalf of the FUND or concerning any
Portfolio in connection with the sale of FUND shares other than
the information or representations contained in the registration
statement, prospectus, and SAI for FUND shares, as such
registration statement, prospectus, and SAI may be amended or
supplemented from time to time, or in reports or proxy materials
for the FUND, or in sales literature or other promotional material
approved by the FUND or its designee, except with the permission
of the FUND or its designee.
4.3 The FUND or its designee will furnish, or will cause to be
furnished, to the PLAN administrator or its delegate, each piece
of sales literature or other promotional material of the FUND in
which the PLAN is named, at least fifteen (15) days prior to its
intended use. No such material will be used if the PLAN
administrator or its delegate objects to such intended use within
fifteen (15) days after receipt of such material.
4.4 The FUND will not give any information or make any representations
or statements, or cause such information to be given or
representations to be made, on behalf of or concerning the PLAN
other than the information or representations contained in a
registration statement or prospectus, as such registration
statement and prospectus may be amended or supplemented from time
to time, or in published reports for the PLAN that are in the
public domain or approved by the PLAN administrator or its
delegate for distribution to PLAN Participants, or in sales
literature or other promotional material approved by the PLAN
administrator or its delegate, except with the permission of the
PLAN administrator or its delegate.
4.5 The FUND will provide to the PLAN one complete copy of all
registration statements, prospectuses, SAI's, reports, proxy
material, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the FUND or its
shares, contemporaneously with the filing of such document with
the SEC or other regulatory authorities.
4.6 The PLAN will provide to the FUND one complete copy of all
reports, sales literature and other promotional material,
applications for exemptions, requests for no-action letters, and
all amendments to any of the above, that relate to the PLAN and
the FUND, contemporaneously with the filing of such document with
the SEC, IRS or other regulatory authorities.
5. MONITORING OF MATERIAL IRRECONCILABLE CONFLICTS
5.1 The FUND's Board of Directors will monitor the FUND for the
existence of any materials irreconcilable conflict between and
among the interests of the Certificateholders of the Separate
Accounts investing in the FUND and the participants of the PLAN,
and any other Qualified Plans investing in the FUND. A material
irreconcilable conflict may arise for a variety of reasons,
including: (a) action by any state insurance regulatory authority;
(b) a change in applicable federal or state insurance, tax or
securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretive letter, or any similar action by
insurance, tax or securities regulatory authorities; (c) an
administrative or judicial decision in any relevant proceeding;
(d) the manner in which the investment of the FUND are being
managed; (e) a difference in voting instructions given by variable
annuity Certificateholders and variable universal life
Certificateholders of the Separate Accounts vis-a-vis voting
instructions provided by the trustees of the Qualified Plans; (f)
a decision by AAL or another life insurance company to disregard
the voting instructions of Certificateholders in one or more of
the Separate Accounts; or (g) if applicable, a decision by the
trustee of a Qualified Plan to disregard the voting instructions
of the participants of such Qualified Plan. A determination by the
FUND's Board that a material irreconcilable conflict exists will
be a final determination.
5.2 If it is determined by a majority of the FUND's Board, or by a
majority of its disinterested directors, that a material
irreconcilable conflict exists, the PLAN shall, at its expense and
to the extent reasonably practicable (as determined by a majority
of the disinterested directors of the FUND), take whatever steps
are necessary to remedy or eliminate the material irreconcilable
conflict. Such steps could include withdrawing the assets
allocable to the PLAN from the FUND or any Portfolio of the FUND
(but no charge or penalty shall be imposed as a result of
withdrawal) and reinvesting such assets in a different investment
medium, which could include another Portfolio of the FUND.
5.3 The PLAN is responsible, to the extent permitted by applicable
law, for taking remedial action in the event that the FUND's Board
determines a material irreconcilable conflict exists. The PLAN
will take remedial action only as it pertains to PLAN assets and
in accordance with its fiduciary responsibility to the PLAN
participants. The PLAN will be responsible for the cost of any
such remedial action. For the purposes of this Section, a majority
of the disinterested members of the FUND's Board will determine
whether or not any proposed action adequately remedies any
material irreconcilable conflict. In no event shall the FUND or
AAL be required to establish a new Portfolio or new funding medium
for any variable annuity or variable universal life contract. The
PLAN will not be required by this Section to establish a new
funding medium if (a) a majority of its participants materially
and adversely affected by the irreconcilable material conflict
vote to decline such offer or (b) pursuant to the PLAN's documents
and applicable law, the PLAN makes such decision without a vote of
its participants.
5.4 The FUND's Board determination of the existence of a material
irreconcilable conflict and its implications will be made known
promptly and in writing to the PLAN administrator.
5.5 All reports of potential or existing conflicts received by the
FUND's Board and all Board actions with regard to, or determining
the existence of, a conflict of interest, notifying the PLAN of a
conflict, and determining whether any proposed action adequately
remedies a conflict, will be properly recorded in the minutes of
the FUND's Board or other appropriate records, and such minutes or
other records will be made available to the SEC upon request.
5.6 The FUND will disclose in its prospectus that (a) shares of the
FUND may be offered to both Separate Accounts and to Qualified
Plans; (b) material irreconcilable conflicts may arise between the
interest of various Certificateholders investing in the Separate
Accounts and the interests of Qualified Plans participants
investing in the FUND; and (c) the FUND's Board will monitor
events in order to identify the existence of any material conflict
and determine what action, if any, should be taken in response to
such material irreconcilable conflict.
5.7 No less than annually, the PLAN will submit to the FUND's Board
such reports, materials and data as the Board may reasonably
request so that the Board may carry out fully its obligations
under this Section. Such reports, materials and data will be
submitted more frequently if deemed appropriate by the FUND's
Board. In any event, the PLAN promptly will notify the FUND's
Board in writing if it becomes aware of any facts or circumstances
that could give rise to a material irreconcilable conflict between
the interests of various Certificateholders in the Separate
Accounts and the interests of the Qualified Plan participants
investing in the FUND. All reports submitted to the FUND's Board
under this Section 5.7 shall include all information reasonably
necessary for the Board to consider the conflict issues raised. In
this regard, if the PLAN documents ever permit pass-through voting
to plan participants, the PLAN promptly shall notify the FUND's
Board whenever the PLAN trustee has determined to disregard PLAN
participant voting instructions on any matter submitted to a vote
of shareholders of the FUND.
6. FEES AND EXPENSES
6.1 The FUND will pay all expenses incident to the FUND's performance
under this Agreement. In addition to the investment advisory fee,
subject to the expense reimbursement arrangement discussed below,
each Portfolio will bear all of its operating expenses that are
not specifically assumed by AAL, including the following: (i)
interest and taxes (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses for those Directors who
are not "interested" persons under Section 2(a)(19) of the Act;
(v) independent legal and audit expenses; (vi) fees and expenses
of the FUND's custodian, shareholder servicing or transfer agent
and accounting services agent; (vii) expenses incident to the
issuance of its shares, including stock certificates and issuance
of shares on the payment of, or reinvestment of dividends; (viii)
fees and expenses incident to the registration under Federal or
state securities laws of the FUND or its shares; (ix) FUND or
portfolio organizational expenses; (x) FUND expenses of preparing,
printing and mailing reports and notices, proxy material and
prospectuses to shareholders of the FUND; (xi) all other expenses
incidental to holding meetings of the FUND's shareholders; (xii)
dues or assessments of or contributions to the Investment Company
Institute or any successor or other industry association; (xiii)
such non-recurring expenses as may arise, including litigation
affecting the FUND and the legal obligations which the FUND may
have to indemnify its officers and Directors with respect thereto;
and (xiv) cost of daily valuation of each of the Portfolio's
securities and net asset value per share.
6.2 AAL will pay all expenses incident to AAL's performance under this
Agreement. In addition, AAL will pay for all expenses for the
printing and distribution to the PLAN administrator or its
delegate the FUND proxy materials, proxy cards and voting
instructions forms (collectively "proxy information"), tabulating
the results of proxy solicitations, printing and distributing to
the PLAN administrator or its delegate the FUND prospectus, SAI,
supplements, proxy materials, report to shareholders and other
communication to shareholders.
6.3 The PLAN will pay all expenses incident to the PLAN's performance
under this Agreement. In addition, the PLAN will bear any expenses
associated with administration of the PLAN.
7. DIVERSIFICATION
7.1 The Portfolios will be invested in accordance with the terms of
the FUND's prospectus and the PLAN document. Without limiting the
scope of the foregoing, the Portfolios will at all times comply
with Section 817(h) of the Code and Treasury Regulations Section
1.817-5 relating to the diversification requirements for
segregated asset accounts and any amendments or other
modifications to such Section or Regulations.
7.2 The FUND shall furnish to the PLAN, on a regular basis, reports of
all of the investments of each Portfolio in a form sufficient to
permit the PLAN to determine whether each Portfolio is in
compliance with the diversification requirements of Section 817(h)
of the Code and the Regulations thereunder and shall take
immediate action, on learning through its own monitoring, or on
advice from AAL or the PLAN, that any Portfolio is not in
compliance with such requirements, to return to compliance with
such requirements.
7.3 If any Portfolio is found not to comply with the diversification
requirements at the end of a calendar quarter and the 30-day grace
period allowed under the Regulations, the FUND shall take all
appropriate efforts immediately to restore any such Portfolio to
compliance and shall fully cooperate with the PLAN in any effort
to correct such diversification failure under procedures
established by the Internal Revenue Service, including those set
forth in Revenue Procedure 92-25.
8. INDEMNIFICATION
8.1 Indemnification by AAL, as PLAN Sponsor
(a) AAL, as PLAN sponsor, will indemnify and hold harmless the
FUND and each of its Directors, officers, and employees and
each person, if any, who controls the FUND (collectively, the
"Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent
of AAL and the PLAN), or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, and
which:
(i) arise out of or are based upon any failure by the PLAN or
AAL to perform the duties or assume the general business
responsibilities of the PLAN with respect to the design,
drafting, federal approvals, issuance, servicing and
administration of the PLAN, or the establishment and
maintenance of the PLAN; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the registration statement, prospectus, or SAI
regarding the PLAN, or contained in the sales literature
for the PLAN (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the
statements therein not misleading, provided that this
Agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
AAL or the PLAN by or on behalf of the FUND for use in the
registration statement, prospectus, or SAI for the PLAN or
in the PLAN or sales literature (or any amendment or
supplement) or otherwise for use in connection with the
sale of the FUND shares to PLAN participants; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the PLAN,
or persons under its control), or wrongful conduct of the
PLAN or persons under its control, or failure to supervise
persons under AAL's or the PLAN's control or entities or
individuals with which the PLAN contracts, with respect to
the sale or distribution of the FUND shares to PLAN
participants; or
(iv)arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the FUND by or on behalf of AAL;
or
(v) arise out of or result from any failure by AAL or the PLAN
to provide the services and furnish the materials
contemplated by this Agreement; or
(vi)arise out of or result from any material breach of any
representation and/or warranty made by AAL: in this
Agreement or arise out of or result from any other
material breach of this Agreement by AAL or the PLAN, as
limited by and in accordance with the provisions of
Sections 8.1(b). and 8.1(c) hereof.
(b) AAL will not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or
litigation to which an Indemnified Party would be subject by
reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this
Agreement or to the FUND, whichever is applicable.
