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Previous: VARIABLE INSURANCE PRODUCTS III, 485BPOS, EX-99.N18F-3PLAN, 2000-12-15 |
Next: ONYX ACCEPTANCE FINANCIAL CORP, 8-K, 2000-12-15 |
1933 Act Registration No. 33-82056
1940 Act Registration No. 811-8662
As filed with the Securities and Exchange Commission on December 15, 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. 11 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 12 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):
____ on March 1, 2001 pursuant to paragraph (b)
____ 60 days after filing pursuant to paragraph (a)(1)
____ on March 1, 2001 pursuant to paragraph (a)(1)
__X_ 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.
Equity and Balanced Portfolios
AAL Technology Stock Portfolio
AAL Aggressive Growth Portfolio
AAL Small Cap Stock Portfolio
AAL Small Cap Index Portfolio
(Formerly known as the AAL Variable Product Small Company Stock Portfolio)
AAL Mid Cap Stock Portfolio
AAL Mid Cap Index Portfolio
AAL International Portfolio
(Formerly known as the AAL Variable Product International Stock Portfolio)
AAL Capital Growth Portfolio
AAL Large Company Index Portfolio
(Formerly known as the AAL Variable Product Large Company Stock Portfolio
AAL Equity Income Portfolio
AAL Balanced Portfolio
(Formerly known as the AAL Variable Product Balanced Portfolio)
Fixed-Income Portfolios
AAL High Yield Bond Portfolio
(Formerly known as the AAL Variable High Yield Bond Portfolio)
AAL Bond Index Portfolio
(Formerly known as the AAL Variable Product Bond Portfolio)
AAL Money Market Portfolio
(Formerly known as the AAL Variable Product Money Market Portfolio)
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.
Table of Contents
Page
Risk/Return Information; Investment Objectives and Strategies
Organization
Summary of Changes
AAL Technology Stock Portfolio
AAL Aggressive Growth Portfolio
AAL Small Cap Stock Portfolio
AAL Small Cap Index Portfolio
AAL Mid Cap Stock Portfolio
AAL Mid Cap Index Portfolio
AAL International Portfolio
AAL Capital Growth Portfolio
AAL Large Company Index Portfolio
AAL Equity Income Portfolio
AAL Balanced Portfolio
AAL High Yield Bond Portfolio
AAL Bond Index Portfolio
AAL 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
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 Variable 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.
New Names and Portfolios and Subaccounts
On November 8, 2000, the AAL Variable Product Series Fund, Inc. Board of Directors approved seven new portfolios to be introduced on
or about March 1, 2001. These new portfolios will underlie seven new corresponding subaccounts. In conjunction with the new
portfolios, the Board of Directors also approved a name change for the portfolios and corresponding subaccounts. In line with this,
AAL CMC will be renaming some of the existing portfolios and subaccounts.
New Portfolios: AAL Technology Stock AAL Mid Cap Index AAL Aggressive Growth AAL Capital Growth AAL Small Cap Stock AAL Equity Income AAL Mid Cap Stock Old Portfolio Names: New Portfolio Names: AAL Variable Product Small Company Stock AAL Small Cap Index AAL Variable Product International Stock AAL International AAL Variable Product Large Company Stock AAL Large Company Index AAL Variable Product Balanced AAL Balanced AAL Variable Product High Yield Bond AAL High Yield Bond AAL Variable Product Bond AAL Bond Index AAL Variable Product Money Market AAL Money Market
Any references in the prospectus or SAI referring to the new portfolio names is referring to the portfolios that were already in existence under their former names.
Investment Objective
The portfolio seeks long-term capital appreciation by investing primarily in a diversified portfolio of common stocks and securities
convertible into common stocks.
Principal Investment Strategies
Under normal circumstances, we invest at least 65% of the portfolio´s total assets in technology stocks. We focus on equity
securities of companies engaged in offering and/or developing products, processes or services that utilize new or improved
technologies. Within this group, we look for companies that we believe have strong potential for future growth. We may invest the
remaining 35% of the portfolio´s total assets in additional common stocks, preferred stocks, and securities convertible into these
stocks. We limit our investment in convertible securities to no more than 5% of the portfolio´s net assets. The technology
companies in which we invest may be in any of the following industries, among others:
The portfolio may also invest in securities of foreign issuers. Foreign securities are generally selected on a stock-by-stock basis without regard to any defined allocation among countries or geographic regions. Foreign securities for the portfolio are selected, in part, based on analysis of the technology the company provides and the company´s financial strength. However, we also consider other factors when analyzing an individual, foreign security, such as; expected levels of inflation, government policies influencing business conditions, the outlook for currency relationships and prospects for economic growth among countries, regions or geographic areas. Typically, we consider an issuer as domiciled in a particular country if it:
The technology sector is composed of many companies representing different market capitalizations. The portfolio invests in
companies of any size, from small cap companies, to large cap companies. We take a “bottom up” approach to investing for the
portfolio, meaning each stock in the portfolio is individually selected, in part, based on analysis of the technology the company
provides and the company´s financial strength. A company owned by portfolio will usually have a number of the following qualities:
new technology, capable management and a strong outlook for growth. We sell a stock when the company no longer offers sustainable
growth and we believe there are better, alternative investments. This investment strategy may result in short-term gains or losses
for the portfolio
[Sidebar: The Impact of Initial Public Offerings on Performance]
The portfolio may invest in an initial public offering (“IPO”) of a security. On occasion the portfolio will participate in an
oversubscribed IPO. Because the IPO is oversubscribed, this presents the portfolio with the opportunity to “flip” or trade the
security at higher prices resulting in a profit for the portfolio. However, participation in an IPO may result in a loss for the
portfolio. Investments in IPO´s may have a magnified performance impact on a portfolio with a small asset base. A portfolio may not
experience similar performance as its assets grow.
Principal Risks
Financial Risk: Many factors affect the performance of a company in which the portfolio may invest. Some
examples include strength of management, demand for a company´s products or services and general economic
conditions. A company´s performance will affect the market price of its stock, and consequently, the value of
the portfolio. You could lose money investing in the portfolio.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise generally
and periods when stock prices decline generally. The value of the portfolio´s investments may move with these
cycles, and in some instances, increase or decrease more than the stock market, as measured by the S&P 500
Index.
Industry Specific Concentration Risk: Sector funds may be more volatile than funds that diversify across many
industries. Portfolio investments are primarily concentrated in technology-related industries. At times, stocks
of companies in technology industries may experience periods of significant price fluctuations. As a
consequence, the portfolio may be subject to more price volatility than a fund which invests in a broader range
of industries.
Foreign Investment Risks: The portfolio faces particular risks associated with foreign investing. Foreign
investment risks include currency, liquidity, political, economic and market risks, as well as risks associated
with governmental regulation and non-uniform corporate disclosure standards.
Small Cap Company Risks: When compared with large companies, small, less-established companies may have
relatively lower revenues, limited product lines, less management depth and a lower share of the market for their
products or services. Because of these and other factors, stocks of small companies present a greater risk of
losing value than stocks of larger, more established companies.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the Portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.75% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily pay on behalf of the portfolio, or reimburse the portfolio, all expenses in excess of management
fees. Therefore, net fees at the portfolio level are 0.75%.
Expense Example
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
Investment Objective
The portfolio seeks long-term capital appreciation by investing primarily in a diversified portfolio of common
stocks and securities convertible into common stocks.
Principal Investment Strategies
We invest in companies that offer the potential for accelerated earnings or revenue growth. Stocks of these
companies are generally referred to as “growth” stocks. Under normal circumstance we invest at least 65% of the
portfolio´s total assets in common stocks, not including convertible securities. The portfolio invests in
companies of any size, from small cap companies, to large cap companies. The portfolio may invest in any
industry and sector.
We take a “bottom up” approach to investing for the portfolio. In other words we seek to identify individual
companies with earnings growth potential that may not be recognized by the market at large. We make this
assessment by looking at companies one at a time, regardless of size, country of organization, place of principal
business activity, industry or other similar selection criteria. We sell a stock when the company no longer
offers sustainable growth and we believe there are better, alternative investments. This investment strategy may
result in short-term gains or losses for the portfolio.
The portfolio may invest in securities of foreign issuers. Foreign securities are generally selected on a
stock-by-stock basis without regard to any defined allocation among countries or geographic regions. However,
certain factors such as expected levels of inflation, government policies influencing business conditions, the
outlook for currency relationships and prospects for economic growth among countries, regions or geographic areas
may warrant greater consideration in selecting foreign securities. There are no limitations on the countries in
which the portfolio may invest and at times the portfolio may have significant foreign exposure.
We may invest up to 35% of the portfolio´s total assets in additional common stocks, preferred stocks illiquid
securities and high yield bonds or “junk bonds.” While high yield bonds have the potential for a higher yield
than investment-grade bonds, they also have speculative characteristics including a higher risk of default on
principal and interest payments.
The portfolio may also invest in investment-grade bonds, however, the portfolio does not invest in bonds for
capital growth or for long time periods, but may invest in bonds for temporary defensive measures. We limit our
investment in convertible securities to no more than 5% of the portfolio´s net assets.
[Sidebar: The Impact of Initial Public Offerings on Performance]
The portfolio may invest in an initial public offering (“IPO”) of a security. On occasion the portfolio will
participate in an oversubscribed IPO. Because the IPO is oversubscribed, this presents the portfolio with the
opportunity to “flip” or trade the security at higher prices resulting in a profit for the portfolio. However,
participation in an IPO may result in a loss for the portfolio. Investments in IPO´s may have a magnified
performance impact on a portfolio with a small asset base. A portfolio may not experience similar performance as
its assets grow.
Principal Risks
Financial Risk: Many factors affect the performance of a company in which the portfolio may invest. Some
examples include strength of management, demand for a company´s products or services and general economic
conditions. A company´s performance will affect the market price of its stock, and consequently, the value of
the portfolio. You could lose money investing in the portfolio.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise generally
and periods when stock prices decline generally. The value of the portfolio´s investments may move with these
cycles, and in some instances, increase or decrease more than the stock market, as measured by the S&P 500
Index.
Aggressive Growth Investment Risk: “Growth” stocks tend to have greater price volatility than stocks of larger,
well-established companies. Generally, the value of the portfolio's investments tends to increase more than the
stock market, as measured by the S&P 500 Index, during periods of rising stock prices. Conversely, the value of
the portfolio's investments tends to decrease more than the stock market during periods of declining stock
prices. However, these price trends may not always occur.
Small Cap Company Risks: When compared with large companies, small, less-established companies may have
relatively lower revenues, limited product lines, less management depth and a lower share of the market for their
products or services. Because of these and other factors, stocks of small companies present a greater risk of
losing value than stocks of larger, more established companies.
Foreign Investment Risks: The portfolio faces particular risks associated with foreign investing. Foreign
investment risks include currency, liquidity, political, economic and market risks, as well as risks associated
with governmental regulation and non-uniform corporate disclosure standards.
Derivative Risk: The portfolio may use futures, options, swaps, and other derivative instruments to hedge or
protect the Portfolio from adverse movements in securities prices and interest rates. The portfolio may also use
a variety of currency hedging techniques, including foreign currency contracts, to manage exchange rate risk.
The use of these instruments may benefit the portfolio. However, if the Portfolio Manager´s judgment proves
incorrect, the portfolio´s performance could be worse than if the portfolio had not used such instruments.
High Yield Bond Risk: High-yield bonds have a higher yield to compensate for greater risk that the issuer might
not make its interest and principal payments. High-yield bonds are speculative and, therefore, typically
considered to be below investment-grade bonds by national ratings agencies.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.80% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily 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
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
Investment Objective
The portfolio seeks long-term capital growth by investing primarily in small company common stocks and securities
convertible into small company common stocks.
Principal Investment Strategies
Under normal circumstances, we invest at least 65% of the portfolio's total assets in small company common
stocks. We may invest the remaining 35% of the portfolio's total assets in any combination of small-cap,
mid-cap, large-cap stocks and securities convertible into these stocks.
By small companies, we mean those with market capitalizations of less than $1.5 billion. We often refer to small
company stocks as small-cap stocks. Small-cap stocks trade in the over-the-counter market as well as on U.S.
securities exchanges. We focus on companies with market capitalizations ranging from $100 million to $1
billion. Generally, small companies have not yet gained a reputation for quality. Further, small companies tend
to be less recognizable than companies listed in the S&P 500 Index or the S&P MidCap 400 Index. We look for
small companies (including companies initially offering stock to the public) that, in our opinion:
Due to certain market inefficiencies, we believe properly selected small company stocks offer greater
opportunities for long-term capital growth. We tend to sell the stocks of companies when we think that other
investments offer better opportunities. This investment strategy may result in short-term gains or losses for
the portfolio.
[Sidebar: The Impact of Initial Public Offerings on Performance]
The portfolio may invest in an initial public offering (“IPO”) of a security. On occasion the portfolio will
participate in an oversubscribed IPO. Because the IPO is oversubscribed, this presents the portfolio with the
opportunity to “flip” or trade the security at higher prices resulting in a profit for the portfolio. However,
participation in an IPO may result in a loss for the portfolio. Investments in IPO´s may have a magnified
performance impact on a portfolio with a small asset base. A portfolio may not experience similar performance as
its assets grow.
Principal Risks
Financial Risk: Many factors affect the performance of a company in which the portfolio may invest. Some
examples include strength of management, demand for a company´s products or services and general economic
conditions. A company´s performance will affect the market price of its stock, and consequently, the value of
the portfolio. You could lose money investing in the portfolio.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise and
periods when stock prices decline. Historically, small-cap stocks have experienced more price volatility than
mid-cap and large-cap stocks. Small company stocks tend to have greater price volatility than large company
stocks. Generally, the value of the portfolio's investments tends to increase more than the stock market, as
measured by the S&P 500 Index, in a period of rising stock prices. Conversely, the value of the portfolio's
investments tends to decrease more than the stock market in a period of declining stock prices. However, these
price trends do not always occur. You could lose money investing in the portfolio.
Small-Cap Company Risks: When compared with large companies, small, less-established companies may have
relatively lower revenues, limited product lines, less management depth and a lower share of the market for their
products or services. Because of these and other factors, stocks of small companies present a greater risk of
losing value than stocks of larger, more established companies.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.70% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily pay on behalf of the portfolio, or reimburse the portfolio, all expenses in excess of management
fees. Therefore, net fees at the portfolio level are 0.70%.
Expense Example
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the Portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
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.
Principal Investment Strategies
This portfolio is indexed against the Samp;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.
Principal 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:
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 2000
Best Quarter: Q4 1998 17.60%
Worst Quarter: Q3 1998 (20.77)%
Average Annual Total Return as of December 31, 2000
1 Year 5 Years Inception (6/14/95)
Small Cap Index Portfolio % %
S&P SmallCap 600 Index* % %
* 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 Portfolio 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
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.
1 Year 3 Years 5 Years 10 Years $43 $135 $235 $529
Investment Objective
The portfolio seeks long-term capital growth by investing primarily in common stocks and securities convertible
into common stocks, of mid-sized companies.
Principal Investment Strategies
Under normal circumstances, we invest at least 65% of the portfolio's total assets in mid-sized company stocks.
By mid-sized companies, we mean those with market capitalizations ranging from $100 million to $7.5 billion.
Within this category, we generally focus on companies with market capitalizations ranging from $500 million to
$3.5 billion. Mid-cap companies tend to be smaller and less-seasoned than large-cap companies listed in the S&P
500 Index. Mid-cap companies may trade in the over-the-counter market as well as on national securities
exchanges.
We may invest the remaining 35% of the portfolio's total assets in any combination of additional mid-cap stocks,
large-cap stocks and securities convertible into such stocks. We look for mid-sized companies (including
companies initially offering stock to the public) that, in our opinion:
We usually pick companies in the middle stages of their development. These companies tend to have established a
record of profitability and possess a new technology, unique product or market niche. We tend to sell stocks of
companies when we think other investments offer better opportunities. Due to this policy, the portfolio may from
time to time have short-term gains or losses.
[Sidebar: The Impact of Initial Public Offerings on Performance]
The portfolio may invest in an initial public offering (“IPO”) of a security. On occasion the portfolio will
participate in an oversubscribed IPO. Because the IPO is oversubscribed, this presents the portfolio with the
opportunity to “flip” or trade the security at higher prices resulting in a profit for the portfolio. However,
participation in an IPO may result in a loss for the portfolio. Investments in IPO´s may have a magnified
performance impact on a portfolio with a small asset base. A portfolio may not experience similar performance as
its assets grow.
Principal Risks
Financial Risk: Stocks of mid-sized companies may present a greater risk of losing value than stocks of larger,
more established companies, but may present less risk than stocks of smaller companies. Mid-sized companies tend
to have relatively smaller revenues, narrower product lines, less management depth and smaller shares of the
market for their products or services than large companies.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise generally
and periods when stock prices decline generally. Due to the tendency for mid-cap stocks to have less liquidity
in the market than large company stocks, the value of the portfolio's investments might increase and decrease
more than the stock market in general, as measured by the S&P 500. You could lose money investing in the
portfolio.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.70% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily pay on behalf of the portfolio, or reimburse the portfolio, all expenses in excess of management
fees. Therefore, net fees at the portfolio level are 0.70%.
Expense Example
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
Investment Objective
The portfolio seeks total returns that track the performance of the S&P MidCap 400 Index, by investing primarily
in common stocks comprising the Index.
Principal Investment Strategies
We select stocks through the use of computer models, instead of using traditional analysis, to duplicate the S&P
MidCap 400 Index in proportion to their weightings in the index. We try to hold all the stocks that comprise 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 in the Index. Our ability to match the performance
of the S&P MidCap 400 Index will be affected by the size and timing of cash flows into and out of the portfolio.
We will try to manage the portfolio to minimize such effects. The portfolio has expenses that an index does not
have, so the portfolio will not be able to exactly match the performance of its comparable index.