(c) AAL will not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party
unless such Indemnified Party shall have notified the AAL in
writing within a reasonable time after the summons or other
first legal process giving information of the nature of the
claim shall have been served upon such Indemnified Party (or
after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify
AAL of any such claim will not relieve AAL from any liability
that it may have to the Indemnified Party against whom such
action is brought otherwise than on account of this
indemnification provision. In case any such action is brought
against the Indemnified Parties, the AAL and or the PLAN shall
be entitled to participate, at its own expense, in the defense
thereof. AAL also will be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the
action. After notice from AAL to such party of the AAL's
election to assume the defense thereof, the Indemnified Party
will bear the fees and expenses of any additional counsel
retained by it, and AAL will not be liable to such party under
this Agreement for any legal or other expenses subsequently
incurred by such party independently in connection with the
defense thereof other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the AAL of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
8.2 Indemnification by the FUND
(a) The FUND will indemnify and hold harmless the PLAN and each of
its directors, officers and employees and each person, if any,
who controls the PLAN (collectively, the "Indemnified Parties"
for purposes of this Section 8.2) against any and all losses,
claims, damages, liabilities (including amounts paid in
settlement with the written consent of FUND) or litigation
(including legal and other expenses) to which the Indemnified
Parties may become subject under any statute, regulation, at
common law or otherwise, which:
(i) arise out of or are based upon any failure by the FUND to
perform the duties or assume the general business
responsibilities required by this Agreement with respect
to the sale of shares of the FUND to the PLAN; or
(ii) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained
in the sales literature for the FUND and/or the
Certificates, or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or necessary
to make the statements therein not misleading, provided
that this agreement to indemnify will not apply as to any
Indemnified Party if such statement or omission or such
alleged statement or omission was made in reliance upon
and in conformity with information furnished in writing to
the FUND by or on behalf of the PLAN for use in the
registration statement, prospectus, or SAI for use in the
sales literature or otherwise for use in connection with
the sale of Portfolio shares; or
(iii) arise out of or are based upon statements or
representations (other than statements or representations
contained in the registration statement, prospectus, SAI,
or sales literature of the FUND not supplied by the FUND,
or persons under its control) or wrongful conduct of the
FUND or persons under its control, or failure to supervise
persons under the FUND's control or entities or
individuals with which the FUND contracts, with respect to
the sale or distribution of the Certificates or FUND
shares; or
(iv) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration
statement, prospectus, or sales literature of the FUND or
any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading if such a statement
or omission was made in reliance upon information
furnished in writing to the PLAN by or on behalf of the
PLAN; or
(v) arise out of or result from any failure by the FUND to
provide the services and furnish the materials
contemplated by this Agreement; or
(vi) arise out of or result from any material breach of any
representation and/or warranty made by the FUND in this
Agreement or arise out of or result from any other
material breach of this Agreement by the FUND, except to
the extent provided in Section 8.2(b) and 8.2(c) hereof.
(b) The FUND will not be liable under this indemnification
provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would
be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such
Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the FUND, whichever is
applicable.
(c) The FUND will not be liable under this indemnification
provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have
notified the FUND in writing within a reasonable time after
the summons or other first legal process giving information of
the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have
received notice of such service on any designated agent), but
failure to notify the FUND of any such claim will not relieve
the FUND from any liability that it may have to the
Indemnified Party against whom such action is brought
otherwise than on account of this indemnification provision.
In case any such action is brought against the Indemnified
Parties, the FUND shall be entitled to participate, at its own
expense, in the defense thereof. The FUND also will be
entitled to assume the defense thereof, with counsel
satisfactory to the party named in the action. After notice
from the FUND to such party of the FUND's election to assume
the defense thereof, the Indemnified Party will bear the fees
and expenses of any additional counsel retained by it, and the
FUND will not be liable to such party under this Agreement for
any legal or other expenses subsequently incurred by such
party independently in connection with the defense thereof
other than reasonable costs of investigation.
(d) The Indemnified Party will promptly notify the FUND of the
commencement of any litigation or proceeding against it or any
of its respective officers or directors in connection with
transactions that are the subject of this Agreement whether or
not indemnification is being sought hereunder.
9. TERM AND TERMINATION OF THIS AGREEMENT
9.1 This Agreement will terminate:
(a) as to any party hereto, at the option of that party, upon
prior written notice to the other party as provided in Section
9.3 herein; or
(b) at the option of the FUND in the event that formal
administrative proceedings are instituted against the PLAN by
the IRS, DOL or any other regulatory body regarding the PLAN's
duties under this Agreement or related to the sale of shares
to PLAN participants, the operation of the PLAN, provided,
however, that the FUND determines, in its sole judgment
exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of the PLAN to perform its obligations under this
Agreement; or
(c) at the option of the PLAN in the event that formal
administrative proceedings are instituted against the FUND by
the NASD, the SEC, or any state securities or insurance
commission or any other regulatory body, regarding the FUND's
duties under this Agreement or related to the sale of FUND
shares or the operation of the FUND, provided, however, that
the PLAN determines, in its sole judgment exercised in good
faith, that any such administrative proceedings will have a
material adverse effect upon the ability of the FUND to
perform its obligations under this Agreement; or
(d) at the option of the PLAN, upon requisite authority to
substitute the shares of another investment company for shares
of the FUND in accordance with the PLAN investment policy or
standards of conduct; or
(e) at the option of the PLAN, in the event any of the FUND's
shares are not registered, issued, or sold in accordance with
applicable federal and any state law or such law precludes the
use of such shares as an investment of the PLAN; or
(f) at the option of the PLAN, if the FUND fails to meet the
requirements specified in Section 2.2 or 2.3 hereof; or
(g) at the option of the FUND, if the investments of the PLAN
fail to satisfy the diversification requirements of the Code
and the regulations thereunder, or
(h) at the option of the PLAN, if the FUND dissolves or becomes
otherwise unable to sell shares to fund the PLAN.
9.2 It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 9.1(a) may be
exercised for any reason or for no reason.
9.3 Notice Requirement for Termination. No termination of this
Agreement will be effective unless and until the party terminating
this Agreement gives prior written notice to the other party to
this Agreement of its intent to terminate, and such notice shall
set forth the basis for such termination. Furthermore,
(a) in the event that any termination is based upon the provisions
of Section 9.1(a) hereof, such prior written notice shall be
given at least sixty (60) days in advance of the effective
date of termination as required by such provision;
(b) in the event that any termination is based upon the provisions
of Section 9.1(b) or Section 9.1(c) hereof, such prior written
notice shall be given at least sixty (60) days in advance of
the effective date of termination;
(c) in the event that any termination is based upon the provisions
of Section 9.1(d) hereof, the PLAN will give at least sixty
(60) days prior written notice to the FUND of the date of any
proposed action to substitute FUND shares, including the
filing of any applicable exemptive application under the 1940
Act relating to the PLAN; and the PLAN will provide the FUND
with a copy of any such exemptive application; and
(d) in the event that any termination is based upon the provisions
of Section 9.1(e), Section 9.1(f), or Section 9.1(g) hereof,
such prior written notice shall be given as soon as possible
within twenty-four (24) hours after the terminating party
learns of the event causing termination to be required.
9.4 Partial Termination. It is also understood that this Agreement may
be terminated with regard to a specific Portfolio or Portfolios of
the FUND, or the entire FUND at the discretion of the terminating
party. Notwithstanding any termination of this Agreement, the
FUND, or any Portfolio, provided its shares are then available for
sale to any persons, shall at the option of the PLAN, continue to
make available additional shares of the FUND pursuant to the terms
and conditions of this Agreement, for all PLAN participants who
own FUND shares on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Shares").
Specifically, without limitation, the owners of Existing Shares
shall be permitted to transfer or reallocate investments under
terms of the PLAN, redeem investments in the FUND and/or invest in
the FUND upon the making of additional purchase payments under the
Existing Shares.
10. NOTICES
Any notice will be sufficiently given when sent by registered or certified mail
to the other party at the address of such party set forth below or at such other
address as such party may from time to time specify in writing to the other
party.
If to AAL or the PLAN: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Steven F. Mielke
If to AAL CMC: 222 West College Avenue
Appleton, Wisconsin 54919-0007
Attention: Robert G. Same
If to the FUND: 4321 North Ballard Road
Appleton, Wisconsin 54919-0001
Attention: Robert G. Same
11. MISCELLANEOUS
11.1 This Agreement will be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of
Wisconsin, where the sale of any FUND share shall be deemed to
have been made; provided, however, that if such laws or any of the
provisions of this Agreement conflict with applicable Provisions
of the 1940 Act, the latter shall control.
11.2 If any provision of this Agreement will be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the
Agreement will not be effected thereby.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the 1st day of January, 2000.
AID ASSOCIATION FOR LUTHERANS AAL CAPITAL MANAGEMENT CORPORATION
By: /s/John O. Gilbert By: /s/Robert G. Same
------------------------- -----------------------------
John O. Gilbert Robert G. Same
President and President
Chief Executive Officer
By: /s/Woodow E. Eno By: /s/Frederick D. Kelsven
------------------------- -----------------------------
Woodrow E. Eno Frederick D. Kelsven
Senior Vice President, Secretary
Secretary and General Counsel
AID ASSOCIATION FOR LUTHERANS SAVINGS PLAN
By: /s/Steven F. Mielke
-------------------------
Steven F. Mielke
Benefit Plan Administrative Officer
By: /s/Woodrow E. Eno
-------------------------
Woodrow E. Eno
Senior Vice President,
Secretary and General Counsel
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the 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 26, 2000, in the Registration Statement
(Form N-1A) of the AAL Variable Product Series Fund, Inc., and its incorporation
by reference in the related prospectus and statement of additional information
of AAL Variable Product Series Fund, Inc. filed with the Securities and Exchange
Commission in this Post-Effective Amendment No. 10 to the Registration Statement
under the Securities Act of 1933 (File No. 33-82056) and in this Amendment No.
11 to the Registration Statement under the Investment Company Act of 1940 (File
No. 811-8662).
/s/ ERNST & YOUNG LLP
Milwaukee, Wisconsin
April 18, 2000
CODE OF ETHICS WITH RESPECT TO
SECURITIES TRANSACTIONS OF ACCESS PERSONS
FOR
THE AAL MUTUAL FUNDS
AAL VARIABLE PRODUCT SERIES FUND, INC.
AID ASSOCIATION FOR LUTHERANS
AND
AAL CAPITAL MANAGEMENT CORPORATION
<PAGE>
TABLE OF CONTENTS
PAGE
I. INTRODUCTION ...............................................3
II. DEFINITIONS ...............................................4
III. STATEMENT OF GENERAL PRINCIPLES....................................6
IV. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES......................7
V. EXEMPT TRANSACTIONS ...............................................9
VI. REPORTING REQUIREMENTS OF ACCESS PERSONS.......................... 9
VII. COMPLIANCE MONITORING..............................................11
VIII. REVIEW BY BOARD OF DIRECTORSITRUSTEES..............................11
IX. RECORDS RETENTION ...............................................12
X. CONFIDENTIAL TREATMENT.............................................12
XI. VIOLATIONS OF THIS CODE............................................13
XII. INTERPRETATION OF PROVISIONS.......................................13
XIII. AMENDMENTS TO THE CODE.............................................13
<PAGE>
APPENDIX A
APPENDIX B
APPENDIX C
APPENDIX D
APPENDIX E
APPENDIX F
THREE COMPLIANCE CATEGORIES
PERSONAL TRADING REQUEST AND AUTHORIZATION FORM
QUARTERLY SECURITIES TRANSACTIONS REPORT
INITIAL CERTIFICATION
ANNUAL CERTIFICATION
FINAL CERTIFICATION
<PAGE>
I. INTRODUCITON
Rule 17j-1 (the "Rule") under the Investment Company Act of 1940 (the "1940
Act") requires investment companies, as well as their investment advisers and
principal underwriters, to adopt written codes of ethics containing provisions
reasonably necessary to prevent "Access Persons" from engaging in any act,
practice, or course of business prohibited under the anti-fraud provisions of
the Rule.(1) Pursuant to the requirements of the Rule, The AAL Mutual Funds and
the AAL Variable Product Series Fund, Inc. (together the "Funds") and AAL
Capital Management Corporation and Aid Association for Lutherans (together the
"Advisers") have adopted this Code of Ethics (the "Code") with respect to
securities transactions of the directors/trustees, officers, and certain
employees of the Funds and the Advisers that come within the term "Access
Person," as defined below. To the extent the Funds employ a sub-adviser to
manage any series of the Funds, the provisions of the Code shall apply to the
sub-adviser with respect to the series of the Funds for which it acts as
sub-adviser.