We may also invest to some degree in money market instruments. We do not expect to have more than 5% of the
portfolio´s assets in money market instruments. 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 attempt to
follow the performance of the S&P MidCap 400 Index, we cannot guarantee these results. You could lose money
investing in the portfolio.
Principal Risks
Financial Risk: Stocks of mid-sized companies may present a greater risk of losing value than stocks of larger,
more established companies, but may present less risk than stocks of smaller companies. Mid-sized companies tend
to have relatively smaller revenues, narrower product lines, less management depth and smaller shares of the
market for their products or services than large companies.
Many factors affect the performance of a company in which the portfolio may invest. Some examples include
strength of management, demand for a company´s products or services and general economic conditions. A company´s
performance will affect the market price of its stock, and consequently, the value of the portfolio. You could
lose money investing in the portfolio.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise generally
and periods when stock prices decline generally. Due to the tendency for mid-cap stocks to have less liquidity
in the market than large company stocks, the value of the portfolio's investments might increase or decrease more
than the stock market in general, as measured by the S&P 400 MidCap Index.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily 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
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
Investment Objectives
The portfolio strives for long-term capital growth by investing primarily in foreign stocks.
Principal 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.
Principal 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,
2000. 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 2000
Best Quarter: Q4 1999 23.88%
Worst Quarter: Q3 1998 (14.25)%
Average Annual Total Return as of December 31, 2000
1 Year Inception (3/2/98)
International Portfolio % %
EAFE® Index* % %
* The Morgan Stanley Capital International Europe, Australasia, Far East Index (EAFE® Index) is a stock index
designed to measure the investment returns of the developed countries outside North America. The EAFE® 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.
Investment Objective
The portfolio seeks long-term capital growth by investing primarily in a diversified portfolio of common stocks
and securities convertible into common stocks.
Principal Investment Strategies
Under normal circumstances, we invest at least 65% of the portfolio's total assets in common stocks, not
including convertible securities. Generally, we focus on dividend-paying stocks issued by companies with
earnings growth per share that is higher than stocks included in the S&P 500 Index. In selecting stocks we look
for good corporate fundamentals by examining a company´s quality, operating growth predictability and financial
strength. We may invest across all market capitalizations and across all industries and sectors.
We may invest the remaining 35% of the portfolio's total assets in additional common stocks, preferred stocks and
bonds. The portfolio does not invest in bonds for capital growth or for long time periods. We limit our
investments in convertible securities to no more than 5% of the portfolio's net assets.
We sell a stock when the company no longer offers sustainable growth or has deteriorating fundamentals, and we
believe there are better, alternative investments. This investment strategy may result in short-term gains or
losses for the portfolio.
Principal Risks
Financial Risk: Many factors affect the performance of a company in which the portfolio may invest. Some
examples include strength of management, demand for a company´s products or services and general economic
conditions. A company´s performance will affect the market price of its stock, and consequently, the value of
the portfolio. You could lose money investing in the portfolio.
Market Risk: Over time, the stock market tends to move in cycles, with periods when stock prices rise generally
and periods when stock prices decline generally. The value of the portfolio's investments may increase and
decrease more than the stock market in general, as measured by the S&P 500 Index.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.65% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily 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 0.65%.
Expense Example
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
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.
Principal 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.
Principal 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 2000
Best Quarter: Q4 1998 21.28%
Worst Quarter: Q3 1998 (9.83)%
Average Annual Total Return as of December 31, 2000
1 Year 5 Years Inception (6/14/95)
Large Company Index Portfolio % % 26.59%
S&P 500 Index* % % 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.
Investment Objective
The portfolio seeks current income, long-term income growth and capital growth by investing primarily in a
diversified portfolio of income-producing equity securities.
Principal Investment Strategies
Under normal circumstances, we invest at least 65% of the portfolio's total assets in income-producing equity
securities. By "income-producing equity securities," we mean equity securities, including securities
exchangeable or convertible into equity securities, that offer dividend yields that exceed the average dividend
yields on stocks comprising the S&P 500 Index. We may invest the remainder of the portfolio's total assets, in
whole or in part, in additional income-producing equity securities, bonds and commercial paper.
In selecting equity securities for the portfolio, we look for companies that:
We buy bonds, including convertible securities, if, at the time of purchase at least two nationally recognized
statistical rating organizations (NRSROs) have rated them investment grade, or, if unrated, we have determined
them to be of a credit quality comparable to investment grade. We may invest up to 5% of the portfolio's total
assets in such securities rated below investment grade, otherwise known as “high yield bonds” or “junk bonds.
High-yield bonds generally offer a higher yield than investment-grade bonds, but also expose the portfolio to
greater risk that the issuer might not make its interest and principal payments. We buy commercial paper rated
in the top two categories by a NRSRO. We may buy unrated commercial paper if we determine the commercial paper
is of a credit quality comparable to investment grade.
We expect to receive income from dividends paid on equity investments and interest earned on debt securities. We
seek capital growth by attempting to select income-producing equity securities that we believe are under-priced
relative to the securities of companies with comparable fundamentals. We sell a stock when the company no longer
offers sustainable growth or has deteriorating fundamentals, and we believe there are better, alternative
investments. This investment strategy may result in short-term gains or losses for the portfolio.
Principal Risks
Industry Concentration: Income-producing equity securities, in which the portfolio invests, tend to be more
prevalent in some market sectors than others, for example; communications, retail, energy, utilities, financial
services and consumer non-cyclical and cyclical market sectors. Prices of stocks of companies in these
industries may not always move in tandem with the market, generally, causing the portfolio's performance to lag
or outperform the overall market.
Financial Risk: The market sectors in which companies tend to issue income-producing equity securities usually
have high operating, interest and other regulatory expenses, such as the public utilities industry. Also, some
of these sectors are maturing, meaning that growth is peaking. Companies in these market sectors frequently use
their profits for paying higher dividends rather than reinvesting for company growth. As a result,
income-producing equity securities typically have lower capital growth potential than equity securities in other
sectors. Capital growth for many income-producing equity securities corresponds to the company's competitive
position, in particular its capability to capture market share from its competitors. You could lose money
investing in the portfolio.
Interest Rate Risk: Like bonds, changes in the level of interest rates affect the value of income-producing
equity securities and the value of the portfolio as a whole. Their values tend to move in the opposite direction
of interest rates.
Market Risk: Market cycles affect all equity securities over time, with periods when stock prices rise generally
and periods when stock prices decline generally. However, income-producing equity securities may rise less and
fall less than the market as a whole, because of the higher income component of these securities.
Past Performance
The portfolio commenced operations on March 1, 2001. Because the portfolio has been in operation for less than a
full calendar year, we have not included any performance information.
Fees and Expenses of the Portfolio
Like any investor, you pay certain fees and expenses related to your investments. Annual portfolio 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 0.45% Distribution (12b-1) Fees None Other Expenses % Total Annual Portfolio Operating Expenses* %
* Operating expenses are expressed as a percentage of average daily net assets based on management’s
estimate of expenses for the fiscal year ending December 31, 2001. We agreed to voluntarily pay on behalf of the portfolio, or reimburse the portfolio, all expenses in excess of management
fees. Therefore, net fees at the portfolio level are 0.45%.
Expense Example
This example is intended to help you compare the costs of investing in the portfolio with the costs of investing
in other mutual funds. It assumes that you invest $10,000 in the portfolio for the time periods indicated and
then redeem all your shares at the end of those periods. It also assumes that your investment has a 5% return
each year, and that the portfolio's operating expenses remain the same. Although your actual costs may be higher
or lower, based on the foregoing assumptions your costs would be:
1 Year 3 Years $ $
You should use the expense example for comparison purposes only. It does not represent the portfolio's actual expenses and returns, either past or future. Actual expenses may be greater or less than those shown.
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 Index, Bond Index and
Money Market Portfolios.
Principal Investment Strategy
The portfolio selects securities consistent with the policies of the Large Company Index, Bond Index 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
Index Portfolio, weighting those stocks proportionately to the weightings in the Large Company Index Portfolio.
For debt securities, the portfolio generally selects securities from the same pool of securities that make up the
Bond Index Portfolio, however, some debt securities may not be the same as are in the Bond Index 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
o Common Stocks 35% 75%
o Debt Securities 25% 50%
o Money Market Instruments 0% 40%
[Sidebar Current Weighting of Assets]
As of December 31, 2000, we weighted the investments in the classes as follows:
percent weighted
o common stocks %
o debt securities %
o money market instruments %
total 100%
Principal 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 2000 Best Quarter: Q4 1998 11.60% Worst Quarter: Q3 1998 (3.82)% Average Annual Total Return as of December 31, 2000
1 Year 5 Years Inception (6/14/95) Balanced Portfolio % % S&P 500 Index* % % Lehman Aggregate Bond Index* % %
*The S&P 500 Index and the Lehman Aggregate 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 Aggregate 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.
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.”