(1) Rule 17j-1 under the 1940 Act provides that it is unlawful for any
affiliated person of or principal underwriter for a registered investment
company, or any affiliated person of such company's investment adviser or
principal underwriter, in connection with any purchase or sale, directly or
indirectly, by such person of a "security held or to be acquired" by such
investment company, to engage in any of the following acts, practices or
courses of business:
A. employ any device, scheme, or artifice to defraud such investment
company,
B. make to such investment company any untrue statement of a material
fact or omit to state to such investment company a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading;
C. engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon any such investment company;
and
D. engage in any manipulative practice with respect to such investment
company.
This Code reflects the principal recommendations in the May 9,1994 Report of the
Investment Company Institute Advisory Group on Personal Investing. It is
intended to provide guidance to access persons of the Funds and the Adviser in
the conduct of their personal investments to eliminate the possibility of
securities transactions occurring that
<PAGE>
place, or appear to place, such persons in conflict with the interests of the
Funds or their shareholders.(2)
(2) Consistent with Section 206 of the Investment Advisers Act of 1940 and
Rules 204-2(a)(12) and (13), and to the extent appropriate, the Access
Persons of the Advisers shall abide by the principles established by this
Code and the specific reporting and other requirements hereof when dealing
with other advisory clients of the Advisers.
Your receipt of this Code for your review and signature means that you
are a person to whom the Code applies. You are required to certify initially,
and annually thereafter, that you have read, understood and complied with this
Code. See Appendices D, E and F.
If you have any questions concerning this Code, please contact the
Compliance Officer ("Compliance Officer").
II. DEFINITIONS.
A. Access Person. "Access Person" means the following:
1. With respect to the Funds and AAL Capital Management Corporation,
any Director/Trustee, officer or "Advisory Person" (see
definition below) of the Funds or AAL Capital Management
Corporation.
2. With respect to Aid Association for Lutherans, any director,
officer, or Advisory Person (as defined below) of Aid Association
for Lutherans who, with respect to any of the Funds, makes any
recommendation, participates in the determination of which
recommendation shall be made, or whose principal function or
duties relate to the determination of which recommendation shall
be made to any of the Funds; or who, in connection with his/her
duties, obtains any information concerning securities
recommendations being made to any of the Funds.
B. Advisory Person. Advisory Person means (a) any employee of the Funds
or the Advisers who, in connection with his/her regular functions or
duties, makes, participates in, or obtains information regarding the
purchase or sale of a security (as defined in II.H. below) by or on
behalf of the Funds, or (b) any employee of the Funds or the Advisers
whose functions relate to the making of any recommendations with
respect to such purchases or sales.
<PAGE>
In the event that any individual or company is in a control
relationship with the Funds or the Advisers, the term "Advisory
Person" includes such individual company, or any employee of such a
company to the same extent as an employee of the Funds or the
Advisers.
THE DIFFERENCES BETWEEN ACCESS PERSONS, ADVISORY PERSONS AND PORTFOLIO
MANAGERS ARE OFTEN CONFUSING. IN AN EFFORT TO CLARIFY THIS SITUATION, PLEASE SEE
APPENDIX A.
C. Beneficial Ownership. Beneficial Ownership has the same meaning as
used in Rule 16a-1(a)(2) under the Securities Exchange Act of 1934,
except that the term applies to both debt and equity securities.
"Beneficial ownership" under Rule 16a-1(a)(2) includes accounts of a
spouse, minor children who reside in an Access Person's home and any
other relatives (parents, adult children, brothers, sisters, etc.)
whose investments the Access Person directs or controls, whether the
person lives with the Access Person or not, as well as accounts of
another person (individual, partner, corporation, trust, custodian, or
other entity) if by reason of any contract, understanding,
relationship, agreement or other arrangement the Access Person obtains
or may obtain therefrom a direct or indirect pecuniary interest. A
person does not derive a direct or indirect pecuniary interest solely
by virtue of serving as a trustee or executor unless he/she or a
member of his/her immediate family has a vested interest in the income
or principal of the trust or estate. A copy of Release No. 34-18114
issued by the Securities and Exchange Commission on the meaning of the
term "beneficial ownership" is available upon request from the
Compliance Officer, and should be reviewed carefully by any Access
Person before preparing any reports required by this Code.
D. Being Considered for Purchase or Sale. A security is Being Considered
for Purchase or Sale when a recommendation to purchase or sell such
security has been made and communicated by an Advisory Person of the
Funds or the Advisers, in the course of his/her duties and, with
respect to the person making the recommendation, when such person
seriously considers making such a recommendation.
E. Control. Control means the power to exercise a controlling influence
over the management and policies of a company, unless such power is
solely the result of an official position with such company.
F. Independent Trustee. The term Independent Director/Trustee means a
director/trustee of the Funds who is not an "interested person" of the
Funds within the meaning of Section 2(a)(19) of the 1940 Act. These
Directors/Trustees have been designated by the Funds.
G. Portfolio Manager. A Portfolio Manager is a person who makes decisions
as to the purchase or sale of portfolio securities of the Funds.
H. Security. "Security" has the same meaning as in Section 2(a)(36) of
the 1940 Act, as well as futures and commodities. Included within the
definition are interests in self-directed retirement plans. Excluded
are interests in independently managed retirement plans. Also excluded
from this definition are shares of registered open-end investment
companies (mutual funds and variable annuities), securities issued
(irrespective of maturity) as direct obligations of the United States
Government, bankers' acceptances, bank certificates of deposit,
commercial paper, and various "money market instruments" (e.g.,
conventional repurchase agreements, U.S. Government agency
obligations, obligations issued or guaranteed by foreign governments)
maturing within 397 calendar days from the date of purchase.
I. Security Transaction. The term Security Transaction means the
execution, either directly or indirectly, of any purchase or sale of a
security.
J. Security Held or to be Acquired by the Funds. Security Held or to be
Acquired by the Funds means:
1. Any Security which, within the most recent 15 days:
a. Is or has been held by the Funds; or
b. Is Being Considered for Purchase or Sale by the Adviser for
the Funds; and
2. Any option to purchase or sell, and any Security convertible into
or exchangeable for, a Security.
III. STATEMENT OF GENERAL PRINCIPLES.
The following general fiduciary principles shall govern the personal
investment activities of all Access Persons.
Each Access Person shall adhere to the highest ethical standards and
shall:
A. at all times, place the interests of the Funds before his/her personal
interests;
B. conduct all personal securities transactions in a manner consistent
with this Code, so as to avoid any actual or potential conflicts of
interest, or any abuse of position of trust and responsibility; and
C. not take any inappropriate advantage of his/her position with or on
behalf of the Funds.
Access Persons should follow not only the letter of this Code, but also
its spirit and their transactions will be reviewed for this purpose.
IV. RESTRICTIONS ON PERSONAL INVESTING ACTIVITIES.
A. Preclearance Required for All Securities Transactions. Unless the
transaction is exempt under V. below, no Access Person (other than an
independent Director/Trustee of the Funds) may directly or indirectly,
initiate, recommend, or in any other way participate in the purchase
or sale of a security in which such Access Person has, or by reason of
the transaction may acquire, any direct or indirect beneficial
interest, without first obtaining prior written clearance for such
transaction from the Compliance Officer. When requesting preclearance,
each Access Person should be aware that:
1. all requests for preclearance must be set forth in writing on the
standard Personal Trading Request and Authorization Form, a copy
of which is attached as Appendix B.
2. preclearance of a securities transaction is effective for the day
of clearance and the next three business days.
B. Timing of Purchases and Sales (Blackout Periods). Unless the
transaction is exempt under V. below, no Access Person (other than an
independent Director/Trustee of the Funds) may (I) execute a
Securities Transaction on a day during which the Funds have a pending
"buy" or "sell" order in that same Security, until that order has been
executed or withdrawn, or (ii) purchase or sell any Security in which
he/she has, or by reason of such transaction acquires, any direct or
indirect beneficial ownership, in a Security being considered for
purchase or sale by the Funds. Additionally, no Portfolio Manager may
purchase or sell as beneficial owner any Security within at least
seven calendar days before and after the Funds trade (or haves traded)
in that Security.
A Security is not deemed to be Being Recommended for Purchase or Sale
if it is (1) a component of an index or model which a portfolio of the AAL
Variable Product Series Fund is designed to reflect unless the determination as
to whether to add or delete the Security is within the discretion of an Advisory
Person of the Fund; and (2) the Security is not Being Recommended for Purchase
or Sale by any of the other Funds. In each case, a determination as to whether a
Security is or is not deemed to be Being Recommended for Purchase or Sale will
be made by the Compliance Officer.
The foregoing blackout periods shall not apply to a transaction
following written preclearance by the Compliance Officer as to a Security
purchased or sold by a Fund modeled on an index of Securities and which Fund
transaction is made for the purpose of maintaining existing index weightings
within the Fund.
C. Short-Term Trading Profits. Short term trading by Advisory Persons
shall be looked upon with disfavor. All sales and purchases (or
purchases and sales) of the same or equivalent securities within 60
calendar days by an Advisory Person shall be reported to the Funds'
Board of Directors/Trustees.
D. Initial Public Offerings. No Access Person may acquire any Beneficial
Ownership in any Securities in an initial public offering.
E. Gifts. No Advisory Person may receive any gift or anything else of
more than $100 value within any calendar year from any person, entity
or person affiliated with an entity that does business with or on
behalf of the Funds. Business related entertainment such as meals,
tickets to the theater or a sporting activity or event which are
infrequent and not unreasonable in nature are excepted from this
prohibition.
F. Private Placements. With regard to private placements, each Advisory
Person shall:
1. obtain express prior written approval from the Compliance Officer
(who, in making such determination, shall consider among other
factors, whether the investment opportunity should be reserved
for the Funds, and whether such opportunity is being offered to
such Advisory Person by virtue of his position with the Funds)
for any acquisition of Securities in a private placement; and,
2. if and after such authorization to acquire Securities in a
private placement has been obtained, disclose any personal
involvement any subsequent consideration by the Funds (or any
other investment company for which he acts in a capacity as an
Advisory Person) of investment in that issuer arises.
If the Funds decide to purchase Securities of an issuer the shares of
which have been previously obtained in a private placement for personal
investment by an Advisory Person, that decision shall be subject to an
independent review by the independent Directors/Trustees with no personal
interest in the issuer.
G. Service as a Director. No Advisory Person shall serve on a board of
directors of a publicly traded company, absent prior written
authorization by the Board of Directors/Trustees of the Funds, based
upon a determination that such service would be consistent with the
interests of the Funds.