Principal 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 portfolioCs 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:
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:
Principal 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, 2000. 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 2000
Best Quarter: Q4 1998 2.11%
Worst Quarter: Q3 1998 (7.28)%
Average Annual Total Return as of December 31, 2000
1 Year Inception (3/2/98)
High Yield Bond Portfolio % (4.19)%
Merrill Lynch High Yield Master Index®* % 1.86%
* The Merrill Lynch High Yield Master Index® is an unmanaged index
composed of over 1,200 “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.
Investment Objective
The portfolio strives for investment results similar to the total return of the Lehman Aggregate Bond Index by investing
primarily in bonds and other debt securities included in the index.
Principal Investment Strategies
For this portfolio we invest in a representative sample of fixed income and mortgage-backed securities included in the Lehman
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:
[Sidebar] As of December 31, 2000, these four classes represented the following proportions of the portfolio´s long-term market value:
Percent of Total
U.S. Treasury & Government Agency %
Corporate %
Other Government %
Asset-Backed %
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 Index Portfolio will include any additional asset classes included in the Lehman Bond Index.
Principal 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 2000
Best Quarter: Q3 1998 4.42%
Worst Quarter: Q1 1996 (1.82)%
Average Annual Total Return as of December 31, 2000
1 Year 5 Year Inception (6/14/95)
Bond Index Portfolio % % 5.54%
Lehman Bond Index* % % 5.94%
* The Lehman Aggregate 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.
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.
Principal 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:
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.
Principal 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 2000
Best Quarter: Q4 1995 1.37%
Worst Quarter: Q2 1999 1.14%
Average Annual Total Return as of December 31, 2000
1 Year 5 Year Inception (6/14/95)
Money Market Portfolio % % 5.24%
Salomon Brothers Short-Term Index®* % % 4.79%
* An index composed of 1-month Treasury Bills.
The 7-day yield for the period ended 12/31/00 for the AAL Variable Product Money Market Portfolio was ____%.
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.
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, 2000, AAL CMC managed over $___ 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-Advisers
AAL International Portfolio
Oechsle International Advisors, LLC (Oechsle LLC) is the sub-adviser to the International 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, 2000, Oechsle managed over $___ billion in assets.
AAL Aggressive Growth Portfolio
Janus Capital Corporation [“Janus”] makes the day-to-day investment decisions for the AAL Aggressive Growth Portfolio under AAL CMC's
direction and control. Janus 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. Janus has its principal offices at 100 Fillmore Street,
Denver, Colorado 80206-4928.
AAL High Yield Bond Portfolio
Pacific Investment Management Company (“PIMCO”) serves as sub-adviser to the AAL High Yield Bond Portfolio. PIMCO is a registered
investment adviser under U.S. securities laws. Pursuant to the sub-advisory agreement, PIMCO makes the day-to-day investment
decisions for the AAL High Yield Bond Portfolio subject to the direction and control of AAL CMC. PIMCO 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 Fund. PIMCO is located at 840 Newport Center Drive, Newport Beach, California, 92660. Organized in 1971, PIMCO provides
investment management and advisory services to private accounts of institutional and individual clients and to mutual funds.
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
percentage 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 2000 are set forth in the table below. We
pay a sub-advisory fee to Janus, Oechsle and PIMCO out of the adviser fees that we receive from each respective Portfolio.
Portfolio % of Average Net
Assets for the
year ended
12/31/01
AAL Small Cap Index 0.35%
AAL International 0.80%
AAL Large Company Index 0.32%
AAL Balanced 0.32%
AAL High Yield 0.40%
AAL Bond Index 0.35%
AAL Money Market 0.35%
The projected adviser fees paid by the seven new portfolios for the period March 1, 2001 through December 31, 2001 are set forth in
the table below. We agreed to pay on behalf of each portfolio, or reimburse each portfolio, all expenses in excess of management
fees.
Portfolio Projected % of Average Net Assets
for the year
ended 12/31/01
AAL Technology Stock 0.75%
AAL Aggressive Growth 0.80%
AAL Small Cap Stock 0.70%
AAL Mid Cap Stock 0.70%
AAL Mid Cap Index 0.35%
AAL Capital Growth 0.65%
AAL Equity Income 0.45%
For the AAL Aggressive Growth Portfolio, International Portfolio and High Yield Bond Portfolio, we pay Janus, Oechsle and PIMCO the following agreed upon amounts based on that Portfolio´s average daily net assets:
JANUS
Total Assets Annual Fee
First $100 million 0.55%
Next $400 million 0.50%
Over $500 million 0.45%
OECHSLE
Total Assets Annual Fee
First $20 million 0.54%
Next $30 million 0.45%
Over $50 million 0.36%
PIMCO
Total Assets Annual Fee
On all assets 0.25%
Portfolio Managers
Portfolio Portfolio Manager(s) Experience
AAL Technology Stock Brian J. Flanagan, CFA Brian J. Flanagan CFA, has been the co-portfolio manager
Portfolio Manager of the AAL Technology Stock Portfolio since it commenced
James A. Grossman operations on March 1, 2001. He is also the portfolio
Portfolio Manager manager of the AAL Small Cap Index Portfolio. Mr.
Flanagan also serves as portfolio manager of The AAL
Technology Stock Fund and The AAL Small Cap Index Fund
II, each a series of an affiliated mutual fund group.
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.
James A. Grossman has been co-portfolio manager for the
AAL Technology Stock Portfolio since it commenced
operations on March 1, 2001. Mr. Grossman also serves
as the co-portfolio manager of The AAL Technology Stock
Fund, a series of an affiliated mutual fund group. From
1996 through 2000, Mr. Grossman served as a securities
analyst, following selected technology investments for
The AAL Mutual Funds. Prior to joining AAL CMC, Mr.
Grossman served as a securities analyst for Monetta
Financial Services.
AAL Aggressive Growth Michael Dugas Michael Dugas has been the portfolio manager of the AAL
Portfolio Manager Aggressive Growth Portfolio since its inception on March
1, 2001. Mr. Dugas also serves as the portfolio manager
of The AAL Aggressive Growth Fund, a series of an
affiliated mutual fund group. Mr. Dugas is Assistant
Portfolio Manager of Janus Mercury Fund and also manages
separate accounts in the diversified growth discipline.
Previously, he performed equity security analysis,
focusing his research efforts on large-capitalization
domestic healthcare and technology companies. Prior to
joining Janus in 1993, Mr Dugas was an audit senior at
Price Waterhouse, analyzing financials of large
investment firms. He was also controller of the U.S.
branch of a European manufacturing firm. Mr. Dugas
holds a bachelors degree in Spanish from Louisiana State
University, where he graduated magna cum laude, and an
MBA in professional accounting from the University of
Texas. He is a Level II candidate in the CFA Program
and has nine years of professional investment experience.
AAL Small Cap Stock Kevin A. Schmitting, CFA Kevin A. Schmitting, CFA, has managed the day-to-day
Portfolio Manager Portfolio investments since its inception on March 1,
2001. Mr. Schmitting is also the portfolio manager of
The AAL Small Cap Stock Fund, a series of an affiliated
mutual fund group. Mr. Schmitting managed The AAL Mid
Cap Stock Fund from November 1, 1995, through March 17,
1997. Prior to November 1, 1995, Mr. Schmitting served
as investment director and in other investment
capacities for the State of Wisconsin Investment Board
from 1984 through 1995.
AAL Mid Cap Stock Michael R. Hochholzer, CFA Michael R. Hochholzer, CFA, has managed the day-to-day
Portfolio Manager Portfolio investments since its inception on March 1,
2001. Mr. Hochholzer also serves as portfolio manager
of the AAL Mid Cap Index Portfolio. Mr. Hochholzer
currently serves as portfolio manager for The AAL Mid
Cap Stock Fund, The AAL Mid Cap Index Fund and The AAL
Mid Cap Index Fund II, each a series of an affiliated
mutual fund group. Prior to serving as a portfolio
manager, Mr. Hochholzer served as a securities analyst
and portfolio manager for Aid Association for
Lutherans, the parent company of AAL Capital Management
Corporation, from 1989 through 1997.
AAL Mid Cap Index Michael R. Hochholzer, CFA Michael R. Hochholzer, CFA, has managed the day-to-day
Portfolio Manager Portfolio investments since its inception on March 1,
2001. Mr. Hochholzer also serves as portfolio manager
of the AAL Mid Cap Stock Portfolio. Mr. Hochholzer
currently serves as portfolio manager for The AAL Mid
Cap Stock Fund, The AAL Mid Cap Index Fund and The AAL
Mid Cap Index Fund II, each a series of an affiliated
mutual fund group. Prior to serving as a portfolio
manager, Mr. Hochholzer served as a securities analyst
and portfolio manager for Aid Association for
Lutherans, the parent company of AAL Capital Management
Corporation, from 1989 through 1997.
AAL Capital Growth Frederick L. Plautz, CFA Frederick L. Plautz, CFA, has managed the day-to-day
Portfolio Manager Portfolio investments since its inception on March 1,
2001. Mr. Plautz also manages the equity portion of The
AAL Balanced Fund and The AAL Capital Growth Fund, each
a series of an affiliated mutual fund group. Prior to
his employment with AAL CMC, Mr. Plautz served as vice
president and portfolio manager for Federated Investors
from 1990 through October 1995.