If board service of an Advisory Person is authorized by the Board of
Directors/Trustees of the Funds, such Advisory Person shall be isolated from the
investment making decisions of the Funds with regard to Securities of the
company on whose board the advisory person serves.
H. Confidentiality. No Access Person shall reveal to any other person
(except in the normal course of his/her duties on behalf of the Funds
or the Advisers) any information regarding securities transactions
made, or being considered, by or on behalf of the Funds.
V. EXEMPT TRANSACTIONS.
The prohibitions described in IV.A and B above shall not apply to:
A. purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control, or in any
account of the Access Person which is managed on a discretionary basis
by a person other than the Access Person and, with respect to which
the Access Person does not in fact influence or control purchase or
sale transactions;
B. purchases or sales that are non-volitional on the part of the Access
Person or the Funds, including mergers, recapitalization or similar
transactions;
C. purchases that are part of an issuer's or broker's automatic dividend
reinvestment plan;
D. purchases effected upon the exercise of rights issued by the issuer
pro rata to all holders of a class of its Securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired; and
E. purchases or sales that receive the prior approval of the Compliance
Officer on the basis that (a) the transaction is not potentially
harmful to the Funds, (b) the transaction would be unlikely to affect
the market in which the portfolio securities for the Funds are traded,
or (c) the transaction is not related economically to the Securities
to be purchased, sold, or held by the Funds and the decision to
purchase or sell the Security is not the result of material non-public
information. As noted above, prior approval must be set forth in
writing on the Personal Trading Request and Authorization Form
(APPENDIX B).
VI. REPORTING REQUIREMENTS OF ACCESS PERSONS.
A. Certification. All Access Persons shall, when they first become
subject to the Code, no less often than annually thereafter and when
they change status or terminate employment, certify, in writing, that
they understand that they are/have been subject to the Code, will/have
complied with the Code, and will cooperate with any inquiry regarding
their personal trading activities by the Funds, the Advisers or the
Compliance Officer.
B. Access Persons (other than Independent Director/Trustees of the
Funds). Every Access Person (except independent Directors/Trustees of
the Funds) shall complete and submit a Quarterly Report to the
Compliance Officer which discloses the information required by VI.D.
below with respect to transactions in any Security in which such
Access Person has, or by reason of such transaction, acquires any
direct or indirect Beneficial Ownership in the Security.
C. Independent Directors/Trustees. An independent Director/Trustee of the
Funds shall report a transaction in a Security if the
Director/Trustee, at the time of the transaction, knew or, in the
ordinary course of fulfilling his/her official duties as a
Director/Trustee of the Funds, should have known that, during the
15-day period immediately preceding or after the date of the
transaction by the Director/Trustee, the Security is or was purchased
or sold by the Funds or was Being Considered for Purchase or Sale.
The foregoing provision as to a Security Being Considered for Purchase
or Sale shall not apply with respect to a Security merely because it is a
component of an index or model which a series or portfolio of the Funds is
designed to reflect.
D. Time and Content of Quarterly Report. Every Quarterly Report shall be
provided to the Compliance Officer not later than ten days after the
end of each calendar quarter, whether or not there has been a
transaction for the quarter. If there has been a transaction for that
period, the Quarterly Report shall contain the following information:
1. the date of the transaction, the name of the issuer, and the
number of shares or the principal amount of the Security
involved;
2. the nature of the transaction, i.e., purchase, sale or any other
type of acquisition or disposition;
3. the price at which the transaction was effected; and
4. the name of the broker, dealer, or bank with or through whom the
transaction was effected.
All reports shall be made on the Quarterly Report form available from
the Compliance Officer, a copy of which is attached as APPENDIX C. In lieu of
the form provided as part of Appendix C, the reporting person may provide copies
of monthly or quarterly brokerage statements reflecting equivalent information.
E. Confirmations. All Access Persons (other than independent
Directors/Trustees of the Funds) shall supply to the Compliance
Officer, on a timely basis, duplicate copies of confirmations of all
personal Securities transactions. These confirms may be provided
directly by the Access Person or through the Brokers. However, it is
the responsibility of the Access Person to ensure that confirms of all
trades are provided to the Compliance Officer.
F. Disclosure of Personal Securities Holdings. All Advisory Persons shall
disclose all personal Securities holdings upon commencement of
employment and thereafter on an annual basis.
G. Disclaimer of Beneficial Ownership. No Quarterly Report shall be
construed as an admission by the person making such report that he/she
has any direct or indirect beneficial ownership in the Security to
which the report relates.
H. Potential Conflicts of Interest. Every Access Person shall immediately
report to the Compliance Officer any factors of which the Access
Person is aware that would be relevant to a conflict of interest
analysis, including the existence of any substantial economic
relationship between the Access Person's transactions and Securities
held or to be acquired by the Funds. These factors may include, for
example, officerships or directorships with issuers or beneficial
ownership of more than 1/2 of 1% of the total outstanding shares of
any issuer whose shares are publicly traded or that may be initially
offered to the public in the foreseeable future.
I. Notification of Reporting Obligation. All Access Persons having a duty
to file Quarterly Reports hereunder shall be informed of such duty by
the Compliance Officer and shall be provided with a copy of this Code.
Once informed of the duty to file a Quarterly Report, an Access Person
has a continuing obligation to file such report, in a timely manner,
whether or not the Access Person had any Securities transactions for
the quarter.
VII. COMPLIANCE MONITORING.
The Compliance Officer shall review all Quarterly Reports,
confirmations, and other materials provided to him/her regarding personal
Securities transactions by Access Persons to ascertain compliance with the
provisions of this Code. The Compliance Officer shall institute any procedures
necessary to monitor the adequacy of such reports and to otherwise prevent or
detect violations of this Code. Upon discovery of a violation of this Code, it
shall be the responsibility of the Compliance Officer to report such violation
to the management of the Advisers, as well as to the Board of Directors/Trustees
of the Funds.
VIII. REVIEW BY BOARD OF DIRECTORS/TRUSTEES.
The Compliance Officer shall regularly (but not less frequently than
annually) furnish to the Board of Directors/Trustees of the Funds a report
regarding the administration of this Code. If any such report indicates that any
change to this Code is advisable, the Compliance Officer shall make an
appropriate recommendation to the Board of Directors/Trustees. The Compliance
Officer also shall inquire into any apparent violation of this Code and shall
report any apparent violation requiring remedial action to the Board of
Directors/Trustees. Upon finding such a violation of this Code, including the
filing of any false, incomplete, or untimely Quarterly Report, or the failure to
obtain preclearance of any personal securities transaction, the Board of
Directors/Trustees may impose any sanction or take such remedial actions as it
deems appropriate. No Director/Trustee shall participate in a determination of
whether he/she has committed a violation of this Code or of the imposition of
any sanction against himself/herself.
IX. RECORDS RETENTION.
The Funds and the Advisers shall maintain records in the manner and to
the extent set forth below, which records may be maintained on an appropriate
electronic or film media under the conditions described in Rule 31a-2(f)(1)
under the 1940 Act:
A. Retention of Copy of Code. A copy of this Code shall be preserved in
an easily accessible place;
B. Record of Violations. A record of any violation of this Code and of
any action taken as a result of such violation shall be preserved in
an easily accessible place for a period of not less than five years
following the end of the fiscal year in which the violation occurs;
C. Copy of Forms and Reports. A copy of each Personal Trading Request and
Authorization Form and each Quarterly Report prepared and filed by an
Access Person pursuant to this Code shall be preserved by the
Compliance Officer for a period of not less than five years from the
end of the fiscal year in which such report is made, the first two
years in an easily accessible place;
D. List of Access Persons. A list of all persons who are, or within the
past five years of business have been, required to file Personal
Trading Request and Authorization Forms and Quarterly Reports pursuant
to this Code shall be maintained in an easily accessible place; and
E. Sites of Records to be Kept. All such records and/or documents
required to be maintained pursuant to this Code shall be kept at the
offices of AAL Capital Management Corporation, to which each of the
Funds and Aid Association for Lutherans shall have access during
normal business hours.
X. CONFIDENTIAL TREATMENT.
All reports and other records required to be filed or maintained under
this Code shall be treated as confidential, except to the extent required by
law.
XI. VIOLATIONS OF THIS CODE.
Violations of this Code may result in the imposition of sanctions or
the taking of such remedial steps as the Funds and/or the Advisers may deem
appropriate, including, but not limited to, unwinding the transaction or, if
impractical, disgorgement of any profit from the transaction, a letter of
censure, reduction in salary, and suspension or termination of employment. No
Director/Trustee or officer of the Funds or the Advisers shall participate in a
determination of whether he/she has committed a violation of this Code or of the
imposition of any sanction against himself/herself.
In addition, the Funds or the Advisers may report any violations to the
appropriate regulatory authority, including the Securities and Exchange
Commission.
XII. INTERPRETATION OF PROVISIONS
The Board of Directors/Trustees of the Funds and management of the
Advisers may, from time to time, adopt such interpretations of this Code as such
Boards or management deems appropriate.
XIII. AMENDMENTS TO THE CODE.
Any amendment to the Code shall be effective 30 calendar days after
written notice of such amendment shall have been received by the Compliance
Officer, unless the Board of Directors/Trustees of the Funds or the management
of the Advisers, as appropriate, expressly determines that such amendment shall
become effective on another specific date or shall not be adopted.
CODE OF ETHICS
Three Compliance Categories
ACCESS PERSONS-obtain (have "access" to) information about a fund's purchase or
sale of securities in the course of their normal work. Everyone who is subject
to the Code of Ethics is an Access Person and every Access Person is subject to
the Code of Ethics.
ADVISORY PERSONS-are involved in the decision making process but do not make the
final decision (typically traders & investment analysts).
PORTFOLIO MANAGERS-make the investment decisions for the Funds.
<PAGE>
CODE OF ETHICS
Restrictions on Personal Investing
ACCESS PERSONS REQUIREMENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
(IV.A) (IV.B) (IV.D) (VI.E) (VI.B & D) (IV.H) (VI.H) (VI.A)
Preclearance of Blackout IPO prohibition Copies of B/D Quarterly Confidentiality Conflict of Initial, Annual
securities Periods confirms to Reports except in normal Interest and Final
transactions Compliance of securities course Situations Certification
Officer transactions of business
Compliance Officer
Request in writing Total Prohibition Officer
Access person can't Completed Quarterly
buy/sell a security Reports Due to
on any day that the Compliance Officer
Fund buys/sells it. by 10th day
following each
calendar quarter
Approval in writing
Clearance day plus 3
business day approval
period
</TABLE>
<PAGE>
CODE OF ETHICS
Restrictions on Personal Investing
ADDITIONAL ADVISORY PERSONS REQUIREMENTS
<TABLE>
<CAPTION>
<S> <C> <C>
(IV.C) (IV.E) (IV.F)
Short-term profits w/in 60 days Gift prohibition Private Placements
Report to Board $100 cap on gifts, etc. from any Requires prior written approval
person doing business with or on
behalf of the investment company
If prior approval given, disclosure
requirements for that issuer in
future considerations
Disinterested Trustee review
needed if Fund considers buying
above security
</TABLE>
(IV.G) (VI.E)
Director of publicly traded Annual Disclosure of securities
company holdings
Must have prior written approval
of Fund Trustees
<PAGE>
CODE OF ETHICS
Restrictions on Personal Investing
ADDITIONAL PORTFOLIO MANAGERS REQUIREMENTS
(VI.B)
Blackout
Periods
Portfolio Manager cannot buy/sell
within 7 days either side of a Fund
trade (15 day window)
<PAGE>
APPENDIX B
PERSONAL TRADING REQUEST AND AUTHORIZATION FORM FOR THE CODES OF ETHICS FOR THE
AAL MUTUAL FUNDS, THE AAL VARIABLE PRODUCT SERIES FUND, INC., AID ASSOCIATION
FOR LUTHERANS, AND AAL CAPITAL MANAGEMENT CORPORATION
PERSONAL TRADING REQUEST (TO BE COMPLETED PRIOR TO ANY PERSONAL TRADE):
1. Name:
2. Phone ext:
3. Position:
4. Date of proposed transaction:
5. Name of the issuer and dollar amount and number of Securities of the issuer
proposed to be purchased or sold:
6. Nature of transaction (i.e., purchase, sale): (1)
7. Are you or is a member of your immediate family an officer or director of
the issuer of the Securities or any affiliate (2) of the issuer? Yes No
If yes, please describe:
8. Describe the nature of any direct or indirect professional or business
relationship that you may have with the issuer of the Securities: (3)
(1) If other than a market order, please describe any proposed limits.