AAL Equity Income Lewis A. Bohannon, CFA Lewis A. Bohannon, CFA, has managed the day-to-day
Portfolio Manager Portfolio investments since its inception on March 1,
2001. Mr. Bohannon alsoe serves as portfolio manager of
The AAL Equity Income Fund, a series of an affiliated
mutual fund group. From 1980 through 1994, Mr. Bohannon
was at Cigna Corporation, serving as managing director
and portfolio manager from 1990 to 1994.
Small Cap Index Brian J. Flanagan, CFA Brian J. Flanagan CFA, is the portfolio manager of the
Portfolio Manager AAL Small Cap Index Portfolio. Mr. Flanagan also serves
as co-portfolio manager of the AAL Technology Stock
Portfolio. Mr. Flanagan currently serves as portfolio
manager of The AAL Technology Stock Fund and The AAL
Small Cap Index Fund II, each a series of an affiliated
mutual fund group. 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 Kathleen Harris Managing the portfolio since it commenced operation on
Portfolio Manager March 2, 1998. Both Ms. Harris and Mr. Roche are
Sean Roche employees of Oechsle, LLC, the sub-adviser. Ms. Harris
Portfolio Manager has been a portfolio manager at Oechsle since January
1995. Prior to this, she was portfolio manager and
Investment Director for the State of Wisconsin
Investment Board and a Fund manager and Equity Analyst
for Northern Trust Company. Mr. Roche has been a
general partner and portfolio manager with Oechsle since
1986.
Large Company Index David J. Schnarsky, CFA David J. Schnarsky, CFA, has been the portfolio manager
Assistant Vice President since the portfolio commenced 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 Reginald L. Pfeifer, CFA, has been the portfolio manager
Vice President and Head of since June 1, 1998. Mr. Pfeifer is responsible for
Fixed Income overseeing The AAL Mutual Funds and AAL Variable Product
Series Fund, Inc. fixed-income funds and portfolios.
Previously, Mr. Pfeifer served as the portfolio manager
of the mortgage-backed and asset-backed securities
portfolios of AAL´s general account. He has served in
this role since 1990. Mr. Pfeifer has been employed by
us since 1990.
High Yield Bond Benjamin L. Trosky, CFA Benjamin L. Trosky is the individual at PIMCO (the
Portfolio Manager sub-adviser) who is primarily responsible for managing
the Portfolio. Mr. Trosky, who has managed the
Portfolio since July 1, 2000, is a Managing Director of
PIMCO. He joined PIMCO as a Portfolio Manager in 1990,
and has managed fixed-income accounts for various
institutional clients and mutual funds since that time.
Bond Index Gregory R. Anderson, CFA Has been the portfolio manager for the AAL Bond Index
Portfolio Manager Portfolio since March 1, 2001. Mr. Anderson also serves
as the portfolio manager of The AAL Bond Index Fund, a
series of an affiliated mutual fund group. Mr. Anderson
is also portfolio manager of the mortgage and
asset-backed security portfolio of AAL´s general
account. He has served in a number of investment roles
with AAL since 1997. From 1991 through 1997, Mr
Anderson was employed at Telephone and Data Systems,
Inc., serving as a senior treasury analyst from 1994
through 1997.
Money Market Alan D. Onstad, CFA Alan D. Onstad, CFA, has been the portfolio manager
Assistant Vice President of since the portfolio commenced operations on June 14,
Securities. 1995. Mr. Onstad currently serves as portfolio manager
of The AAL Bond Fund and The AAL Government Zero Coupon
Target Fund Series 2001 and 2006. Mr. Onstad is also
co-portfolio manager of The AAL Balanced Fund. Mr.
Onstad previously served as portfolio manager of the
utility portfolio of AAL´s general account, and for the
money market portfolio of the AAL Savings Plan. Mr.
Onstad has been employed by us since 1973.
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 Cap Index, Large Company Index and Bond Index) 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 Index, Balanced (equity and bond portions), Large Company Index and Small Cap Index. 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 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 Indices
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 (now the Small Cap Index 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®,” “S&P®,” “Standard & Poor´s 500,” “S&P 500®,” “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.
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 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.
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.
The AAL Technology Stock Portfolio, AAL Aggressive Growth Portfolio, AAL Small Cap Stock Portfolio, AAL Mid Cap Stock Portfolio, AAL Mid Cap
Index Portfolio, AAL Capital Growth Portfolio and AAL Equity Income Portfolio commenced operation on March 1, 2001, and consequently do not
have financial highlights information.
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.
AAL SMALL CAP INDEX PORTFOLIO
(Formerly known as the AAL Variable Product Small Company Stock Portfolio)
Financial Highlights
Year Year Ended Year Ended Year Year
Ended 12/31/99 12/31/98 Ended Ended
12/31/00 12/31/97 12/31/96
Net asset value: beginning of period $12.40 $14.88 $12.54 $10.99
Income from Investment Operations:
Net investment income 0.06 0.08 0.11 0.12
Net realized and unrealized gains (losses) on 1.43 (0.13) 3.05 1.86
investments
Total from Investment Operations 1.49 (0.05) 3.16 1.98
Less Distributions from:
Net investment income (0.06) (0.08) (0.11) (0.12)
Net realized gains (0.63) (2.35) (0.71) (0.31)
Total Distributions (0.69) (2.43) (0.82) (0.43)
Net increase (decrease) in net asset value 0.80 (2.48) 2.34 1.55
Net asset value: end of period $13.20 $12.40 $14.88 $12.54
Total return (a) 12.19% 0.14% 25.37% 18.19%
Net assets, end of period (in thousands) $225,952 $198,321 $152,928 $70,209
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35% 0.35%
Ratio of net investment income to average net 0.49% 0.55% 0.81% 1.14%
assets (b)
Portfolio turnover rate 30.51% 103.70%* 29.65% 20.14%
If the Portfolio had paid all of its expenses without the adviser´s voluntary expense reimbursement, the ratios
would be as follows:
Ratio of expenses to average net assets (b) 0.41% 0.43% 0.45% 0.75%
Ratio of net investment income to average net 0.44% 0.47% 0.71% 0.74%
assets (b)
(a) Total return does not reflect expenses that apply at the Variable Account level. Inclusion of these expenses
would reduce the total return for the periods shown.
(b) Calculated on an annualized basis
* Prior to March 1, 1998, the portfolio´s objective was to approximate the performance of Willshire 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. The change in indices lead to a higher portfolio turnover rate.
AAL International Portfoli
(Formerly known as the AAL Variable Product International Stock Portfolio)
Financial Highlights
Year Year Period
Ended Ended Ended
12/31/00 12/31/99 12/31/98 (a)
Net asset value: beginning of period $11.05 $10.00
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.
AAL Large Company Index Portfolio
(Formerly known as the AAL Variable Product Large Company Stock Portfolio)
Financial Highlights
Year Year Ended Year Ended Year Year
Ended 12/31/99 12/31/98 Ended Ended
12/31/00 12/31/97 12/31/96
Net asset value: beginning of period $22.90 $18.06 13.83 $11.51
Income from Investment Operations:
Net investment income 0.25 0.24 0.23 0.23
Net realized and unrealized gains (losses) on 4.42 4.85 4.25 2.34
investments
Total from Investment Operations 4.67 5.09 4.48 2.57
Less Distributions from:
Net investment income (0.25) (0.24) (0.23) (0.23)
Net realized gains (0.22) (0.01) (0.02) (0.02)
Total Distributions (0.47) (0.25) (0.25) (0.25)
Net increase (decrease) in net asset value 4.20 4.84 4.23 2.32
Net asset value: end of period $27.10 $22.90 $18.06 $13.83
Total return (a) 20.52% 28.36% 32.59% 22.47%
Net assets, end of period (in thousands) $873,762 $572,361 $318,475 $120,089
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.32% 0.33% 0.35% 0.35%
Ratio of net investment income to average net 1.01% 1.20% 1.48% 1.97%
assets (b)
Portfolio turnover rate 2.74% 1.49% 1.00% 1.77%
If the Portfolio had paid all of its expenses without the adviser´s voluntary expense reimbursement, the ratios
would be as follows:
Ratio of expenses to average net assets (b) 0.35% 0.38% 0.43% 0.63%
Ratio of net investment income to average net 0.98% 1.15% 1.39% 1.69%
assets (b)
(a) Total return does not reflect expenses that apply at the Variable Account level. Inclusion of these expenses
would reduce the total return for the periods shown.
(b) Calculated on an annualized basis.
AAL Balanced Portfolio
(Formerly known as the AAL Variable Product Balanced Portfolio)
Financial Highlights
Year Year Ended Year Ended Year Year Ended
Ended 12/31/99 12/31/98 Ended 12/31/96
12/31/00 12/31/97
Net asset value: beginning of period $15.97 $14.05 $11.96 $10.92
Income from Investment Operations:
Net investment income 0.53 0.50 0.46 0.41
Net realized and unrealized gains (losses) on 1.19 2.17 2.09 1.05
investments
Total from Investment Operations 1.72 2.67 2.55 1.46
Less Distributions from:
Net investment income (0.53) (0.50) (0.46) (0.41)
Net realized gains (0.44) (0.25) - (0.01)
Total Distributions (0.97) (0.75) (0.46) (0.42)
Net increase (decrease) in net asset value 0.75 1.92 2.09 1.04
Net asset value: end of period $16.72 $15.97 $14.05 $11.96
Total return (a) 11.00% 19.27% 21.71% 13.65%
Net assets, end of period (in thousands) $777,646 $545,337 $306,501 $126,518
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.32% 0.33% 0.35% 0.35%
Ratio of net investment income to average net 3.26% 3.38% 3.62% 3.89%
assets (b)
Portfolio turnover rate 16.91% 21.39% 6.86% 5.43%
If the Portfolio had paid all of its expenses without the adviser´s voluntary expense reimbursement, the ratios
would be as follows:
Ratio of expenses to average net assets (b) 0.36% 0.39% 0.43% 0.60%
Ratio of net investment income to average net 3.22% 3.32% 3.53% 3.65%
assets (b)
(a) Total return does not reflect expenses that apply at the Variable Account level. Inclusion of these expenses
would reduce the total return for the periods shown.
(b) Calculated on an annualized basis.
AAL High Yield Bond Portfolio
(Formerly known as the AAL Variable Product High Yield Bond Portfolio)
Financial Highlights
Year Year Ended Period Ended
Ended 12/31/99 12/31/98 (a)
12/31/00
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.
AAL Bond Index Portfolio
(Formerly known as the AAL Variable Product Bond Portfolio)
Financial Highlights
Year Year Ended Year Ended Year Year Ended
Ended 12/31/99 12/31/98 Ended 12/31/96
12/31/00 12/31/97
Net asset value: beginning of period $10.36 $10.15 $9.90 $10.23
Income from Investment Operations:
Net investment income 0.62 0.64 0.64 0.63
Net realized and unrealized gains (losses) on (0.76) 0.21 0.25 (0.33)
investments
Total from Investment Operations (0.14) 0.85 0.89 0.30
Less Distributions from:
Net investment income (0.62) (0.64) (0.64) (0.63)
Net realized gains - - - -
Total Distributions (0.62) (0.64) (0.64) (0.63)
Net increase (decrease) in net asset value (0.76) 0.21 0.25 (0.33)
Net asset value: end of period $9.60 $10.36 $10.15 $9.90
Total return (a) (1.35)% 8.59% 9.37% 3.10%
Net assets, end of period (in thousands) $56,361 $42,207 $26,710 $17,666
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35% 0.35%
Ratio of net investment income to average net 6.33% 6.26% 6.55% 6.51%
assets (b)
Portfolio turnover rate 19.50% 18.29% 18.41% 11.65%
If the Portfolio had paid all of its expenses without the adviser´s voluntary expense reimbursement, the ratios
would be as follows:
Ratio of expenses to average net assets (b) 0.44% 0.48% 0.52% 0.68%
Ratio of net investment income to average net 6.23% 6.13% 6.38% 6.18%
assets (b)
(a) Total return does not reflect expenses that apply at the Variable Account level. Inclusion of these expenses
would reduce the total return for the periods shown.
(b) Calculated on an annualized basis.
AAL Money Market Portfolio
(Formerly known as the AAL Variable Product Money Market Portfolio)
Financial Highlights
Year Year Ended Year Ended Year Year
Ended 12/31/99 12/31/98 Ended Ended
12/31/00 12/31/97 12/31/96
Net asset value: beginning of period $1.00 $1.00 $1.00 $1.00
Income from Investment Operations:
Net investment income 0.05 0.05 0.05 0.05
Net realized and unrealized gains (losses) on - - -
investments
Total from Investment Operations 0.05 0.05 0.05 0.05
Less Distributions from:
Net investment income (0.05) (0.05) (0.05) (0.05)
Net realized gains - - - -
Total Distributions (0.05) (0.05) (0.05) (0.05)
Net increase (decrease) in net asset value - - - -
Net asset value: end of period $1.00 $1.00 $1.00 $1.00
Total return (a) 4.94% 5.31% 5.33% 5.23%
Net assets, end of period (in thousands) $46,494 $33,571 $25,460 $17,125
Ratios and Supplemental Data:
Ratio of expenses to average net assets (b) 0.35% 0.35% 0.35% 0.35%
Ratio of net investment income to average net 4.85% 5.20% 5.24% 5.10%
assets (b)
Portfolio turnover rate N/A N/A N/A N/A
If the Portfolio had paid all of its expenses without the adviser´s voluntary expense reimbursement, the ratios
would be as follows:
Ratio of expenses to average net assets (b) 0.41% 0.44% 0.46% 0.65%
Ratio of net investment income to average net 4.79% 5.11% 5.13% 4.80%
assets (b)
(a) Total return does not reflect expenses that apply at the Variable Account level. Inclusion of these expenses
would reduce the total return for the periods shown.
(b) Calculated on an annualized basis.
Board of Directors John O. Gilbert — Chairman of the Board
F. Gregory Campbell
Woodrow E. Eno
Richard L. Gady
John H. Pender
Edward W. Smeds
Lawrence M. Woods
Officers Robert G. Same — President
James H. Abitz — Vice President
Woodrow E. Eno — Vice President
Charles D. Gariboldi — Treasurer
Joseph R. Mauel — Assistant Treasurer
Todd J. Kelly — Assistant Treasurer
Frederick D. Kelsven — Secretary
Steven J. Fredricks — Assistant Secretary
Investment Adviser & Distributor AAL Capital Management Corporation
222 West College Avenue
Appleton, WI 54919-0007
Transfer Agent Aid Association for Lutherans
4321 North Ballard Road
Appleton, WI 54919-0001
Sub-Adviser (Aggressive Growth Portfolio) Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206-4928
Sub-Adviser (International Portfolio) Oechsle International Advisors LLC
One International Place
Boston, MA 02110
Sub-Adviser (High Yield Bond Portfolio) Pacific Investment Management Company
840 Newport Center Drive
Newport Beach, California, 92660
Custodian Citibank, N.A.
111 Wall Street
New York, NY 10043
Legal Counsel Quarles & Brady LLP
411 East Wisconsin Avenue
Milwaukee, WI 53202
Independent Auditors PricewaterhouseCoopers LLP
Suite 1500
100 East Wisconsin Avenue
Milwaukee, WI 53202
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]
4321 North Ballard Road
Appleton, Wisconsin 54919
(800) 225-5225
or (920) 734-5721
Statement of Additional Information
Dated March 1, 2001
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 March 1, 2001. 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:
Equity and Balanced Portfolios
AAL Technology Stock Portfolio
AAL Aggressive Growth Portfolio
AAL Small Cap Stock Portfolio
AAL Small Cap IndexPortfolio
(Formerly known as the AAL Variable Product Small Company Stock Portfolio)
AAL Mid Cap Stock Portfolio
AAL Mid Cap Index Portfolio
AAL International Portfolio
(Formerly known as the AAL Variable Product International Stock Portfolio)
AAL Capital Growth Portfolio
AAL Large Company Index Portfolio
(Formerly known as the AAL Variable Product Large Company Stock Portfolio)
AAL Equity Income Portfolio
AAL Balanced Portfolio
(Formerly known as the AAL Variable Product Balanced Portfolio)
Fixed-Income Portfolios
AAL High Yield Bond Portfolio
(Formerly known as the AAL Variable Product High Yield Bond Portfolio)
AAL Bond Index Portfolio
(Formerly known as the AAL Variable Product Bond Portfolio)
AAL Money Market Portfolio
(Formerly known as the AAL Variable Product Money Market Portfolio)
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 SmallCap 600 Index
The S&P MidCap 400 Index
The S&P 500 Index
Disclaimers and Limitations of Liabilities of Standard & Poor's
Calculation of Performance Data
Financial Statements
Appendix: Bond Ratings
The AAL Variable Product Series Fund, Inc. (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 May 24, 1994. The Fund currently consists of fourteen
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 established 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 fourteen 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.
In addition to those policies mentioned in the Fund prospectus, the portfolios are subject to certain investment restrictions. A portfolio may not:
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 indices, 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 indices 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. Except for the AAL Technology Stock, Aggressive Growth, Small Cap Stock, Mid Cap Stock, Mid Cap Index, Capital Growth and Equity Income Portfolios, 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 above restrictions, (1) through (14), are not deemed fundamental policies, and therefore, may be changed without shareholder approval.
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.
Exchange Traded Funds (ETF’s)
The portfolios may, consistent with their investment objectives,
purchase Standard & Poor’s Depositary Receipts (SPDRs), iShares, and
other similar Exchange Traded Funds. ETF’s are generally American Stock
Exchange-traded securities that represent ownership in a Unit Investment 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 a
corresponding index. ETF’s 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 ETF’s 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.