(2) For purposes of this question, "affiliate" includes (I) any entity that
directly or indirectly owns, controls, or holds with power to vote 5% or
more of the outstanding voting Securities of the issuer and (ii) any entity
under common control with the issuer.
(3) A "professional relationship" includes, for example, the provision of legal
counsel or accounting services. A "business relationship" includes, for
example, the provision of consulting services or insurance coverage.
9. Are you aware of any material non-public information regarding the Security
or the issuer? Yes No
10. Does this transaction involve a Private Placement? Yes No
Note:If you marked "yes," and you are an Advisory Person or Portfolio
Manager, you must obtain written approval from the Compliance Officer
before executing the trade.
11. Is the Security being purchased part of an Initial Public Offering?
Yes No
Note:Advisory Persons and Portfolio Managers are prohibited from
participating in Initial Public Offerings.
12. Do you beneficially own more than 1/2 of 1% of the outstanding equity
Securities of the issuer? Yes No
If yes, please report the total number of shares "beneficially owned":
13. Are you aware of any facts regarding the proposed transaction, including
the existence of any substantial economic relationship between the proposed
transaction and any Securities Held or to be Acquired by the Funds or other
managed accounts or affiliates of the Advisers that may be relevant to a
determination as to the existence of a potential conflict of interest? (4)
Yes No
If yes, please describe:
(4) Facts that would be responsive to this question include, for example, the
receipt of "special favors" from a stock promoter, such as participation in
a private placement or initial public offering, as an inducement to
purchase other Securities for the Funds or the Advisers' clients. Another
example would be investment in Securities of a limited partnership that in
turn owned warrants of a company formed for the purpose of effecting a
leveraged buy-out in circumstances where the Funds' or the Advisers'
clients might invest in Securities related to the leveraged buyout. The
foregoing are only examples of pertinent facts and in no way limits the
types of facts that may be responsive to this question.
<PAGE>
14. Do you want to have an executed copy of this request for your files?
Yes No
To the best of my knowledge and belief, the answers provided above are true and
correct.
Signature:
Date:
APPROVAL OR DENIAL OF PERSONAL TRADING REQUEST
[to be completed by Compliance Officer or His/Her Designee]
______ APPROVED. The proposed transaction appears to be consistent with the
policies described in the Code. Preclearance is granted from and
including_______________ through____________.
______ DENIED. The proposed transaction does not appear to be consistent
with the policies described in the Code and/or the conditions
necessary for approval of the proposed transaction have not been
satisfied. Preclearance is denied.
Signed:
Title:
Date:
<PAGE>
APPENDIX C
QUARTERLY SECURITIES TRANSACTIONS REPORT
FOR THE QUARTER ENDED_________________
Reportable Securities Transactions are all Securities transactions of
Access Persons* of the AAL Mutual Funds, AAL Variable Product Series Fund, Inc.,
Aid Association for Lutherans and AAL Capital Management Corporation, regardless
of the size of the Securities transaction; except that it shall not include
shares of registered open-end investment companies (mutual funds and variable
annuities), securities issued as direct obligations of the United States
Government, bankers' acceptances, bank certificates of deposit, commercial
paper, and various money market instruments (e.g. conventional repurchase
agreements, U.S. government agency obligations, obligations issued or guaranteed
by foreign governments) maturing within 397 calendar days from the date of
purchase. In addition, exempt transactions, as described in the Code of Ethics
and interests in independently managed retirement plans need not be reported. A
report must be filed quarterly, by the tenth day after the end of each calendar
quarter, whether or not you have had any Securities Transactions for the prior
quarter. Each report must cover all accounts in which you have a direct or
indirect Beneficial Ownership* interest (unless you have no influence or control
over such accounts) and all non-Adviser accounts that you manage or with respect
to which you give investment or voting advice.
I [check one] had ______ had no ______ reportable securities
transactions during the above quarter. Please describe all reportable securities
transactions on the following page. Copies of individual confirmations or
monthly or quarterly broker statements may be attached to a signed report in
lieu of setting forth the information required on the following page. Use
additional copies of this form if necessary.
To the best of my knowledge and belief, the answers set out in this
Report are true and correct.
Printed Name:
Signature:
Date:
* The terms "Access Person" and "Beneficial Ownership" are defined in the
Code.
<PAGE>
REPORTABLE SECURITIES TRANSACTIONS**
1. Date of transaction:
2. Name of the issuer and dollar amount or number of securities of the issuer
purchased or sold:
3. Nature of transaction (i.e., purchase, sale, or other type of acquisition
or disposition):
4 Price at which the transaction was effected:
5. Name of broker, dealer, or bank with or through whom the transaction was
effected:
** This Report shall not be construed as an admission by the person making
such Report that he or she has any direct or indirect beneficial interest
in the security or securities to which the Report relates.
<PAGE>
APPENDIX D
INITIAL CERTIFICATION
I hereby certify that I (I) have read and understand the Code of Ethics
of The AAL Mutual Funds, AAL Variable Products Series Fund, Inc., Aid
Association for Lutherans, and AAL Capital Management Corporation, dated January
1,1997; (ii) recognize that I am subject to the Code of Ethics as of
_______________________; and (iii) will cooperate with any inquiry regarding my
personal trading activities by the Funds, the Advisers or the Compliance
Officer.
Signed:
Name:
Date:
<PAGE>
APPENDIX E
ANNUAL CERTIFICATION
I hereby certify that I (I) have read and understand the Code of Ethics
of The AAL Mutual Funds, AAL Variable Products Series Fund, Inc., Aid
Association for Lutherans and AAL Capital Management Corporation, dated January
1,1997 (ii) recognize that I am subject to the Code of Ethics, (iii) have
complied with the requirements of the Code of Ethics over the past year, (iv)
have disclosed all personal Securities transactions, over the past year,
required to disclosed by the Code of Ethics, and (v) will cooperate with any
inquiry regarding my personal trading activities by the Funds, the Advisers or
the Compliance Officer.
Signed:
Name:
Date:
<PAGE>
APPENDIX F
FINAL CERTIFICATION
I hereby certify that I (I) have read and understand the Code of Ethics
of The AAL Mutual Funds, the AAL Variable Products Series Fund, Inc., Aid
Association for Lutherans and AAL Capital Management Corporation, dated January
1,1997 (ii) recognize that I am subject to the Code of Ethics, (iii) have
complied with the requirements of the Code of Ethics over the past year, (iv)
have disclosed all personal Securities transactions, over the past year,
required to disclosed by the Code of Ethics, and (v) will no longer be subject
to the Code of Ethics after _______________________ (date of change of status or
termination of my employment).
I further certify and agree that I will assist the Compliance Officer,
if necessary, after said date, to ensure that my Personal Trading file is
complete and accurate.
Signed:
Name:
Date:
OECHSLE INTERNATIONAL ADVISORS, LLC
CODE OF ETHICS
The reputation of Oechsle International Advisors, LLC ("Oechsle") for integrity
and ethics is one of our most important assets. In order to safeguard this
reputation, we believe that it is essential not only to comply with relevant
federal and state laws and regulations, but also to maintain high standards of
personal and professional conduct. Oechsle's Code of Ethics (the "Code") is
designed to ensure that our conduct is at all times consistent with the highest
of ethical standards, with our fiduciary obligations to our clients, and with
industry and regulatory standards for investment managers.
The Code is based on the principle that the officers, directors, members, and
employees of Oechsle owe a fiduciary duty to our clients to:
o Always place the interests of our clients first.
o Conduct our personal securities transactions in a manner which does
not interfere with client transactions, create an actual or potential
conflict of interest with clients, or otherwise take unfair advantage
of our relationship with our clients.
o Avoid even the appearance of impropriety in our personal actions.
Persons covered by this Code must adhere to this general principle as well as
comply with the Code's specific provisions. It bears emphasis that although the
Code provides guidance with respect to many common situations, it cannot address
every possible circumstance that could give rise to a conflict of interest,
potential conflict, or an appearance of impropriety. Regardless of whether a
specific provision of the Code applies, each of us at Oechsle must conduct his
or her activities in accordance with the general principles embodied in the Code
and in such a way as to avoid any actual or potential conflict of interest or
any abuse of an individual's position of trust and responsibility. Please
remember that even if our clients are not harmed, we cannot take inappropriate
advantage of information we learn through our position as fiduciaries.
Technical compliance with the procedures incorporated in the Code will not
insulate from scrutiny trades which contravene an individual's duties to Oechsle
and its clients. Therefore, to protect yourself and Oechsle, please be alert for
any potential for conflicts of interest, and please consult the Senior
Compliance Officer or the General Counsel whenever questions arise concerning
the application of the Code to a particular situation.
<PAGE>
PERSONS COVERED BY THE CODE
The provisions and requirements of the Code apply to all officers, directors,
members, and employees of Oechsle and its subsidiaries ("Oechsle employees"). In
addition, the provisions and requirements of the Code, including the rules
pertaining to pre-clearance of personal securities transactions, apply to all
members of any employee's "immediate family." Any family member who is presently
living in your household, or to whose financial support you make a significant
contribution, is considered to be a member of your immediate family. Please bear
in mind that the Code applies to all securities accounts:
(i) in which any Oechsle employee or his or her immediate family have any
direct or indirect beneficial interest (e.g., family trust); or
(ii) over which any Oechsle employee or his or her immediate family
exercise any investment authority; or
(iii)which receive any investment advice from any Oechsle employee or his
or her immediate family.
Please remember that the term "beneficial interest" includes more than ordinary
ownership. In general, you may be deemed to have beneficial ownership under any
of the following circumstances:
1. You have the power to sell or transfer the security, or you have the
power to direct the sale or transfer; or
2. You have the power to vote the security or the power to direct the
vote; or
3. You have an economic interest in the security; or
4. You have the right to acquire, within 60 days, the power to sell, the
power to vote, or an economic interest in the security.
You should consider yourself as having beneficial ownership of a security in the
following situations (which also apply to your immediate family):
1. The security is held by you, whether in bearer form, registered in
your name, or otherwise;
2. The security is held by others for your benefit, such as a security
held for you by a bank, custodian, broker, relative, executor,
administrator, agent, or any other person;
3. The security is held by a trust of which you are the trustee, or in
which you have an economic interest, or where you participate in the
investment decisions or otherwise have direct or indirect influence or
control;
4. The security is held by a trust of which you are the settlor if you
have the power to revoke the trust without obtaining the consent of
all the beneficiaries;
5. The security is held by any partnership in which you are a general
partner, or with respect to which you have direct or indirect
influence or control;
6. The security is held in the name of another person if, by reason of
any contract, understanding, relationship, agreement, or other
arrangement, you obtain therefrom benefits substantially equivalent to
those of ownership;
7. The security is held in the name of another person, even though you do
not obtain therefrom benefits substantially equivalent to those of
ownership, if you can vest or revest title in yourself at any time.