When-Issued and Delayed Delivery Securities
To ensure the availability of suitable securities, we may buy
when-issued or delayed delivery securities for the Technology Stock, Aggressive
Growth, Small Cap Stock, Mid Cap Stock, International, Capital Growth, Equity
Income, Balanced, High Yield Bond, Bond Index, and Money Market 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 Aggressive Growth, International 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 Index, 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 Aggressive
Growth, International, Balanced, High Yield Bond and Bond Index 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 Aggressive Growth, Balanced, High Yield Bond and Bond
Index 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 Aggressive Growth, Balanced, High Yield Bond and Bond Index
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 Aggressive Growth, Balanced, High Yield Bond and Bond Index 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 Aggressive Growth, International 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, and 1998 to 1999, 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 Aggressive Growth and 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.
Initial Public Offerings
From time to time the portfolios may invest in an initial public
offering (“IPO”) of a security. Investments in an IPO are made
consistent with the individual portfolio’s investment objective and
investment strategies. On occasion the portfolios will participate in an
oversubscribed IPO (“Hot IPO”). Because the IPO is oversubscribed,
this presents the portfolios with the opportunity to “flip” or trade
the security at higher prices. Proceeds from the Hot IPO are distributed among
the portfolios consistent with the portfolios’ “Initial Public
Offerings Policies and Procedures.” Investments in IPO’s and Hot
IPO’s may have a magnified performance impact on a portfolio with a small
asset base. A Portfolio may not experience similar performance as its assets
grow.
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 Technology Stock, Aggressive Growth and International Portfolios 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 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 Index and Small Cap Index 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 Index 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 Technology Stock, Aggressive Growth and International
Portfolios 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 Portfolio may
invest in sponsored and unsponsored ADRs.
In addition to ADRs, the Technology tock, Aggressive Growth and
International Portfolios 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-advisers for the Aggressive Growth and International Portfolios
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:
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.
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, for bona fide
hedging or other permissible risk management purposes, and to a limited extent,
to generate income. 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:
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 Indices
Options may be purchased and sold on debt or other securities or
indices 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 Indices
For the Technology Stock, Aggressive Growth and International
Portfolios, 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 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 indices, in an industry or market
segment, rather than movements in the price of a particular stock. Accordingly,
successful use by the portfolios of options on stock indices will be subject to
the sub-advisers’ 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 Index, Large Company Index and Small Cap Index 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 Index Portfolio. The Russell 2000 Index future
would be the instrument used to gain small-capitalization market exposure in the
Small Cap Index 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 indices, 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 indices. 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
indices 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
Indices
There are several risks associated with transactions in options
on securities and on indices. 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.
For the Aggressive Growth, International 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 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.
We expect the indexed portfolios to have a portfolio turnover of
less than 100%. The actively managed portfolios may have a turnover rate of greater 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.
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. AAL CMC manages over %10 billion in assets. 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:
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 dob 4/5/46 Director Senior Vice President, Secretary and
Vice President* General Counsel, Aid Association for
Lutherans; Chairman of the Board for AAL
Capital Management Corporation
Richard L. Gady dob 2/28/43 One Director Vice President
ConAgra 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 Director Retired; formerly Senior Vice-President
dob 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,
dob 12/31/59 Aid Association for Lutherans
Joseph R. Mauel Assistant Treasurer Director, Fund Accounting
dob 11/26/59
Todd J. Kelly Assistant Treasurer Manager of Mutual Fund Accounting, Aid
dob 8/15/69 Association for Lutherans
Frederick D. Kelsven Secretary Assistant General Counsel, Aid Association
dob 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
* Denotes Directors who are "interested persons" of the Fund, as defined in the Investment Company Act of 1940.
The following table shows the compensation paid to the Directors* of the Fund for the year ended December 31, 2000:
Pension or Total Compensation
Name, Position Aggregate Retirement Benefits Estimated Annual From Fund and AAL
-------------- Compensation Accrued As Part of Benefits Upon Fund Complex**
from Fund Fund Expenses Retirement Paid to Directors
--------- -------- ---------- -----------------
John O. Gilbert -0- -0- -0- -0-
Director
Woodrow E. Eno -0- -0- -0- -0-
Director
Richard L. Gady $ -0- -0- $
Director
F. Gregory Campbell $ -0- -0- $
Director
John H. Pender $ -0- -0- $
Director
Edward W. Smeds $ -0- -0- $
Director
Lawrence M. Woods $ -0- -0- $
Director
* The Fund did not pay any compensation to its executive
officers during this period.
** The AAL Fund Complex includes The AAL Mutual
Funds, with respect to which, each of the Fund’s independent directors serves as a trustee.
Principal Holders of Securities
As of December 1, 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.
AAL Ownership for Its Own AAL Ownership through
Account Separate Accounts or through
the AAL Savings Plan
Small Cap Index Portfolio 0.00% 100%
International Portfolio 16.20% 83.80%
Large Company Index Portfolio 0.00% 100%
Balanced Portfolio 0.00% 100%
High Yield Bond Portfolio 41.23% 58.77%
Bond Index Portfolio 0.00% 100%
Money Market Portfolio 0.00% 100%
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.
The fee for the Money Market, Bond Index, Balanced, Large Company Index and Small Cap Index 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 projected adviser fees paid by the seven new portfolios for the period March 1, 2001 through December 31,
2001 are set forth in the table below. We agreed to pay on behalf of each portfolio, or reimburse each
portfolio, all expenses in excess of management fees.
Portfolio Projected % of Average Daily Net Assets
for the year ended 12/31/01
AAL Technology Stock 0.75%
AAL Aggressive Growth 0.80%
AAL Small Cap Stock 0.70%
AAL Mid Cap Stock 0.70%
AAL Mid Cap Index 0.35%
AAL Capital Growth 0.65%
AAL Equity Income 0.45%
The advisory fee for the AAL Aggressive Growth Portfolio is a daily charge equal to an annual rate of 0.25% of the average daily net assets of the Portfolio above the sub-adviser's fee. The sub-adviser is paid the following fee based on assets under management:
JANUS
Total Assets Annual Fee
First $100 million 0.55%
Next $400 million 0.50%
Over $500 million 0.45%
The advisory fee for the AAL International Portfolio is a daily charge equal to an annual rate of 0.80% 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:
OECHSLE
Total Assets Annual Fee
First $20 million 0.54%
Next $30 million 0.45%
Over $50 million 0.36%
The advisory fee for the AAL 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. From this amount the sub-adviser is paid the following fee based on assets under management:
PIMCO
Total Assets Annual Fee
On all assets 0.25%
The table below shows the amount of the advisory fees that each portfolio paid to the adviser for the past three years.
Year Ended Year Ended Year ended
December 31, 2000 December 31, 1999 December 31, 1998
Small Cap Index Portfolio $ $684,092 $628,572
International Portfolio 199,082 85,674
Large Company Index Portfolio 2,264,468 1,454,419
Balanced Portfolio 2,115,998 1,403,423
High Yield Bond Portfolio 125,283 79,906
Bond Index Portfolio 176,714 111,756
Money Market Portfolio $ $138,690 $101,533
Currently, there are no service agreements in place between the Fund and any other party.
Sub-Advisers
The following supplements our discussion of the sub-advisers as
contained in the prospectuses.
AAL Aggressive Growth Portfolio – Janus
Capital Corporation
Janus Capital Corporation (“Janus”) makes the
day-to-day investment decisions for the AAL Aggressive Growth Portfolio under the
Board of Directors and AAL CMC’s direction and control. Janus 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. Janus has its principal offices at 100 Fillmore Street,
Denver, Colorado 80206-4928.
Janus is owned in part by Stilwell Financial Inc.
(“Stilwell”), which owns approximately 81.5% of the outstanding voting
stock of Janus. Stilwell is a publicly traded holding company with principal
operations in financial asset management businesses. Thomas H. Bailey, President
and Chairman of the Board of Janus, owns approximately 12% of Janus’s
voting stock and, by agreement with Stilwell, selects a majority of Janus’s
Boards, subject to the approval of Stilwell, which approval cannot unreasonably
be withheld.
AAL International Portfolio – Oechsle
International Advisors, LLC
Oechsle International Advisors, LLC (“Oechsle LLC”) is
the sub-adviser to the International Portfolio. Oechsle LLC is a Delaware
limited liability company and a registered investment adviser. It has served as
sub-adviser to the portfolio since November 1, 1998. Oechsle LLC makes the day-to-day
investment decisions for the portfolio under the Board of Directors and AAL CMC’s
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.
AAL High Yield Bond Portfolio – Pacific
Investment Management Company
Pacific Investment Management Company (“PIMCO”) is a
Delaware general partnership and is a wholly-owned subsidiary of PIMCO Advisors,
L.P. (“PIMCO Advisors”). PIMCO is located at 800 Newport Center Drive,
Newport Beach, California 92660. PIMCO is a money management firm and is
registered as an investment adviser with the Securities and Exchange Commission
Allianz of America, Inc. (“Allianz of America”) owns
approximately 70% of the outstanding partnership interests in PIMCO Advisors.
The remainder of the partnership interests in PIMCO Advisors are owned by
Pacific Life Insurance Company (“Pacific Life”). Allianz of America is
a subsidiary of Allianz AG. Allianz AG is a leading provider of financial
services, particularly in Europe, and is represented in 68 countries world-wide
through subsidiaries, branch and representative offices, and other affiliated
entities.
Significant institutional shareholders of Allianz AG currently
include, among others, Dresdner Bank AG, Deutsche Bank AG, Munich Reinsurance
and Hypo Vereinsbank. Crédit Lyonnais, Dresdner Bank AG and Deutsche Bank
AG, as well as certain broker-dealers that might be deemed to be affiliated with
these entities, such as DB Alex Brown LLC, Deutsche Bank Securities, Inc. and
Dresdner Kleinwort Benson North America LLC (collectively, the “Affiliated
Brokers”), may be considered to be affiliated persons of PIMCO. Absent an
SEC exemption or other relief, the Fund generally will be precluded from
effecting principal transactions with the Affiliated Brokers, and its ability to
purchase securities being underwritten by an Affiliated Broker or to utilize the
Affiliated Brokers for agency transactions is subject to restrictions. PIMCO
does not believe that the applicable restrictions on transactions with the
Affiliated Brokers described above will materially adversely affect its ability
to provide services to the Fund, the Fund’s ability to take advantage of
market opportunities, or the Fund’s overall performance.
Duties and Responsibilities of the Sub-Advisers
Under the sub-advisory agreements, the sub-advisers determine
which securities and other investments will be purchased, retained or sold for
the respective portfolios. The sub-advisers place orders for each portfolio;
manage the portfolios’ overall cash position; and provide the adviser with
U.S. and foreign broker research and a quarterly review of international
economic and investment developments. The adviser, among other things, assists
and consults with each sub-adviser in connection with each portfolio’s
continuous investment program; reviews the portfolios’ 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. The sub-advisers provide services under
this agreement in accordance with the portfolios’ investment objectives,
policies and restrictions. Unless sooner terminated by the adviser or Board of
Directors upon 60- days’ written notice, the sub-advisory agreements 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.
We (and, with respect to the Aggressive Growth, International,
and High Yield Bond Portfolio; Janus, Oechsle and PIMCO respectively) 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.
Brokerage commissions paid by each of the portfolios listed below were as follows:
Portfolio Name Year Ended 2000 Year Ended 1999 Year Ended 1998 Small Cap Index $ $148,898 $506,871* International 85,118 42,711 Large Company Index 129,900 107,240 Balanced 102,645 $90,386 High Yield Bond N/A N/A Bond Index N/A N/A Money Market $ $N/A $N/A
* In 1998, the Small Cap Index 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, 2000
through December 31, 2000. As of December 31, 2000, 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 Index 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 Cap Index Portfolio
Market Value
Broker Name
Dain Rauscher Corp. $348,750
Jefferies Group, Inc. 314,600
Raymond James Financial, Inc. $529,791
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.
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.
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.
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 Index, Balanced, Large Company Index, Mid Cap Index Index, Small Cap Index
and High Yield Bond Portfolios. We will declare and reinvest dividends annually
on the International Portfolio. Dividends for the Technology Stock, Aggressive
Growth, Small Cap Stock and Mid Cap Stock Portfolios are declared annually and
reinvested annually. Dividends for the Capital Growth Portfolio are declared
semi-annually and reinvested semi-annually. Dividends for the Equity Income
Portfolio are declared quarterly and reinvested quarterly. 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.
From time to time the Fund may advertise yield and total return
for various periods of investment. Such advertisements will always include
uniform performance calculations based on standardized methods established by
the Securities and Exchange Commission and may also include other total return
information. Performance information should be considered in light of the
particular portfolio’s investment objectives and policies, characteristics
and quality of its portfolio securities and the market conditions during the
applicable periods and should not be considered as a representation of what may
be achieved in the future. Investors should consider these factors, in addition
to differences in the methods used in calculating performance information and
the impact of taxes on alternative investments, when comparing a particular
portfolio’s performance to any performance data published for alternative
investments.
Standardized Performance Information
Average Annual Total Return
For each of the portfolios, except the Money Market Portfolio,
standardized average annual total return is computed by finding the average
annual compounded rates of return over the 1-, 5- and 10-year periods (or, in
the case of a start-up portfolio such as this, the portion thereof during which
the portfolio has been in existence) that would equate the initial amount
invested to the ending redeemable value according to the following formula:
P (1 + T)^n = ERV
Where:
P = A hypothetical $1,000 initial payment;
T = Average annual total return;
n = Number of years;
ERV = Ending redeemable value of a hypothetical $1,000 payment made at the beginning of the
1, 5 and 10-year periods (or fractional portion thereof).
Average Annual Total Return
Portfolio Name Period from Inception(1) to
Year Ended December 31, 2000 December 31, 2000
Small Cap Index % 14.38%
International % 27.56%
Large Company Index % 26.59%
Balanced % 16.97%
High Yield Bond % (4.19)%
Bond Index % 5.54%
Money Market % 5.24%
(1) The Small Cap Index, Large Company Index, Balanced, Bond Index, 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 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]
Where:
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, 2000, the current yield
for the Bond Index Portfolio was ___%, the Balanced Portfolio was ___% and the
High Yield Bond Portfolio was ___%.
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, 2000, the Current and Effective Yields of the Money Market Portfolio were
____% and ____%, 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 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 February 1, 2001, range from $____ million to $___ billion. The median capitalization was $____ 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.
Another index from Standard & Poor’s we use as a benchmark is the S&P MidCap 400 Index. The S&P MidCap 400 Index is a benchmark for tracking performance of medium-capitalization stocks. As of February 1, 2001, the median market capitalization for stocks in the S&P MidCap 400 was $____ billion. While this index is relatively new, the industry recognizes it as a good benchmark for tracking mid-cap stocks. The 400 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 MidCap 400 Index make it relatively easy to emulate. The easier it is to track an index, the more likely it is for a Fund to track that index’s performance.
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.
The disclaimers and limitations below are set forth in a
contract between Standard & Poor’s and AAL. The Product refers to the
Large Company Index, Mid Cap Index and Small Cap Index 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.
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:
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 (920) 734-5721 locally.
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 pect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates 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.
The Exhibit Index following the signature page of this Amendment is incorporated by reference.
Exhibit Number Name of Exhibit Incorporated by Reference(1) Filed Herewith
-------------- --------------- --------------------------- --------------
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 Post-Effective Amendment
Corporation ("AAL CMC") and the Fund dated January 1, 2000 #10 dated April 20, 2000
d(ii) Sub-Advisory Agreement between the Fund, AAL CMC, and Oechsle Post-Effective Amendment
International Advisors LLC for the International Portfolio #10 dated April 20, 2000
dated January 1, 2000
e(i) Amended and Restated Participation Agreement between AAL, AAL Post-Effective Amendment
CMC, the Separate Accounts, and the Fund dated January 1, 2000 #10 dated April 20, 2000
e(ii) Amended and Restated Participation Agreement between AAL, AAL Post-Effective Amendment
CMC, AAL Savings Plan, and the Fund dated January 1, 2000 #10 dated April 20, 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 Post-Effective Amendment
#10 dated April 20, 2000
k Not applicable
l Stock Subscription Agreement between the Fund and AAL dated Post-Effective Amendment #6
December 11, 1997 dated February 27, 1998
m Not applicable
n Financial Data Schedule N/A
o Not applicable
p(i) Code of Ethics for AAL Capital Management Corporation Post-Effective Amendment
#10 dated April 20, 2000
p(ii) Code of Ethics for Sub-Adviser, Oechsle International Advisors Post-Effective Amendment
LLC #10 dated April 20, 2000
q Powers of Attorney for all Directors Post-Effective Amendment #8
February 9, 1999
r Transmittal Letter from Counsel X
(1) Documents incorporated by reference are incorporated from the identified previously filed amendments to this Registration Statement.
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.
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.)
------------------------------ ------------------------------- ----------------------------
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:
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:
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.
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 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.
At a special meeting held on June 21, 2000, the certificate holders of the AAL High Yield Bond Portfolio approved Pacific Investment Management Company (“PIMCO”) to serve as Sub-Adviser. PIMCO is a registered investment adviser under U.S. securities laws. Pursuant to the sub-advisory agreement, PIMCO makes the day-to-day investment decisions for the AAL High Yield Bond Portfolio subject to the direction and control of AAL CMC. PIMCO 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.
PIMCO is located at 840 Newport Center Drive, Newport Beach, California, 92660. Organized in 1971, PIMCO provides investment management and advisory services to private accounts of institutional and individual clients and to mutual funds. As of March 31, 2000, PIMCO had approximately $186 billion in assets under management.
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.
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(a) 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 15, December 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 December 15, 2000
------------------------- (Principal Executive Officer)
Robert G. Same
/s/ Charles D. Gariboldi Treasurer December 15, 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 December 15, 2000
-------------------------
John O. Gilbert
Attorney-in-Fact
AAL VARIABLE PRODUCT SERIES FUND, INC.
INDEX TO EXHIBITS
Exhibit Number Name of Exhibit -------------- ---------------- r Transmittal Letter from Counsel
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