Although persons who are not members of your "immediate family" are not required
to comply with the pre-clearance procedures contained in the Code, they also may
not take improper advantage of information that they may receive from you
regarding the activity or holdings of Oechsle clients. In addition, it would be
a violation of the Code, and, specifically of Oechsle's Insider Trading Policy,
for an Oechsle employee to arrange for a friend or relative to trade in a
security in which that Oechsle employee would be precluded from trading for his
or her own account, or for an Oechsle employee to give information about the
activity or holdings of Oechsle clients to any person for the purpose of
facilitating securities trading by that person.
GENERAL TERMS AND PROVISIONS
These provisions apply to all employees of Oechsle and its
subsidiaries. These provisions apply only to transactions in reportable
securities.
A. Reportable Securities are all securities except:
(a) shares of registered, open-end investment companies (mutual funds) for
which Oechsle is not an advisor or sub-advisor;
(b) direct U.S. government obligations, such as Treasury bonds, notes, and
bills, and U.S. Savings Bonds;
(c) CDs, bankers' acceptances, and other money-market instruments;
(d) transactions in commodities and options and futures on commodities;
(e) investments in or by hedge funds and commingled funds managed by
Oechsle, in which Oechsle employees may have beneficial interests.
You do not need to report transfers of securities, stock splits, or other such
activity.
Thus, reportable securities include, but are not limited to:
(a) any type of equity or debt security (including, without limitation,
common and preferred stock and corporate and municipal bonds and debt
obligations issued by foreign governments);
(b) any rights relating to such a security, such as put and call options,
warrants, and convertible securities;
(c) ADRs;
(d) options and futures on security indexes.
B. Compliance Officer - the Oechsle officer assigned the responsibility of
administering this Code is the Senior Compliance Officer, or in his absence
the General Counsel.
C. Pre-Clearance - of all personal securities transactions in reportable
securities is required for all Oechsle employees.
D. Brokerage Confirmations - copies of brokerage confirmations for each
pre-cleared transaction are required.
E. Blackout Periods - for certain designated periods surrounding client trades
or while a transaction is being actively considered for a client.
F. Excessive Short-term Trading - is discouraged and profits from such trading
may have to be disgorged.
G. Quarterly Reporting - of personal securities transactions.
H. Annual Certification - that the employee has read and understood the Code.
PRE-CLEARANCE
1. GENERAL RULE:
Oechsle requires written pre-clearance of personal trades in reportable
securities.
2. PROCEDURES:
The pre-clearance requirement is satisfied by completing the Personal Securities
Transaction Pre-Trading Authorization Form (see Exhibit A). Pre-clearance is
only effective for the specific trade date (or for the next available market
session if same-date is not practicable due to foreign market constraints) and
for a specific number of shares. Trading instructions given to brokers must be
for same day execution. You may not change the trade date, and you may not
increase the size of your order, without obtaining a new pre-clearance. You may,
however, decrease the size of your trade without obtaining a new pre-clearance.
Moreover, you need not place an order for which you have obtained pre-clearance.
If you choose not to place that order, you must obtain a new pre-clearance if
you change your mind and wish to enter the order on a later date. In addition,
you must inform the Compliance Officer in writing if you decide not to execute a
pre-cleared trade.
Generally, the date on which you initiate your trade instructions should be the
date on which the trade is actually executed. However, there are some
exceptions. For purposes of this Code, the trade date for a limit order or a
stop-loss order is the date on which you give the order to your broker, not the
date on which the order is finally executed in accordance with your
instructions. Therefore, if your limit or stop-loss order is entered with the
broker in accordance with the pre-clearance requirements and consistent with the
blackout period, the subsequent execution of that trade will satisfy the Code,
even if Oechsle subsequently enters trades for client accounts that are executed
on the same day as your order is executed.
Three signatures are required on the pre-clearance form:
1. The Compliance Officer, the Senior Compliance Officer, or the General
Counsel in the Boston office (in the absence of the Compliance
Officer), or the Compliance Officer of the London office, in the case
of that office.
2. The Trading Desk.
3. A Managing Principal.
As a general rule, no person may sign a pre-clearance form for himself or
herself. In order to ensure that all personal securities transactions are
conducted in accordance with the Code, the Compliance Officer of the Boston
office will retain copies of all pre-clearance forms in each employee's personal
securities transactions file.
The Compliance Officer and the Trading Desk will monitor trading in pre-cleared
securities among Oechsle clients to ensure that all applicable blackout periods
have been complied with and that there is otherwise no activity in such
securities that would raise questions regarding any conflicts or potential
conflicts.
EXEMPTIONS:
A. Third Party Accounts. If an Oechsle employee nominally has beneficial
ownership over a particular account, but does not exercise direct or
indirect influence or control over that account and provides no investment
advice with respect to the investment decisions made for the account, he or
she may apply to the General Counsel for a waiver from the pre-clearance
provisions of the Code. Waivers are not automatic, are made on a
case-by-case basis, and are conditioned, at a minimum, upon the following:
1. The Oechsle employee discloses to the General Counsel the existence of
the Third Party Account and allows the General Counsel to review, in
her discretion, the governing documents of such accounts.
2. The Oechsle employee establishes to the satisfaction of the General
Counsel that he or she has no direct or indirect influence or control
over the Third Party Account or over investment decisions made for
that account.
3. The Oechsle employee completes the Brokerage Account Certification
(see Exhibit B) on an annual basis.
4. The Oechsle employee does not disclose to any person with influence
or control over the Third Party Account any action that Oechsle may
or may not take, or has or has not taken, with respect to any
security.
B. Stock Index Futures and Options. The pre-clearance requirements of the Code
do not apply to purchases and sales of stock index options and stock index
futures. However, such transactions must be reported on the employee's
quarterly personal securities transactions report.
PROHIBITED TRANSACTIONS
The following categories of transactions may not be engaged in by Oechsle
employees:
1. TRANSACTIONS IN CONJUNCTION WITH OECHSLE CLIENTS:
A. No Oechsle employee shall cause an Oechsle client to either take or not
take any action for such employee's personal benefit (or the personal
benefit of anyone else) rather than for the benefit of the client. For
example, an employee would violate this Code by causing a portfolio to
purchase a security he or she owned for the purpose of supporting or
increasing the price of that security. Causing a portfolio to refrain from
selling a security in an attempt to protect a personal investment, such as
an option on that security, also would violate this Code.
B. No Oechsle Employee shall use knowledge of Oechsle client transactions to
profit by the market effect of those transactions.
C. No Oechsle employee may use futures or options to take positions in
securities which the Code would prohibit if the positions were taken
directly.
D. No Oechsle employee may purchase a security with knowledge that it is being
contemplated for purchase, or will be purchased, for an Oechsle client. No
Oechsle portfolio manager, analyst or trader may buy or sell a security
within seven calendar days on either side of a date on which the security
is bought or sold for the account of any Oechsle client. As an example, if
such an account purchases a particular security on Day 8, all portfolio
managers, analysts and traders would be precluded from purchasing or
selling that security for his or her own account(s) from Day 1 through Day
15.
For all other Oechsle employees the blackout period is one day before and one
day after any trade by any Oechsle client.
If a previously-entered employee trade falls within the blackout period, the
employee must reverse the trade. Thus, for example, if an employee pre-clears a
trade and purchases the security on Day 1, and an Oechsle client purchases the
security on Day 2, the Oechsle employee must reverse the trade. If the trade can
be reversed prior to settlement, the employee should do so, with the cost of
reversal being borne by the employee. If the trade cannot be reversed prior to
settlement, the employee must engage in an offsetting transaction immediately.
If a loss results, the employee must bear the loss; if a profit results, the
employee must donate the profit to a charity of the employee's choice with
suitable evidence of such donation provided to the General Counsel, or forfeit
the profit to Oechsle.
EXEMPTIONS:
A. Large Capitalization Stocks.
An Oechsle employee may purchase or sell shares of a security which is being
actively considered for purchase or sale, or which is being purchased or sold,
for Oechsle clients if, given the number of shares the employee is purchasing or
selling and the market capitalization (outstanding shares x current price per
share) of the issuer, the employee's trading could have no material impact on
the price of the security and if Oechsle were to trade in the security, such
trading could have no material impact on the price of the security. This
exemption is subject to prior written approval by the General Counsel, the
Trading Desk, and the Chief Operating Officer. You must specifically request
this prior approval.
B. Option Exercise by Others.
An Oechsle employee who has sold ("written") a put or call option in compliance
with the Code will not violate this or any other provision of the Code if the
put or call is exercised and the Oechsle employee must honor the contractual
commitment to purchase or sell the security, as the case may be.
C. Margin Calls.
An Oechsle employee who maintains securities in a margin account with a
broker-dealer will not violate this provision of the Code if the securities are
sold by the broker-dealer pursuant to a bona fide margin call, provided,
however, that withdrawal of collateral by the employee was not a contributing
factor to the margin call.
D. Dividend Reinvestment.
An Oechsle employee will not violate this provision of the Code by participating
in an automatic dividend reinvestment program offered by the issuer of a
publicly traded security.
E. Client Small Investments.
An Oechsle employee may engage in a transaction which would otherwise violate
this provision of the Code if (a) the client buying the security, or for whom
the security is being considered, is engaged in an ongoing investment program to
augment an existing position with relatively small regular increments of cash
flow, (b) the General Counsel, after consultation with investment personnel,
determines that neither the client's nor the employee's purchases will
materially affect the market price of the security, and (c) the General Counsel
gives prior consent to the transaction.
F. Gifts.
Gifts of securities made to others, such as relatives or charities, are treated
as dispositions of beneficial ownership, and must be pre-cleared prior to
transfer of the securities. However, gifts of securities received, if
non-volitional on the Oechsle employees' part, need not be pre-cleared.
G. Acquisition and Exercise of Certain Rights.
The acquisition and exercise of rights that are offered pro rata to all
shareholders is not covered by the Code. Exercise of oversubscription rights,
however, does require pre-clearance.
H. Stock Index Futures and Stock Index Options.
The purchase and sale of stock index futures and stock index options are not
subject to the blackout periods. However, such purchases and sales must be
reported in quarterly reports.
2. PUBLIC OFFERINGS:
No Oechsle employee may purchase equity and equity-related securities in initial
public offerings, whether or not Oechsle client accounts participate in the
offering, except as described below. Oechsle employees may purchase securities
that were the subject of a recent public offering after the offering is
completed, and then only at the prevailing market prices and subject to the
usual pre-clearance procedures. Oechsle employees may not receive special
allocations of "hot issues" from brokers which receive Oechsle business.
<PAGE>
EXEMPTIONS:
A. Oechsle employees are permitted to purchase equity and equity-related
securities in secondary offerings if Oechsle client accounts do not hold
the security and if no Oechsle portfolio manager wishes to participate in
the offering for client accounts.
B. Oechsle employees are permitted to purchase equity and equity-related
securities in rights offerings if the opportunity to purchase is extended
equally to all holders of the company's common stock and the offer is
extended to the employee as a holder of the company's common stock.
C. Oechsle employees are permitted to purchase equity and equity-related
securities in an offering if they are entitled to such purchase by virtue
of being a citizen or resident of a country who qualifies for privatization
issues made available to the public in general.
Any purchase of any security in a public offering, even if permitted under these
rules, must be pre-cleared in writing by the Senior Compliance Officer.
3. PRIVATE OFFERINGS:
No Oechsle employee may purchase a security in a private offering without first
obtaining a pre-clearance from the Senior Compliance Officer. The employee
should complete and submit to the Senior Compliance Officer a checklist in the
form attached as Exhibit C hereto.
Consideration of the prior approval request will take into account, among other
factors, whether the investment opportunity should be reserved for an Oechsle
client(s), and whether the opportunity is being offered to an individual as a
favor designed to influence that employee's judgment in the performance of his
or her job duties at Oechsle or as compensation for services of an investment
advisory nature rendered to the issuer. If approval is granted and the employee
has any material role in subsequent consideration by an Oechsle client of an
investment in the same, or a directly affiliated issuer, the employee must
disclose his or her interest in the private placement to the person making the
investment decision.
4. SHORT-TERM TRADING:
Excessive short-term trading increases the risk of conflict of interest, may
over time adversely affect an Oechsle employee's investment judgment on behalf
of Oechsle clients, and may unduly occupy an Oechsle employee's time and
thoughts during working hours. Oechsle employees are hired and compensated on
the assumption that their personal investing will generally be on a long-term
basis.
Therefore, while this Code does not impose an absolute prohibition on short-term
trading, excessive short-term trading is prohibited. Whether the extent of
short-term trading by an employee is "excessive" will be determined on a
case-by-case basis, taking into account all relevant factors, including
conditions prevailing in the securities markets and the types of securities
traded. Persons determined to be engaged in excessive short-term trading will be
subject to imposition of any or all of the sanctions described at the end of
this Code, including disgorgement of profits realized from the short-term trade.
A short-term trade is any purchase and sale, or sale and purchase, of the same
(or equivalent) securities within 60 calendar days.
EXEMPTIONS:
A. Option Exercise by Others.
An Oechsle employee who has sold ("written") a put or call option in compliance
with this Code will not have effected a short-term trade if the put or call is
exercised and the Oechsle employee must honor the contractual commitment to
purchase or sell the security, as the case may be, within 90 days of selling the
option.
B. Margin Calls. An Oechsle employee who maintains securities in a margin
account with a broker-dealer will not have effected a short-term trade if the
securities are sold by the broker-dealer pursuant to a bona fide margin call,
provided, however, that withdrawal of collateral by the employee was not a
contributing factor to the margin call.
5. TRANSACTIONS WITH OR INVOLVING OECHSLE CLIENTS:
No Oechsle employee may knowingly initiate a purchase from or sell to an Oechsle
client any securities or other property, nor engage in any transaction to which
an Oechsle client is a party or with which any Oechsle client has a significant
relationship.
6. GENERAL FIDUCIARY OBLIGATION TO CLIENTS; DISCLOSURE OF PERSONAL INTEREST:
As noted above, Oechsle and its employees have a fiduciary responsibility to
Oechsle's clients. Therefore we must avoid any conduct that would be detrimental
to their interests. In order to fulfill our duty, Oechsle employees must offer
all investment opportunities to Oechsle's clients before taking advantage of
such opportunities. Therefore, before trading in any security that is not
covered by an Oechsle analyst, you should ensure that the appropriate research
analyst or portfolio manager is aware that you have identified a security that
you believe would be a good investment, and explain the basis for your interest
in the security. If, after receiving that information, the analyst or portfolio
manager does not wish to recommend the security for investment by Oechsle
clients, you are free to trade, after securing the necessary pre-approvals. If
the analyst or portfolio manger expresses an interest in that security, however,
you must refrain from trading in that security until a decision has been made as
to whether to purchase that security for Oechsle clients and until any
applicable blackout period has expired.
In addition, if one of your personal securities holdings could create a conflict
of interest, or even a potential conflict of interest, with the interest of an
Oechsle client, you must disclose that conflict or potential conflict to the
appropriate analysts or portfolio managers before participating in any decision
that could affect the security you hold. For example, if you are an analyst, and
if you are recommending that Oechsle should purchase for client accounts
securities of any company whose securities you hold personally, you must
disclose the fact that you own the securities to the portfolio manager(s) who
will make that purchase decision before making your recommendation. Similarly,
if you are a portfolio manager and you want to purchase for client accounts
securities of any company whose securities you hold personally, you must
disclose the fact that you own the securities to someone else involved in
investment decisions before initiating the purchase. Please bear in mind, that
although not prohibited, as a general matter, Oechsle does not expect that
portfolio managers will hold the same securities as the Accounts that they
manage.
WAIVERS
A written request for a waiver from the prohibited transaction rules may
be granted by the Senior Compliance Officer after consultation with the
applicable personnel, upon a determination that the waiver is warranted to avoid
undue hardship to the employee and that none of the abuses or potential abuses
that the Code is designed to prevent would occur. Seeking waivers is not
encouraged and waivers will not be granted routinely.
REPORTING
Each Oechsle employee is responsible for complying with the following
reporting requirements:
1. COPIES OF CONFIRMATIONS:
Each Oechsle employee must instruct each broker-dealer with whom he or she
maintains an account, and with respect to all other accounts as to which the
employee is deemed to have beneficial ownership, to send promptly to the
Compliance Officer a copy of all transaction confirmations generated for the
account. For your convenience, a form letter for requesting such confirmations
to be sent to Oechsle is attached as part of Exhibit A.
Confirmations must include the account description, trade date, security
description, number of shares or principal amount of each security, the nature
of the transaction (e.g., purchase, sale, etc.), the total price, and the name
of the institution (e.g., broker, bank, etc.) effecting the transaction.
Each brokerage confirmation received by Oechsle is cross-checked against
pre-clearance forms and quarterly securities transaction reports submitted by
each employee. Copies of all confirmations and associated pre-clearance forms
are retained by the Compliance Officer in the employee's personal securities
transaction file.
In order to ensure that brokerage confirmations are received for all employee
brokerage accounts, all employees are required to complete a Brokerage Account
Form (see Exhibit B) and to submit an updated form (within 5 business days)
whenever an account is added or deleted. You and members of your immediate
family must disclose promptly every brokerage account that you maintain and
every new brokerage account that you open to the Compliance Officer. In
addition, each employee is asked to certify annually that the list of brokerage
accounts that have been reported previously remains complete and accurate.
2. TRANSACTION REPORTS:
Each Oechsle employee must file a Quarterly Securities Transaction Report (see
Exhibit D) with the Compliance Officer within 10 days after the end of each
quarter, whether or not the employee entered into any personal securities
transactions during that quarter. Quarterly reports are required by the SEC for
all investment company managers and enable Oechsle to double-check that all
personal securities transactions have been appropriately pre-cleared and
reported to Oechsle.
3. ANNUAL ACKNOWLEDGMENT:
By February 28 of each year, every Oechsle employee must sign an acknowledgment
stating that he or she has reviewed, understood, and complied with the
provisions of this Code (see Exhibit E).
OTHER CONFLICTS OF INTEREST
1. GIFTS OR OTHER PREFERENTIAL TREATMENT:
No Oechsle employee may seek or accept gifts, favors, preferential treatment, or
any special arrangement of material value from certain persons because of the
employee's association with Oechsle. This prohibition applies to anyone who does
business or is soliciting business with any Oechsle entity or Oechsle client, as
well as to any organization (such as any broker, dealer, or investment adviser)
engaged in the securities business.
This rule is intended to permit only the most proper type of customary business
amenities. Listed below are examples of items which would be permitted under
proper circumstances and which are prohibited under the intent of this rule.
These examples are illustrative and not all-inclusive. Notwithstanding these
examples, an Oechsle employee may not, under any circumstances, accept anything
which could lead to or create the appearance of any kind of conflict of
interest. For example, acceptance of any consideration is prohibited if it would
create the appearance of a "reward" or inducement for business conducted with
the person providing the consideration or his employer.
Among items not considered of "material value" which, under proper
circumstances, would be considered permissible are:
(a) Occasional lunches or dinners conducted for business purposes;
(b) Occasional cocktail parties or similar social gatherings conducted for
business purposes;
(c) Occasional attendance at theater, sporting or other entertainment
events; and
(d) Small gifts, usually in the nature of reminder advertising, such as
pens, calendars, etc.
Among items of consideration of "material value" which are not permitted under
any circumstances are the following:
(a) Any gift over $250 in value, or any accumulation of gifts which in
aggregate exceeds $250 in value from one source in one calendar year;
(b) Entertainment of a recurring nature such as sporting events, theater,
golf games, etc.;
(c) The cost of transportation to a locality outside the Boston
metropolitan area, and lodging or meals while in another locality,
unless such attendance and reimbursement arrangements have been
approved in advance by the General Counsel;
(d) Personal loans to the Oechsle employee on terms more favorable than
those generally available for comparable credit standing and
collateral; and
(e) Preferential brokerage commissions or spreads or allocation of stock
in "hot issue" initial public offerings for the Oechsle employee's
personal trading account.
2. DIRECTORSHIPS AND TRUSTEESHIPS IN OUTSIDE ORGANIZATIONS:
No Oechsle employee may accept a directorship in an unaffiliated company without
the prior notification and written approval of the Senior Compliance Officer.
Persons such as portfolio managers and analysts whose primary responsibilities
include recommending and selecting securities for the accounts of Oechsle
clients will not be granted approval to accept directorships in companies which
might qualify for investment by any Oechsle clients. Approval will be based upon
the determination that the board service would not be inconsistent with the
interests of Oechsle's clients. If board service is authorized, appropriate
procedures will be implemented to ensure that confidential information is not
obtained or used by either the employee or Oechsle.
No Oechsle employee may accept a position as trustee, executor, custodian, or as
any other fiduciary, or as a private investment adviser or counselor for any
outside account, without the prior notification and written approval of the
Senior Compliance Officer.
3. PROVIDING INVESTMENT ADVICE TO OTHERS:
No Oechsle employee may provide investment advice to anyone or manage any
person's portfolio on a discretionary basis, other than for Oechsle clients or
members of the employee's immediate family. Thus, employees should not give
advice to anyone, other than immediate family members, concerning the purchase
or sale of any security. In particular, Oechsle employees may not provide
investment advice for compensation to anyone other than an Oechsle client,
unless the arrangement is disclosed and approved by Oechsle.
4. IMPROPER USE OF FUNDS:
No Oechsle employee may pay, or offer or commit to pay, any amount of
consideration which might be or appear to be a bribe, kickback, or other similar
improper use of funds.
5. GENERAL ANTI-FRAUD PROVISION:
No Oechsle employee may violate the anti-fraud provisions of the federal
securities laws and the rules and regulations promulgated thereunder. This
provision covers a broad range of conduct, including, without limitation, the
following:
A. Affirmative Duty to Disclose. Oechsle employees who own a security, or who
have decided to effect a personal transaction in a security, have an
affirmative duty to disclose this information in the course of any
communication about that security when the purpose or reasonable
consequence of such communication is to influence an Oechsle client to buy,
hold, or sell that security. The disclosure of ownership should be part of
the initial communication but need not be repeated in the case of
continuing communications directed to a specific person.
B. Disclosure of Oechsle Information. No information regarding any Oechsle
client account or actual or proposed securities trading activities of any
Oechsle client may be disclosed outside the Oechsle organization unless the
information has been publicly announced or reported. Oechsle research
information must not be disclosed unnecessarily and never for personal
gain. Information generally about Oechsle and Oechsle clients is
confidential, and should not be disclosed without a valid business purpose.
C. Use of Information. No Oechsle employee may use information from any source
in a manner contrary to the interest of, or in competition with, any
Oechsle client. In particular, an Oechsle employee may not invest in a
company which could reasonably be considered as a potential investment for
Oechsle clients and which has not been considered by Oechsle analysts until
determining with appropriate investment personnel that no portfolio
managers have a current interest in the company on behalf of an Oechsle
client. This rule is not intended to prohibit any Oechsle employees from
uncovering and capitalizing on new "investment ideas," but requires that
Oechsle have the first right to such ideas for its clients.
D. "Inside" Information and Insider Trading.
Neither Oechsle nor any Oechsle employee may utilize "inside" information
about any issuer of securities for personal benefit or the benefit of
clients. Inside information is material information not generally available
to the public. Information is considered "material" if there is a
substantial likelihood that a reasonable investor would consider it
important in making his or her investment decisions, or if it could
reasonably be expected to affect the price of a company's securities. It
need not be so important that it would have changed the investor's decision
to buy or sell. Information that has been disseminated in a way that makes
it available to investors generally (e.g., national business and financial
news wire services, such as Dow Jones and Reuters; national news services,
such as New York Times; SEC reports; brokerage firm reports) is considered
to be public information. But, for example, information given by a company
director to an acquaintance of an impending takeover prior to a public
announcement would be "nonpublic."
No Oechsle employee may trade, either personally or on behalf of others, on
material, nonpublic information (insider trading), or communicate such
information to others who trade in violation of the law (tipping). Although the
pre-clearance, reporting, and trade restriction requirements of this Code apply
only to Oechsle employees and their immediate family members, the insider
trading and tipping restrictions reach beyond to prohibit Oechsle employees from
illegally profiting or from funneling illegal profits to any other person. They
also prohibit Oechsle from insider trading or tipping in client accounts.
No Oechsle employee may solicit inside information from any company, whether or
not Oechsle clients own stock of the company or Oechsle analysts follow the
company. In addition, please note that the SEC has adopted a rule specifically
prohibiting trading while in possession of material information about a
prospective tender offer before it is publicly announced or trading during a
tender officer if in possession of information which one has reason to know is
not yet public.
Procedures to be Followed When Receiving Inside Information:
Whenever an Oechsle employee receives information that he or she believes to be
material, nonpublic information, he or she should not trade on his or her own
behalf or on behalf of Oechsle clients in the securities to which the
information relates, tip the information to others, or recommend for purchase or
sale such securities, so long as the information remains nonpublic. In addition,
the employee should contact the Senior Compliance Officer, or, in his absence,
the General Counsel immediately and should refrain from disclosing the
information to anyone else, including persons within the Oechsle organization,
unless specifically advised to do so by the Senior Compliance Officer or the
General Counsel.
SANCTIONS
Failure to comply with this Code may adversely affect an Oechsle employee's
performance evaluation, may require the employee to give up any benefit derived
from the violation, may require the employee to refrain from personal trading
for a period, and may lead to termination of employment in appropriate cases.
Penalties under the federal securities laws are also possible in certain
circumstances.
Sanctions may include:
1. Caution: Administered by the Senior Compliance Officer;
2. Warning: Administered by the Senior Compliance Officer;
3. Fine: Assessed by the General Counsel, the Chief Operating
Officer, and the Chief Investment Officer;
4. Dismissal: Determined by the Executive Committee;
5. Civil referral to the SEC or other civil regulatory authorities:
Determined by the Executive Committee;
6. Criminal referral: Determined by the Executive Committee.
Procedures:
When potential violations of the Code come to the attention of the Senior
Compliance Officer, he will investigate the matter and inform the General
Counsel. This investigation may include a meeting with the employee. Upon
completion of the investigation, if necessary, the Senior Compliance Officer may
meet with senior management (the Chief Operating Officer and/or the Chief
Investment Officer) or other appropriate parties, and a determination will be
made as to whether any sanction should be imposed. The employee will be informed
of any sanction deemed to be appropriate. If the employee believes that such
sanction is unwarranted, the employee must provide the Senior Compliance Officer
with a written explanation of such belief within 30 days of being informed after
such determination. The Senior Compliance Officer will then arrange for a review
by senior management or other appropriate party and will advise the employee as
to whether the sanction will be imposed, modified, or withdrawn. The employee
will be given an opportunity to submit a written statement to senior management
and may be represented by counsel of his or her own choosing, at his or her own
expense, at his or her election.
The Senior Compliance Officer will maintain a written record of all exceptions
granted from prohibited transactions under this Code.
<PAGE>
EXHIBIT A
PERSONAL SECURITIES TRANSACTION PRE-CLEARANCE FORM
NAME OF EMPLOYEE: ____________________________
ACCOUNT NAME AND NUMBER: ____________________________
DATE OF TRANSACTION: ____________________________
SECURITY NAME: ____________________________
SECURITY ID NUMBER (CUSIP/SEDOL): ___________________________
COUNTRY: _______________ TYPE OF SECURITY: ______________
NUMBER OF SHARES: ___________ PRICE: ___________________
BUY: ____________ SELL: _________________
IS THIS A LIMIT ORDER OR STOP-LOSS ORDER TRADE: YES / NO
NAME/ADDRESS OF BROKER: __________________________________________
__________________________________________
__________________________________________
I hereby certify that I am familiar with Oechsle's Code of Ethics, and
that this transaction complies in all material respects with Oechsle's policies.
I am not aware of any material, non-public information concerning this issuer or
the market for its securities, or any pending plans or consideration to purchase
these securities for Oechsle clients.
SIGNATURE: _________________________________ DATE: _______________
AUTHORIZATION
TRADING DESK: _________________________ DATE: ____________
MANAGING PRINCIPAL ___________________ DATE: ____________
COMPLIANCE OFFICER: __________________ DATE: ____________
*IF THIS PRE-CLEARED TRADE IS NOT EXECUTED, PLEASE WRITE CANCELED ACROSS IT AND
SUBMIT A COPY OF THIS CANCELED FORM TO THE COMPLIANCE OFFICER.
EXHIBIT A
PERSONAL SECURITIES TRANSACTION PRE-CLEARANCE FORM - (LONDON)
NAME OF EMPLOYEE: ____________________________
ACCOUNT NAME AND NUMBER: ____________________________
DATE OF TRANSACTION: ____________________________
SECURITY NAME: ____________________________
SECURITY ID NUMBER (CUSIP/SEDOL): ___________________________
COUNTRY: _______________ TYPE OF SECURITY: ______________
NUMBER OF SHARES: ___________ PRICE: ___________________
BUY: ____________ SELL: _________________
IS THIS A LIMIT ORDER OR STOP-LOSS ORDER TRADE: YES / NO
NAME/ADDRESS OF BROKER: __________________________________________
__________________________________________
__________________________________________
I hereby certify that I am familiar with Oechsle's Code of Ethics, and
that this transaction complies in all material respects with Oechsle's policies.
I am not aware of any material, non-public information concerning this issuer or
the market for its securities, or any pending plans or consideration to purchase
these securities for Oechsle clients.
SIGNATURE: _________________________________ DATE: _______________
AUTHORIZATION
TRADING DESK: ___________________________ DATE: ____________
MANAGING PRINCIPAL: ____________________ DATE: ____________
COMPLIANCE OFFICER: ____________________ DATE: ____________
*IF THIS PRE-CLEARED TRADE IS NOT EXECUTED, PLEASE WRITE CANCELED ACROSS IT AND
SUBMIT A COPY OF THIS CANCELED FORM TO THE COMPLIANCE OFFICER.
EXHIBIT A
SAMPLE LETTER TO SEND TO YOUR BROKER
TO REQUEST DUPLICATE ACCOUNT INFORMATION
[Broker-Dealer Name]
[Broker-Dealer Address]
RE: Account Number(s)
Dear [Broker]:
Please send a duplicate copy of all trade confirmations (not the monthly
statements) relating to the account(s) listed above to:
James Record
Compliance Officer
Oechsle International Advisors, LLC
One International Place, 23rd Floor
Boston, MA 02110
Very truly yours,
[Employee Name]
<PAGE>
EXHIBIT B
LIST OF BROKERAGE ACCOUNTS IN WHICH YOU HAVE DIRECT OR
INDIRECT BENEFICIAL OWNERSHIP*
ANNUAL CERTIFICATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
NAME OF
BROKER NAME BROKER ADDRESS ACCOUNT NUMBER ACCOUNT HOLDER RELATIONSHIP
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
- -------------------- ----------------------------------- --------------------------- -------------------------- --------------------
</TABLE>
Name of Employee___________________________________________________
(Print)
I certify that I have disclosed to Oechsle all brokerage accounts in which I
have a direct or indirect beneficial interest.
Signature___________________________________________________________
*Beneficial ownership is explained in the Code of Ethics.
<PAGE>
EXHIBIT C
PRIVATE PLACEMENT APPROVAL REQUEST
EMPLOYEE NAME: ___________________________ DATE: ______________
1. COMPANY NAME: ______________________________________
2. Business Operations Summary:
3. Who contacted you regarding this investment? _______________________
4. Which firm/company employs this individual? _______________________
5. Does this individual or firm have a relationship with Oechsle or Oechsle
clients? If so, please explain.
6. What is the individual's role within the company? __________________________
7. What is your relationship to the individual? ______________________________
8. What is the total amount of the private placement? ________________________
9. What is the value of your proposed investment? ____________________________
10. Does this company have publicly traded securities? _______________________
11. Is this investment suitable for Oechsle clients? Yes ______ No _______
If not, please explain.
__________________________________________
__________________________________________
__________________________________________
- -----------------------------------------
Employee Signature
Approved _______ Disapproved ______
Managing Principal _______________________ Date: ______________
Senior Compliance Officer _______________ Date: ______________
<PAGE>
EXHIBIT D
QUARTERLY TRANSACTION REPORT
October 1 - December 31, XXXX
The following is a record of every transaction in which I had, or by reason of
which I acquired, any direct or indirect beneficial ownership in securities from
October 1 - December 31, XXXX excluding transactions which do not have to be
reported under Oechsle's Code of Ethics.
I had no securities transactions for the quarter: __
I had the following transactions:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
Account Name / Trade Buy / Sell # of Price Name and Description (ID # ) Broker/Dealer
(Number) Date shares of Security
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
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- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
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- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
- ----------------- ----------- ------------ ----------- ----------- -------------------------------- --------------------------
</TABLE>
- ------------------------------ ------------------------------
Signature Date
- ----------------------------
Print Name
EXHIBIT E
OECHSLE INTERNATIONAL ADVISORS, LLC
CODE OF ETHICS
ANNUAL CERTIFICATION
I have received a copy of Oechsle International Advisors, LLC's Code of Ethics,
dated July 29, 1999, I have read it and understand it.
I understand that, as a condition of my employment, I am required to comply with
the Code of Ethics. I agree to comply with all provisions of the Code of Ethics,
including, but not limited to, those governing personal securities transactions.
I certify that to the best of my knowledge I have complied with the terms of the
Code of Ethics during the most recent calendar year.
I authorize Oechsle to furnish the information contained in any report of
securities transactions filed by me with the General Counsel or the Compliance
Officer to such federal, state, and self-regulatory authorities as may be
required by law or by applicable rules and regulations.
I certify that I have disclosed to Oechsle all brokerage accounts in which I
have a beneficial interest, and that I have authorized each such brokerage firm
to send directly to Oechsle duplicate copies of all transaction confirmations
for such accounts.
- --------------------------------
Date
- ---------------------------------
Name (Print)
- ----------------------------------
Signature of Employee
